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61ST CONGRESS)

2d Session

J

SENATE

(DOCUMENT

\

No. 586

NATIONAL MONETARY COMMISSION

Banking in
Russia, Austro-Hungary
The Netherlands
and Japan

Washington : Government Printing Office : 1911




NATIONAL MONETARY COMMISSION
NELSON W. ALDRICH, Rhode Island, Chairman.
EDWARD B. VREELAND, New York, Vice-Chairman.
J u u u s C. BURROWS, Michigan.
JOHN W. W E E K S , Massachusetts.
E U G E N E H A L E , Maine.
PHILANDER C. K N O X , Pennsylvania.
THEODORE E . BURTON, Ohio.
H E N R Y M. TELLER, Colorado.

ROBERT W . BONYNGE, Colorado.
SYLVESTER C. SMITH, California.
LEMUEL P . PADGETT, Tennessee.
GEORGE F\ BURGESS, Texas.

HERNANDO D. MONEY, Mississippi.

ARSENE P . Pujo, Louisiana.

JOSEPH W . BAILEY, Texas.

ARTHUR B. SHELTON, Secretary




A. PIATT ANDREW, Special Assistant to Commission.

CONTENTS.
Page.

I. Organization of Banking in Russia. By Professors Idelson and
Lexis. From Conrad's Handworterbuch der Staatswissenschaften, 3d edition
I I . The Bank of the Netherlands. By R. Van der Borght. From
Conrad's Handworterbuch der Staatswissenschaften, 3d edition.
I I I . The Austro-Hungarian Bank. By Professor Zuckerkandl.
From Conrad's Handworterbuch der Staatswissenschaften, 3d
edition
IV. The Banking System of Japan—
By Marquis Katsura
By Baron Sakatani
By S. Naruse
By Professor O. M. W. Sprague




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39

55
119
141
149
177




Organization of Banking in Russia
BY

PROFESSORS IDELSON AND LEXIS

[From Conrad's Handworterhuch der Staatswissenschaften, 3d edition]




V




ORGANIZATION OF BANKING IN
RUSSIA.
Page.

I.
II.
III.
IV,
V.
VI.
VII.
VIII.
IX.
X.

History prior to i860
The early activities of the Imperial Bank
The municipal banks
Credit associations based on mutual help
Private banks
The new statutes of the Imperial Bank
The resumption of specie payments
The situation after 1897
The Imperial Bank and the currency in recent years
Statistics of Russian banking institutions

1
8
10
14
15
18
24
28
33
36

I.—HISTORY PRIOR TO i860.

Banks came into existence in Russia in the eighteenth
century through the action of the Government. In the
years 1729-1733 the mint received funds from the imperial treasury for the purpose of granting short-term 8 per
cent loans on the security of the precious metals. In 1754
the Government established three banks, which were to
carry on business not only with the capital assigned to
them by the State, but also with the deposits of private
individuals. Two of these were to be banks for the
nobility, located, respectively, at the old and new imperial
residences (Moscow and St. Petersburg), which were to
loan money on the precious metals and on precious
stones, and to grant credit on the security of mortgages
on estates cultivated by serfs. The third institution was




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to be a commercial bank for the merchants of St. Petersburg. The finances of these institutions became embarrassed through mismanagement, and in 1782-85 they
were successively closed. In 1757-58 the Government
undertook to promote the business of discounting bills
and the method of payment by giro—that is, by means
of transfers from one bank account to another—for which
there was great need by reason of the quantity of copper
money that was in circulation. For this purpose it established a dual institution which became known as the
Copper Bank. It was intended that this bank should
develop the giro system of payments, take interest-bearing
deposits, and grant loans. It was founded mainly, however, for the purpose of '* drawing silver money to the
imperial money offices, and in particular to St. Petersburg.* ' This bank likewise failed to achieve any noteworthy results. The establishment of state banks of issue,
begun in 1762, introduced a considerable advance in the
matter of the granting of credit. The first attempt was
a failure, but in 1768 two establishments were founded
under the name of Assignation Bank. They were to
facilitate monetary intercourse and to grant credit to
private individuals. They were authorized to issue notes
up to the sum of 1,000,000 rubles, for which they were to
provide a cash cover consisting of copper money. Catharine II promised in her message that these notes would
be forever redeemable and would never be appropriated
by the Government (or lent to it) for its own purposes.
This promise was not kept, and the volume of the notes
(assignations) in circulation was increased in 1774 to
20,000,000 rubles, and in 1786 to as much as 50,000,000




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Russia

rubles. In the latter year these two establishments were
replaced by a single Assignation Bank and the note circulation was raised to 100,000,000 rubles. Part of this was
handed over to the Government in the way of a noninterest-bearing loan (26,000,000 rubles out of the fresh
issue of 50,000,000 rubles). The remainder was to serve
for the operations of the bank and to be assigned to the
newly established state mortgage institution, the so-called
Loan Bank, which was to take the place of the banks for
the nobles created in 1754. There were now three kinds
of mortgage institutions—the Loan Bank, the provident
societies ("colleges") for the service of the general public
(!775)>a a n ( i the deposit and loan institutions operated
by the boards of guardians at the two imperial residences
(1772). Subsequently an "Aid Bank for the Nobility"
was established (1797-1802).
The Assignation Bank discounted bills and granted
loans on collateral. The resources at its command were,
however, very limited. It was replaced in 1817 by the
newly founded Imperial Bank of Commerce. This bank
received from the Government as its capital the sum of
30,000,000 rubles (16,000,000 rubles of which was, however, soon taken back) and was authorized to take deposits, discount bills, and to grant credit on the security
of merchandise. The Bank of Commerce was in existence
until the foundation of the Imperial Bank, and its affairs
were wound up, along with those of the above-mentioned
° T h e credit business of these "colleges/' which were benevolent
institutions, was based on their privilege of taking deposits from private
individuals and on the obligation imposed on government officials of transferring to them in the way of deposits all sums placed in the hands of the
officials for safe-keeping or otherwise disposable.




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credit institutions in 1859. T h e business of these banks
reached t h e following dimensions:
The total a m o u n t of deposits in t h e Loan Bank increased
from 31,520,000 rubles in 1817 t o 109,120,000 in 1835, and
to 412,760,000 in 1857. T h e great bulk of these deposits
came from the Bank of Commerce, t h e "colleges" (provident societies mentioned above), and t h e officers of
t h e Government. The deposits of private individuals
amounted t o about 15 per cent of t h e total. T h e loans
in 1857 amounted t o 368,300,000 rubles.
The deposit and loan institutions operated b y t h e
boards of guardians h a d deposits in 1859 aggregating
478,340,000 rubles, in addition to their capital aggregating 65,610,000 rubles, and the aggregate of their loans
was 508,280,000 rubles.
T h e Bank of Commerce had deposits in 1856 aggregating 241,120,000 rubles, of which 222,020,000 rubles was
deposited with t h e Loan Bank. I n 1859 t h e aggregate
of bills discounted reached t h e sum of 47,630,000 rubles.
The " colleges" (provident societies for t h e service of
t h e general public) h a d deposits in 1858 aggregating
113,090,000 rubles. T h e aggregate of loans in t h a t year
was 128,710,000 rubles.
The above institutions h a d between t h e m at t h e beginning of 1858 deposits aggregating 1,012,870,000 rubles
and the aggregate of discounts and loans was 1,037,850,000
rubles.
I t will be perceived t h a t t h e main resources of these
banks consisted of deposits withdrawable on demand.
As against these liabilities there were long-term credits
granted to landowners and t h e Government, t h e aggre-




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gate of whose obligations amounted on J a n u a r y i, 1858,
t o 521,400,000 rubles. Only a small p a r t of the resources
of t h e banks was applied to the discounting of bills and
t o loans on merchandise. I t was realized at an early date
t h a t such a condition was untenable, and in 1822 the
minister of finance proposed the liquidation of t h e Loan
Bank. This suggestion did not meet with favor and the
plan was adopted of developing the institution further by
concentrating in it the deposits of all t h e state banks. In
1830 t h e situation of t h e state institutions became still
more precarious. At t h e suggestion of Count Kankrin
the short-term obligations of the Government were converted into a long-term loan, bearing interest at the rate
of 5 per cent, with an amortization of only 1 per cent, so
t h a t these funds were locked up for a period of thirty-seven
years. The t e r m of t h e new mortgage loans t h a t were
to be granted was lengthened considerably, and t h e rate of
interest on deposits was reduced from 5 to 4 per cent.
Thereupon there was an outflow of deposits from t h e state
banks, which, b y reason of the restricted field for the investment of capital, was followed by an inflow of money
into t h e banks. A time came when t h e banks no longer
found any opportunity for the profitable investment of the
funds intrusted t o them. In 1855 t h e sum of 20,000,000
rubles was lying idle, and at the middle of 1857 the amount
reached 146,000,000 rubles. This situation could, in the
n a t u r e of things, be nothing more t h a n a transitory one,
as new railways, joint-stock companies, and other undertakings h a d t o place new issues of securities on t h e market.
Instead of waiting for t h e natural outflow of t h e deposits
or making greater efforts for their profitable utilization,




