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Collection

tle

Papers

rich
Series/Volume

Shelf/Accession No:11 / 1
/
1
4
5
:
/
LC 77-38

(1/7C)




71

Aldrich, Nelson Wilmarth, 1841-1915.
Papers, 1777-1930. 58 ft. (ca. 42,500 items)
U.S. Representative and Senator from Rhode
Island, financier, and philanthropist. Correspondence, diaries and notebooks, material relating
to tariff rates and legislation (1880-1915) and
the National Monetary Commission (1907-12),
financial papers, speech file, and printed matter,
chiefly relating to Aldrich's career as U.S.
Senator (1881-1911). Papers also include a
group of biographer's research materials containing correspondence and notes of Nathaniel W.
(Continued on next card)

Aldrich, Nelson Wilmarth, 1841-1915. (Card 2)
Stephenson and Jeannette P. Nichols, and some
diaries and engagement books kept by Aldrich's
wife, Abby Chapman Aldrich. Correspondents
include Joshua M. Addeman, Edward B. Aldrich,
William B. Allison, Abram Piatt Andrew, Henry B.
Anthony, George E. Barnard, Jr., Robert W.
Bonynge, Jonathan Bourne, Jr., Charles R. Brafton,
Theodore E. Burton, Adin B. Capron, Jonathan Chace
William E. Chandler, LeBaron B. Colt, Samuel P.
Colt, Charles A. Conant, George B. Cortelyou,
Henry P. Davison, Elisha Dyer, Jr., Henry W.
(Continued on next card)

Aldrich, Nelson Wilmarth, 1841-1915. (Card 3)
Gardner, Eugene Hale, John E. Kendrick, Philander
C. Knox, Charles Warren Lippitt, Henry Cabot
Lodge, Stephen B. Luce, Orville H. Platt, Aram J.
Pothier, Theodore Roosevelt, John P. Sanborn,
William Howard Taft, Henry M. Teller, Edward B.
Vreeland, Paul M. Warburg, George Peabody Wetmore,
William Whitman, and Nathan M. Wright.
Finding aid and inaex in the Library.
Information on literary rights available in
the Library.
Gift of the Aldrich family, 1944; John
D.
(Continued on next card)

Aldrich, Nelson Wilmarth, 1841-1915. (Card )4)
Rockefeller, Jr., 1955-56; and the Seminary of
Our Lady of Providence (Rhode Island), 1970.

Formerly NUCMC MS 60-464

1972
MICROFILMED
LIBRARY OF CONGRESS
PHOTODUPLICATION SERVICE







58
CONTOINER

Collection Title

Nelson
Series/Volume
Shelf/Accession No.



I ci 1)

NELSON ALDRICH




Wave
41111111111111PPORPA

FeL-uar- - 22, 11C.
.

IT: DISCOUNT SYS=

An illuminating discuocion of one of the
features of bankins policy Which is closely linked in ::urope
with the central bank
system is presented in a monograph written
by La'. 2aul Li. ;arburg,
of the banking firm of Kuhn, :ioeb - Comp
any, of New York, and just
made public by the rational :Ionetary Commissi
on.
The monograph is
entitled "The Discount i%rsten in Europe,"
and begins by stating as a
general principle of sound bankinz policy
that "with the present
system of immense deposits payable on dena
nd, and by right payable
in gold, at the option of the payee, only
that structure is safe and
efficient Which provides for effective
concentration of cash reserves
and their freest use in case of need, and
enables the banks, When
necessary, to turn into cash a maximum of
their ascots with a minimum
of disturbance to general conditions."
In this respect, 1:r. Warburg
declares, recent events have nado it clea
r that our system is an unqualifiod failure, and that it is now gene
rally acknowledged :;7.1at the
end of 1007 witnessed one of the most impr
essive victories of the
central bank system.
it is declared, however, that it was a vict
ory
of the discount system of handling comm
ercial paper, because the
central bank is only a component part, alth
ough a most vital one, of
the discount system.
A careful description of What this system
is,
in contrast with the Lmerican system of
advances on securities and
single-nano paper, forms the subject matt
er of flr. Varburg's monograph.




lik

-2-

"Discounts," it is declared,

represent, -- or, li;:e our

promissory notes, out always to represent, -- temporary indebtedness Which is 4 c) be paid off by the liquidation of the business
transaction for the carryinr out of Which the loan was incurred.
A bill may be drawn for cotton while it is being harvested, or While
it is in transit for :;urope, or While it is being manufact:red into
or While the merchant that purchased the finished article continues to owe the nanufacturer therefor, or posoibly even while the
i'iniFhed article is bein,: shirTed bac]: to the same country from which
the raw product oric
.inally came.

Tc bride each of these periods a

long bill may be drawn by the various parties who, each in turn,
handle the goods on

way from their original state to their

place of final distribution.

?he length of the bill will dupend on

the underlying transaet;ion; in ::ngland, Tftkance, and German:: it varies, as a rule, between two and four months, i'ho vast maiority of
such vapor being issued for three months.
Ath us the promissor: rote is, cenerally, one-name paper,
,
while In :urope sinr:ae-name paper is looked upon with distrust and
is scarcely purchased at all by to banks.

The Thropean baxi,:er be-

lieves in having several oftznaturen on the bill that he buys, thus
securing

M020

than one guaranty.

Furthermore, e0(litional eina-

tures are evidence of the legitimate character of the paper and dhow
that The money was taken for a temporary transaction, not for permanent investment.




Through the acceptance or endorsement of the merchant's
note by the bank or banher the -oromissory note, from being a dead
instrument and a nonliquid asset, -- becomes a liquid asset

part

and parcel of the system of tokens of cr;:colilan'e ii;hich serve as a su'ostitute for money or as aumiliary currency.
:he old promissor:: note is notn

but the evidence of a

commercial crodit, the grantinz: of which entails a material business
risk and must remain an inaividual trannacticn only to be concluded

noe R.116 are wi1lin7
credit.

.he issuor o. the
P

re 71 nocluainte

1)7 the few "dho happen tc

a..ze the huzufa of :rantin

c

that ?articular

:11..-ouh the aiJAition of the banker's eignature the 0,17estion
,

of the naker's creait is eliminated an
mere evidence: o

the note

instead of being a

an advance, is transformed into 9 stanetar0 izrvest-

ment, the - urchasc and cab o cf which will be :Joerlied only by the
question of interost.

Jie investment commands the broaaeot possi-

ble f,arket.
.
Aecc )taneos arc ;iven. by European banT7s and baners mainly
f0:2

hro 11.:10LI of arafts:

thc documentary bill, the commercial

credit 'era, and the finance bill.
2hc
those three.
will

aocunontary

is probably the most important of

if an Araerioan merchant* Inly2 coffee in

an Paolo, he

)openin:_7; for the shipper a documentary
enerally pay for it 1)-

credit in i.urope; that is to say, thq American rurchaser nlaes an arraArpment with the Muropes.n banker, by rihich the latter f.;rees to acce'i,t

let us say, a tYreo-mcrths' bill




arawn

on him with shipping

8.11

docamonts attachoJ, coverinz a certain shipment of coffee, the amount
to be drawn being the ocr,iivalent of the amount aue
,
purchaser to the 3out1 ‘rrAorican sbippur.

the :,nerican

The shaper will have no

difficulty in selling to a bank in San 2aolo his bill drawn on a
first-class :uropean banking house, and thus will promptly secure the
money duo him for the goods sold.

The local bank in San .11aolo will

buy the bill wnhout hesiiation, bccutuoo it :mows that

need only

16.1and, kionr.f1.11:/, or France, tt•
send t'hi2 forei,n 7,111 to 7,
:Jny be, vhiere, owia1,3 to the oTztensive disco- mt

:ace

rkit 421 the).le colln-

-,
.,
,
iJo, 1, can immollaCel. rei3eo.lnt tie 1)±11 thus ;10,1ri ; repay/
mont in cash for the anoll_i% 1n7r1W.

Indeed, if t'lo .73razilian bank

:
fors to lo so, it can at :no moment of ihIpment, by caLlin- to
Itc

aisoLInt rae it Ville:. the bills will be discounted

Ikpoy. uhcir arrival 1.1 :':)rope.
hen tho nill r:acl-es FAirope, the araree puts his accept=c€ CL it, and having thus obligated himself to pay the bill when
duc, the c!ocuments are in nost cases 2.010=0 and sent to the American
1,uro1aser o: - he goods, wic opened the credit wjth the
-ay
OZ core, ihc ,American I,urohaser :
"JaLLer for tho

reraerod.

L)ta;Idilic of the purchaser ai

oropean bank.

a commifIcion to the lluropoan

,
7.72 e componeatl.on depend

on the

In ,art on tN) question of Whether or

not tho documents are to be released upon acceptenon (t/le Anerican
parohaser oblioatin

h:Insalf to put the banlz in 4'itna7 before the bill

calls due, or Ilhoth-f or uot tho looumelts are only to be given up
by ae accepting burf( acainot cash -rnymont b7 the purr:haser.




It may

-5.
-

be said that the average compensation for such acceptance is between
a quarter of On

cent. up to three-querters of one

or cent. for

three months, accordik: to the conditicns of tl case.
,e
:he majoritL, of all shipments of merchandise, particularly
those of raw materird, aro everywhere "fintnned" in this way by docImentary bills on 77.1e-or,e.
how goo(1

It is Interesting to note that no matter

1): the ;eqit Gf the Amerinnn rrrnhaser or

ALiorioan bL.nk, whe

Acr;nptan3,-: the purchls

:ouu;1 JImrica, or 7.1:12rop:I, no
;Jill, as a

eneral

MF1.

or

any

offer to the ship-

hipr in smoh countries

take the anaeltanne of Anorican bank or

banker, bacauo th2! Anori an bill ias no roa,
ly nar;:et, thilo ;Ie
'.iuxopean bilj is of wl.ry

or?.1o.

It is inossible to estimate

*Ji(r; larty) a 31;_m !..3rioa pays cvar7 year to
,
sion

-1.7.rol-)e by way of commis-

for accopting sudh aocumentar:: lill,4. "TrtemeTrtrr-bellikommetk
1
1

yetoormorommkerTm414 bi.t the figures rvn Into manv millions.
in importance to the lecumentary bill
troe montlLs' till 'Ira=
.

"tian2.: or IvIner as a commercial credit

E2ranod by the accoptor tc the customer.
paraLivaly uiftple

•

s the two or

771,is tronsaction is a cora-

It means that the "!ropean banlmr permits

his costDmer, -ehother resiaing in the banker's crn country or abroad,
to MM. dro.w on him -.7.1: two 07.7 three mont11p' sight, with the understanain

that th

cuvtomer will pt the Dccepting banker in funds be-

fore to 11111 frIlls clue, en thit the drawee will not be called upon
t*, varce ary carh.
%/3




7e merely i7ives his eirnature to an accept-

t17o c!toncr F7err 7-Ider discount, ernployInç in his

ON.

business the cash thus realized.

,
The privilege of renewinr the

bill at maturity is often agreed upon at the outset, and the use to
Which the customer may safely and legitimately put the money realized
from such a credit will in part depend on this feature of the arrangement between banker and customer.
Large business firms will, as a rule, have such accommodas
tion at their disposal in several countries and they will draw against
their credits on such countries as have the lowest discount rate for
the tine being.

They 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 nay at tines cover all their foreign credits
and use only the financial acconmodation offered at home, if, for the
time being, the home rate is lover than the rates abroad.
The vast majority of these commercial credi'L; bills are
dram without collateral, but there are many instances where the drawer of the bill gives security to the acceptor by the pledge of his
ern bills receivable or of claims against his customers or of merchandise or similar collateral.
The total volume of bills representing commercial credits
given by one country to any other is relatively unimportant as tompared to the amount of documentary bills issued, but large nuffuers of
such bills are dram by the home customer on the alone

usiJec-

ially in France and r_lermany.
Since the rate for a three-months' cash advance is very
much higher than the discount rata for three-months' pills, it12




tho
nearly always more avantatseons for the customer to draw on
flaition,
s
trz.n27er and to pay the collaniion fo- : acceptance ana l in
st
.
the European stamp tax, rather that to /a: the r.Ao of intero
charged for a three-nort

cnsh advance.

This heavy difference between the discount rato

ho

different
r03e. for cash advances most eloquontly illustrates the
vrtLzntion v.rplied by the 71roper-n banker to an investment of eL.sy
sale, -- thr discount,

v..1) :3ach for

o.s compared to one that

even tho comTarativoly short timo of three months in a nonlicitid
asset.
Mere are nreo 7.7inde of rarehasers of aiscounts in all
inportant financial centers:

One is the centrL1 tank of each coun-

try; the second is :11o. lan7I7inc; community at largo, AhiCh nouns banks,
bnnkers, and brokers, 14ho fern te regular investors; the third is
the irrocular investor within tAna without tho countrr.
The rlationfthil) betwoon the central ban': and. the (2.1zoount
market is a not important one.
proportl.on of to bus4nosF i?
'
04 t'is
CRW'V

,
(?ver

While in normal tines only a small

one by the centl.c.1 ha2r, tLe czistence
finrIncial str7;xtvxc,

nll-iriportrnt to
maes it ^

not tc reaiscolmt with the
independen: of this

17
cnritr^1 bar: nne ir its general
.tr4;tnn,
inst.

fact remaipsJz

n (2,3.cv

rnaiscoluit with tbo central bank nvor::

ne

t cun nevertheless
7:cth tankers'

a
.
or reroartiln annertance, so that evcr:" lejitimate i1l1 re7resents
7/hi& ever:- bank or banker can
quick asset, on the realisstion of .




always rely.

Consequently no investor bank) banker) private capital-

ist) or fina=1::.1 LIctto

;r1l over 1-ecitate to buy rood bills.

Purthormore l there will not 1)e in critical tines any rush to sell
goocl hills) as everybody in these countries knows that there is no
1
better and safer investment) .ecause for no other investment is there
an

ually reliable market.

It is this confident reliance that

creates the cnornous discount rmrhet in modern financial economies
nnd

)ossible for untol
rcndors it ,

chaire hand s daily, sometimes

illions of discounts to

any ollnncp whatever of rate or

else with fll)ctuations of only ono-si7tonnth or one-eighth of ono per
cont.




or nnYmm.

February 24, 1910.

TOW CIMTRAL BAXTB IUFT=CE THE MO= LTARY=.

The manner in which the central 1.-an1s of Diirope, by control of their note circulation, maintair filo reserves of the contry and check violent flwItuations ir the moncr.i mar7cet, is ono of
,
the interestin

phases of the renn:rayih cf

which has just been made public

y the

7311.1

Wyrburg,

atInn.P.1 rbnetnry lonmission.

Mt. Warburg begins this part of tIne discussion IYJ declaring ttl_at it
is one of the main duties and -nrivtlels of Vie gcivernmeat banks to
Ge7x4-rte
buy legitimateA paper,
1,9x been nTeeptel or end.orsc: b lankors.

As the government banks from time to tine 7.- 7;y t•his 4
.
„aper, the

volume of their circulatinf rotes, t!lich they issue in payment, in,
creases, while, on the other hand, 7ihon they collect

paper at

its maturity and thus refluce their 11:11d1ngs of discounts their outstanding circulation decreases.

:his means that they exaand or

contract according to the requirements of trade, becaase discounts
represent proilTessive stages in the proons7. of connerco -nd inaustry.

However, thts 19 not n noroly autonntic process, for when

those entrusted with the mana,
jement of ;he central bt,, see the
necessity of exercising a restrainin:-- influence on the 1)8iness
comunity, they raise the rate at vthidh the ban:: will discoun, and
in thiE they are f7enera11y followed by tho other banks of the country.




-2-

as
The government banks consider thenselves more or less
part i.
custodians of the national reserve, ready to take an active
the nation's business only in tines of emergency.

The distinction

crisis
should, however, be carefully observed between the abnornal
e
in
fIcal the normal emergency, arising periodically
and What mirmay

t

nts or the
consequence of certain economic changes, like crop moveme
s,
particular requirements for special industries at fixed period
which, as experience &ors, subside as regulaxly as they occur.
When those normal emergencies arise, the central bunks do no

ordi-

narily raise their rate, but, for a time, meet all the requirements
at the usual, or at a very slightly increased, rate and allow their
circulation to increase with the result that tN, reserves go down.
When the government tanks anticipate, however, that more than a normal emergenc;, 72111 liave to be dealt with, they successively raise
re in order to protect the reserve and to force liquidation,
and in order to deter all branclIns of industry from entering upon
far-reaching obligations.
Each governrent bank has a very decided interest in keepin

Is

o)d

as large an possible and in preventing the

6.01a from leaving t77e country.

If an aumerted demand for money

nding,
and. urerAt 5,oconnoftation !.ncronsen the anntult of notes outsta
only to enthe government ban]:, by raising its rate, purposes not
the general
collrago a gare:::a contraction of business and to force
-oarL:0 of aa ocrontr7
i
4L---L,; your:I- rk/ Ty.7




contrrIct, hut also to attract foreign money
inrinement of the Iliher intorost return.

liont of the central banhs in normal times accumulate large
amounts of foreign bank paper.
pose:

This is done for a two-fold, pur-

Yirst, in oraer to withdlea

Amda from '.1,c; ,olno maret

1-+. a

time of ease, thus creating a reserve; seconalj, for the purpose
warding off rildrr 77als of geld by Ilse of the foreign bills then
.
forcign onnbane rates approach the gold exporting point.
In the United States it is not only a central 119.11;r .
eich
iv lr.ckinf7, but a discount system which creates accontancoc: cn-)a1
,1c
of rcad7 sale in the money marl:et.

The fluctuations in the demand

for money cause distrbance on the stock exchange, becallse that is
the only market for call money.

Our own system being absolutely

inelastic, we huve 1)ecolro accustomed to use as a sul stitate the
.
,
porer of

OUT

Eulto-po av

banking comminity to bor-ow in :;urope.

;7(1 tl-_uB use

n au.dliary finamia3 mac'the; but -Je forot that our

weidvt has 'become 00

roat

s to '6111'oaten the safoty of the -uro-oean

machinery when ue are coml)elle, to Itse it to its utmost capacity in
order to provide for our needs.

lurope, in shear se1E-definsc, re-

fuses under those circumstances to let us borrow, and by the simple
means of refusing our finance bills renders useless our reserve of
elasticity.

Thus, instead of ,
,oc,riqc, additional means of usr:,.ct-

ance at ths mo3t critical moment, we find ourselves sndden1:7 forced
to dispense with a most important parL of our nacY.iner;., 1-pon vep_ich
we were mont to rely in normal times.
the panic (:11 1907.




2his is that hap,enea luring

In -1111ro-rie the

plus and minus of money requirononts

are adyested by t7ne uso of the discount nar:zet, -- that is to say,
in a final anal:fsis, by purchase or sale of hills.

721

"
a,

ana]ysis this means that in reurope attempts to liquidate are pr::.marily al-)peals to the whole nation to liquidate its temporary commercial investments, the brunt of such liquidation beins borno by the
entire community, and the pressure being constantly subdiviaod,
.
elrery member of the eorn:-dnity thus

.tIng his share.

As a majority of discounts re -present goods in process of
production or on the way to consumption, liquidation with them primarily expresses itself b-

falling off in new production, While

the consumer: on the other hand, cannot stop consuming ara nuert
therefore continue to pay.

The brunt is thus borne by the whole

nation and adjustment follows without violent convulsions.
Of course, general liquidation in Europe includes a
liquidation of securities, just as liquidation in the United States
also includes liquidation of commercial paper as it natures.

But

the difference is that in Europe bills will be the main factor and
securities will play a much more subordinate part, While with us
jur3t the reverse is true.
lo naintain the right proportion between the demand cash
oblic;ations of a nation and its holding

of actual cash is a tank

requiring the minutest study and the most constant care.

In Europe

this is the function of the central bank, wLich concentrates its at,
tention and enerc?;ies almost exclrsivel: on this duty, and which




..5

should therefore be kept free from too intimate and direct contact
with the ..7eneral business of the country.
be !3eneral ban::s, on the other hand, organized to be
money-makinf:; concerns and devotin6' their energies, as tho

do, to

takini; care of the requirements of the c;enerni public, cannot be expected individually to watch this problem of the cash reserves of
the nation.

Moreover, such a duty cannot possibly ho z;erfornecl by

21,C00 competing institutions, Which can only protect thomzolves by
attackim7 one another.

Mere must be one central reserve to thich

all unemployed cash will inevitably return, and to which everybody
can apply,

an fl.cute denand for cash will unavoidably bring forth

heation to pay in cash, as happened with is "Curini; the last crisis.
Hesitation in pc4n3 cash only increases the drain, thich each bank
.
can meet on17 by drawin3 on tlic reserves o17 1- 7re other bunks, and if
to these -aboarnblo conditions thoro is tLdaou a foolish law (unavoidable unor a decentralize'l. s:Totem` which, by making it obligatory to keoy, 25 per cent. of the el.oposio in caz;h 0 renders the cash
:
reserves asolute14 useless, there car 7 ,n only one conseouon-e 7
ViL.,

runs by '6110 rr.blic, :erns by the banks, hoardinc; by the

and by the

ana finally a 7eneral

anks

pen.

.
7 2 a. .7ter n )7rclongea droup4ht n thunderstorm threatens,
What would

consequence if the wise mayor of a town should at-

tempt to moet the dancer of fire by distributing the available water,
0:iv1ng each house owner one pailful?

ohen the ligktning strikes,
.

the unfortunate householder will in vain fight the fire with his one




-6-

pailftl of writer,

the other citizens will all frantically hold

on to thoir own little

upp1y

aaner.

their onl, d.?fense in the face of

The fire will s- read a:Id resistance will be impossil,le.
d

If, however, instead of uselossl

dividing the water, it had re-

mained concentrated in one reservoir with an effective system of
pipes to direct it Where it was wantei for short, enere;etic, and efficient use, the torn would have been safe.
7:c have parallel conditiom in or currency system, but,
ridiculol:s as neso may appear, our br-ue condition is even more pro- cstorous.

For net only io the viter -doeleselj Li3tributea into

21,000 pails,

are permitted, to 1,so Uhe wz).ter only in small

-,:ortion:3 at a tIL3e, in proportion as the house burns down.
Totcs is;.raed L -aiaist uisco.
cnts mean elastiolty based on
the chan:;inc deriv.nds of comnerce and trade of the nation, While
notoc. Thse0,

.;overnmont 'bonds mean constant expansion withou4 con,

traction, inflation based on the requiromehts of the ',.overnment witho- 1t connection of any kind with the temporary needs of the toiling
.
nation.

Requirements of the ;Tvernment shorild 1.0 net

divan', or

indirect taxation or 1):7 trle sale of' p
.overmiliont bonds to the )oog.o.
,
Ett to use L-ovornment bonds or othor )ermanent investments as a basis
for note issue is unscientifi2 and dangerous.
If the Panama Canal costs C500,000,000 we shall have
500,000,000 adqitional currency, whether the nation needs it or not.
But that sane 1;erson can be found to make the currency of the nation
dependent on Whether or not we build a canal?




And why should we

-7-

l canal rather
have more currenc:: if we decide to build a sea-leve
If ve were not so well protected by our immense
than a lock canal?
exportin

catas-power, we should suffer even worse and more frequent

ining a
troPhes throuh our system of issuing notes without mainta
and through
safe Proportion betweer gold-secured and uncovered notes
ments and
our device of a circulation not based on temporary invest
therefore incapable of contraction.
a continuance of rler. a syote

!
;
3ean. doubt that
211,ero cannot 1
Tho economic

must prove

be aalal;i dislaw that 1-)nl :=ey al7fayt:J drives out .;-ood mo1i4 oi,rinot
offect will dhow
regfl7aea, and it i? only a questicn of time 1,71u
itself.
yre compare the not results of the dikicoluit system with
:11.ro
.1
the so of the bond-secured system, we find that in
terest fluctuate within cormaratIvely small

rtoEi of in-

While the out-

s within wiao
standing circulation constantly contracts and exl)and
;
Thn outfstandini clroula-U.)n,
"M.th wi it if= the rovr;rse:
ranms•
inonc. it is iss7le, renains fairly stationary, 1j.hila
te-ont f11:.ctuatc violently fron 1 to 20^ per reat.
its
Me discount system onaTdas the oountry to concentrate

ngs about a clear
reserves r111.(1 to use them frccly vihen nooi"ed; itTJ.ri
and. the
thin seneral
distinction I:etvmon thercrl:inE,; 77oserves c?

or t1)(1
aotilal cash reserves needed to protect the circl.11tion
,
E.71(1. (v.- x reWith ur such. a line of 4.emarention cannot be cla7aw71
elsolutely unavailserves become hopelessly decentralilea and prove
able in tines of stress.




-8-

Tho discount system reeoc:nizes the fact that issuing money
and making lacyLiA

are two entircl

:listinct functions, Which are at

tines antsuaistic to oach othcr.
It is the duty of the money-isbank
suino restrain the noney-main!_; ban3.: When the latter wams to go
too fa:, or to !7ast.

Therefore note issliing and general banking

aro 3e1)aratela in Europe, thn power to issue notes being more or less
centvIlizod.

71th us, on the contralry, ,7eneral-banking power and

noto-loouLic: power arc lodgel in the same ban, and the note-issutftg power 1:-7 not cortY:Tlined.




,
IA.

ta

:)

".1.•

p

•

r.f

Mr. Aldrich. I desire to state to the Commission the subjects which I think it necessary to investigate and the class
of people that I want to take hold of things with us and for
us, with a view to getting the best possible result.

There are

a larr:e number of men who have been studying the various phases of the currency question alo'u, different lines.
In the first place, 'Professor Davis R. Dewey, of the Institute of Technology, - .oston, has been placed in charge by
_
the Carnegie Institute of the subject of the banking history
oi the United States.

He is willing to put the material that

he has gathered at our disposal if we are willing to give him
some clerical assistance - say that of some young men (students
and college graduates)
thorities, etc.

who can assist him in looking up au-

It seems to me that this would be a very

uable thing to do.

val-

The work he has in charge is a history of

banking in America before the nivil War.
a-ea-0
There haveA been a number of young men who are at work on
various subjects whom we can employ to do different parts of
our work in tais country.



I should like

o have some one make

a special investigation of the safety fund and free banking
system of New York.
Mr. 3ailey. I question the authority of the commission
to investigate general bankin

conditions.

Mr. Aldrich. I will cal the senator's attention to Section 18 of the Act of May 30, 1908, which is as follows:




Mr. Bailey. I protest against obtaining information about
savings banks and the ordinary banks of discount and deposit,
and think we should limit our invesItation to the banks over
which the Government has control.
Mr. Aldrich. The questions concerning which I am now suggesting that the Commission inquire into led up to the formation of the national banking system.
Mr. Bailey.

And that was purely as a means of selling

bonds.
mr Aldrich.
.

It 1:Lay not be profitable for us at this

moment to enter upon the discussion of what were the reasons
for the formation of the national banking system.

I do not

agree with the senator from Texas, but that is not important
to decide now.
Mr. Money.

I think it is very important to know now what

our work is to be.

I understood that the prime object was to

inquire into the monetary system of the United States, and that
would embrace the banking system as an important part of our
inquiry.




. Bailey.

I do -01: question the propriety or the power

of the Con:mission to conduct any_nvesti€,rations of the existing national banking system.

What I protested against was

the statement of the Chairman that he wanted information about
the safety fund and free banking system of New York.
(Af or some further discus

0

.

ry)

4, Zer/t-t).1_
1

iww
6,44-01- c
•
Mr. Aldrich. I am in hopes that some tine in July, or per-tt

ore4 / -7 1

haps before, we will be able to present the complete report
of the information collected in England, France and
.• -

ermany.

o say

U

I•

A2i4)
wA.N4-44.31,7, partisan in the information which we obtain,and
the preliminary reports \vi1.1 contain simpl:r facts and not theor-

ies or conclusions.

T.r. Hale.

If you can get the information you speak of

into shape by the end




of the extra session of

r' ongress

- the

complete state.
'qents of the systems of the three countries referred to - that will be an immense step in the direction you
have in mind.
Mr. Money.
be

Is it necessary for the entire Commission to

engaged in this preliminary work of obtaining information?
Mr. Aldrich.

I will be glad to go ahead withoort tite-qpiono-

prw-rAL,
zagirogrirrn if the members of the commission understand and approve
of what I am going to do.

I will be glad to consult with the

Vice-Chairman and with 1Nc member of the ("omission from
61
time to time.

Mr. Vreeland.

I agree vith the Chairman that this infor-

mation will be worth ten times what it will cost.
Mr. Weeks.

(Addressing the Chairman).

If any consider-

able expense is to be incurred, I think, for your own protection, some formal action should be ta':en by the Commission,
granting you the proper authority,
Mr. Aldrich. I entirely agree with that.

I should be

glad to have a subcommittee created which wuuld have authority




to pass on questions of expense.
1\Mr. Hale.

I would su:-gest the Chairman and Vice-Chairman.

Mr. Aldrich.

That would be most satisfactory to me, but

I would be very glad if Senator Teller could be associated
with us.

Mr. Teller.

Mr. Hale.

I am willing to trust you in the matter.

4.44Kn
e
I move that the employment of agent, or a sist,
44LALLee-ea 4_4

/t

ants in investigation, and the expenses of the same, be comA.
mitted tc; a subcommittee consisting of the chairmar! o.ftd Vicel
Chairman, and senator Teller, this subcommittee to make such reports to the full Commission frcJrn time to time as they may deem
essential.
This motion was agreed to.
Mr. Hale.

My understanding now is that it is left en-

tirely to this subcommittee to exercise authority regarding
expenses and to scrutinize the same, and, whenever they deem
essential,




to report to the full Commission.

(After some further discussion).
Mr. Aldrich.

In connection

with the visit of the sub-

committee abroad, I desire to say that our Ambassador to France,
Mr. White, rendered most valuable assistance to us in the prosecution of our work.
Mr. Weeks brought up the question of foreign and domeuic
exchange, suggesting that he regarded that as one of the most
important questions that the commission would have to deal
with.
Mr. Aldrich stated that when the members

came to read

the report of the investigations of the subcommittee abroad
and their interviews in foreign countries, they. would see that
the subcommittee made that one of the principal branches of

their inquiry.
Mr. Weeks. I wondered if you. had it in mind

to employ

SOMR one to investigate this question.
Mr. Aldrich.

I am very glad you spoke about that. I cer-

tainly think we ought to do it. You will find that we exam7
'cA-1-4^-e
in this subject.
ined Lord Swayt




Thereupon, at 1 o'clock p.m., the mommission adjourned.

The National Monetary Cammiasion took up this moreing the
questtion of suggested amendments to the administrative features of
the banking laws.

Secretary Cortelyou, who was present, asked to

have the hearing on t'e1.3 subject postponed for the reason that the
forma. recommendations of the Department had not yet been completed,
and the Commission decided to take the matter up for further consideration on Wednesday morning, December 2.
The Coevei.;sion have communicated with the President of the
American Barkers' Aseociation and suggested the presence here at
that tine of the legislative committee of that Association, consisting of five members.

In order that the various sections of the

country should be more fully covered by representative officers of
national banks, the Commission decided to invite the attendance of
the following gentlemen: Wm. H. Porter, President Chemical National
Bank, New York; Thos. P. Beal, President Second National Bank, Boston; Ernest A. Hamill, President Corn

xChange National Bank,

Chicago; E. F. Swinney, President First National Bank, Kansas City,
Mb.; C. E. Currier, President Atlanta National Bank, Atlanta, Ga.;
J. T. Gannon, President New Hibernia National Bank, New Orleans,
La.; C. K. McIntosh, Vine-President San Francisco National Bank,
San Francisco.
They have also asked the President of the American Bankers'
Association, Mr. Geocge M. Reynolds, President of the Continental
Bank .3f Chicago, to be present at that time.




PROCEEDINGS OF TH)3 NATIONAL MONETARY e0'UTISSI0N.
Hotel Imperial,
Narragansett Pier, R.I.,
July 20, 1908.

Pursuant to the call of the Chairman, the Commission met
at 11 o'clock a.m.
Present: Messrs. Aldrich (Chairman) Hale, Teller, Money,
Weeks, Bonynge, Smith, Padgett, Burgess, and Pujo.
At 11:30 a.m., after the coruaission had been in session
about half an hour, Mr. Overstreet appeared.
In calling the meetin,L to order, the

Chariman stated

that one or two of the members, including the Vice-Chairman of
the Commission, Mr. Vreeland, had not yet arrived, and he
suggested that formal sessions of the Commission should not
commence until they were present.
He stated, in a general way,what the Commission had
done up to the present time.

(This will be found in the min-

utes of a preceding meeting of the Commission and $ subcommittee thereof).
He further stated that, in his opinion, it would be
impossible for the commission to make a full report at the
next session of Congress, and that probably the only subjects
that could be successfUlly taken up would be such amendments
to the administrative features of the national banking laws
and of the Act of May 30, 1908, as could be agreed upon with
practical unanimity.




Minutes of July 20.

2.

He also stated that the Secretary of the Treasury had
been requested to recommend necessary or desirable changes
in the administrative features of the national banking law,
and that the Secretary had been invited to appear before the
Commission during the week, at which time he would probably
submit such recommendations as he had decided upon.
One feature of the Act of May 30, 1908, which, in the
opinion of the Chairnan, demanded early attention was the regulations governing the formation of national currency associations, the particular objection which had arisen since the
passage of the Act being the inability of a bank to withdraw
from the association, once having formally become a member.
The Chairman also called the attention of the Commission
to the immediate importance of giving some attention to the
subject of postal savings banks, on account, first, of legislation on that subject being on the calendar of the Senate,
and, second, of its having been recommended in both the Republican and Democratic national platforms.
This statement was followed by an informal discussion
by the members of the Commission of the general subject of
postal savings banks, and, at 12:50 p.m., the Commission adjourned to meet again at the call of the Chairman.




PROCT-IDINf.'rel Or TTE-1 NATIONAL 11011MARY COITITISSION.
7Tote

'raper i
liarragansett Pier, R.I.,
July 21, 1908.

Pursuant to the call or the Chair:awl, the colrassion 2:iot
at 10

'elock a.m.

There ....Toro pr-erd'ent, in addition to the members who attended :,.rer,t3rd's sennion, Messrs. Bu -rows, Daniel, and
Vreeland.
In discunsing the scope of the investic tion to be undertaken by the Connif;sion, the Chairman said that its inquiries
coltid be divided into the following senora:1 subjects:
1.

The money question, 5poakin

in the broadest possible

sense, 1nc1udin5 note isauos in our own and foretik countries,
ion and under
by w,

that conditions, and a zrea.t many kindred

questions.




2.

Nulks, national, savings, state, and trust companies;

!Iinutos July 21.

eta.

postl 5avin6s
no:;mstir; and int c)rnktt,

exnha.r1

.

Tho r1a,10fl of t%:1 ';ovorwient to tlio vollmo of money

4.

bi rik,00n of t7if) no1.1.31tion, handain, and disbursement of
the revonues.

st 101i 1-)e fore +.,he Co; vission was, V71I.tt

Tho
S

st way to malbe .4 ()aroful stud.; of t;e av.L110.1is ma,

'
te •ial with ro 4 oronno to th9se (firtstions.
In an5wer to an in(r.ziry Iv 'Ir. 7)ani el, the Chat mian stated tLtt 1t

tas tit; rtonnonnur, of opinion th.t

;entr. 1
;)
.
.

so fox as

wac; oonr)ornod, f,alowin, this meet irk; then
:
„

would bq no othur meat in„, unt*.1
.1 after tho ((lotions
her, bu!',
should

the

Y.

o on

n ':oven-

work of ,repard.tion

subeolanit to*); the irid1vicua1 vietabers and
,-

by the oxerrItive.!or) of thr, (7o1D-11. f;sion.
Thi.

6t,htomnt of tic Chd.trl Ian was non nurrod in by tho

CO iiitssion.




This preparation, iii t'to opinion of the Ch.ttrman, should

! inut(is July 21.
.
:

consist of t
;ottini; toLethor literature and statistics On the
sqbjects above refcrred to and investiatin,; the expertenceS
Of the principal con. iorcial countries of the -vorld, so that
,elon the Corclission should assemble in t,ho Thi1, the;

d

hi!.ve a library in W.vr,I.inL ton for their ovn use, w%lich wilJ
;
cover the es:,ential

juostions which must come before .t,Y.e Com-

mission for eonr idoration.
.
.
The chairrian annoltncod th.t the subcolulittee which met

iii

'Iew York in Jane took thc responsibility of employin6
-

Profes:or A. P. Andrew, -..ho was at th.t time Assistant Professor of ;(10r1011iC3

ricrided

to

:Tarvard, and was very stron,,
-1:; recom-

to Conninnion by President 7,11ot, of Itarvard, and

others.
suested
The chainlan f;Irther xtalmat t7.at the host way for the
Co:lrlission to obtain infor:lation in rer;are to forein nountries iii ht be to oriploy an expert
'IroEut 1ritain,

n each country - say

cOtland, Ireland, C:.nacia,

ormany, and T;lrance -

to write a history of the various phases of the development



,
'linutes Jul: 21.

of th

•i're sent banking and none:: systons in these c ,)untries,

and a:1.5° a synopsi s of tlioso s:sistens as the:

r'i)

sent.