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the administration of finance undertook a portentous reform. The ukase of July 20, 1857, decreed the lowering of
the rate of interest on private deposits from 4 to 3 per cent,
converted the thirty-seven-year debt of the Government
into a fifty-six-year debt by fixing the yearly payment,
including amortization, at 4 ^ per cent, and likewise ordered
the yearly payments in the case of mortgages to be reduced. It was assumed that the anticipated withdrawals
of deposits would ensue gradually, and that the banks, following the instructions of the finance minister, would be
able to meet their obligations. It turned out very differently, however. The economic standstill of the days of
the Kankrin regime was over. The money market offered
capitalists all kinds of investments in the shape of government loans bearing a high rate of interest, stocks, bonds,
etc. With the many new undertakings following one upon
another, there was a veritable scramble for capital. In
particular, the founders of the " Chief Association of
Russian Railways " exerted their influence with the Government in the direction of lowering the rate of interest
on deposits in order to set money free for the purposes of
their undertakings. Deposits were consequently withdrawn in large sums and before long the administration
of the banks had to face a crisis. The repayment of the
deposits had to go on while it was not possible to realize
on the assets. The ministry of finance sought to avert a
crisis by prohibiting the establishment of new joint-stock
companies, suspending loans on the estates of the nobles,
and taking energetic steps to collect sums due. But
these measures proved unavailing; nor could the imperial
treasury lend any effectual aid. The ministry of finance




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Russia

then proceeded to fund the bank debt by means of two
foreign loans, an issue of 4 per cent "inscription certificates, " for which the 3 per cent deposit certificates might
be exchanged, and another of 5 per cent bank notes.
At the same time the liquidation of the state banks was
decreed, the taking of deposits by the institutions was prohibited except in the case of the Bank of Commerce, and
the deposit banks operated by the boards of guardians
and the " colleges " (provident societies) were placed under
the ministry of finance. In this way the reform of the
state banking system was made to pass through a crisis by
means of regulative measures requiring a vast outlay of
money (over 1,000,000,000 rubles), an expenditure which
without doubt delayed for a long time the reform of the
monetary standard.
In i860 the state banks were replaced by the newly
established Imperial Bank. Private banking now developed vigorously, and Russia soon had modern private
banks. The decade 1880-1890 witnessed again the creation of two state agricultural banks—the Peasants' Bank
and the Bank for the Nobility. In 1894 the Imperial
Bank was reconstituted and the reform of the monetary
standard in 1896 marked for the institution the beginning
of a period of far-reaching activity.
The history of banking in Russia presents the following
characteristic features: The dominant role played by the
state banking system and the consequent close connection
between the banks and the national credit; the late beginnings of private banking and the complete absence of
private banks of issue; the tendency toward a comprehensive regulation of private banking by the State.




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I I . — T H E EARLY ACTIVITIES OF THE IMPERIAL BANK.

The liquidation of the state credit institutions was
assigned to the newly founded Imperial Bank (established May, i860). The settlement with the depositors
in the Loan Bank, the institutions operated by the boards
of guardians, and the banks of the provident societies
("colleges") required extensive means, and, as the funds
thus expended were only gradually restored to the bank,
considerable sums of money were tied up for a long period.
The sums expended by the bank for the purposes of liquidation were as follows:
1860-1864
1865-1869
1870-1874
1875-1879
1880-1884
1885-1886

Rubles.
402, 079, OOO
631,545,000
724, 824, 000
528,756,000
323, 487,000
80,489,000

.

These operations crippled the bank in its legitimate
activities, which should have been directed toward the
promotion of business and the placing of the currency on
a more solid basis. In 1886 it was relieved from the duties
pertaining to the liquidation, but it had still to assist the
state mortgage institutions with large sums of money.
The original capital of the Imperial Bank was 15,000,000
rubles and the surplus 1,000,000 rubles. The figures
were raised by additions from the net profits to 25,000,000
and 3,000,000 rubles, respectively. The bank was authorized to receive deposits, but the right of issue was, as
heretofore, to appertain to the Government.® The Imperial Bank was permitted to engage in the following kinds
a The resources of the bank consisted therefore almost exclusively of the
deposits of private individuals.




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Russia

of business: The discounting of bills and other kinds of
maturing paper; t h e loaning of money on collateral (securities, merchandise, precious metals); the taking of deposits; t h e purchase and sale of all kinds of securities on
commission or for t h e account of the institution itself (the
aggregate investment in the latter case being restricted
to t h e a m o u n t of t h e capital). The bank was to be a
purely state institution, placed directly under the minister of finance. I t was provided t h a t representatives of
t h e nobility and t h e merchant class should have a share
in t h e management. The operations of t h e institution
were centralized and only a few branches were established.
The interests of trade received b u t scant consideration,
and t h e discounting of bills was hampered by red tape.
I t was not until 1892 t h a t a better policy was inaugurated
in the m a t t e r of discounts. In 1884 the Imperial Bank
engaged in a new business, t h e loaning of money on
mortgage to agriculturists. In 1892 various concessions
were made t o the agriculturists, and in particular to the
nobles.
Credits were to be granted for a term of
from nine to twelve months, with t h e privilege of
extension. The sums expended in such loans between
1884 and 1894 amounted to 99,000,000 rubles. By order
of t h e Crown t h e bank also granted credit for other
purposes, especially industrial undertakings. As originally constituted, the Imperial Bank did nothing toward
the rehabilitation of t h e monetary standard.
I n 1894 new statutes were framed for t h e Imperial
Bank, and in 1896 t h e reform of t h e monetary standard
was undertaken.




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Commission

I I I . — T H E MUNICIPAL BANKS.

Such banks came into existence in 1789; but for some
time they did not meet with great favor, so that down to
1862 no more than ten of them had been established. In
that year the Government published "normal statutes
for municipal banks/' which facilitated the creation of new
banks. As many as 215 such institutions were established
between 1862 and 1883. A law was promulgated in 1883
aiming to protect the banks against mismanagement on the
part of their officials and undue interference on the part
of the city authorities and also to prevent the institutions
from engaging in unprofitable business. The provisions of
this law, in particular the more rigorous supervision
exercised, hindered the multiplication of these banks.
The increase in their number between 1883 and 1907 was
only 39.
The establishment of such institutions is effected pursuant to the act of 1883 with the sanction of the Government (the minister of finance in accord with the minister
of the interior). The original capital must amount to at
least 10,000 rubles. The bank is under the supervision of
the municipal assembly, to which it is accountable. The
municipal assembly elects the board of directors of the
bank. The directors are not permitted to fill any office
in the municipal government or in any other credit institution. No one who is a member of the municipal assembly is eligible as a director, neither is any. relative of a
member of the municipal council. Two persons who are
relatives or who are members of one and the same business
house may not serve simultaneously on the board of
directors. A special committee, with the president of the




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bank at its head, composed of delegates specially chosen
for the purpose, may be organized to arrange matters
pertaining to discount. The above-mentioned restrictions
apply to the choice of these delegates also. By means of
these restrictions the banks and their customers are to be
guarded against undue exercise of authority on the part
of the municipal government. The annual statements
are presented to the municipal assembly, which chooses
a revisory committee for the purpose of verifying them.
The cash account is overhauled every month by the mayor
and two members of the municipal council and has to be
submitted for examination at any time at the request of
the municipal assembly. After being examined, the report
is sent in, together with the written opinion of the
committee and the resolutions of the municipal council,
to the finance minister and the minister of the interior.
The Government may institute an examination either on
the application of the governor of the province, based on the
request of the municipal assembly of of a portion of its
members, or at the instance of the finance minister, acting
in accord with the minister of the interior. In addition to
this, the banks are required to furnish every kind of information regarding their affairs to the ministry of finance.
The minister of finance is authorized to prescribe the
formularies to be employed in the balance sheets and regulations relative to the business of the banks.
The banks may engage in the following kinds of transactions:
The taking of deposits; the discounting of bills; the
loaning of money on collateral (securities, merchandise,
and also real estate), and the opening of accounts current
218930—11