The C ha mail a).s ,) stated that ho would like the ro:rinis'
F.;ion to ecIthorizo a sna- ,1 subcoruliti.me to take up this ,vork
of preparation,
possible, ti-lc Co

ith a vixJ t
ii

carr:Tin6

t forward Xxximg

as

ion to fix thr; scope of the inquiry as

to coli.ntr es and subjects, ,aid to leave to the subconnit tee
carr _ int.s; out or th
.

details.

At this point (12 o clock neridian) t:a() Cori; liss ion took
a recoss to 3

.
Wh0:4 1 110

(tlock p.n.

fiSiOn

.
reconvened at 2 0,c7 ock, the dir-;-

rriss..on of t - ,e tiuostion of obtain in; 1.nfornation in fore iJn
countries was resuned.
it 'as f inally decided
the folios:in

the ini ry sho id embrace

ctmntries: The 77nited. ntittes, (71k-ulada, 7nclztnd

r;cotland , Ireland, 7rance, .1.ernan:r,




74,.veden, and r7-litzerland.
,

,osted that perhaps Professor clamor, of
The Chair:Ian su,;,

5.

!linutos Jul': 21.

,
;
Yale, wo. t1d be the 1-,of- t rian to, ,trit ; for tho CoHmission, in
hir,tor:f of bankir.L; and

conde11s(3 forn,

,rronn:f in the

Unt

next,

30;

line of

ioulci. uncle 1.to.ke

t.tod t

7rie ChaThlan

.on of the Con:Aosi.on,

1

V

i)

-"on
4.

,

tt)

fornulato

30M0

bo fore t.,he

:;eneral

covcr tlte scope of the i.nquiries ro-

1atin6 to t'o) countries refor-ed to.

The Chai mian

;
.
.vas t'oasible, in nii.k•r2:rin.) on
%ion, it .

.
. fhet,er,

the

.•7
0

tcd to the nenbers of te Co:Jlission

r3:: of ilivestiation, t;) rolect certain queotions for

examination , and to c:ploy :;o:lo trained econoni st

f.tral lox

i
%vith the literature cr (:;-•:,onr;:r , to take up these tiistionr,
Conni3oion the d.r3u.ients on both sides, to-

and Dive

f'71 references and citations to the ai)thoritiGs.

gether

Actinz upon thic. mi,:„:,or,tion, :Ir. vfooks noved Th.at the

bo ,ottiorixed to appoint a con-

,
mit tee of six, of wIlich ho nl- 11 be One, to 01 Idoy a person,
or porsons,

dlzty it :1 -;,L!:1 be to prepare a compilation

of arolaients and ro fere:icon for and ELainst the establishment
of a nontr.41 bank, and those who have il.iven carefiti consider


linutes of .1141r

,

1)

at ion to this s'abj e et be inv it ed to subni t their vie 0/5

lzpon

$Que .%) th: corclission in wri
4
This not on ,z.l.rter be in

r. Burgess

000ndod by

was

unanimousl: ad_op ted
In the di s(tur,oiQ
he f.trii

•thi eh
.

foil owed as to thc; Nen who wolild

th this sub(tt, the f31:1.0-in

ested: :lessrs.

ld.oIy,

naltpis were suc,-

oberts, 71 ..irrlhild, Joseph Tlninch

Johnson (or the 'jo':,"Iork 'Jniversi ty),
and

warber3,

)we
The Ch,lin-lan stiLtod

heun th,) lo.11)aration or
.

The Chi.

kstXPL*14.at

OH .00ncy.

Li hi I o3raphy O

fizrther :3t.ted that it 'tlitd ;,eon his inten-

tion to ruest
of Con,;ross

Professor Andrew had a ready

,r.

ri:rrin, the

3 tIlio L rapher of the Library
,

to api ea.r boforo the Comission at this meet int
;

on ini'tir

tiiis tine.

TT. 1.7'1:fin,

Y. was found that lir.

The chain Ian had hoped to sere




he advi no of

n consul t[ition with Prate ssor .',.ndrew, as to
,

what bo:-)ks not now in the Library of ConL,ro
sirable to

rf in was abroad

ouro for the library or the

it .
.io;z1d be de-

Tone tary Cotrini

Minutes of July 21.
After s3me discussion of this question, Mr. Burgess moved that the commission civo to the Chairman authority, with
the assistance of Professor Andrew, to secure for the Commission a z.od workint library of the best authorittes on bank,
ing and currency in this and other countries.
?Ir. Hale seconded this :41on, and it was unanimously
ado)'',ed •
The C'in.irman st:i.ted that at the meotint of the subcom;
mittee in New York certain rooms had been selected for the
use of the Commission in thn Senate Office I-balding, and that
the Soorotary was directed to communic...te with Mr. ivoods, the
Superintendent of the Caritol, with a view

of having these

rooms assigned to the Commission.
The 13uild1ni cola/As:don, in charee of the Se ,Jate OVine
,
Tht11dir, advised Ni'. "oods that it had no authority, under
the law, to assign any rooms in this bn.ilding, their duties
boirk., limited to the construction of the building-.




The chairman sui:;;ested tht the Committee on ?inane., as

8.

'anutes of July 21.
one or theload in. nommittoos of
led to rooms in the flon.Ite Of1
for

used

library,

,
-41.1-411:
1 02ap02

r,enate, would be entit-

iiidin

th:
)
-

.)

ror horinc,sid
socured, r:oul(1 be

rooms,

ti .t

;.1
.

t 1 .6

Comission until suit-

I
able rooms ( )1( bo assined b'r Con yess for tile
b

1110

of ti-io

COIuJIi5fliOfl.

r. Overst-t4et

:loved t:-b.t the w!Lole iiuestion of r;e-

,:or•inL; ;.Iiit,ble rooms in '.70.;ViinL ton for the u;;e of t:ie
;

commissi.on, either in the 7,finate Ort'f.7i4e
where, be de1o6a.ted to thr)

1111:1(Ln,:_; or else-

with al2thority to act on

boh(lif of the co:imission.
This riot on was secondod and adoptod.
The Co:lnission then, at 5 o'(:lock p.m., adjourned until
WodneF,da:, Jul': 22, 19,0, at 10 o'illock a..




PROCIMINGS O

VP, 'TAT TONI:, TIONTITAR'y'

rote' inporial,
7arragansett Pier, I.I.,
July 22, 1908.

The 0QiItriOI

1Li

C.alOd to

.1; ho,
111ttod t.
r-

UL;

t.M.

toi;other wi th ..!r*. Vreeland

y3rie ral out). the
vorG rt.4i(1: to p :*4- nen t a ,
1-)

and !!r. 01r)rfArc

or n“,i

o-dor at 10

0•;)t.,1.:
currency

-1:,rot%-uiti.011

ri:f3t,0;a5

1,‘,creuLlon
.

in recard

of the leadin

:.;)nt

to the hank-

coyillernial nations.

tLc

Th; j;encral pu rpose of tho CoA, c1on
1
Lein„, to make an exhaustive
the varbus bankino

WO

WO

comprehensive in,90.ry into

currency s: s toms
,

01 are in opera-

t ion in the leacanz cora in rola?. nations of tlie

co;iret-

out pc)tenons should he employ/A in each of sucli couptries to
prepare for the informati oil or the Commi r;sion non oi se
rate hi3torie3 of the development
countries,

or

should iritiude a

statistical information rolative to

ften11-

ex st1n,3 sz'*toms in sttch

important historical and
hi swim;

such informa-

tion in re ,vi.rd to these various countries to follow, as far
,
as pos6ib7.s, sirillar
may he comparahlo




onoria lines, in order that ',lit) revilts

2.

::irilltos of ,Tly 22.

; e(loild.1(7_
;

'1'

doptorl

plan iO

novad

}Ir.

motion

ur1zLjoL;

)
Ov , rstrGat t*:-.“;r1

th,,t

i'.1Toint-

17.1 510)c:oil/1 t tee tho CI-lair:Jan of the
ed by tiho Chairvtli, of ..11);,
Oot;tcw3hia 1 -tA; thf:
F.ttropeitti c;ap i tals as

V;T
;

o(1_,4opiceil /lc nor;r)t,a7 411(1 pratlt i cable
t)011.10 -,an

to -11.-4.:00) prop ().1. 4nrazie tontv. ft)
.A..
e!tt pqrsonr, j1z3t ivz -r,horizod, n.t
,14,01 1 (:k)
. 1

thorized to vit, rtch

xtit

of

l
-prio t-

ch invo st

ions

Of i,..c,11tit,t) fksi t'' 1;1.0 propev

.1.?*

-, vorti of fill(' cort:i1;-:..ion.
,
Titil;

wa;:,

t...
r(ldit Lou to the ,:lostions

te;1
(h he ik441

1;10)

t,id

vious(.4.;)

in., 0;,ti,;1.
: ,ion h:
.

sfdon , there were the

Co: -1

1. The Tao:Ate:1

o
ox t'.oui

hank dt-r, onit5.
ht

onsiciered

safety-fund s: 4,4;:l In 7o-; "ark, tho fro 0-biaLk int :;;;, st,ert of
;
.:1




MI

!linutes of July 2.
York and the

3.

A 7fo1k synte;i of :%4,5sii.chirsett5.

34r. ":1;tr,;frsr.tt

th-t

nor's !!ajazine t! ere :las

it.:1

;

:11.111)er of r'.(Iri b-

article Ly ::r. Laut
3hlin opposin,;

,.
the L;.t.k.r...ntp- of banlz do: sits
It

,
.4s alr.;o st.;.tocl that ::r. Por ,an, of Chic:J.3o, was ; r2.ti

haps a, ,;(),-)d man to 'trite in the nti ;Ltiv, ) oil t i
,
2.

F;titte

,nestion.

nkin. laws .1.110_ statistics.

t 1:i.; •-to

:',,- ction the Chair:via/1
)

t': (Lt 1-1(1htd

alre-dy caltsed lett(Jrs to be :;ent to the h.nk
tho v.i.rious st-tes

exaniners of

noplosof t..e 1,resont St,:tte

la.:5 on th: slb.,:ect of hankinz.
The question of holdin,,

eirferent, pctrts of

the United, Stilt os at ; L;r1:: fi,:ture 1,
.
:11
moral-Ars of ',110 00:1 ;;:lion
that perhaps this
each sulicorauit

o be;In

no112.

Was 611—listed ty one rpilnbor
be done thro't,_;1, subconilitte,;s,

anni6nod a (to '
1",itin

country in which to hold hearin,,s.
opinion, ho rover, t:,:;.t it



.ts discw,
,!4ad by 1,11e

;;Ontion

of the

The chalruan was of the

mid have a bet imr of rpict, on the

linutes of July 22.

4.

d I rferent localities visitcr! if thit ;re -; commission should
hold thl hearinzs, an

thc diussi.on

17olloed develop-

ed this to be the conoria opinion of the Commission.
;
su(it tint u..londt cri `;:; to the adninistrat I vs features
of the lational 13ankinc,
(11',E4,rioo

the Chairma.n said there was one

elh certainly wzcht t

be riadn at; 1,1to rirst oppor-

tunity, n,4,mely, that national bank oxaminers oucht t. be com,
pensated by r ropor slar I :Er; paid by th

ati nal G-vernment

instead of by fees paid by the banks whic;i they examined;
that they should 1.)o - von more power than they now possess;
and

that an endeavor should be made to get a better class of

men.

)0.
.;ost, that bank eNaninors should have
It was su .

ljpeaka

authority to examine banks in the national nu P-renny 413s0 oia-

tionts

41athorized

the Act of IIity 30, 1906.

It was also suczented that it nizht be wise to appoint a
subcomnittle which would take up this question between now and
the next miltins ofthe full Commission, and perhaps consider
other chances in the administrative features of t141.0atiina3.



:linutes of July 2,2.

5.

'Ranking Law.
At this po'nt (11:45 a.ra.) the commission took a recess
until 3 o'clock p.m.
‘:11:en the) commission reconvened at 3 o'clock, the chairman
sue e6tc.10 that a:; tli
.
,

'
,
tor° co.isidering the several chances

in the administratIve foaturos of the National Bariking Act ,
the commission might adjourn until 10 o'clock toAorrow :norning,when the Secret.try of the TrGaeltry 'o (?.d appear before
them on this subject.
The su„'—estion wan adopted, and thereupon the commission
adjourned to Thltrsday, July 25, 1908, at 10 a.m.




-4

,7)ITY1 0 1 T!'ll 71.A..TIOTTAT, TIONETARY
PIZ007

coincirsIoN.

!Ire 1 Imp erita 1
Narraowisett Pier, R.I. 2
1

Tho

ui31O

247
)

1: 0(
)

calle4 to order At 10

tmtary or the Trfatsitr:,
Se,
Seretitry

sist,tnt

(11:0,17UI ikid

il,,)paarod

co:t

on

The Sor!rot.:./-: o.r t1.0
in rerd

n t,ho

1L.Ld 14.-tr. n ide
;
:t.90t; ‘ 11(.)/ic tn
: ,

it)zit. iii Ca!'ryi11,31t1:nt: Aftl,

',aws,

1

the

sd nort.Lin (letstro,1;le

tent 9.
At, 12 o nlo

.0)1

1,hC

: lerid13.n, the conlvission t

CO41i

i on

onvInof' to-, 2

• •; • 3

rHrte,

't ? t)
)

r;0

-

t iiry

of the Trtvonry
7•03foro
for




pj()7g .Ort

t

th

va.r.tous rit(1,). :endationf:
Na1ona

nankin‘. -Aws.
;

Minutes of July 23.

2.

Cop .es of the statements and ri)co; riendations of the
Senoetary will be attache(' to those minutes as 4.4 part of the
ro coed ins
"'hen the Secretary no:1(0110.0d,

l'reolanct, the vice

Chair tan of the conni:;sion, took the chair durin,; the
temporary abs ow 0 of the chaiman.
nr. 'looks rived that a subcommittee be appotnted by the
Chair to consider Chanzen in the 7ational 71.v.ikint TA
;
03 and
especially those :31rittld by the So.:rotary s)f the Treas
ury,
and Lo reliort its k;onniusions to tho Commission at

it

next

mi$tat

Before thr: discussion of this motion Was concluded, the
00:.u.l1.ssion took a rece3s until 8:50 1).m.

8:0 p.n. the Comission roconvened :

rionator Al-

drich in Via ohair.
After sone further discussion, the mot ion of ?Tr. reeks
was 46 ood to, and thy) Chair ari, inted the
-r
follo"vine, subcom


ilingtes of July 23.
mitt:

3.

Senators Allison, Burrows, Teller, 77onti l and 'Iatley

Ropr4iontatirem riooks*, 'ionynze,

riit1t,Tlur3ess, and Pujo.

Upon notion of Senator 1:oney, at 9:30 p.m., the eonnisslot) took a final adjournment, ,tvin

to the lhatrAn the au-

thority to detornine the timo and plane of next meetine.




Triperial l

t Pier, R. I.,
July 25, 1908.

At ,tn

r•,w!fororirle of

tn't rionhors or the cortlis-

sion as %Tor- F;ti11 irmL7-'i4-4.1-P-ii,:;aisett Pier, the following
;

stitt,c)lct., t •fo- ti:()

0.,:;reed. to:




S5 W:15 S'1hAi t; tod by tho c}ii-tirriiirl 0,nd

Corriis si

t on Of t,he v.'.riotts pl-ito;€1

i
a8stc20-.0 t.,4;

iteri

d

,
,
1)011 4411. 41

;
, c"..tr Iat Ii Lr;1')I

o r 4,ht- important work
vort ion

A 1..r

!
1); 1,11, .kol. of 14.klf 301 190

up in nonsidaring plans for so cur-

of the :the '-L4$ bac34/ ri

,re
;1".117.illii.t,o report to oonL
.
ine informition upon whicli'
1.
Ti, saao de •xf.od or tile u tilos t. import„tnne that ate')s h4.1 t
en to se(rues

of thii 1.ein6

exam twit ion of tho rioneto.ry and b*wkin,
eorimornittl nti.tionz,*.
to

810)(101111 t

Preparation for

work Wea.5 ntru F). tt;c1
..noz;

,
,
corir, trAin; or -•.e.)44.1.t- ,-,/.3 Aldrich, 74.1

q3. and Rol)ri r,ent„;ivo s 'inteland

and

exh.sats t Lye

qear its po si3tb1o

tlloros.42;h and ,

Overstri.:0,

111,rton,

.

rind
Th s

r.,t)ok to 5scure fron r.orti, t 4int arid

001.11:1

r• 1 tative r,ottreo s a.1.1 available hi. sto r'I 64.1
:nne to ti
(led (;...1i, 41.th ref()
'iri ta.in
31, 0. I 41

currently

rwij, and Prioloo.

x..imirult toti of the

4.7 CO tch,

arict

u

s tat 1st

bit/a:AIL; exi,tir

The:"

(t.niditn,

,
1 it). so 11441..e

s-

and 9wed sh

titi 07, ialw the nharizes which 1-1.0/0 r# emtiy boith adopted in
zerl.Lne .
It 15 the intcr,t, oh Of
At, 441 ourl: day fo
Ade, (

the f zu. Coruo 1 Bs tort to visit (3.AL
xitri-

.,080 or
the imr

1 n(At ion into the fsanadian f5ystsn.
.
In the p ro fse(rat.1 on of tlio ir .vork

tho 8141.null lit ts

-;1't 1.

1
4tbroad in the near flitttro, sitiltni; on Vol .-"rottir1ll4e:in
eettilie on the 4th of




u,pr.t.

m):1::,int triJ of '4tk.tOJ'A All i twit ,

Another subnoril t
1114 tyro ,rfs

're 11 r

7 Tor

7.1ort,;(116o,

Tgqith

"Pa r114

:3(1

$
o

, :trie P

fion 5,(1.(rAti.;)n 1.110 1140:It A.

r

t 11•'s
.

1.1111, ,riAt=ir o
,

AlthtiOrrilt 1
.11, :1(.3

; 1:1:1

htt

e

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.;441 t.,021.; tr. i

1-1:.I5 ")(11t1 l'Ii.r11101•110113
1.*

4

41

vizaim-a s.