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on the deposit, as security, of government obligations or
obligations guaranteed by the Government or of warehouse certificates (deposits of grain); the collection of bills
and other maturing paper for account of third parties;
the transfer of sums of money (only if the amount has
been actually paid in) to any place where the bank has a
correspondent; the purchase and sale of all kinds of securities for account of other parties; the purchase and sale
of government obligations and obligations guaranteed by
the Government for account of the institution itself; the
purchase and sale of the precious metals (coin and bullion)
for account of other parties or of the bank; the pledging
of the securities belonging to the bank to other banking
institutions; the pledging of the securities placed in the
hands of the bank as collateral to other banking institutions, this to be done only with the consent of the owner.
The aggregate of the liabilities of the bank shall not
exceed five times the amount of its capital. The amount
of the credit granted to any single individual in any shape
or form shall not exceed one-tenth of the capital. The
directors and employees, as well as the mayor and the
members of the municipal council, can obtain credit only
subject to various restrictions. The cash reserve, together
with the credit balance at the Imperial Bank, shall not
be allowed to sink below 10 per cent of the total liabilities.
An important feature of these institutions is the fact that
the security afforded the depositors lies not merely in the
capital of the bank, but also in the mortgage of some part
(a definite item) of the city's property. In the withdrawal of deposits payable on demand previous notice is
required, the time ranging from one week to three months.




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Real estate on which money is loaned on mortgage must
consist of parcels of ground or buildings located in the
same city or of estates located in the same government.
The city real estate may be dwellings, warehouses and
stores, factories, workshops, or other buildings. Mortgage loans in connection with real estate that yields no
income are prohibited. In the case of buildings the time
within which the sum loaned on mortgage is to be repaid
varies from one year to eight years. In the case of
landed estates the term may extend to as much as twelve
years. Loans granted for as long a term as eight years
are not to be repaid at a single payment. In the case
of an eight-year term, after the expiration of three years
one-fifth of the amount is to be repaid annually until the
indebtedness is extinguished, and in the case of a twelveyear term, after the expiration of two years one-tenth of
the amount of the loan is to be repaid annually. The
amount of the mortgage is not to exceed one-half of the
value of the property.
A percentage of the net profits, varying from 10 to 20
per cent, is to go to the surplus, until the surplus reaches
the sum provided for in the statutes of the bank. The
surplus is intended to cover losses that may be incurred
by the bank, and is either to be deposited in the Imperial
Bank or invested in government bonds. The remainder
of the profits may be devoted to municipal or to benevolent purposes. The city may, with the sanction of the
Government, secure a loan at the bank, the sum to be
taken from the original capital. Unexpended profits go
to increasing the capital.




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IV.—CREDIT ASSOCIATIONS BASED ON MUTUAL H E L P .

These are associations with limited liability, whose
capital is created by the imbursements of members, fixed
at one-tenth of the amount of the credit granted them.
The maximum imbursement of any one member shall
not be in excess of fifty times the amount of the smallest
imbursement. The obligation to make after-payments is
limited by the amount of the credit granted. It is not
lawful to belong to more than one of these credit associations. Business is to be done with members only. Exceptionally, however, credit may be granted, with the
sanction of the finance minister, to rural communes and
peasants' associations. The governing body is the general
assembly. If this is very numerous, it may be replaced
by an executive council. Associations of this kind may
also be established as self-governing corporations by the
zemstvos of the governments and the smaller administrative divisions, called "circles."
The first of these credit associations was established at
St. Petersburg in 1862 after the pattern of the " Union
du credit" of Brussels. By the year 1883 there were 87
of them. From 1883 to 1893 the creation of such institutions was interdicted. Between 1894 and 1908 as
many as 232 new ones were established. A project has
been on foot the last few years for the establishment of a
central bank for credit associations, as they can not
obtain sufficient credit either at the Imperial Bank or at
the private banks.




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V.—PRIVATE BANKS.

After t h e liquidation of t h e state credit institutions t h e
Government permitted t h e establishment of private
banks, which previously—to quote t h e words of the minister of finance, Count Kankrin—were regarded " a s
extremely dangerous institutions t h a t ought not to be
tolerated at all." The first joint-stock bank (the Private
Bank of Commerce of St. Petersburg) was established in
1864 with t h e assistance of the Government, which subscribed to one-fifth of t h e stock. Between 1864 and 1874
no fewer t h a n 39 private banks were founded. This
feverish activity, however, on t h e p a r t of promoters was
suppressed b y t h e act of May 31, 1872, which interdicted
for t h e time being t h e establishment of new joint-stock
banks in t h e two imperial residences (St. Petersburg and
Moscow) or any city in which a private b a n k already
existed. After an interval of some years, ending in 1879,
new banks made their appearance, 12 of t h e m being established between t h a t date and 1908. At present there
are 36 joint-stock banks. 0 Since 1891 t h e Credit I/yonnais
has had a branch at St. Petersburg.
The establishment of joint-stock banks is effected in
accordance with the provisions of the law of 1883. In
cases where deviations from these regulations are deemed
a The largest banks, with the amount of their business, as given to the
public in the annual statement published at the beginning of 1907, are:
The Volga-Kama Bank, 199,000,000 rubles; the Russian Bank for Foreign
Trade, 198,000,000 rubles; the St. Petersburg International Bank, 193,000,000 rubles; the Azov-Don Bank, 151,000,000 rubles; the Moscow Bank
of Commerce, 147,000,000 rubles; the Northern Bank, 144,000,000 rubles;
the St. Petersburg Discount Bank, 97,000,000 rubles; the Russian Bank
for Trade and Industry, 84,000,000 rubles; the Siberian Bank, 62,000,000
rubles.




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desirable the minister of finance has to submit a bill
relative to the matter to the national assembly. According to the provisions in force at present, the original
capital of the bank is not to exceed 5,000,000 rubles.
One-half of this capital is to be paid in at the time the
shares are subscribed for and the remainder within six
months. The liabilities are not permitted to be in excess
of five times the amount of the bank's capital. The bank
is obliged to keep at least one-tenth of the total amount
of its liabilities in cash or in the form of a credit balance
at the Imperial Bank. The maximum credit granted to
any one customer shall not exceed one-tenth of the original
capital of the bank, and the same restriction applies to the
aggregate of blank credits. The bank is allowed to issue
only certificates of deposit, the negotiation of which must
be recorded by an entry in the books of the bank. The
banks are obliged to create a surplus fund, one-half of the
net profits above 10 per cent being taken for the purpose.
The general assembly of the shareholders may resolve that
part of the surplus may be used for increasing the dividend in case this falls short of 8 per cent. Two-thirds of
the surplus fund may be invested by the bank, but onethird has to be deposited in the Imperial Bank in the
shape of government bonds or securities guaranteed by
the Government. The members of the board of managers (with the exception of the advisory members), as
well as the president and the officials, are not to obtain
credit at the bank in any shape or form. No person is
allowed to be a member of the board of managers (or of
the advisory board) of more than one bank. The rights
of the minority are secured by the provision that no




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shareholder shall, at a general meeting of the shareholders,
have a voting power exceeding one-tenth of the aggregate
number of votes of the members present. An examination
of the affairs of the bank by the ministry of finance is made
not merely in pursuance of a resolution of the general
assembly of the stockholders, but also on the application of
a minority if it commands one-tenth of the aggregate number of votes at a general meeting of the shareholders and
represents one-twentieth of the capital. Such minority
may apply for an examination at the hands of the finance
minister independently of the general assembly.
A word remains to be said concerning banking and billbrokerage houses. Private banking concerns which are
not incorporated are under the supervision of the finance
minister, who may at any time ask for information regarding their business and send examiners to overhaul
their accounts. In case the examination reveals any
abuses, the minister is authorized to prohibit certain
kinds of business, as, for instance, the taking of deposits.
The ministry of finance has recently been contemplating
a very thoroughgoing regulation of private banking.
Above all, the kinds of business in which the individual
concerns are allowed to engage are to be distinctly defined
and regulated by legal prescription, and banking houses
that receive deposits are to be obliged to publish periodical statements.




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V I . — T H E N E W STATUTES OF THE IMPERIAL BANK.

The main provisions of the new statutes of the Imperial Bank, which received the imperial sanction on June
18, 1894, a r e a s follows:
The capital of the bank (hitherto 25,000,000 rubles)
may be increased to 50,000,000 rubles and the surplus
(hitherto 3,000,000 rubles) to 5,000,000 rubles. Until
this limit is reached (apart from possible accessions not
provided for) 10 per cent of the annual profits are to go
to the enlargement of the capital and 5 per cent to the
surplus. Any deficit that the bank may sustain is to be
covered by the surplus, and in case the surplus is exhausted the amount is to be charged to the imperial
treasury, which, on the other hand, is to be credited with
the amount of the net profit remaining after the abovementioned percentages have been assigned to the bank
and after deduction of bonuses and pensions to employees. The bank is under the direct control of the
minister of finance, who is at the head of the management. The central administration consists of a council of
the bank, a governor, and two deputy governors. The
branch offices are divided into main branches and
secondary branches. Each office has a committee for
discounts and loans, which has to pass on the security
of the paper handed in and the value of the collateral
and to determine the maximum credit to be granted in
the case of each customer.
The business of the bank comprises the discounting
of bills and other paper maturing at a fixed date, the
granting of loans and credits, the taking of deposits
and the reception of valuables for safekeeping, the
purchase and sale of bills and other paper, the issue




18

Organization

of Banking

in

Russia

of drafts drawn in one locality upon some other place,
and buying and selling on commission. There are special
provisions relative to the various kinds of transactions,
some of which are noteworthy. The paper discounted
by the bank may be either bills or promissory notes,
which may originate abroad as well as at home. They
have to be made payable at a banking town, must bear
at least two good signatures, and must mature within
six months (in the case of some regions, twelve months).
The bank is allowed to take notes not resting on a consummated commercial transaction but put forth with
reference to the prospective needs of some mercantile or
industrial undertaking. The rate of discount has to be
fixed at least once every quarter of a year, and it may
vary in the case of different kinds of business and different
localities. The minister of finance may exceptionally
grant an extension in the case of protested or nonprotested bills or leave to pay in installments, but only if a
mortgage or other pledge deemed sufficient by the council
of the bank is offered as security.
The bank grants so-called industrial loans against
promissory notes bearing merely the signature of the
debtor, such notes being secured either by mortgages
on real estate, by mortgages on the appurtenances of
farmed lands or of industrial plants, by the guaranty of
third parties, or by some other collateral which the
minister of finance deems sufficient. When the amount
of the loan does not exceed 300 rubles the managers of
the branch office concerned may resolve to grant the
credit even without such special security. The industrial credit must be intended for some specific purpose
indicated by the person applying for the credit and can




19

National

Monetary

Commission

only be granted in order to afford the borrower working
capital or to enable the agriculturist or manufacturer to
provide the necessary outfit for his farm or factory, or in
order to afford similar assistance to the artisan, the
retail merchant, or to the worker in some house industry.
The machines and implements that serve as security
must be of Russian manufacture. Exceptions may be
made in certain cases by the finance minister, or conjointly by him and the minister of agriculture. The
amount of credit allowed in the case of any individual
industrial undertaking is not to exceed 500,000 rubles,
and in the case of the owners of small workshops the
maximum amount is 600 rubles. Loans for the purpose
of procuring machinery, implements, etc., shall not run
for more than three years. When the time of the loan
exceeds six months, provision must be made for the
repayment in regular installments. Loans shall not exceed 50 per cent of the appraised value of the articles
mortgaged. Those loans which are granted for the purpose of providing working capital are not to exceed 75
per cent of the amount required in the way of such
capital. The borrower must bind himself by a special
document to use the money only for the particular purpose indicated and to keep up the articles that serve as
security to their full value. In the case of loans of this
kind the bank is authorized by paragraph 8 of the regulations to permit (with certain precautions) the articles
mortgaged to remain in the hands or in the safe-keeping
of the borrower.
The bank grants, moreover, credit on nonperishable wares
of Russian manufacture, warehouse certificates, bills of
lading, etc. Loans on foreign goods may be granted only




20

Organization

of Banking

in

Russia

pursuant to a resolution of the council of the bank, confirmed by the minister of finance. Loans on merchandise
and warehouse certificates are not to run over nine months,
those on bills of lading not over three months, and those
on metals not over fifteen months. Extensions of time in
the repayment of loans on merchandise shall not exceed
three months. Loans on merchandise shall not exceed
two-thirds of the value as appraised by the committee on
loans. In the case of warehouse certificates and railway
bills of lading (the loans on the latter being for six weeks)
the maximum is 80 per cent. If the goods offered as
security depreciate in value or fall in price to the extent of
15 per cent below the appraisal, the debtor must on request
of the bank repay a corresponding fraction of the loan or
else put up additional security. If, however, the price has
fallen as a result of unusual circumstances, the council of
the bank is permitted to grant an extension or to release
the borrower from the necessity of making a partial repayment or of putting up additional security. Persons enjoying the implicit confidence of the bank may be granted
credit on the security of goods other than those contained
in the list prepared by the council of the bank. The
security may, furthermore, be left in the possession of the
borrower, and the amount loaned may run as high as 75
per cent of the value of the security.
The bank grants six months' loans on government
securities and securities guaranteed by the Government
up to 90 per cent of their value. In the case of mortgage
debentures the ratio is 80 per cent and in the case of other
securities allowed by the council of the bank it is 75 per
cent. The term for which the loan may be renewed shall
not exceed three months. Special accounts current are




21

National

Monetary

Commission

opened against the deposit of securities, the depositor
being permitted to draw up to a certain sum, paying
interest only on the amount that he owes to the bank.
The bank may also, as far as it has any available resources
left, grant credit to the governments (main administrative
divisions), circles (districts), and cities. It may, in addition, by means of intermediaries, grant credit to small
agriculturists, peasants, leaseholders, and artisans on the
security of the products of their industry, and it may also
advance money for the purchase of machinery, implements,
or other equipment, or the creation of a working capital.
It may likewise make advances on merchandise in transit
or about to be shipped. The intermediaries may be the
provincial or district assemblies, the credit institutions,
loan associations, or the artels (associations of workingmen)
in so far as their statutes have received the sanction of the
Government and they are willing to subject themselves to
the prescribed conditions and the supervision of the bank.
Private individuals also, residing in the same place as the
borrower, in whom the bank has confidence, may be made
use of as intermediaries. In the case of goods in transit
the intermediaries are the railways and transportation
companies. The intermediaries assume full responsibility
for the sums advanced to them by the bank. The zemstvos (government and district assemblies) may, however,
with the sanction of the minister of finance, limit their
liability to the preservation or maintenance of the goods
assigned as security.
The bank takes both deposits repayable on demand
and deposits repayable only at the expiration of a certain
time. The conditions relative to the taking of deposits




22

Organization

of Banking

in

Russia

are fixed by the council of the bank with the sanction of
the finance minister, and any changes must be announced
a month in advance. a The depositors dispose of their
credit balance by means of checks and drafts.
No other state institution has hitherto attempted to
grant credit to agriculturists and manufacturers so
readily and with the exercise of such leniency in the
event of difficulty of repayment. In addition to the
kinds of loans authorized by the statutes of the bank,
long-term loans have been granted "by virtue of special
provisions" up to large sums (even 6,000,000 to 9,000,000
rubles) for various purposes, as the support of banks,
industrial undertakings, a hotel company, etc., and in
aid of such undertakings as mines, harbor improvements,
etc. There is no special account of such loans figuring
in the statements of the Imperial Bank. According to
the report of the imperial comptroller of finances, the
aggregate amount in 1900 was about 41,000,000 rubles,
65,000,000 in 1901, and over 100,000,000 in 1902. After
the last-mentioned date the granting of loans of this kind
was greatly restricted, although they were not discontinued. At the beginning of 1905 the aggregate was
72,600,000 rubles and at the beginning of 1906 it was
72,000,000 rubles. To this latter amount must be added,
in the opinion of the comptroller, the sum of 58,400,000
rubles, representing various kinds of transactions not
a From i860 to 1886 interest was allowed on account-current deposits
up to 3 per cent (from 1875 only 2 per cent in St. Petersburg and Moscow,
and in the case of the deposits of private banks only 1 per cent); from 1886
to 1889 the maximum rate was 1 per cent; from 1889 to 1906 no interest
was allowed; from 1906 to May 1, 1908, the maximum rate was 2 per cent;
since the last-mentioned date such deposits pay no interest.