Ate

,o
ho able. 11141
(101,

t,r'exetinc to 11or1':(1V0/111r...r

Tr, •te: t tt>tt
on

it

tho Corrti Y4 -

t,ilitt no arion(;!* rit,a3 3

(1.Y.1) 1t
04

thfjr l'Of::)170-o*Ite.iat I.on:Irs

ttø

so ere Lary

i
1.1% (:0 rtfttri- tle.a

sifl illt h rorel re?!cte

itLif3d

tuirind t6t)tt,s t.%) t 1114

:r.' lotto

of t,hto ?roa3t- 1%7
4




,JI)

tiro, tve re 4t t, .rtft:;orI otia.1

LI

hfl

34)11 tat /Yr)01 W0t3k

feti 6.1 -Y.

to

4

1';ay 25

The quo st Jai 0 r the noxt
Was dtsnizisod,

tLat the 01-„..1r
.a1




!t,

ioot n,; of t}t fuJ; (mint ssion
opin ;on of all those present

cule,

o.•

thc nex t
.. veral),ir 1.0
.,!o,

r the con190E;
.

‘,.ilitr.rtilr;

TT-17, ON

0?

:7)ING
7 PROCI'17
1-17,

To Till IzT:17-IIITIIATI7N

74:ln
Air:m.)777,

ri-lATITIT M 0? f.Z:T.'1 NV:770'TX; 1dlY ACT.
,

tol DA,

al.

'4trrit04! et t

or 13.7.,
:
July 25,

„

b;lor.•E ut larre aro ".-;et Ato r $3 All tot,

t7:,t1

.4rtct
llonynzo,

74"Iii#1

Rweriulentic-iivors %rooks,

;ale.

tit h, roar;or.n, 2.:.11 ?IQ°.

Prtisonhthe :v.: o tInc:
fldflL371ur,;asr.,

Thurrow 5 Tol ler
,

mrs

7 •16)(

and Fttjo.
fileeptin; '7,43riatt.ir Allison

The

rne%ri Vimo (711.tirt.tiAtt.
Chat.rt*uk and Tlreztortt:ttivo ,
.
Tho 0013v,ittelo tzr.);t: 111- the flow;ilieration ot' 1-Jvi •ot.,;. est:
;
tons :1,4da 11:! the f.f)nret:.kry of the) Trotovtry .rele4tivii to tilt

the fliinret ary to (1,)13p.7. f,
446

dotc!rviined to reili4.est

bat111:
.

c";anqs in tls,t1

tho Fov-

t on s
o eitbriit the

or.•orqltnity to cto -

he had

revisod st.i.te;ient3 to the

,4)slgible; but;
oorraittoe an noon tS:

if possible, as tutrJ.:: as Nazitnt 13.
Tho oorriittoo dotorninIrt to :rorotnut
.41 lm,11%.)r53
to nal:10 4

;;Z::

olianes in t:141 tut.t tonal
Of tho

0,!;airilar.,

list ore ic(tistgiont;

or.43 on c.'4,t-t,.#.1.)1 6435 Ircio

ty, 1,-ct r
1Vi5

et

44,nd

novulit,tite, nolts:(stine,

%opl-onitnt.c.iver; :s3on:ings,

;
,
androtri 143$ ..voro 4;)1,0int4,,t1 to attend the ;:ieetiti6 of the Atleri(an '
.14.tn.l.to ra t

Anfiociat ton, t;) be held at Colorado !-'11,rin;s4 the
-

wook of lepteriber 27.




!linlates Of Jtaj 25s

After

nu:el:red .4nd nompiled from thi)ntitri-

al 'makers t, the Ttfar.tionn subrattifict it in proi-;osod
)
:
corliat toe

publi

ho

I.:16 5

in son() of tht

&nit t v.; 311hr:01:till t




ties,

it5 inforv-v:.tion on t,htisii mihjocts.

to mkt

(.140 I

rbo r

t11.;

r

(nuttnian.

itdj cpArypi I
(

subject to till)

IT ilk ,w,
May 29, 1910.

THE FIRST AND SECOND BANK'S OF THE UNITED STATES.

The difference between the character and status of the
first and second banks of the United States, incorporated early in
the country's history, and the conception of a central bank as developed under modern conditions in Europe, is brought out in a forcible manner in a volume just made public by the National Monetary
Commission.

The volume consists of two parts, -- a study of the

first Bank of the United States, by Dr. John Thom Holdsworth, of the
University of Pittsburg, and one of the second Bank of the United
States, by Dr. Davis R. Dewey, the author of "A Financial History of
the United States."
The essay of Dr. Holdsworth recounts the plan of Hamilton
to found a bank for the purpose of aiding the government, which became law in 1791.

It is declared by Hamilton that a national bank

was not "a mere matter of private property, but a political machine
of the greatest importance to the state."

Thus conceived as a po-

litical machine, it is declared by the author that the bank "never
threw off entirely its political trappings, and it finally died as
the result of political enmities and jealousies."

The capital of

the bank, mut which was fixed at 00,000,000, was allowed to be subscribed to the proportion of three-quarters in United States stock
bearing six per cent. interest, and the President of the United
States was authorized to subscribe on behalf of the government
$2,000,000.




An equal amount was to be loaned by the bank to the

government, which was to be repaid in ten equal annual installments.
It is obvious, from these details, that the capital was
raised more largely by bookkeeping transfers than by the actual payment of specie, at a time When specie was extremely scarce.

The de-

vice by which Hamilton carried through the government subscription is
defined as "an ingenious example of financial juggling."

Shorn of

technicalities, the government paid for its stock by bills of exchange on Amsterdam, then it borrowed these bills and gave its note
for $2,000,000, payable in ten =mit equal annual installments, with
interest at six per cent.

The practice thus instituted by the gov-

ernment itself of paying subscriptions with stock notes was followed
widely, and in numerous instances with disastrous effects in the next
fifty years.

The central office of the bank was in Philadelphia, on

the present site of the Girard Uational Bank, and of the first board
of twenty-five directors eleven were from Pennsylvania and six from
New York.
Hamilton was not in favor of branches, but they were soon
established at the leading commercial centres of the country and entered into clearing and other relations with the local banks.

The

government soon availed itself of Hamilton's original project to borrow freely from the bank, and these loans proved to be larger and for
a longer time than was at first expected, causing embarrassment to
the Treasury and uneasiness to the bank before they were finally settled.

This indebtedness amounted within four years to $6,200,000,

or nearly two-thirds of the capital of the bank.




The loan of so

large a proportion of its funds crippled its services to commerce and
manufacturers and made it difficult even to continue the temporary
loans required to facilitate the financial operations of the government.

Ultimately the loan was repaid, partly from the proceeds of

the sale of the government holdings of bank stock.

As these shares

were sold at a premium, in some cases as high as 45 per cent., the
government made a profit of $671,860, exclusive of dividends received
to the amount of $1,101,720.
The first Bank of the United States did not have the exclusive privilege of note issue, but customs duties were made payable
in the notes of the bank, which gave them a wide circulation.

The

bank, moreover, exercised a salutary restraint upon the other banks
by presenting their notes promptly for redemption when received over
its counters.

The passing of the political control of the country

from the hands of the Federalists to those of the Democrats at the
beginning of the nineteenth century, it is declared by Dr. Holdsworth,
had no immediate effect upon the interests or fortunes of the bank.
Though always regarded as a Federalist institution, and managed largely by men of Federalist leanings, its affairs were administered in the
main with an eye single to business and profit, and it never became
embroiled in political controversies as did its successor, the second
Bank of the United States.

Only once did the Treasury, under Demo-

cratic administration, apply to the bank for aid, and then it was as
cheerfully and generously given as under earlier Federalist administrations.




Jefferson never gave up his antagonism to banks in general,
and to the Bank of the United States in particular.

He permitted

Gallatin, his Secretary of the Treasury, however, to support the recharter of the bank, and the failure of Congress to authorize it was
a disagreeable surprise for the business community.

The renewal of

the charter was indefinitely postponed in the House on January 24,
1811 by a vote of 65 to 64, while in the Senate the bill failed by
the casting vote of Vice-President Clinton.

The bank liquidated its

affairs as promptly as possible and its buildings and a large part of
its assets were taken over by the private bank established by Stephen
Girard.
In recounting the history of the second Bank of the United
States, Which was chartered in 1816, with a capital of 035,000,000,
Professor Dewey pursues the plan of analysis by subjects rather than
a narrative of events in the order of time.

He points out that many

of the difficulties of the bank and of the country were caused by the
deficiency of specie and the excessive issues of notes by the local
banks.

During the period of expansion after 1811, and the speculat-

ive profits which attended specie suspension and unwise local legislation, state banking had assumed proportions which were beyond control.
If the Bank of the United States had been organized when commercial
operations wore normal and banking methods were sound, the bank would
undoubtedly have had a different history.

Established, however, after

the local banks had enjoyed a free license for their operations, it was
well nigh impossible for it to do its work without mkashing with local




and selfish interests.

The pressure of the bank and the national

Treasury threatened to force resumption of specie payments by the local banks, but their resistance delayed resumption until the summer
of 1817, after a conference in February with representatives of the
banks of New York, Philadelphia, Baltimore and Richmond.

The Bank of

the United States itself made mistakes in speculative loans, difficult
to avoid in an undeveloped country, and allowed the branches, especially in the south and west, to extend discounts beyond the margin of
safety.
The political conflict between President Jackson and the bank
Is not discussed at great detail by Professor Dewey, because of the
fullness with which these aspects of its career have been discussed in
political histories.

Fe declares, in summing up the lessons to be

drawn from tLe history of the bank, that "the circumstances which gave
rise to the establishment of the second bank wore altogether different
from those which have brought about a discussion of the question of a
central bank at the present juncture; that the bank in its final operations was nothing more or less than a large commercial bank with
practically the same functions as other hankF3 established under state
charters, and differed from them in little save size and enjoyment of
a few special privileges; that the bank began its operations during a
period of commercial demoralization and developed its practice during
a period of crude banking methods, as measured by curTent standards;
and finally, that the bank in its closing years, was subject to a
political attack, violent, Indiscriminating, and even unscrupulous in




-6-

its character.

It is difficult, therefore, to find in the experience

of this institution, any lessons of importance which may be of special
service in the preparation of a plan for a large national central bank
at a later period, when business methods have been transformed by the
railroad, the telegraph, and by the development of corporate enterprise, to say nothing of the change in barking law through the general
substitution of national supervision for state control."




May 20, 1910.

MONETARY STATISTICS OF TIE 'UNITED STATES.

The most complete collection of statistics regarding the
financial and economic progress of the country during the past generation has been embodied in a large volume coOpiled by Dr. A. Piatt
Andrew, now Director of the Mint, for the National Monetary Co/mission.

The statistics are divided into four parts, mm those dealing

with the general growth of population, wealth, business, production
of minerals, leading food products, cotton, wool, and similar matters; those dealing with the banks; those dealing with the amount and
movements of money and. exchange; am those dealing with the Treasury
a
and the public credit.
The banking ;tatistics cover the entire history of the
national banking system from 1867 to 1909, and the available facts
regarding commercial banks, trust companies and savings banks.

Among

the data presented are the weekly statements of the clearing-house
banks of New York City; loan and discount rates; balances duo between
banks; dividends paid by national banks; and statistics in regard to
the movement of circulatioh.
The data in regard to money shows the export and import
movement of gold, rates of exchange, both foreign and domestic, and
the interior movement of money, both from New York and Chicago.

The

figures in regard to Treasury operations give the facts in regard to
bond issues as well as receipts and ,lisbursements, and the prices and




-2

net return of government bonds in l'Anland, France and Germany, as well
as in America.

Many of the figures presented go beyond the usual

routine of such statistics and are intended to answer questions as to
the effect of the crop movement on the money supply and rates of interest, and other similar problems which have been repeatedly raised
durin:, the discussions before the NatJonal Dmetary Commission.




rApril 27, 1910.

EV01,UTI011 OF CRIMIT ADD BALKS IN FRANCE.

A stri7P-in

l
review of the 7- iannr,r in which the Bank of

France has attained the dominatir.: position which it occupies iv
French finance and its relation to the joint.stock banks, has Jost
been made public by the National ;,o.cietarj Comiseion.

Thc mono-

T7raph on the sutjlct lc thititled "Evolation of Credn apd T..^,:177: in
,
Trance," and 10 writr.)n Trd Au1r4 Licsse, Professor at the Nqt1-173,1
Consorvotcry of Arts and TraD$ ana
Sciences.

t

hc Sohool of Pclitica1

;,:t3s up ;he ovo1ulo-1 of banking in
,iesse .
Professor -

France in three periods, from 1800 to 1848, when the business of
the Dank of France wqc 'restricted larelzr to Pf2,ris, the period from
1848 to 1875, when the bank became truly a national institution by
the absorption of the departmental banks of issue, by its aid in the
extension of the railway network, and by its rasterly conduct of the
neo;otiatiOns for the payment of the urent war indernity to Gerrany;
and fror 1875 to tlx Ilresent time.
The narrative i

verLr far fror br.in

.1
more historf.cz-

!
eummnry c" the development of the 11k of France itself, bu4- -,1-twes
the manner in which the bi

credit cerpanies p;row up with tie ,owth

of Frencl- capital an(1 its distribution at hone and abroad, and the
manner in which they have leaned in emer7ehcies upon the central
bank.

The Bank of France appear' an the friendly cruardian of the

market in tidinc7 over the period of stress caused by the failure of




the Union Gen6ra1e in 1882, 1;..lo collapse of the copper corner and
the liquidation of the Conrptoir DTBsconrpte in 1889; the reaction of
the Baring fai1:17f.° in LnE;land.
the crisis of 1890 the Ban

in

JJ;00; and the crisis of 1907.

In

of Englan.d borrowed of the Bank of

Prance 75,000,000 francs (115,000„000)
the stress in the Enp,..lish market.

with which to relieve

The Bank of France, it is de-

clared by M. Liesse, "was not affected at all. by this ernortation of
coin."

The avere reserve in fact in the year 1890 was about

500,000,0A, corirpoL:ed almost equally of gold and silver.
Bank of England had been ablo
In order to meet

If the

o issue notes for 75,000,000 francs,

he difficulties of the crisis, there would not have

been, M. Licosa declares, the slightest need of an appeal to the
credit of the Bank of France, and since the latter was willin7 to Fl.vet.
credit to the Bank of Englord, the citizens of Enraand would have done
so equally by accepting its notes.
The pressure in the money market in the fall of 1906 was
,
met by the Bank of France by the liberal :li.sconting of English paper.
This policy, it is declared, was much more economic, in the high sense
of the word, than the rather arcliaic one practiced :!'orieriy of making
discreet loans of ;:old to th., 71ar.1: a?
year, 1907, the crisis i7ew worse.

In the following

Discount at the Bank of France

!
went up again to 3? per cent. and then to 4 per cent.ipmemompl4M9—emm---'
The Bank of France intervened a second time,
discounting English paper.

The report of the operations of the bank

for 1907 states that in this way a ready capital of more than
80,000,000 francs in Arerican ,:.•r)10, was 1(arnieheit to the .;.01:ton market.




In another direction, the BanIr cr.: France opposed no 07,stacle tthe
shinmentfl of French

ola to Now York, which were farthered by '1:30

:
bank's makin : its normal commercial discount.

Finally, 1io

isoolirt

rate reimined 3 por cont. lower in France than ix,. Erglanei or Germany.
hio way, .,he action of ae 'Jank made itE.elf felt, rot

In

only on the French market uut also on the inrnatiornl, and. ptxticu;lish market.

larly the

MaT:ing discounts 311 foreixo paper rrut be

constderad, to-aay, a volv normal means of e.stahlishIns nseftl !rein.
betweon the aifferont niarts, and of applyinr: thc law of sup-

tin

ply and demand of capital in an intelligent and pro -Pi:table manner for
the country which furnizhes its capital.

Not rak-inc forei;:r discounts

is L. deficiency which the Dank of Enclana adds i“1 its lnck of einstioity of iccuc.

Ach
The Reic'hebalik Me a forein "portfolio" vA,

creassa in impc -tance fron year to year.

,The Bari of Fran(;e ho the

right to discount forei:m paper, and hae used it very ably, tbarks to
tho enlightonod airectiun of its 2:overnor, M.CooTrjes Pallnir.
7
,
Commenting upon this ser1e, of events, Y. Lieso decl,?res
that the alliance of all tYe banks of :.7-1-c.)
fsested after tie panic
no

Eire, w1c1i rns

:Allister,
1.907 by an eminent Italiar, arcs

rocf6ire to bo consurria':od by any officiel netion.

There ic no

neod of official intervontion, of contracts with binding c3auses, to
create a solidarity between those establishments.

This solidarity is

eutollis1,11 wl/cr noceosf....r:-

either airoctlar, if the brInks or issue have

the privileo of disoount

forei[T commercial paper, or indirectly,

by 110 creal




coL.')ETIles or Me Intermediary banks.

The intervertion

of one or another of the banks of issue in favor of a foreign market
is therofore free, and so much the more usefIll on that account, because this actlnli

i2

Tnsponse to a solidatity (notated

,,erfomA
-

by the positive interoct that the ban" has in intervenin7, since it
dcxivos profit from sc
Sting up what has been accomplished by the big credit
companies ir developing the inaustries anj financial resource
Agnnc;e, supporte

of

as they have boon by the central 1,1nk, M. T'iose

says:
n2hey 3radual1- extend their Letivity in Franee 117 7).eans of
J
numerous ITanch offices or aL:encies.

The Bank of ?raroe follows

the sane movement, either of its oral accord or by reason of conditions
imposod by the

overnitiont.

The present organimation of erealt begins

,
to take shapo; the role of thc credit con7aninc, grown in importance;
thej adapt thenBelvez to the -temper of the colIntr7 and. of their depositors; they engage preferably i

iscountTh, in short.date operations;

they make avery effort to rordor available by means of suitable investmonts the capital ontrustoa to them, Tlhich they receive at sicct in
:cinch grer:ter amounts than on timo.

Finally, tbey take root on For-

eign soil and help to invest Pronh caT,Ital (which woul0 be iale in
L;p
France) L. forei' secizrittes.

monical, inveTts
7mrce, always eco.

abroad in this way savino to the amount of 7eme tbirty-odd billions.
This siLvaticn ::.kev France s er0.1tor of rany nations and Plves it
almoct ccrutantTy
.or th

.
,braii(:e
Bani- of i

(77711-ar-;e r!Ite.

It nals it -possible

tpar7x I7c) the prril.ert -c-,)rotary po1.ic7 inaugu-

almlate a forridav p.old.
ratee by amn SPy, to -).(1(1reserve.



Bank of France thus Locos a ecyter of supply, not only for the
ere1j

o: PraLc0, but for ar inportant rict3.hborinc: narhet, tlmt of

:Jordon."




kt"f

crlMarch 25, 1910.

ERMAN

IRIPER IAL BANKING LAWS.

Special interest is given to the translatioil of the
"Imperial Gorman Banking Laws," which has been prepared under the
authority of the National Monetary Commission, by the fact that an
Ufrel 4

introduction bas0.49,wevislred by Dr. R. Koch, who only recently
resigned as governor of the Imperial Bank and has long been considered the foremost monetary authority in Germany.

The laws then-

selves include the original bank act of March 14, 1875, which
brought unity out of the heterogeneous mass of notes and systems of
different types in Germany and the subsequent laws by which the charter of the Imperial Bank has been amended at intervals of ten years.
Among the latter are included the law of June 1st, 1909, which resulted from the special inquiry instituted by the German Imperial
Government during the year 1908.

Dr. Koch, in his introductory re-

view of these laws, declares that the conditions which prevailed in
Germany, not much more than a generation ago, with regard to the
circulation,

coin, paper money and bank-notes,

striking picture of our political conftsion."

"afforded a

Efforts to secure a

uniform coinage system, by co-operation among the German states, including Austria, had brought no satisfactory results.

Paper Txney

had been issued by the governments of several of the states, which
became known as "wild bills," which could be passed beyond the
limits of the states which issued them only with difficulty and loss.




Paper which was more acceptable, althouzh not considerable
in amount, was issued alF'o upon special concessions by railroad com
panies, municipalities, and other corporations.

Practically in

Prussia only were conditions tolerable, where the Bank of Prussia,
which was vested with the unlimited right of note issue in 1856, had
been able to render great services to Ger-aan commerce in the 3rises
of 1857, 1866, and 1870 and had developocl into a central note bank
for the greater part of Germany.

"acre were still, however, nine

private note banks in the old provinces of Prussia, and other German
sovereigns f-ade very liberal use of their authority of granting the
privilege c)

note

iSP110,

and often on a scale quite exceedin:, the

amount requirod by the extent of their state4.
to protect herself by forbidding

The effort of Prussia

he circulation of those foreign

notes was unsuccessful, especially in ridOle Germany, because of the
varied and changing business relations of the territories.

The cir-

culation which was uncovered by bullion, excluding Bavaria, increased *
&wordily,' to the monthly records, from about 15,000,000 marks
($3,575,000) at the beginning of the fifties, to an average of
202,296,000 marks in 1867 and to 400,284,000 narks (05,000,000) in
1873.
The far-broaching genius of the non who had. brought about
the political union of Germany soon realized that such conditions
-6
could not be longer endureerMaitAMM-1044gimalmerWOTIF 10444%*

Already,

the constitution of the Borth German Confederation of July 26, 1867,
had provided for subjecting such matters to the supervision of the




/11.13•11

Confederation.

Further issues of notes by the states were sus-

pended, except with no u..0

riy o2 a reaeral law.

The coinage re-

form was first taken up as a preliminary to the unification of the
banking laws.

By the Goentre law of July 9, 1873, the gold standard

was adopted and a coinage provided for all of Germany uniform in
character and denominations, although permitted in some of the stater
to bear the distinctive stamp of t'Ee local sovereign.
The coinage having been unified, the government set about
the reform of the banking system on lines which suggest in some respects the history of the United States.

Provision was made for re-

ducing the circulation of -overnment paper and a committee was appointed to investigate the subject of uniform and more careful restrictions upon the banks.

The issue of notes below 50 marks (412)

was prohibited after July 1, 1875, and the banks were required to
publish monthly reports.

A bill embodying further reforms, includ-

ing a duty of four per cent. on uncovered notes above a certain
amount, was submitted to the Reichstag on Tovember 5, 1874.

The dis-

cussions on the subject, however, compelled recognition of tile general
desire for an imperial bank to be established in the public interest.
So strong was this sentiment that the discussion was adjourned until a
bill could be prepared, establishing the Reichsbank and providing for .
Its gradual absorption of the note-issuing function throughout Germany.
This bill became law on March 14, 1875, and with some modifications in
1889, 18
pire.




and 1909, is still the fundamental banking law of the em-

This act rested, accordin:: to the analysis of Dr. Koch,
on a compromise of the central bank system with the system of a
plurality of banks, Which latter had its root in the existip;_; conditions.

First of all, it created for a number of years a transi-

tional stae, freed from the most pressing evils, in order that ultimately experience would load to the adoption of an adequate uniform
system.

New mote privile3es could be cranted only by imperial

lop:islation.

The Reichsbank thus appears, though in a moderate

sense, ar the contrra vote bank of Germany.

The

economic

and po-

litical position on which its special ri::hts and duties rest, is
shorn not only in the classification of its public duties but also
in the close connection indicated by its name with the institutions
of the empire.

,
Its nanauernent must not be governed solely, or oven

chiefly, by considerations of gain.

Thus, owir

to its capital and

the netrork of branches acquired from the Bank of Prussia in virtue
of the authority ziver, to it by the bank act, which secured the immediate support of the whole eimpire, the Reiohcbank forms, especially
in bad times, the stronhold for no credit of the country.

It aids

the whole syster of exchanc;e, not Drily by the imaxplems purchase of
short time bills and other paper, but also by its collection, deposit
and disbursement business, and chiefly by its enormously developed
Lro or transfer operations.
Thus, according to the narrative of Dr. 1:och, Germany
passed through somewhat tho sane transitional stages as are now being
discussed in the United States, --a currency isruod by a {-Teat




variety of institution, which were not co-ordinated with each other
in such a manner as to neet the pressure of crisiss and whose condition led to the demand for more drastic regulation by the Imperial
Government and finally to the :rant of c7eneral powers of direction
over the money narhet to a single groat institution.




AMR

t`k
TIE. RZICHSEIIITK ALT TNT, GLRLIA: JOII:T STOCK BA=3.

analysis of the manner in Which the big German jointstock banks have developed the commerce of aermany, while supported
by the Reichsbank, the central bank of issue, is made in a special
treatise on "Development of the German Banking System," which was
prepared by Robert Franz, editor of "Der Deutsche Oekonomist," for
the Ilational 14bnetary Commission, and just submitted by then to
Congress.

It is declared by Herr Franz that the Rei6hsban7,: forms

one of the principal supports of the German credit system and of
German economic life at large.

"In this capacity," he continues,

"It has proved its value repeatedly, especially in the period of
great depression at the beginning of the century.

The collapse of

a number of larger banks which until then had enjoyed a good reputation caused a profound shaking of confidence and threatened to precipitate a severe credit crisis.

Such a crisis would have involved

disastrous consequences for the entire business life of the country
had not the Reichsbank at that time supported the tottering confidence by a liberal though at the same time prudent extension of
credit."
Turning to the development of the joint-stock banks, :err
Franz declares that the business of industrial financing and stock
issues was part of the program of the oldest joint-stock banks,
founded as early as the middle of the last century.




-2

The development of the railroad system beginning about the
middle of last century, which caused a considerable demand for and
circulation of capital, and the greater extension of state credit,
induced the banks to turn to the flotation and issue business.
The period following the founding of the German ;//27pire
witnessed a vigorous development of German industry, especially of
the mining and (beginning with the nineties) of the electrical inAt
dustries, Which required a continuous inflow of new capital.
time
the sameAGernnn foreign commerce, particularly with oversea countries, .:ept on steadily increasing.

The banks furthered this

do-

velopmenl; by forming stock companies, granting long-term credit, assuming shares and bonds, placing the new industrials on the stock
market and selling them to the public.

There is no doubt, Herr

Franz declares, that but for their policy of furthering the industries, the economic development of Germany would have taken considerably longer than has been the case.
It is true that the larger part of the increase in capital
is the result of industrial production.

But normally the fresh in-

crements of capital can be turned into industrial channels as reinvestments only through the medium of the banks.
The placing of capital in industrial investments in Germany
proceeds as a rule as follows:

The bank extends a certain amount of

credit to the industrial corporation, which is used by the latter
successively in proportion as its enterprise develops.

3uch "in-

vestment" credit, owing to its very nature and purpose, cannot be




0.0.4

refinaed within a short time.

It is granted from the start with a

view to being converted into capital of the inaustrial corporation
(through the increase of capital stock) or into long-term amortization credit (through bona issues).

In order to repay its debt to

the bank: the industrial corporation issues new stock or bonds.

The

bank must for the time being take over the additional new securities
by changing the "book-credit" into "issue-credit."

This, however,

enables it to shift the risk, assumed by the granting of the original
credit, to the wider spheres of the investing public, and to recover,
above all, the invested capital.

Only in this manner can the bank

retain its power of action, and it must be admitted, Herr Franz declares, that as a general rule the German banks have operated in this
regard with great skill and circumspection, so that they were able
both to meet their own obligations and to satisfy the demands for
short-term working credit.
In order to obtain the means for granting industrial credit
and to dispose of the enormous amounts of newly created industrial
MXIX1A securities, it was and. is necessary to attract in as large a
measure as possible the surplus funds of the community available for
capital investments.
For this purpose the joint-stock banks spread a network of
deposit branches, destined to serve as reservoirs for the inflow of
available funds, and at the same time as distributors for the industrial securities created.

With the sane end in view the large

Berlin banks, either through the acquisition or exchange of stock




-4-

(for permanent investment), entered into friendly alliances with the
pro vinvial banks.
This latter development, representing a centralization of
capital, though not of operation, is to be regarded as part of the
general process of centralization applying to industry as a Whole.
It was particularly strong during the last decade, but seems to have
abated somewhat during the last years.
The concentration in the German banking system, the growth
of the large joint-stock banks, and the extension of their sphere of
Interest by means of branches and deposit branches, and by their alliances with medium-sized small banks in the provinces, was furthered
by certain extraneous circumstances.
One of these was the stock exchange act of June 22, 1896,
which, by restricting trading in options, secured considerable advantages to the strong, large banks at the expense of the weaker banks
or private banking firms.

It is probable that this development re-

ceived its first powerful impetus as early as 1891.

At that time

several private banking houses failed and these failures revealed,
in a number of cases, the wrongful conversion of deposits.
caused deep commotion among wide circles.

This

Public interest became

aroused on the subject of bank deposits, and the amendment of the existing XifIT civil, criminal, and economic legislation was undertaken.
The result was the bank deposit act of July 5, 1896.

This did not,

however, completely allay the suspicion once aroused, and the disastrous experience with small private bankers helped to no small extent




to turn the confidence more and more to the large joint-stock
banks,
which offer a much greater security for the money and. securities
entrusted to them.
The most important factor, however, was the fact of the
simultaneous capitalistic evolution of industry proper, Which necessitated, a parallel development in the banking field.

It goes with-

out saying that this evolution, considered in its entirety, cannot
be ascribed to chance or the arbitrary action of individuals, but is
largely the result of economic forces.
Herr Franz declares that it is the undisimted merit of the
persons at the head of the banks that they appreciated those endeavors
and supported them by advancing the requisite capital, oftentimes incurring great risks for the banks.

The progressive industrialization

of Germany and the large increase of its population caused on the one
hand increasing imports of industrial and auxiliary materials as well
as of foodstuffs, and on the other steadily growing exports of industrial products.

As

a result 1I Germany's share in the world's com-

merce shows a rapid growth.
Until the seventies of the last century the financial regulation of German foreign oversea trade had been aimost exclusively in
the hands of London banks.

The establishment in 1870 of the Deutsche

Bank at Berlin meant a turning point in this regard.
charter adopted the following program:

The bank in its

"It is the purpose of the

corporation to do a general banking business, particularly to further




-6-

and facilitate commercial relations between Germany, the other
European countries, and oversea markets."

The founders of the

Deutsche Bank had recognized that there existed in the organization
of the German banking and credit system a gap Which had to be filled
in order to render German foreign trade independent of the English
intermediary, and to secure for German commerce a firm position in
the international market.

It was rather Oifficult to carry out this

program during the early years, the more so, because Germany at that
time had no gold standard and bills of exchange made out in various
kinds of currency wore neither known nor liked in the international
market.

The introduction of the gold standard in Germany in 1873

did away with these difficulties, and by establishing branches at the
central points of German oversea trade (Bremen and Hamburg) and by
opening an agency in London, the Deutsche Bank succeeded in vigorously furthering its program.

iliamplommitliater the other Berlin joint-

stock banks, especially the Disconto Gesellschaft and the Dresdner Bank,
followed the example of the Deutsche Bank, and during the last years
particularly, the Berlin joint-stock banks have shown great energy in
extending the sphere of their interests abroad.




Larch 31, 1010.

REITEWAI, OF REICT'SBAn. CHARTER.

The latest developments and discussions in regard to
bankin

in larmany are erbodied in a monograph just made public by

the Eational Monetary Commission under the title, "Renewal of
Reichsbank Charter."

Senator Aldrich and the other members of the

Connission had the -lova fortune to be in Germany at the moment when
a special commission was sitting to consider the revision of the
charter of the Imperial Bank, Which is made at regular periods of
ten ;Tears.
orl

They have had translate0 for the use of Congress not

the text of the discussions in this commission, made up of the

ablest bankers and economists, but also nuch of the discussion
which took place in the financial press before the enactnent of the
lar of June 1, 1909, and the reasons civen by the 1e7is1ative cormittee for the provisions of this law.

The subject was ruch dis-

cussed whether the strain imposed upon Garman banking facilities in
the crisis of 1907 would have been mitigated if the Iuperial Bank
had possessed a larger eapital.

This vier was dismissed by the

comrittec which reported the nor law with the demonstration that tie
capital and surplus of the bank were larger than those of the Bank
of France, the Bank of Austria-Fungary, or the Bank of Russia, and
were second only to the capital resources

the Dank of England.

In deciding the question as to whether a further increase of the resources of the Imperial Bank was desirable, it was declared by the




committee that it should be borne in mind, that in the case of a
central bank of issue, its own funds are of less importance than
they are in the case of other briking institutions; they serve principally as a guaranty fund for the creditors of the bank while the
working capital is created through the notes issued and the funds
deposited in the bank.
prove this.

The experience of all the banks of issue

As a guaranty fund for the creditors of the Reichs-

bank its present capital is fully sufficient.

The banl- does not

require an increase of its resources for the task directly laid upon
It as a bank of issue and for the sake of the bulk of its businesc
resulting from this capacity.
The other point to which the greatest attention was given
by the legislative committee was whether the system of limiting the
volume of notes in circulation, by inrposlng a tax of five per cent.
on the amount of notes above a fixed limit, when the note' were not
fully covered by gold, was upon the whole a wise one.

The commit-

tee found that the system had been shown to have worked perfectly
well by the experience of the many yearn that have elapsed since
the establishment of the Reichsbanl:.

Although a certain indirect

connection between the limit of untaxed note circulation and the
action of the Reichsbank in regard to the discount rate muct he admitted in so far as the exceedirr; of the contingent and the raising
of the discount rate presuppose increased demands upon the Reichsbank, a direct influence on the discount rate through the fixing of
the note continent cannot be expected.




In fact, the management

3
-

of the Roichsbank has never allowed the tax imposed on the excess
circulation to have any decisive influence on its discount policies.
As therefore the discount policies of the Reichsbank would not be
favorably affected by the elimination of the continent, no reason
was found for abandonin

this system.

On the other had., it was

declared by the committee, it seems altogether desirable to maintain
the contingent system, as the exceeding of the continent has more
and more developed into a danger signal heeded by business men.
The former amount of the tax-free note continent was not,
however, regarded as sufficient.

The fiures for 1906 proved the

inadequacy of the contingent, showing that it was exceeded seventeen
times, wiTh a maximum excess of 572,644,757 marks (136,000,000), and
this conclusion was strengthened by the events of the year 1907.
That year showed no less than twenty-five instances, of which the excess reported on December 31st reached the amount of 625,974,363
marks, a maximum never reached before.

At the sane time it happened

for the first time in 1907, by reason of the large demands of business, that the Roichsbank had a note circulation which even in its
yearly average exceeded the contingent, by more than 58,000,000
marks.

Although these two years could not be accepted as a general

demonstration, because they wore periods of exceptional financial
strain, it had become evident that the old contingent of the Reichsbank was insufficient for the increased demands of business due to
the increase of population and the accelerated economic development
in Germany.




In establishing an increase the fact has to be reckoned with
that the demands on the Reichsbanh are regularly made to an especially
large extent at the quarter days.

The condition, resulting from cus-

tom, that at the beginning of a quarter large liabilities have to be
met, -- for instance, in regard to mortgages, rert, interest, and
salaries, -- causes at those times an extraordinarily heavy demand
for instruments of payment, which-, ii is the Reichsbank's unavoidable
obligation to meet.

In accordance with this view the new law in-

creased the limit of authorized issues, covered bu a reserve of onethird, to 550,000,000 marks, and in addition provided that this issue
might ho permitted to rise to 750,000,000 narks ($178,20°,000) at the
close of March, June, September, and December in each year.
Another important point in which the new law departs from
the old charter of the bank is in making the note': of the bank legal
tender.

There was a strong disinclination to this policy when, the

bank was established, which is explained by the earnest desire then
prevailing to do away with the existing paper
metallic currency on a firm foundation.

r6gimo and to place the

This air has been realized

to such an extent that at the present time Germany's metallic circulation, and particularly that of gold coin, is abundant for all demands of trade.

On the other hand, bank-notes also are regularly

taken in payment, and for payments of large amounts they are used almost exclusively.

In vtow of the fact that the legal status of this

mode of payment was somewhat uncertain, however, such institutions as
had to make nunerous payments, banks especially, generally felt




obliged for precautionary reasons to provide themselves with a considerable stoc77 of gold in order to be prepared for any demand for
gold that they might have to meet.
In proposing this measure the new law followed the examples
of England and Prance.

In England the notes of the Bank. of England

have been legal tender since January 1, 1834.

In France the notes

of the Bank of France were invested .vitl-, this quality by the acts of
August 12, 1870, and August 3, 1875.
The conferring of the legal-tender quality upon the Reichsbank notes does not in any way affect the maintenance of the gold
standard, as is proved by the example of the Bank of 'England.

In

order to emphasize this more strongly, the words "legally current
Garman money" in the paragraph relating to redemption of notes, have
been replaced by "German gold coin."