23

National

Monetary

Commission

enumerated in the statutes of the bank. Loans granted
" b y virtue of special provisions'' (that is to say, in pursuance of imperial orders) have occasioned great losses.
Down to the beginning of 1906 a total of 25,600,000
rubles had been paid out of the net profits of the bank in
order to cover doubtful debts. Such loans are altogether
improper, and even loans for industrial purposes, granted
in accordance with the statutes of the bank, ought to be
made with due caution and only up to a certain aggregate
amount. Now that the bank is bound to make specie
payments and has to provide for the perpetual redemption of its notes, it is all the more incumbent upon it to
be careful not to tie up its resources in investments not
suited to a bank of issue.
V I I . — T H E RESUMPTION OF SPECIE PAYMENTS.

The resumption of specie payments by the Imperial
Bank on the basis of the gold standard has been successfully accomplished after several years' preparation through
the energy of the finance minister, Witte, in the face of
strong opposition on the part of large sections of the
public.
The first thing to be attained was the reduction of the
volume of notes in circulation and the enlargement of the
stock of gold in the bank and in the imperial treasury.
The issue of notes had previously been something apart
from the mercantile business of the bank, so that it
might almost have been said that there existed, as in the
case of the Bank of England, an issue department and a
banking department. In the course of the Russo-Turkish
war of 1877-78, however, credit bills up to an aggregate




24

Organization

of Banking

in

Russia

amount of 417,000,000 rubles had been " temporarily"
issued for account of the banking department, of which
266,263,146 rubles were outstanding in 1891. This temporary issue was secured by government bonds up to the
sum of 173,500,000 rubles and by loans to private customers for the remainder. By the ukase of July 28,1891, a
temporary note issue of 75,000,000 rubles was made for the
issue department, and simultaneously the redemption fund
was increased by an equal nominal amount in gold rubles
taken from the resources of the bank and the gold in the
imperial treasury. The reserve was thereby raised to
285,379,000 rubles in gold (nominal value) and 1,126,000
rubles in silver, against which there was at that time a
fixed note issue of 780,032,000 rubles and the new temporary issue of 75,000,000 rubles. The ukase of December 9, 1894, provided that the 266,263,146 rubles which
figured as a temporary expenditure in the liabilities
of the mercantile department be transferred to the
issue department and be permanently kept in circulation.
The 5 per cent government bonds assigned as a partial
cover were to be canceled, and for the remainder of
the cover (92,734,591 rubles) an equivalent sum in
gold, according to the existing premium (65,433,691
rubles), was to be assigned to the issue department. In
this way the amount of gold in the issue department
was raised to 350,813,041 rubles (nominal value), there
being a fixed circulation of 1,046,282,000 rubles and a
temporary issue of 75,000,000 rubles. By the ukase of
March 15, 1895, an additional 98,061,276 rubles in gold
was transferred from the imperial treasury to the reserve
of the issue department, which was thus raised to




25

National

Monetary

Commission

375,000,000 rubles as a cover for the fixed circulation or
altogether to 450,000,000 rubles, reckoning the cover for
the temporary 75,000,000 rubles (the 1,125,082 rubles
in silver having been replaced by an equivalent amount
of gold).
There was a further accession of 50,000,000 rubles in
gold to the metallic reserve constituting the redemption
fund at the beginning of 1896, and, in addition, the ukase
of February 23 of that year decreed that one-half of the
75,000,000 rubles which had been set aside as a cover for
the temporary issue of 1891 be assigned to the reserve,
while at the same time the authorized note circulation
was reduced by 52,500,000 rubles (paper), that is to say,
from 1,121,300,000 rubles to 1,068,800,000 rubles. The
reserve was thus increased to 462,500,000 gold rubles
(old rubles). In the meanwhile, in December, 1895, the
half imperial (5 rubles) had been declared equivalent to
lY* paper rubles and this ratio was definitely established
for the time being by the ukase of August 8 (new style,
August 20), 1896. The Imperial Bank was now ready to
pay out gold on demand in exchange for paper at this ratio.
The ukase of January 3 (15), 1897, introduced a new
gold monetary unit, the gold coins of the weight and
fineness of imperials and half imperials being now stamped
with the imprint of 15 rubles and 7 ^ rubles, respectively.
At the same time the Imperial Bank announced that it
would buy, sell, and accept in payment gold coins at the
established valence. The resumption of specie payments
was thus practically consummated. That this reform
was so splendidly accomplished in Russia, while in Austria, for example, it could still not be effected, was due




26

Organization

of Banking

in Russia

primarily to the collecting of an immense stock of gold.
According to information furnished by Prof. H. von
Kauffmann, of St. Petersburg (one of the directors of
the bank), the gold reserve of the Imperial Bank, inclusive of credit balances (gold) abroad, foreign bills payable in gold, and the gold deposited by the imperial
treasury for safe-keeping in the bank, was as follows at
sucessive dates, the imperial being reckoned at 15 rubles
(the ruble being equivalent to 2.16 marks):
B e g i n n i n g of—
1884
1887
1890
1893
1896
S e p t e m b e r 8, 1897

_

_
___ ___

__

Rubles.
297, 63O, OCX)
381,940,000
475, 190,000
851,740,000
963,780,000
1,144,880,000

The increase from 1884 was therefore no less than
847,250,000 new rubles or 2,259,000,000 francs. The
stock in September, 1897, was equivalent to 3,053,000,000
francs, which was the largest supply of gold that had
ever been collected at one place.
This colossal sum of 1,144,880,000 rubles, according to
the classification existing on September 8 (20), 1897,
before the ukase of August 29 (September 10), 1897,
went into force, was divided up as follows:
1. Reserve of the issue department, 462,500,000 rubles
(old rubles) gold.
2. Cover for the temporary note issue of 1891 (being
one-half of the amount of the issue), 37,500,000 rubles
gold.
3. Gold belonging to the imperial treasury, deposited
in the bank, consisting of the sum of 75,000,000 rubles,
intended, in pursuance of the ukase of July 8, 1896, for
21893°




National

Monetary

Commission

the diminution of the debt of the state incurred for notes
issued and of 75,045,754 rubles other gold. This gold of
the imperial treasury, equivalent to 225,070,000 new
rubles, figured as a special item in the publication of the
bank's balance sheet down to August 29, 1897.
4. Gold coin in the cash of the mercantile department
of the bank, 50,790,000 rubles (new rubles) gold.
5. Other gold in the possession of the mercantile department, 81,170,000 rubles.
6. Money in the mint belonging to the Government,
24,650,000 rubles (new rubles) gold.
7. Credit balances in foreign countries (gold), 13,120,000 rubles (credit balances directly belonging to the
Government not being reckoned).
8. Foreign gold bills in the possession of the bank,
92,328 rubles.
There was in addition lying in the bank in connection with custom-house business, 83,345 rubles in gold
coin.
V I I I . — T H E SITUATION AFTER

1897.

In pursuance of the ukase of August 29, 1897, the
balance sheet of the bank has been drawn up in an entirely
different way since September 8 (20), 1897. The account
is made up exclusively in new rubles, and the 462,500,000
plus 37,500,000 (500,000,000) rubles (old rubles) gold,
which figured previously as a reserve against the fixed
issue and the temporary issue of notes, was now entered
in the shape of 750,000,000 rubles. This sum is, however,
no longer entered separately but in combination with the
gold of the imperial treasury, which was formerly kept
apart in the publication of the balance sheet (225,070,000




28

Organization

of Banking

in

Russia

new rubles on September 8, 1897). The new gold pieces,
coined after March i, 1897, are not included in the cash.
The rest of the gold is entered in the form of various items.
The balance sheet for September 8 (20), 1897, drawn
up in accordance with the new provisions (relative to the
central bank and to its branches) exhibits the following
assets:
Rubles.