This expresses beyond a doubt

that even a single note of the denomination of 20 marks nust be redeemed in gold, although the amount of 20 marks comes still within
the limit up to which imperial silver coin is decreed a legal tender
by the currency act of July 9, 1873.
Thus, the new law, while expanding the legal limit of the
untaxed circulation, provides for direct redemption of rotes in rold
at the bank and gives uniformity, as far as possible, to the paper
circulation.

Another important provision of the law authorizes the

bank and also the private banks of issue to purchase checks.

Since

the act of March 11, 1909, in relation_ to checks, nad:it possible for




.s-

a holder of a cheeL to obtain legal protection for his claim, just
the same as tIe holder of a bill, the committee declared that the
fundamental objections to the rurchaeo of checks were removed.
By permitting their purchase by the Reichsbank the 'folder
of a check payable in another city could got cash for it at any
moment by having it discounted, whereas under the old method the
amounf; was paid only after the check had been collected, -- that is,
after a lapse of several day:, and no liability was accepted by the
bank for the presentation of the check for payment within the legal
tiny, limit.

The discounted chock, in accordance with its intrinsic

purpose, would be presertod for collection by the bank as quickly as
possible ana its equivalent put at the aisposal of the party present-

ing it by means of the cire (his account current being credited with
the amount), the necessity of a cash remittance being thus avoided.
It is exlpected that the purchase of checks by the Reichsbank will
stimulate the use of checks and in general promote monetary intercourse without the employment of cash.




March 26, 1910.

THE SWEDISH BANKING SYSTEM.

The method by which the issue of bank-notes in Sweden was
transferred from independent local banks to a central institution
is the subject of a monograph made public to-day by the National
Monetary Commission.

The document was prepared by Prof. A. T.

Flax, who has given much attention to the economic development of
the Scandinavian countries, and includes brief sketches or the bank..
ing systems of Norway and Denmark, as well as Sweden.

Special in-

torest attaches to the banking experience of Sweden, because she adhered to the system of isolated local banks of issue longer than any
other European country except Switzerland.

It is only since January

1, 1904, that the right to issue bank-notes in Sweden has been brouttt
under the control of the Riksbank or Royal Bank, and it was in October,
1905, that Switzerland, after twenty years of discussion, authorized
the creation of the rational Swiss Rank, whose history is told in a
monograph already made public by the Lonetary Commission.

Interest

is also Oxen to the history of banking in Sweden by the fact that
the first use of the bank-note is attributed to John Palmstruch, under
a charter granted to the Royal Bank on November 30, 1656.

The ex-

change department of the bank conducted a deposit business, and under
certain conditions depositors could transfer to others sums standing
to their credit or could withdraw them, the document used for the
purpose being designated a bank-note.




The Royal Bank thus occupied

,
-2-

from two and a half centuries

a (1.o1ratinp: position in Swedish

banking, but notes were issued by another type of institution, known
as thu enskilda banks.

These institutions were corporations whose

capital vas divided into shares, but the liability of the principal
shareholders was not limited, although there might be associated
with them silent shareholders with limited liability.

The first of

these banks was founded in 1831, and as late as 1857 only 12 were in
existence, with total assets of about $15,000,000.

Several effortc

were made to bring then under uniform rules in regard to the issue of
notes and the character of the assets held.

By the mint law of 1873

the notes of these banks, which had formerly been redeemable in the
notes of the Royal Bank, were made redeemable in gold, in accordance
with the policy of establishing the gold, standard firmly in Sweden.
Notes for 5 crowns (0..30) were suppressed at the close of 1879, in
order to leave room for the circulation of gold coin.

Both the

Royal Bank and the enskilda banks grow rapidly with the expansion of
business during the latter part of the nineteenth and the beginning
of the present century.

A movement for centralizing the note issue

gained ground under these conditions and was embodied in a law in
1897.

The aim of this law was to give greater security and uniform-

ity to the note issue, without impairing the resources of the enskilda
banks for granting local credit.

The notes of the Royal Bank are

legal tender and are redeemable in gold on demand at the head office.
The capital of the bank is 50,000,000 crowns ($13,400,000), and thA
metallic reserve is required to be in 7:491d.




The minimum reserve is

4.11
0.1 3

fixed at 40,000,000 crowns ($10,720,000), or 40 per cent.ii of the authorized circulation of 100,000,000 crowns, but any additional amount
may be issued when fully covered by gold or foreign balances.
In order to protect the country against any reduction of
credit facilities by taking away the function of note issue fron the
local banks, several duties were laid upon these banks and several
privileges were granted to uhem.

The number of branches of the

Royal Pank was required to be So increased that there sheuld be one
in each of the 24 districts into whiele Sweden is divided ror local
government purposes, excepting the one immediately adjacent to
Stockholm, which is served by the head office.

ne law or IC)7 was

subsequently modified, in respect to the privileges granted the
enskilda banks, by a law of Lay 30, 1901.
the time for abandoning it

This law provided that

note issues having been settled by ar-

rangemert between an enskilda bank and the Riksbanh, and on condition
that none of the offices open on January 1, 1896, should he closed
during the term covered by the arrangement, unless with the permission of the Crown on the 1-ecommendation of the manauers of the Riksbank, the enskilda bank might be granted, against approved collateral,
loans not exceeding 65 per cent. of its notes outstanding on January
1, DOI, and an open credit not exceeding 10 por cent. of the same
fixed at
The interest charge on these loans and advances was, pe:e
amount.
cent. below the three months' discount rate of the Riksbank, though
not in any case lower than 2.per cent., and the usual commission on
the open credit was remitted.




Ftrther, rediscounts up to 25 per

COhj
o•

7 ';1(, i.oton outstanding on January 1, 1901, might be

anted

at a rate not exc!eeding two.thirds of that otherwise eklarL7ed by the
Ricksbank.
At the end of each year, beinnint2; wiro 1903, the vlpoulit
of the raxinuni limit of eacli of these special privileges is decreased by one.eighth of its original amount, so that they lapse entirely at the end of 1910.
-f_1da banks were co liherpT
These concessions to the eLs1,
that they led to the surrender o± theiT rights earlier than the Ciate
fixed in the law for their definite termination.

Several of the

enskilda banks availed tbenselves of the privilege of conversion into joint-stock banks with limited liability, but those of both types
continued to increase their offices an0 the volume of business done
throughout Sweden.
At the end of 1900 the Riksbani- had 19 offices, note.
issuing banks, 183, limited-liability banks, 96, and people's banks,
32 a total of 330 offices.
:

At the end of 1908 the Riksbank had 25

offices, the unlimited, banks (includin, one people's bank), 199 of;
fices, limited-liability banks with capitals of at least 1,000,000
crows, 304 offices, and lesser banks, 51 offices, or a total of 579
offices.

There was thus an increase in the eight years of 249 of.

flees, to which rust be addee those of a number of institutions represorting former people's banls, and a couple of exchange offices of
larger banks not Included in the above totals.
offices were opened in 1907, and 43 in




Doe, so

No less than 59 new
that the development

seens by no neans at an end.

Mere was at the end of 1908 a bank

office for every 9,300 inhabitant

on the avora:r7e, whereas at the end

of 1900 there "ere over 15,000 inhabitants for each

office.

The different 'barks quote rates, both for 1oa7q.s and for (leposits, that are very nearly the sane.

The r;x:Icterce

brancheo of

nore than one bank in ram? PAstricts ineurer this advantage of cOmpetitter.

The R7LM.ebAn1:'s disevent rate 7:Ives, in censequence, a meas-

ure of the rates current everrWtere, though there renains sore varia.
tion in the rates returned by the several banks in the monthly accovrts

These fluetuations mny perhaps rerrecont, in part :If not

entirely, Pifferenees between the elasses of business secured by the
differert institutions.
Drring the panic! of 1907, heavy (lentmds were made upon the
Royal Rar,h, which reduced. Its foreign balaneee because the bark
failed to irroer with. sufficient enerr7 and rromptness the check of
em inoreasee: discount rate on the speculative spirit manifested in
business circlee.

The rate vas raised or rovember 9, 1907 to

per

cent., when the London rate wat:1 lit 7 per cent., and the nerlin rate
7-7- per cent.

The bar:: Tar benefitted, however, by the Mot tlInt

pew Swedish Government lopn

1- non erran ed in France for about

013,000,000, arTAnst which the banl: was ennbled to sell drafts per0ing the need for the use of the noney at home.

In 1907, over 92 per

cent. of the rediscorntr of the otl:er barks were r'Ide with the Royal
Ban17 nnd in. 19081 over 94 per cert. n.m/. abort three-fourths ef the
J.nland bills held by the Royal Ben17 were obtained b7 rodiscorntin.




May 3, 1910.

THE BANK OF FRANCE IN ITS RELATION TO
NATIONAL AND INTERNATIONAL CREDIT.

A striking study of the part which the Bank of France
plays in the international money market has just been made public
by the National Monetary Commission, in the form of a translation
of the work of Maurice Patron on "The Bank of France in its Relation
to Natioil and International Credit."

It is pointed out that the

banks acts essentially as a public institution, pursuing the essential objects of building up and protecting the national gold reserve
rather than seeking profits for its shareholders.

By increasing

its gold reserve the bank, it is declared by M. Patron, is working
against the interests of its shareholders and consequently against
its own interests.

There are two reasons for this:

First the ex-

penile of maintaining an additional reserve and the cost of issuing
'tt
notes againsti‘
7epresents a clear loss to the shareholders.
If the
holdings of gold were smaller, the amounts of assets and liabilities
would decrease without interfering with the profit and loss account.
In the second place, smaller holdings of metal would lead to frequent
rises in the rate of disoount, whioh are the main source of profit
for a bank of issue.




-2
-

In spite of these obvious advantages to the bank in
getting rid of a part of its great stock of the yellow metal, the
gold reserve has been allowed to increase until it amounts to about
$700,000,000 and is the largest stock held in any bank in the world.
Even the advance in the rate of discount which is occasionally made,
It is pointed out, is not for the purpose of safeguarding the reserve, but to avoid the decrease of the money in circulation which
would have resulted from the tempting and persistent offers from
abroad where discount rates ruled much higher.

With these great

resources at its command, the Bank of France has, in the opinion of
M. Patron, become practically the reserve reservoir of gold for the
financial world.

As far back as 1839, the bank lent to the Bank of

England £2,000,000 in gold and again in 1890, at the time of the
Baring failure, £3,000,000.

The Bank of France had just endured

without flinching the downfall of the Comptoir D'Escompte, one of the
oldest of the joint-stook banks of Paris, but the Bank of England,
confronted by like conditions, found it necessary not only to raise
its discount rate to six per cent., but to ask for foreign help.
The Bank of France was severely criticized in the Chamber of Deputies
for making this loan, but this criticism did not deter it from extending similar aid in the autumn of 1906 and in the crisis of 1907
to the amount of 80,000,000 francs, which were forwarded to London in
American gold eagles, in answer to a mere telegram.

The bearing of

this course upon the crisis in the United States gives special interest to the narrative of I. Patron of these events, which he sums up
thus:




.3

"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 United States, and with its refusal to give
The critics forgot that the bank

aid.

VW

prevented by its statutes

from the direct shipment of sums for which the Federal Government refused to become responsible, and that, nevertheless, it forwarded
80,000,000 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 guarantees
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.
"The occasions which we have just mentioned are not the only
ones in which the Bank of France has had to intervene.

In the first

days of W I 1906, it loaned 40,000,000 francs to the Bank of England
in order that the latter might avoid raising the discount rate.

In

September, 1906, it sold several millions in American eagles, with
the knowledge that they would at once make their way to New York.
More recently, in the very midst of the crisis, the bank released
many millions of eagles and sovereigns under similar conditions.

It

would therefore appear that this policy of relief has been definitely
adopted by the Bank of France."




In view of the many occasions on Which the Bank of France
has thus proved the refuge of the great banks of other countries in
averting disaster, interest is given to the suggestions of Signor
Luzzatti, formerly Italian Minister of Finance, in regard to an international agreement between banks of issue and government treasuries for mutual support.

As thus outlined, M. Patron contends that

the Bank of France would be forced to adopt, as an obligatory rule of
conduct, a measure which after all is employed only as an exception,
and at such times as it deems opportune.

It is easy to foresee, he

deolares, what would happen under such a system.

France, financial-

ly the strongest country, would have very little to expect from
abroad, while it would find its aid urgently solicited at the least
alarm among its neighbors:

its position as moderator, from being

voluntarily assumed as it is now, would become obligatory and subordinate, and this would be evidently unacceptable.

In summing up

the present position of the Bank of France, with its reserve towering
above that of any other great bank, M. Patron concludes that this reserve, admirably managed as it is, affords not only an insurance
against crises, but also the surest guarantee against the recurrence
of great wars.

Upon this point he concludes thus:

"We have shown that the fighting power of a nation has now no
limit other than the financial effort of which it is capable.

It is

not going too far to state that the formidable cost which a war would
involve has more than once caused our possible enemies to recoil, and
that in the settlement of political or diplomatic questions the nation




-5—

which is richest in gold is always the one which commands the most
respect."




May 11, 1910.

TIX ELCLISE BAICIUNG

sYszall.

A description of the mechanism of the London money market,
in its relation to the Bank of England, the joint-stock banks, and
the discount houses has just been made public by the National Monetary Commission in a monograph on "The English Banking System," by
Hartley Withers, financial editor of the "London Times."

I.

Withers begins with an enuneration of the distinctive functions of
the Bank of 'England, which he declares to be as follows:
1.

Banker to the British Government.

2.

Banker to the joint-stock and private banks.

3.

(a)

Sole possessor of the right to issue notes which are

legal tender in England; (b)

sole possessor, among joint-stock

banks with an office in London, of the right to issue notes at al/.
4.

Provider of emergency currency.

5.

Keeper of the gold reservo for British banking.

6.

Keeper of the gold reserve which is most readily available

for the purposes of international banking.
These various functions fit into and supplement one another, and though their diversity is sometimes pointed to as throwing
too much responsibility onto one institution, it In fact enables the
tank to carry out its duties with extraordinary ease, and with the
least possible disturbance to the financial community.
that it keeps the balances




or

By the fact

the other banks, the Bank of England is

enabled to conduct the payment of the interest on the British debt
largely by transfers in its books.

By the fact that it keeps the

balances of the government and has the monopoly of the legal-tender
note issue, the bark has a great prestige in the eyes of the general
public, which it communicates to the other banks which bank with it.
A credit in the books of the Bank of England has come to be
regarded as just as good as so much gold; and the other banks, with
one exception, habitually state their "cash in hard and at the Bank
of England" as one item in their balance-sheets, as if there were no
difference between an actual holding of gold or legal tender and a
balance at the Bank of England.

It thus follows at times when an

increase of currency is desirable, it can be expanded by an increase
in the balances of the other hanks at the Bank of England, since they
thus become possessed of more cash to be used as the basis of credit.
For currency in England chiefly consists of checks, and customers who
apply to the banks for accommodation, 'by way of discount or advance,
use it by drawing a check which is passed on and so creates a deposit; and expansion of currency thus consists chiefly in expansion of
banking deposits.

This expansion is only limited by the proportion

between deposits and cash which the banks think fit to keep, and as
long as they can increase their cash by increasing their credit in
the Bank of England's books the creation of currency can proceed
without let or hindrance.




It AO dantertAfrt by liz•,liitherfi,Vatit-the .asse-•-w4,t4
Bank of England ptpvides emergency 9e_ency 0;ives to the Engli
banking system the adv,antage of ext,teme elasticity and adap
The bank is enabled to aticomplishAhis by the fact that

acts as •

l
banker to the other banks ard tat every credit whic.ythey have in
its books Is regarded by them. and by the rest of .rie community as
"cash

to be taken as pract4cally 'equal to so AUch gold.

This cash

This cash at the Bank ofnglard in the hpeds of the rest of the
p,g
bankers can he multiplted as rapidly , the Bank of England is pre..
,
pared to make advanqes, and as tn.9,, 4iercantile and financial community
dan bring it bi1l

for discoupt or securities to he borrowed on.

There is no legitl restria*Ion of any sort or kind, and the close re,
iations betwen the
iary operattons

Mk an0 its borroring customers enable the reces011* IP tuaribd cart
-led Thrtrittet with It-coTrt7- ir111-

lOilledi?mWeny04sts. in, the Tiastex34....„Liszaiap,bazie„...„
Taking up the subject of the position of the Bank of
England in the international market, it is declared that London is the
only European center which is always prepared to honor its drafts in
gold immediately and to any extent.

The Bank of France 1-as the right

to make payments in silver, and uses it by often charging a premium on
gold, sufficient to check any demand for it, and in other centers
measures are taken which make apparently free convertibility of credit
instruments optional at the choice of the central bank.

Consequently

the Bank of England has to be prepared to meet demands on it at any
time from




abroad, based on credits given to foreigners by the English

banking community, and It larl thus to observe the signs of finarciaT
weather in all parts of the world and to regulate the price of money
in London so that the exchanges may not be allowed to become or remain adverse to a dangerous point.

The difficulties of this task

are Increased by the extent to which the English banking community
works independently of it, by accepting and discounting finance paper,
and giving foreigners credits at rates which encourage their further
For the low and wholly unregulated proportion of cash to

creation.

liabilities on which English tanking wors, enables the other banks
to multiply credits ultimately based on the Bank of

ngland's re-

serve, leaving the responsibility for maintaining the reserve to the
bank.

This it does by raising its rate when necessary, and so, if

it has control of the market and its rate is "effective," mommispip
,, aguteria.eirialiiitiswevalpti~6 4
,
,
04

raising the general level of money

rates in London.
When its rate Is not effective, the Bank of England finds
itself obliged to intervene In the outer money market, -- consisting
of the other banks and their custoners, -- and control the rates current in it.

This it does by borrowing some of the floating funds in

this market, so lessening their supply and forcing IT the price of
money.

By means of this borrowing it diminishes the balances kept

with it by the other banks, either directly or indirectly, -- directly if it borrows from them, indirectly if it borrows from their customers who hard the advance to it In the shape of a check on them.




The result is that so much of the "cash at the Bank of England,"
which the English banking coirmasity uses as part of its basis of
credit, is wiped out, money, -- which in London generally means the
price at which the bankers are prepared to lend for a day or for a
short period to the discount houses, -- becomes dearer, the market
rate of discount consequently tends to advance, the foreign exchanges move in favor of London, and the tide of gold sets in the
direction of tN. Bark of z]nglardis vaults, and it is enabled to replenish its reserve or check the drain on it.
In summing up the relation of the bank to the English
money market and to the international money market, it is declared by
Mr. Withers that the prestige which makes a credit in its books as
good as gold e-ollies fro banking community to expand credits and make
check currency as long as it is prepared to lend credit.

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 rew days.

On one side of its account its holding of

securities is expanded by this amount and on the other it
on deposits Is similarly swollen.

liability

At the end of 1902, the last oc-

casion when the bankls weekly return was made up on December 31st,
and so showed the full extent of the extra credit provided by it at
the end of the year, the other securities rose from 227,647,000 on
December 17th, to £47,736,000 or December 31st.

The other deposits

at the same time rose from £36,653,000 to e55,259,000, and this increase in the basis of credit was perlinps used by the other banks for




the provision
customers.

or

five to ten times as much accommodation for their

A weel7 later the other securities had declined to

£29,625,000 and the other deposits to £41,073,000, though reinforced
in the meantime by the payment of government dividends; the emergency
credit had been wiped out, when no longer required, by the simple
process of repayment to the Bank of England of the sums borrowed from
)
It; and the 1 ank's proportion of cash to liabilities, which had faller
to 28 per cent. on December 31st, had risen to 38-3/8 per cent.




THT. R7ICIISBANK AND TIL: G:111:AN JO= STOCE BAEKE.

An analysis of the manner in Which the big German jointstock ban..ao have developed the commerce of Germany, while supported
l
by the Reichsbank, the central banh of issue, is =de in a special
treatise on "Development of the German Ban::ing System," which was
prepared by Robert Franz, editor of "Der Deutsche Oekonomist," for
the National Monetary Commission, and just submdtted by them to
Congress.

It is declared byerr Franz that the Reidhsbanh forms

one of the principal supports of the German credit system and of
German economic life at large.

"In this capacity," he continues,

"it has proved its value repeatedly, especially in the period of
great depression at the beginning of the century.

The collapse of

a number of larger banks Which until then had enjoyed a good reputation caused a profound shaking of confidence and threatened to precipitate a severe credit crisis.

Such a crisis would have involved

disastrous consequences for the entire business life of the country
had not the Reichsbanh at that time supported the tottering confidence by a liberal though at the sarn time prudent extension of
credit."
Turning to tho dcvolopmont of thc joint-stock banlzs, :err
Franz declares that the business of industrial financinis and stock
issues was part of the program of the oldest joint-stock banks,
founded as early as the middle of the last century.




.73,e development of tho railroad s:!stem beginning about
the
middle of last century, which caused a consIderable
demand for and
circulation of capital, and the ,:reater extension of
state credit,
induced the banks to turn to the flotation and iscuo
business.
The period following the founding of the German
:mpire
witnessed a vigorous development of German indust
ry, especially of
the mining and (beginning with the nineties)
of the electrical industries, Which required a continuous inflow of new
capital.
At
tin*
the sameA German foreign commerce, particularly with
oversea countries, kept on steadily increasing.

:he banks furthered this de-

velopment by forming stock companies, sranting long-term
credit, assuming shares and bonds, placing the new industrials on the
stock
market and selling than to the public.

There is no doubt, :le=

Franz declares, that but for their policy of furthering the industries, the ocunomic developnont of Germany would have taken considerably longer than has ',leen the case.
It is Lrue that the larger pert of the increase in capital
is the result of industrial production.

But ncrrielly tho fresh in-

crements of capital can be turned into industrial chanmols as reinvestments onl

through the modUal of the banks.

The placing of capital in indusrial investments in Germany
proceeds as a rule as follows:

The bank extends a certain amount of

credit to the industrial corporation, which is used by the latter
successively in proportion as its eKteriprise develops.

such "in-

vestment" credit, owing to its very nature and purpose, cannot be




Affirm

refunde, within a short time.
1

It is granted from the start with a

view to being converted into capital of the industrial corporation
(through the increase of capital stoct) or into long-tern anortieation credit (through bona issues).

In order to repay its debt to

the ban17 the industrial corporation issues new stock or bonds.
bani': must for the time bein

:he

take over the additional new securities

by changing the "book-credit" into "issue-ereait."

This, however,

enables it to shift the risk, assunea by the granting of the original
credit, to the wider spheres of the investing public, and to recover,
above all, the invested capital.

Only in this manmer can the ban.lz

retain Its rower of action, and it must be admitted, Herr Franz declares, that as a general rule the German banlz have operated in this
regard with great skill and cirelmspection, so that they were able
both to meet their own oblir;ntiens and to satisfy the denalecle for
short-term working creait.
In order to ctain the means for -:rantir.,:7 industrial credit
and to dispose of the enorreo- amounts of nowl
es

antuu

created indr„otrial

securities, it was and. is noceecarzy to attraet in as large a

measure as posoible the seiplix frinas

community available for

caottal investments.
For this purpose ts jointestoel: banks spread a retlimrk of
depoeit traohos, acstinc,f1 to serve as reservoirs fer the inflo•T, of
available funde, and at the sane time
trial seaurities created.

aistribvtore f:)r

A.th the cane end in vie

Lenin banks, either thrcuL:h the acqvicitior_ or ol,ollancg of stock




(for fermanort iv2vestnient), entered into friendly alliances with tIle
provinvial banks.
This latter 6evolopnant, roprosentik; a centralization
„
cspital, thougli not of oDoration, 1-3 to be rei- ardod

rart of the

general process of eentralinatiou F-p-ply1nf2 to industry as a
Ourin; tio ls

rA,E1 forticoTarl:i

dc:cude,

0ocl,o

hnv2

abatod semle%41t 2.arinti the last roars.
61:: German ban1:in6 syrte=, the ,:routh
.rns) noncontration in 4
1;19 11trfi joint-stock "aank2) InCL the e- tous±on of their 0-v1:ere of
z
,
erbst by :,eL.nE; of 1

11oho3 and ael)osi

1,ranches, and by their al-

liances Arlth modium-sizo0. snail ban3ts in the 1:ro7iL00 1 was flIrthered
z
ozT (erl;ain oxt- aneetzs ei:leurstanccw.
irlao c)_- those - Tas -Ze stock oxolla2133uc

of Juno 22, 1L96,

ntleh, by rostrictinG tradind in options, secured %.;onsiderablo advan.s
tages to the utroh,, lnrge "oan:: at to oxi)onso of the weaker banks
or private banking firns.

It is probalol

uh&i; this developrie.it re-

(
ceived its first povelqui impetus a2 oarl;y 4411 18J1.
several private bankins hottos

10

Lt that tine

and tLese failures re'vealcd,

„
In a number c.: cases, the wrongful 3ouversion of deposits.
causel deep °emotion amont; aide circles.

nis

:cablie interest ;)0canc

dosio, 4:1d tho amondment of the ex.
arou0ed on the su'oject of bank dol
isting tall civil, criminal, and oeozonic lcislatio2i was andertaken.
ho resulo was the ban: deposit act of Ju1:2 5, r796.
hoyever, oompiotel

ala

not,

allai the suspicion once ,roused, and the disas-

trous experience with small private bunker




.his

.
beloed to no small extent

-5-

to turn the confidence more and more to thc largo joint-stock banks,
which offer a much greater security for the money and securities entrusted to them.
The most important factor, hownver, was the fact of the
simultaneous capitalistic evolution of industry proper, Which necessitated a parallel development in the banking field.

It goes with-

out saying that this evolution, considered in its entirety, cannot
be ascribed to chance or the arbitrary action of individuals,

is

largely the result of oconomic forces.
HO= Franz declares that it is the undisputed merit of the
persons at the head of the banks that they appreciated those endeavors
and supported them by advancing the requisite capital, oftentimes incurring great risks for the banlm.

The progressive industrialization

of Germany and the large increase of its ropulation caused on tho one
hand increasinG imports of industrial and auxiliary materials as well
indusas of foodstuffs, and on the other steadily growing exports of
trial products.

As a result

az

Germany's share in the world's com-

merce shows a rapid growth.
Until the seventies of the last century the financial reguexclasilely in
lation of German foreign oversea trade had been almost
the hands of London banks.

The establishment in 1W70 oi the Deutsche

Bank at Berlin meant a turning point in this regard.
charter adopted the following program:

The bank in its

"It is the purpose of the

corporation to do a general barkinn business, particularly to




urther

INN

-

and facilitate comercial relations 1)otwewi aernany, thQ other
:uropean countries, and oversou nar;:ets."

ne founders of the

Deutsche ,3ank had recognized that there existed in the organization
of ,he Jerman bunking and credit system a cap Which had to 1,e filled
4
in order to render aernan foreign trade independent of the English
1
intermediary, and to secure for ,orman commerce zL arm position in
the international narke-c.

,
It =43 rather difficulL to ca 4r

%his

:
program during the oarl;" yo3rs, th6 noro so because Gornany :tt that
-t:ine had no told standard and

ilis ol- exchange made out in v'rious

kinds oc.* crIrrency wore heithor "1:nown nor liked in the international
arket.

The introduction of the cola standard in Gernany in I:173
and. by establisliin6 "oranches at the

did away wit4
central point

eir German overse;J. trade (Bremen and Tallburg) and by

opening an t6.onk,ry in .WL,clon, ;he Deutsche 3ank sliwceeded in vigorous?rogram.
ly furthering Its 1

-;keirr-istime;pikater the onier Berlin

oint-

- )resdner Bank,
stock banks, especially the Disconto :3-e3ellscha1t and the _followed Glie example of the Deutscho Bank, and aarin
2articalrly, ;Ale

erlin joint-stock banks have shown great energy in

extending the sphere of their interests abroad.




the last years

March 15, 1910.

rETTERVIEVIS ON SCOTCH BAITIMIG.

2:old in case of
Dopendence upon the 73an7: of PAngland for (
noe

ia

one of tho Jaliont features bronL7.1:t out by the 7ational
in

ing syz;tom.

inquirio

ii reuara to the neotch bank-

Interviows with the chief officers of the Royal Dank

.md, the 7,11.ion Bank, ana the C;onnoreial
o2 3ootlaAd, the 7.3alik of ::coti:
Barik wore hol6 by ,.4:nri.tor :adrich, T,:re Vroelana, a710 other nenbers
of the Commission iJ

Li1O

011/113C7C

printeE by authority of tho

of 1909, Itillch have just been

oiriiion.

institution in respect to the Yietho0AJ of

The anuuors given at oach
cotch banI:ing were silb-

flho circulation in Teotland is issud by eight

stantially similar.

banking institutiuns, the survivor
1845, when the1iti51

of 19 whioh wero in existence in

ar1i7ment forbad° the crei:ttioli of any noro

banks of issue and fixed the limit of the circulation.

The traount

of the authorize° circulation of the :.',cotch banks is only:*2,676,350,
or about

13,000,00C,

'_bove t1ii anount, howevor, notes may be

issuet without lint, provideP„ thoy Are oovore

pound. fcrpowlil by

go10 and the actual circulation ranges up to about l%7,500,000.

The

cotoh law aiffers from the TInE71ish law in allowing notes to be issued
as low as one pounil

terling, while the minim= in :.nglana Is -5,5.

It was explained :,;() :;.he 3omission by 7:r. rl'ait,,aElshier and generalmftnager of the :;o7f1.1 Bank, that wookly fluctuationo,are chiefly duo
to the paynont of wagon,




The seasonal fluctuations are at harvest

time, at Christma,, an

Lew 'foal:, :Inc, to a nuch larger extent at

the half-yearly terms of ihitsuntay (May) and. Martinmas (November),
when rents are pain, interest on mortgages is collected, and. halfyearly wages are paid.
The nysten of cash credits, which was a half century or
more ago one of the chief features of the Footch system, is still
employed,

ut not apparently on so large a scale.

It was stated

by Mr. Tait that o. customer may apply to be allowed to overdraw such
amount as he may require fron time to time up to a specified amount,
an

.eo sureties jointly and severnlly become bound
he anr7 two or t7,.

:
to repay tile smeunt that mm7 at any tive bc awilv.7 with interest, on
(banana being made on them.

Each obligant is liable to pay the

whole sum, lenving iim ;o obain repayment from his co-obligants.
the :ootch system is organized upon a basis independent of

of Jngland, its policies are governed largely by

those of the big British bank.

It was stated by Mr. Tait that

"the Yootoh ban:;; al allow the same rate, and charge the same rates
for discounts an

overdrafts, and these arc axed relativel;: to t-le

Bank of England rate."

The Royal Bank, he declared, had an account

with the Bank of ilngland whi3h had been in operation since 1728, and
.
it collects bills and cheeks for the Bank of .Lngland all over Motland.

This m.lbject was sot forth somalhat more fully by Ar Goorge

Anderson, gHneral-manager of the Bank of Scotland, who said:
71er banks in riondon, all t1-1.
"In oommon wit,1 moot of the 0,
Scottish bn1s-s represented there ia)cp accounts at the Bank of England,




on Which operations are made ai required, a minimum balance being
usually left in the hanas of the Dank of 7-1n71a&.. to recoup then for
trouble in keeping the account.
Bank of Englana an

An arrangement exists between the

the Bank of Scotland for drawing drafts on each

other and collecting documents, ana the former act as clearing
agents in London for the T3an3c of 7.1ot1and...
"The Bank of 'Enfraana As the banker of the government; is the
largest ismers of notes, issuing its notos when rcquired in exchange
for gola bullion una paring netns in [Told coin; and beinFf7 the bankers' bank, the week17 returns as to its position form the best possible barometer of the state of traae an1 credit in the country.

The

rate of discount announcea by the hank of England fro time to time
m
serves as a guiae to the other banks throughout the country in fixing
their rates for '1.oan2 anel deposits."
The 'cotch system, with its eight large banks, is essentially a system of cloneentr!lteE control at the centre, fIrd the distribution of credit throngll branohe.

The :fcetch bank:: have 1,175
,

offices or branches, or an avorac7e of 3 for every 4,000 inhabitants.
Economy in the circulation of cold is l'otnineC,

use of the -411

notes which it was declared by Er. Blyth, general-manager of the
Union Bank, enabled the banks to dispense with keoping large balances
in actual coin at the branches.

The managers of the branches are

known in Scotland as agents %nd have power to grant advances, but
stibject to the approval of the head, office.

It was declared by Mr.

Bogie, general-manager of the (.3omercia1 Bank:




'
4
1:he nJoretion ailoNea io depenaent on the size of the branch
and the rulture (1'. the buzinesa fAnd the class of customer, c.nel on the
record of tne agent.

By our system of reports on advances (weekly,

monthly, and ciaarcly) we keep in co:c touch witL tTle
means of borrowers,

Rile

'ivances and.

ondon Trannili, of course, on different

lines, ane, our manager taore has greater powers than an agent at a
branch in 3cutliLna,




(January 15:1910.)

A set of charts, carefully prepared under the direction
of the National Monetary Commission for putting in graphic form the
progress of American and foreign banking during the past thirty to
forty years, was made public by the Commission to-day.

The number

of the plates is twenty-four and much care has been taken in the
arrangement of spaces, lines and coloring, to maim them tell at a
glance the story of the changes in banking conditions during the
period covered.

The subjects are arranged in a logical order of

evolution, beginning with the progress in the number of national
banks, state banks, and trust companies.

They then deal with

changes in relative capital of each class of banks and in the circulation of the national banks; changes in the circulation of
national banks in their relation to the supply and price of government bonds; the relation of the Treasury balance to deposits of
public money in the banks; the movements of the bank circulation in
reserve cities and other cities; the relative fluctuations in the
price and net return upon the public debt of the United States and
that of Great Britain, France, and Germany; changes in discount
rates in different markets; and the comparative stocks of gold in
leading banks.
The first chart shows the progress in the number of
national banks from about 1650 in 1867 through the gradual rise to
about 3800 in the summer of 1893.




Then comes the depression of the

line, due to the failures and liquidations following the panic of
that year, until the number in the summer of 1899 falls below 3600.
czkrw-eet./
Then berme a sharp upward turn, which began in the summer of 1899,
apparently as the result of returning business activity, but was
sharply accentuated by the act of March 14, 1900, which first permitted the creation of national banks with a capital between
$25,000 and 00,000.

This upward movement continues practically

unbroken until a total of nearly 6700 banks is attained in the summer of 1908, after which the movement is slightly relaxed as the
result of the panic of 1907.
Even more interesting in some respects are the variations
of the line indicating the number of state banks.

Starting below

300 in 1867, the numuer is barely above 600 in 1876 and shows a decline to 475 in 1878.

From that date to the summer of 1885, there

Is a gradual uplvird movement until the number of state banks is only
a little under 1000.

Then comes a depression to about 850, which

suddenly turns in the summer of 1886 into a rapid upward movement,
which has never been permanently interrupted.

It was in 1893 that

the number of state banks began to overtake the number of national
banks.

The lines of increase in banks of both types had been

roaghly parallel down to about the summer of 1888, with the state
banks nearly 2000 less in number than national banks.

Then began

"a stern chase" by the state bank8 to overtake the national banks in
number, influenced apparently by the small profit to the national
banks on circulation, which arose from the high price of United States




bonds.

By the summer of 1891 the distance between the two classes

of institutions had fallen to less than 1100; by the summer of
more
1892, to less than 600; and by the summer of 1893, to a little
than kW.

Finally, in the spring of 1895, in the face of national

d
bank liquidations, the line of the number of state banks crosse
s
that of national banks and began the upward movement which carrie
the line at an acute angle from about 3600 institutions in 1896, to
11,400 in the sunner of 1908.
A somewhat different light is cast upon these figures by
the second chart, showing the amount of capital and surplus funds
of different classes of institutions.

Here the state banks, many

al
of them with capital much below the minimum permitted to nation
banks, lose the predominance which they derive from numbers.
State banking capital and surplus funds in 1867 are shown to have
been $100,000,000 0 while national banking capital and surplus funds
were about 0480,000,000.

By 1880 these funds for national banks

risen
amounted to about $575,000,000, while for state banks they had
only to about 0110,000,000.

Then came an upward curve in the line

with national
of progress of both classes, which culminated in 1893,
banking capital of 0930,000,000 and state banking funds of
0325,000,000.

The downward dip of the curve, after the panic of

0 in 1899,
1893, carried national banking funds to about 060,000,00
Then began the
while those of state banks were about :310,000,000.
el
rapid upward movement of the past ten years, along almost parall




lines, leaving national bank capital and surplus funds in 1909 at
4;1,500,000,000 and similar funds for state banks at 020,000,000.
The difference between banking conditions in :aew York and
other financial centers. is indicated by the chart of discount rates
in Berlin, London, Paris, and New York for the twenty years ending
with 1908.

The Paris rates are the lowest, ranging above three per

cent. only for brief periods at the Bank of France and for still
shorter periods in the open market.

The London rates, both at the

Bank of England and in the open market show frequent variations, but
their range, except in the autumn of 1907, is never higher than 411
per cent., and in 1895 as low as two per cent. at the bank and below
one per cent. in the open market.