Bank notes in the bank and at its branches, etc
57,210,000
Silver and copper coins
43,030,000
New gold coins
104, 490,000
Old and foreign gold coins, bullion, and gold certificates _ _ 1, 027, 190, 000
Gold as a reserve against certificates of deposit
80, coo
Credit balances in foreign banks (gold)
13,120,000
Foreign gold bills
90,000
Uncovered debt of the Government on account of notes
issued
206, 280, 000
Discounted bills, loans on collateral, and various sums due
the bank
342, 280,000

The principal items in the liabilities were:
Rubles.

Notes in circulation
Certificates of deposit in circulation
Capital
Credit balance of the Government
Other deposits
Bills drawn by the bank on foreign countries

1, 068, 780, 000
80,000
53,000,000
239, 410, 000
405, 110,000
2, 040, 000

The uncovered obligations of the Government, which
previously, when the note issue was 1,068,780,000 rubles,
were reckoned at 568,780,000 rubles, are thus reduced
in this statement to 206,280,000 rubles, the 500,000,000
old rubles (gold) of the reserve being now reckoned as
750,000,000 new rubles, and the 75,000,000 old rubles
deposited by the imperial treasury in the bank in
1896 (as mentioned above) having been converted into
112,500,000 new rubles. The remainder of the gold
belonging to the Government—the 75,050,000 old rubles,




29

National

Monetary

Commission

and the 24,650,000 old rubles lying in the mint—was
placed to its credit on current account, while being still
included in the aggregate metallic reserve of the bank.
Only the credit balances of the Government in foreign
institutions, the amount of which was not made public,
were thus left out in the bank statement.
In setting down the figure of the actual note circulation at the above-mentioned date, September 8 (20),
1897, it is necessary to deduct from the amount of the
note issue the aggregate of the notes lying in the bank
and at its branches and in the offices receiving and
disbursing money for the Government, amounting to
57,210,000 rubles, which leaves the sum of 1,011,570,000
rubles.
The aggregate stock of gold in the bank on September 8 (20), 1897, w a s 76,000,000 rubles in excess of the
authorized issue of notes and 132,000,000 rubles in excess
of the actual circulation. Of course, this gold was also
to serve as a reserve against the public and private
deposits, but even after taking this into account the
figure was not a poor one. It must be remembered that
one-third of the total deposits represented the credit
balance of the Government on current account, which
was more than offset by the uncovered obligations of the
Government.
The assurance of the redemption of the notes in the
near future was thus provided for by the ukase of August
29 (September 10), 1897. The notes, secured by a gold
reserve, were to be issued by the Imperial Bank in
amounts strictly limited by the needs of the money
market. The gold reserve against the issue must amount




30

Organization

of Banking

in

Russia

to one-half of the volume of notes issued up to an issue
of 600,000,000 rubles, and any excess above 600,000,000
rubles must be covered by at least an equal amount of
gold, ruble for ruble, every fifteen credit rubles being covered by one imperial.
This meant practically that the bank was authorized
to issue notes up to 300,000,000 rubles without metallic
cover. The bill originally drawn up for the reform of
the currency fixed a larger amount, 500,000,000 rubles,
providing that the issue up to 1,000,000,000 rubles was
to be secured by a one-half gold reserve, and that any
excess over that amount was to be fully covered.
The ukase of November 14 (26), 1897, decreed the coinage of gold five-ruble pieces according to the new monetary unit, and another ukase of the same date brought
the reform to a formal termination by decreeing that
the Imperial Bank was to redeem the notes in gold
without any limitation, and that their redemption was
guaranteed by the entire resources of the Government.
The notes, as a matter of fact, continued to be a legal
tender, bearing the imprint "national credit bill." A
ukase of March 27 (April 8), 1898, fixed the maximum
coinage of silver at 3 rubles per head of the population
and limited the legal-tender quality of the full-weight
silver coins to 25 rubles. The full-weight silver coins,
of which the bank had 27,820,000 rubles on September 8
(20), 1897, and the subsidiary silver coins and copper
coins, which together amounted to 15,210,000 rubles
(the aggregate of these various kinds of currency in the
possession of the bank being therefore 43,030,000 rubles),
were—contrary to what obtained in the case of the




31

National

Mon etary

Commission

German Imperial Bank—not to be reckoned part of the
reserve against circulation. The present Russian coinage
system is based on the law of June 27 (July 9), 1899.
The gold ruble is the monetary unit of the empire and is
supposed to contain 0.774234^ grams of pure gold (17,424
doli).
In the course of the year 1898 the condition of the
Imperial Bank was still further improved. On the one
hand the volume of outstanding notes, and on the other
the uncovered debt of the Government to the bank, were
diminished, the former being reduced from 1,019,000,000 to
901,000,000 rubles, and the latter cut down to 100,000,000
rubles. The diminution of the circulation was effected
mainly by the calling in of the one-ruble and three-ruble
notes, which were to be gradually replaced by silver coin.
The obligations of the Government (note debts) were reduced in the twelve years 1887-1898 by 439,900,000 rubles,
which reduction was accompanied by corresponding withdrawal of notes from circulation. But even the 100,000,000
rubles of uncovered obligations were regarded as an objectionable item. The ukase of December 4, 1899 (January 5,
1900), decreed that 50,000,000 rubles of this debt be paid out
of the receipts of the Government for 1899, a n ( i the ukase
of April 28 (May 11), 1900, assigned another 50,000,000
rubles from the imperial treasury to the bank. By this
latter act the debt of the Government to the Imperial
Bank was definitively extinguished. The liquidation of
this debt was zealously advocated by Lexis and H. von
Kauffmann.




32

Organization

of Banking

in

Russia

I X . — T H E IMPERIAL BANK AND THE CURRENCY IN RECENT
YEARS.

A feature of the policy of the Imperial Bai^k, rendered
necessary by considerations with respect to the redeemability of the notes, is the limited scale on which the
business of granting loans of a kind not suitable for a
bank of issue is carried on. The following figures will
show how moderate the activity of the bank is in this
direction:
i

Paid out in
loans to manufacturers.

Paid out in
loans to agriculturists.

Rubles.

Rubies.

20,000,000

30,000,

13.3oo,000

14,400,000

000

60,000,000

12,200,OOO

77,400,000

12,200,000

54,300,000

15, 1 0 0 , 1 0 0

45, 100,000

15, 5 0 0 , 0 0 0

49,900,000

14, 0 0 0 , 0 0 0

It must be borne in mind, however, that the "industrial" loans are in large part placed to the account of
advances on securities and bills (special accounts current)
and not included in the above figures. Apart from loans
granted "by virtue of special provisions,'' even the
industrial loans sanctioned by the statutes of the bank
are not a fit investment for a bank of issue, a fact especially brought out at a time of crisis. Least of all are
such advances suitable for the Russian Imperial Bank,
which is permitted to make nearly all its loans for terms
ranging from six to nine and even twelve months, which
makes it much more difficult for it to realize on its assets.
The question has been often asked recently whether
the foreign "gold credit balances" of the Imperial Bank




33

National

Monetary

Commission

can be regarded as a cover for note circulation. These
balances are the sums payable on demand that the Imperial Bank has with foreign banks, which have to pay
back these* deposits in gold. They originate mainly
through the assignment by the imperial treasury to the
Imperial Bank of sums realized or to be realized from
foreign loans, which sums the Imperial Bank has then
placed to its credit abroad, handing over the equivalent
in notes to the imperial treasury. This takes place in
the case of the so-called "reports/' when the Imperial
Bank is the intermediary between the foreign lenders
and the Russian borrowers. As far back as 1897 the
council of the bank expressed its opinion to the effect
that this foreign credit balance might be included in the
reserve. This opinion was confirmed by the finance
minister in conjunction with the imperial comptroller.
There is no doubt, however, that the letter of the law
does not admit of such an interpretation. That the
Imperial Bank in the event of a run upon it will not be in
a position to get hold of this gold balance and bring it over
is evidenced by the fact that in 1905, when the visible
gold reserve of the bank had dropped from 880,400,000
to 623,700,000 rubles, there was an export of gold amounting to 50,000,000 rubles. At that time the bank management took measures to retard the redemption of the
notes in gold, restricted the sale of drafts on foreign
places, and sought to induce the private banks to secure
an extension of their credits abroad, so as to check the
drain of gold from the Imperial Bank. The amount of
gold in circulation in the country decreased in the course
of the year 1906 from 837,800,000 to 641,900,000 rubles,
while the volume of notes in circulation remained about




34

Organization

of Banking

in

Russia

the same—1,207,500,000 rubles at the close of 1905 and
1,194,600,000 rubles at the close of 1906. This ought to
make it evident that the foreign gold can not be an actual
reserve against notes. Official journals have pointed to
the fact that other banks of issue include foreign bills
in their reserve. The managers of the Imperial Bank
appear to be of opinion, however, that credit balances
abroad can not be placed on a level with drafts, of which
a separate account is kept. a
The foreign "gold" ought not to be reckoned part of
the reserve of the Imperial Bank. If a larger circulation
o The foreign bills in the portfolio of the bank may properly be regarded
as a reserve against notes, as it is possible to realize on them at any moment
in the domestic market, the direct result of which is either the immediate
strengthening of the gold reserve of the bank or the contraction of the
volume of notes in circulation. But the bank could dispose of its foreign
credit balances only in a limited measure by reason of the needs of its
foreign financial business. The subjoined table gives the aggregate of foreign
credit balances and the amount of foreign bills for the ten years 1899-1908,
together with the amount of gold in the vaults of the bank, the movement
of gold in and out of the country, and the volume of notes in circulation.
It will be seen t h a t there is no relation between the total of foreign gold
credits and the amount of foreign bills. The figures are in millions of
rubles.
Movement of
gold.

Amount
of gold
in the
vaults of
the bank.

Foreign
credit
balances.

1899

991. 1

16. 1

1900

6. 1

167. 0

8 1

o. 2

146.9
208.8
298.5

4 3

So. o

853.7

0

60. 7

1, 2 0 7 . 5

1907

833.4
708. 2
682. 2
708. s
734.o
880.4
717.0
889.9

2 2

1.194.6

1908

944-4

213. 1

4 0

1.155. 1

Beginning of the
year—

1901
1902
1903
1904
1905
1906




Foreign
bills.

Notes in
circulation.

Imports. Exports.
0. 005

24. 7
26.6

0

7

58.2

2

5

14.6

35

7

661.8

122. s

3 5
2 8

49i. 1
55S.O

67.7

542.4
553-8

19-3
21. 9

578.4

National

Monetary

Commission

of notes is desirable, there is nothing to be done but to
amend the law. If an uncovered circulation of
300,000,000 rubles should be deemed sufficient, then
every ruble in circulation in excess of that amount has to
be secured by gold in the vaults of the bank.
There has been an agitation recently in behalf of a
reformation of the Imperial Bank, which it is proposed to
convert into an autonomous institution, independent of
the minister of finance.
Schmoller remarks justly ("Grundriss" II, 221) that
"the great banks that formerly existed in Russia, as well
as the Russian Imperial Bank, were and are merely subsidiary organs of the ministry of finance.'' It would be a
good thing if the statements of the bank were submitted
to the Imperial Duma for inspection. According to the
legal provisions now in force, they are examined by the
second department of the council of state in closed session.
X.—STATISTICS OF RUSSIAN BANKING INSTITUTIONS.
T H E IMPERIAL BANK FROM 1898 TO 1908.
[Main items in the balance sheet in millions of rubles.]

Beginning
of the
year—

Gold, inclusive of
Notes in
credit
balances circulation.
abroad
and foreign bills.

Deposits.

1.169.3
1,008.0

901. 0
661.8

665.2

843.0

1898
1899
1900

Loans
Discounts
and special accounts
current Securi(credit
ties.
against
bills).

789.7

665.0

1901

737-4

491- 1
555.0

1903

709.4
769. 2

542.4
553-8

678. 1

909. 1
i, 031. 6

578.4

808.5

853.7

608.7

919. 7

1,207.5
1,194.6

529.2

1.155. 1

606.8

1904
1905
1906
1907
1908

--

1,190.3
1. 1 6 1 . 5




649. 1
709. 0

566.9

36

155- 1
167.9
245.3
267. 0
279.5
263.8
267.5
182.6
359-4
232.8
281. 9

on—

Advances t o —

Merchandise.

Agri- Manuculturfacists.
turers.

62. 7

22. 9

14.7

11 0

52. 2

22. 2

73.o

29.4

9.6
8.4

22 5

107.7

42. 2

8.0

38 8

127.4

46.8

7-4

38 2

no. 7

46. 0

7.6

39 2

100. 1

52.4

8.0

36 0

no. 6

513

8.4

35 8

281.4

66.4

9-8

27 8

170. 0

58.4

9.2

31 1

152.8

63.3

...

32 8

8 7

Organization

of Banking

in

Russia

JOINT-STOCK BANKS.
[In millions of rubles.]
Capital.

Beginning of the year—

Deposits.

Securities.

1898

235-3

468.0

91.6

1901

267. o

560. 1

108. o

1904

266. 4

747.6

112. 4

1907

282. 9

785.9

106. 7

MUNICIPAL BANKS.
[In millions of rubles.]
Capital.

Deposits.

1898

36.7

89. 1

10.8

75-5

1901

40. 2

97-3

13.8

82. 7

1904

43-9

106.8

15. 1

84.7

1907

46.7

108. 9

14.8

83.8

Beginning of the year-

Discounts
Securities. and loans.

CREDIT ASSOCIATIONS BASED ON MUTUAL H E L P .
[In millions of rubles.]

Beginning of the year-

Capital
and surplus.

1898
1901
1904
1907




Deposits.

Securities.

29.8

6. 1

178. r

9-9

43- 2

214. 1

15.9

47-3

37

143.8

37-6

202. 9

15.8




The Bank of The Netherlands
BY

R. VAN DER BORGHT

[From Conrad's Handwortcrbuch der Staatswissenschaften, 3d edition]







THE BANK OF THE NETHERLANDS.
The central bank of issue of the Netherlands, the Bank
of the Netherlands—a joint-stock company—was created
by the royal decree of March 25, 1814. Its charter was
amended by the ordinance of August 21, 1838, and by
the legislative enactments of December 22, 1863, and
August 7, 1888. The present constitution of the bank
dates from December 27, 1888.
The charter was granted in 1814 for a term of twentyfive years, and it was renewed for the same period in 1838
and again in 1863. The law of August 7, 1888, decreed
an extension provisionally for a term of fifteen years, to
expire on March 31, 1904. It was provided that if notice
of intention to withdraw from the arrangement was not
served by the Government or by the bank two years previous to that date, the term of the charter was to run
another ten years. As the Government availed itself of
the notificatory privilege, a new arrangement went into
effect in pursuance of the law of December 31, 1903. The
term of the charter was extended for a period of fifteen
years (until March 31, 1919), and it was provided that
in the absence of notice of withdrawal on either part,
which notice in order to be effective must be served at
least two years before the expiration of the charter, there
should be an extension again and again for a year. The




41

National

Monetary

Commission

continuance of the Bank of the Netherlands as a jointstock company until March 31, 1894, is provided for in
the new statutes sanctioned on March 5, 1904.
The Bank of the Netherlands has its seat at Amsterdam. The ordinance of 1814 authorized it to do business
in other places through correspondents or commissaries,
and the ordinance of 1838 prescribed the establishment
of a subsidiary bank at Rotterdam. In spite of this nothing was done toward the creation of branches during the
first five decades of the bank's activity. The enactment
of stringent provisions in the law of 1863 at length compelled the bank to take action in this direction. On
March 31, 1907, there were (not reckoning the subsidiary
bank at Rotterdam) 102 branch offices of one kind or
another, variously constituted with regard to the scope
of their activities.
The Bank of the Netherlands had originally an actual
monopoly of note issues in the European territories of the
Netherlands. The ordinances of 1814 and 1838 provided
expressly that no other institution should be authorized
to issue notes in the next twenty-five years. By the law
of 1863 this monopoly was formally abolished, it being
provided that other banks of issue might be created by
special legislation and that the circulation of foreign bank
notes might be legalized. No use has, however, been
made of this authorization, so that the system of banknote circulation in the Netherlands is completely centralized. a
a In the Dutch East Indies a central bank of issue exists in the Bank of
Java, at Batavia, and in Dutch Guiana there is the Bank of Surinam. The
former was established in 1827 and the latter in 1864.