The Berlin rates show a higher

tendency, but only at the close of the year 1899 and the early part
of 1900 did they go above five per cent., until on the eve of the
panic of 1907.

The open market rate in Berlin did not at any tine

except in 1907 go above 4* per cent., and in 1894 was at a point below two per cent.
The Commissionv in dealing with the New York market, did
not take the violent fluctuations in call money as a basis, but only
the rate for commercial paper running from two to three months.
Beginning in 1890 at a rate of about 51 per cent., this New York
rate fell a trifle below four per cent. in 1892, to mount far above
six in the panic of 1893, when the maximum Berlin rate was just over
four per cent. and that of London just over three.

Then came the

fall in the New York rate to three per cent., during the depression




-5
-

following the panic, when the Berlin market rate was under two per
cent. and the London market rate was under one per cent.

The

New Yorx rate returned to a little more than 5* per cent. in 1897,
and then advanced gradually to about 4.25 per cent. in 1900, and
mounted upward after 1901 to about 5.4 per cent. in 1903.

Then

came a fall to 4.25 in 1904 and a rapid rise in 1906 which culminated in a rate of 6.2 per cent. in 1907.

The flew York rate,

whether high or low, was in every case higher than the rates, either
official or private, in London and Paris, and only during the period
from 1897 to 1901, was it lower than the German official rate and
during only a brief portion of this time lower than the German private rate.

An interesting chart, which shows in detail the number

of days during which high and low rates prevailed at the banks of
France, IIngland, and Germany, has a maximum line of seven per cent.,
which is never crossed in any case by the line of actual rates except at the Imperial Bank of Germany in the panic of 1907.
The internal movement of currency between New York and
interior points, and the foreign movement of gold to New York from
foreign countries and from row York abroad, is the subject of a diagram which shows that New York is frequently subject to severe pressure in both directions at the same moment.

Another diagram, rep-

resenting the movements of cash between flew York and the interior in
the form of a wheel, brings into striking relief the loss of currency by New York from August to December, 1907, and the great reflex




-6-

current of incoming money during the winter and spring of 1908.
The mgimun

0:;o3:3 to New York in any one month was in October, 1907,

when the amount was 4402:501,000; the maximum gain was in January,
1908, when the amount was c35,729,000.

The largest monthly loss

recorded in any other recent year was in October, 1906, when the
amount was $23,783,000.
The last table of the series, giving the average gold
holdings of the three principal Iluropean banks and of the United
States Treasury, brings into relief the great increase in gold
stocks in recent years.

The United States Treasury, with over

1,100,0000000 of gold, stands in the front rank of holders of the
yellow metal, offering a remarkable contrast with the conditions of
1895, when total Treasury holdings were under ;;,;140,000,000.

The

Bank of France, although shoving less remarkable variations, discloses a gold stool: which increased from
4;590,000,000 in 1908.

The Bank of

300,000,000 in 1892, to

nEland and the Imperial Bank

of Germany do not show radical gains in gold, but rather the influence of the variation of the discount rate and the control of
the exchange market to keep their reserves up to minimum requirements of from 4150,000,000 to 4200,000,000.




larch 16, 1910,

I1TIRY/11 011 Bair 07 FRANCE,

Ws the Dank of France has steered its course clear of
political oomplioations and has prevented financial crises by serving as a harbor of refuge for the joint-stook banks is told in a
graphic manner in an interview with M, Pallain, the governor of the
bank, which was made publics to-day by the National Yonetary Commission,

The story was told in a conference held at the Bank of Prance

when Senator Aldrich, Representative Vreeland and other members of
the Commilselon were in Europe, holding similar conferences with the
heads of the great note-issuing and joint-stook banks,

The Bank of

Prune, was founAel in the year 1800 and its charter was renewed in
1897, expiring in 1920.

Almost the first question asked Governor

Pallets. was Whether the bank was ever attacked in the controversies
between politioal parties.

He answered in these words:

!ffe Osage has ever been mai* that the bank favored or aided
any politioal parlor.

There is never any claim that politics enters

in any Leers* into the management of the beak.

Busiopt for the re-

newal of the charter in 1897, no legislation affesting the bank has
bees ensetei glass 1847,

There is no sentiment for any *hangs in

baaciag methods nor for any new legislation.

It should be added

that neither the Governer nor Deputy-Governor is permitted to be a
member of either body of Pantomimic*




The government does not own a Share of the capital of
1811,600,000 francs (*36,826,000), but exercises &manly* influence
through the appoint of the governor and deputy-governors and one
of the boards of the bank.

The governor and the two deputp.governors

are appointed by decree of the President of the republic upon the proposal of the Minister of

PIAMMANN.

Their terms of servioe are not

fixed, but usually extend over many years.
Some light is thrown upon the absence of political hostility to the bank by the number of its branches, the manner in Which it
aids small commerce, and the strength which it affords to the banking
system of the country.

There are about 600 banking offiees smat-

tered over France, the more important, to the number of 127, being
known as branches, and the others as auxiliaries and agencies.

The

managers are remunerated by fixed salaries, Whioh does not, however,
prevent the bank from letting all the staff participate in the results of particularly productive years by exceptional allowances.
There is aloe a pension system for employees, Shish guarantees to
saoh agent entitled thereto at least one-half the annual salary after
thirty years' service.
The bank is not limited to redisoeunts„ but has a line of
clients of its own.

It was stated by I. Pallaia, that about 70 per

cent, of the paper held bears the signature of sems bank as one of
the endorsers, but the number of merchants and manufleturers asking
for direst &tomato has reeently been increasing.

The average ma-

turity of paper disoounted during the year 1907 was twenty-six days
and the average value of bills diseounted was 732 francs ($141).




This low average, obtained from the mingling of bills for very
large amounts with smaller ones, is due to the extent to Which the
bank discounts or redisoounts bills for very small amounts.

The

minimum limit admitted to discount was lowered in 1898 to 6 francs
(96i wont.), and the number of small bills disoounted has never
.
ceased to inerease since that time.

In 1907 the number of bills be-

low 100 frame ($19.30) was more than 3,600,000 in a total of
7,600,000.

Anyone Who is known to the bank can open an account, the

minimum being only 600 francs ($96.50).

After an account is once

opened, the depositor may discount paper for as small & wum as 5
francs, provided it meets other requirements.
The bank has for many years charged the lowest reit*. in
Europe almost consecutively for discounting bills.

When I. Palletin

was sliced if it would be more advantageous for the bank, considered
simply as a bank, to impose different rates under different oiroumm
steam and at different places, he made this answer:
wiks a banking establishment, if we thought it advisable to apply different rates, we Gould easily become the masters of the market.
But in our position of Bank of Prance, organised to serve the interests of public credit in a democratic country, we do not believe ourselves justified to use this option,*
Discussing, later on, the method puramed by the bank to
maintain its great gold reserve of more than $600,000,000, I. Pallain




wit is a principle oonsoorated by =porton** that the eaprene
means of defense for an issue bank, to protest its metallic, reserve,
is to raise the rate of disoount, and we never lose sight of this
principle.

However, the extent of our reserves &flan us to coon-

template without emotion important variations of our natant° stook,
and we only emeeptionally have recourse to a measure Which is always
painful for camerae and industry.

The stability and the moderation

of the rate of discount are considered as precious advantages, Which
the French market owes to the organisation and traditional conduct of
of the Bank of France."
Taking up the relation of the joint
-stook banks to the
Bank of Frans*, the question was asked Whether, if the Credit Lyonnais
needed money and brought to the Bank of France acceptable bills, the
bank would. disoount them,
"Certainly.

rhe reply was:

We often do; and this possibility, allays open,

immerging to oiremmetames, is an invaluable resouree for credit
societies.

The eminent founder of the Credit Lyonnais, I, Germain,

a very competent maa in these natters, admitted frankly that if the
Bank of Frame* &Id not =1st he would close the Credit Lyonnais,
in times of crisis.'
I. Pallain added, in response to farther questions, that
in the joint
-044k banks which the Commission would visit, they would
find the liquid oadh very mmall in proportion to the transactions.
Win Frame," he declared, "we consider that the strength of a bank




.5.

consists more in the composition of its portfolio, i.e., in the
value of ito commeroial bills, rather than in the importanoe of its
cash reserves,"

The reason for this was stated to be that for the

French private banks the proportion of sash to liabilities is less
significant on account of the facilities offered by the organisation
of the Bank of Frazee for the rapid conversion of good assets into
ready money.

The part played by the central bank towards the pri-

vate establishments permits the latter, as has many a time been
proved, to reduce to a minimum their cash reserves and to devote,
without emeeptional risk, a larger part perhaps than elsewhere to
productive commercial operations,

In the further discussion of

this wdbjeot, the following colloquy took plaoe:
wQ4

I suppose the relations of the Bank of France with the

other banks are cordial; there in no friction?
"A.

We have as a principle to be on good terms with everybody,

and better with certain persons,
Q.

Do the balks rely implicitly on the Bank of France to

grant them silent when they require it?
"A,

They know very well that in times of difficulty we are the

enprone resew.**
"Q,

Does the amount and the 4:ammeter of credit granted to

other banks depend on the amount and the character of their aosounto
at the Beak of Franco?
"A,

There is no fired rule, and although the balance of the

account is not a matter of indifferenoe, it is more especially the




quality of the paper presented which fixed the extent of the credit.
In periods of crisis, in 1830, in 1848, in 18,0, in 1888, the general council of the bank did not hesitate to some to the assistance of
establishments which were in difficulties, but Whioh held assets of
unquestioned charaeter and value, by extending to them the largest
possible eseititi."
Members of the Commission did not spare the most searching
questions in regard to the standing of the Bank of ?ranee with the
publio and with other institutions.

It. Pallain was asked point-

blank, wig the Bank of Frame regarded as a bank for banks or as a
bank for the people1 "
4

To this he made answer time:

wThe Bank of France remained for a long time, indeed, the bank
for banks, but since it has oovered so much territory wi

its numer-

our branches; since the minimum amount of all its operations has been
lowered; since it has opened deposit accounts to all; sines it has
tried to simplify and minimise the formalities required by its special
charter, the industrial and commercial world has some to UAO the bank
direetly to a much larger degree.

At the same time its credit has

come out stronger, firmer, more popular from all the politieal and
financial crises, so much so that to.day one can reply without hesitation that it is already and that it tends to become more and more,
as you ask, -- the bank of all the French publics."
In order to determine if the system of monopoly of note issue which belongs to the Bank of Frame was acceptable to the sountry




a

as well as to the finansial community, M. Pallain was asked if there
was in any quarter any agitation for a change in this respect.

He

replied in the negative, but added that the people were always inclined to ask more from the Bank of France,

to open new branches;

to extend the benefit of its credit to a larger number of places; and
to increase the faoilities of every kind offered to its customers.
Pressed still further to say if there was any demand in banking circles for extending the right of issue to other banks, the reply of
I. Pallain te this question was as follows:
"The unity of issue was achieved in Frame, in l848, and at no
time since than has there been any question, in responsible circles,
of a possible return to plurality of issue.

The ease tenilleney is

leading, little by little, to an absolute monopoly in Ragland.,
Germany, and even in Italy.

I think that it would also be interest-

ing for you to examine the resent example of Switserland, Which had
its note-issue system founded, as in Amorlea, on the plurality of
banks and which has now substituted for this system one single privileged bank..
referendum."




This transformation has received popular approval by

Larch 14, 1910.

THE BANK OF ENGLAIM AND THE MONEY MARKET.

The changes in fashions and the extension of the week-end
important financil transac-

holiclay have their effect, as well

tions, upon the changes of the bank-note circulation 1..11

ngland.

This was brought out in an interesting manner in the conferences
held by senator 'Lldrich and other members of the National Monetary
:3ennission with the governor and directors of the Bank of England,
which are just being printed for Eistribution by the Commission.
It was stated by the officers of the 1,an1c that there has been a
steaily reauotion of late years in the volume
in LonJon on ',aturdays, an

f bu3is

conducteel

the ALount of the notes withdrawn from

the bank on that day is now as a geLerl rule very =CA less than
on the ether days of the week.

The balance outstanding at the

close of the day generally shows, tlIel'ofwea, a natcrial shrinkage,
On Mondays notes are withdrn in larger quantities than
2
usual in order to replenish tills afte: th, reduction in the amounts
hela on the previous Laturday, whilst on Friaays .111sc the withdraw1
als are above the ,,ve7:age to beet the ieman6.2 occasione, by weekly
payments, Llich as wages, etc.
The increase

total at the close of each quarter is oc-

0
casioned. b- withdrawals to meet paymcnts fte on the four quarter
days, Laclysay, Midcunmor, Michaelmas, an. 7hristmr.2.
Inc large total at ths beginring of iklizust, -- of late
year

generlly the Imximum for the year,

for hoTilc.y an



iv fte to 17ithdrawals

purposee, whil9t thn low fierreo which

Ell

usually occur in the middle of February may be attributed to the
absence of any holiday demand, and to the fact that reaction after
Uhristmas, coupled w1t

the conrartive l'bElence of visitors to

London, causes the retail trade to be less active than in the second
and fourth quarters.
The conferences brought out the fact that the Bank of
England, contrary to meet banking institutions, is organized upon
the principle of "One man, one vote," instead of.9;ivin
shareholders in proportion to their stock holdings.

votes to
it is neces-

sary, however, for a proprietor, as shareholders are called, to have
pe-ofl

500 of stock in order to have a vote and the stock is quoted at

A
about 267 the markot value of the amount required to give a vote is
/
There is no limit to the number of shares which nay
about $6,600.
be held by any one person, but added holdings do not give incresed
voting power.

There are at present about 10,000 proprietors, and.

they are authorized to elect the governor and directors and to nake
by-laws for the conduct of the bank, provided the by-laws are not
repugnant to the LIvis of the kingdom.

The chief legal restriction

upon the character of the directorate is that they must be "natural
horn subjects of England or naturalized," but in actual practice the
selection is confined to thoe 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 KingThere is no inspection or actual supervision by the governposition.
ment, but the bank is required to furnish weekly statements of its
dom.




Although the bank exercises great power over the 7",ondon money market, its branches are limited to 11, -- 2 in London and 9 in the
provinces.
The Bank of

ngland does not make such a specialty of dis-

counting bills for small amounts as is the (v-t.:;e at the Bank of 7Srance
and the imperial Bank of Germany.
bills discounted

is

2ity of
The average period 02 matu-

from 40 to 50 lays, but upon the average their

size was estimated by the officers at about +1,0()O.

lOwo British

names are required upon a bill discounted, one of whioh must be the
acceptor, an

four months is fixed as the Laximum mciAceitz; except in

a few cases, where six months are allowed.

1ho variouL; cla:Lscs

narketable securities quoted on the London utoc:k axchazge, with the
exception of minin

shares, are accepted, uad also with discretion,

good socuritics which are not oo quoted when thoir valu0 can he ascertained.
All the large London banks, most of the Ilcotch, and ioe
of the Irish banks have accounts with the Bank of England.
cial Englisli banks an

Provin-

branehes of ".:iondon banko in tcww: where the

Bank of ]Aagland has branches

have local accounts with. the bark.

The relation of the joint-21'6°01c banks to the Dank of ,r1171,n0. was
discussed very eanilidly wit:a members of the Cominigion Tx Sir Felix
Schuster, Bart., Governor of the Uniou of London
was pointed out that tho jcirt-stock banks

Tmiths Finnk.

It

rrA Terin quite so

much unon the central bank as wa;.; the (lase on the Continent, but
that they 1:el)t their cash balances at the Bank of Engli7ind and would




Discussing the actual position of

look to it in case of emergency.

the Bank of Enrlana at the centre of the syTtem, Sir Felix me
these obnervatiolin:
"To Bauk of England is the central reservoir of the whole bank
Th.cough their holding the balan-

lug system of the United. Kingdom,
oe

of the joint-stock banka, of the clearing house banks, and the

government balances, of course they have obtained very great power,
and thoy can control t:Io market by withholding advances, by fixing IX
the

rr4.to, by borring f- om tie market when they feel inclined to
2

Om so.

2rctically they have the wliole control of the money market

. 11E they are •:.1r;o in touch with general novements
In their Ir:,nas, :
th4lt ao tIrAnE, place; the
the state cf t.:J3 balance

aaa XL;c Lotter than anybody oleo fron
of the joint-tock banks hcw trade is in

the country, whether there is a 'large lomana for Loney', whether
those lxlancea 01ff-I a tndoici
,

to shrixt.z, or wilether they show a

torCency to acounnlate. * * *

It iz generally assumed that in
he Dunk of .21gland. to grant ao-

times of trouble it is the 6-at7 of

eormorlation to solvert parties who have good security to offer.
The Bank of TaigTanl 7c)e; not openly

Acknowlodue

c
has never beer officirlly im- osca upon it, but it 7111,1
up to it, anel were it not so it
er of tIle nitimate ',e7lrve an

ntrongth an
Da

7_,
lays acted

raison Metre aL: hold-

ors' bank would be gone an

other arranreerents would teoon3 imperative."




duty, which

_5_

This obligation of the Bank of England to support the
mart in onorr7encies was 7r)forre
autie:) of tlie hank.

to 17 7ir 7el1x as one of the

In response to the question, 7i1iat

steps taken are !lost effective in ttractlng X gold or in preventing
its outflow?,"

Felix replied thus:

"The raiing of the aiscount rate, and not onlr of the nominal
Ban: of !]nc 1%nOL rata, but of the narket rate ao well.
,
.

You often

have a condition w7l1ch you ,.escribe as tho opon-narket rate, that is
one -!:( tyro per cent. lowe7, than that of the bunk rate, and in those
c,ra1ition3 .1:110 ban", Ilar no influerve whatever.

What the bank have

to Co unor thee conditions if the7 wish to attract goltl and prevent its le.LvinF7 is to pay more in ;he ni%rhet for money than other
,people woula; they must artificially raise the value of money witside;
they imeli,.tely become borrowers and swoop up all the floating snp.
plies at a !1i1!hor rate than c. discount broker would pay 113.
net

do

it themselves.

In one instance they have done it direct, but

in most wtoes they employ a broker.
1;a:1J

in

bo3o-ne

They Ito

whey give security for those

short ti,o they sweep 11 -. t'Lle aarplu .
,
,

effective in raisin.' the iii:lcount rat.

influence on fie forelzn oxcanges.

an

that

That again ho.s an

It is the foreign exchanges that

1.egulate to olAfler or influx of gold, and foreign exchanges can
onl.y




o regulated by the value of money."

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