42

The

Bank

of

the

Netherlands

The Bank of the Netherlands enjoyed at the beginning
various privileges besides that of note issue. In addition,
the Government assigned premises to it for occupancy
free of charge and subscribed to 1,000,000 florins of the
original capital, which was a valuable assistance, as there
was more or less difficulty at first in placing the capital
stock. The privileges were materially curtailed in 1838
and they were altogether suppressed in 1863, except in so
far as the exemption of the notes from the stamp tax was
concerned. In 1864 the Government ceased to provide
free quarters for the bank. In 1847 the Government disposed of its share in the bank's capital.
In the beginning the bank was not obliged to render
any compensatory services to the State, and for a time
the only profit that the Government derived from the
institution was that yielded by the stock which it held
and the gain resulting from the assumption by the bank,
free of charge, of the functions of a fiscal agent. The
law of 1863 provided for further counter obligations.
The duty might be imposed upon the bank by royal
decree of discharging gratuitously the functions of a
receiving and disbursing agent for the royal treasury at
Rotterdam and other places where there were branch
offices, and the institution was to be responsible to the
minister of finance. Legislation might even be enacted
transferring to the bank, under certain conditions, the
entire service of the royal treasury, an obligation which
the bank has redeemed since 1871 by the annual payment
to the Government of 100,000 florins. The bank was
furthermore, obliged by the law of 1863 to lend its aid
gratuitously in the preparation, issue, and withdrawal
21893 0 ---11——4




43

National

Monetary

Commission

of coin certificates (paper money), as long as the volume
of such currency did not exceed 15,000,000 florins.
Finally the Government reserved to itself the right of
subscribing to the 1,000 new shares (1,000,000 florins)
provided for in the law and to sell them to the public,
the profit on the transaction to accrue to the royal treasury. The law of 1880 made it incumbent upon the
bank to act as receiving and disbursing agent for the
system of postal savings banks without compensation.
Additional counter obligations were prescribed by the
law of 1888. The bank was to act gratuitously as receiving and disbursing agent for the Government at Amsterdam, Rotterdam, and other places where there were branch
offices, and to manage the central treasury at Amsterdam
without compensation. It was provided that in case the
Netherlands became a party to a bimetallic league the
bank should be obliged by law to buy the coin metal
brought to it for sale at the coinage price, provided that
such an obligation was imposed upon the central banks
of issue in the other states of the union. The law obliged
the bank to make advances to the Government on current
account up to the sum of 5,000,000 florins, the Government to pay the regular interest on loans and to offer
treasury notes as security. This provision was to be
effective only in so far as the finance minister considered
such advances necessary in order temporarily to strengthen
the royal treasury, and so long as the available metallic
reserve of the bank did not sink below 10,000,000 florins.
The law of 1888 further "authorized" the bank to make
advances to the Government on current account in connection with the exchange of coin certificates for standard




44

The

Bank

of

the

Netherlands

coin, it being provided that the fund entered in the national register of debts as a guaranty of such exchange
should be assigned to the bank as collateral. This obligation was to cease if the Government proceeded to issue
more than 15,000,000 florins of such currency. The law
of 1888 provided that in the event of the nonrenewal of
the bank's charter in 1904 one-half of the amount of the
increase in the surplus between 1889 and 1904 should go
to the State. • By this legislation the Government was
assigned a share in the current profits of the bank. Out
of the net earnings an amount equal to 5 per cent of the
original capital was first of all to be allotted as a dividend
to the shareholders.0 Of the remainder, 10 per cent was
to be assigned to the surplus until this was brought up
to 25 per cent of the capital. One-half of what was left
was to go to the State and one-half to the shareholders
until the dividends to the shareholders amounted to 7 per
cent of the capital. Whatever net earnings there were
after this were to be distributed in the proportion of twothirds for the State and one-third for the shareholders.
The participation of the Government in the profits was to
cease as soon as it authorized any other bank to issue
notes or in the event of its proceeding to issue more than
15,000,000 florins of coin certificates.
The scope of the legislation of 1888 was extended by
the law of 1903. The bank was to be obliged henceforth
to discharge gratuitously the functions of fiscal agent, not
merely for the royal postal savings institution, but also in
< In case the net earnings were not sufficient to provide a 5 per cent
*
dividend the deficiency was to be supplied out of the surplus, which, however, was not to be permitted to sink below 15 per cent of the capital.




45

National

Monetary

Commission

behalf of the other arrangements created by the legislature
or by the Queen, and the safe-keeping of the funds of the
postal savings banks and other institutions, as well as of
the valuables accepted by these institutions as security,
was to be committed to the bank whenever the minister
of finance deemed it necessary. The bank was further
to be bound (not merely " authorized "), at the request of
the finance minister, to make advances to the Government
on current account without interest up to the sum of
15,000,000 florins for the purpose of temporarily strengthening the royal treasury, a sufficient security in the way of
treasury notes being given. This obligation was to cease
when the metallic reserve was reduced to 10,000,000
florins or in the event of the issue by the Government of
coin certificates after October 1, 1904. In case the Government proceeded to issue such currency after that date,
or in case it conferred the privilege of note issue on some
other bank, the participation of the State in the profits
of the Bank of the Netherlands was to cease. The share of
the Government in the profits was increased. An amount
equal to 2>% percent of the capital was first of all to go to
the shareholders. Ten per cent of the remainder was to
be assigned to the surplus until it was raised to the prescribed amount. Three per cent of what was left was
to be allotted to the directors and commissaries, and
beyond that the profits were to be distributed in the proportion of two-thirds for the State and one-third for the
shareholders. In the year 1906-7 the Government's
share of the profits was 3,397,349 florins. In case the
privilege of note issue should not be extended, one-half
of the amount by which the surplus will have been in-




46

The

Bank

of

the

Netherlands

creased in the period 1889-1919 is to go to the State. It
is provided that the coin certificates are to be withdrawn
from circulation, the bank lending its cooperation (only
10-florin bank notes to be issued in exchange). The
law of July 18, 1904, made all the notes of the bank a
legal tender except in the case of payments made by
the bank itself.
The supervision over the bank has been exercised since
1863 by a royal commissary, whose salary, down to 1904,
was paid by the bajik. The management of the institution is carried on by a directorate, consisting of the president, five directors, and a secretary. The president and
secretary, who are permanent officers, are appointed (and
removed) by the sovereign. Since the law of 1888 the five
directors have been elected (not at the same time) by the
shareholders for a term of five years. The whole body
of shareholders has been represented since 1863 by the
general assembly. The possession of five shares entitles
a person to one vote, and every additional 10 shares to one
additional vote. The general assembly chooses fifteen bank
commissaries, who constitute a sort of supervisory council,
for a term of five years. One-fifth of the number retire
each year. a
The members of the directorate and the commissaries
receive a share of the profits.
The capital of the bank was originally 5,000,000 florins.
It was increased by an ordinance of 1819 to 10,000,000
florins, by an ordinance of 1840 to 15,000,000 florins, by a
law of 1863 to 16,000,000 florins, and by a law of 1888 to
a Previous to 1863 six commissaries were chosen by a committee consisting of the fifty largest shareholders.




47

National

Monetary

Commission

20,000,000 florins. Any further enlargement can be effected
through the channel of legislation only, whereas formerly
the King could decree an increase. The legislation of 1888
provided that one-fifth of the capital might be invested
in Dutch Government bonds or in other securities listed
at the Amsterdam exchange or other principal European
exchanges. The list of such securities is determined by
the directorate and the bank commissaries. This provision regarding investment applies also to the surplus.
It was not until 1888 that a surplus was declared by law to
be obligatory. The legislation of that year provided that
it be brought up to 25 per cent of the capital, a condition
which has already existed many years.
The denominations of the bank notes were fixed by the
ordinances of 1814 and 1838 at 25, 40, 60, 80, 100, 200,
300, 500, and 1,000 florins. Since 1863 o n l y the minimum
denomination (at first 25 florins, but since 1903 10 florins)
is prescribed. The quantities of the various denominations of bank notes in circulation on March 31, 1907, was
as follows:
Denomination.

N u m b e r of
notes.

Denomination.

io-florin

2,340,105

100-florin

25 florin

1,600,175

200-florin

40-florin

670,834

300-florin

60-florin
80-florin

585.565

N u m b e r of
notes.

500-florin
1, ooo-florin

15

575.447
93,96i
65,084
38,3H

The ordinances of 1814 and 1838 provided that the
Government should fix the maximum note circulation
with reference to the actual capital and resources of the
bank. It was not until 1847 that it had recourse to




48

The

Bank

of

the

Netherlands

such action; it then fixed t h e amount at
florins.

By t h e ordinance of February

52,000,000

15, 1849, t h e

limit was set a t 72,500,000 florins, and the ordinance of
October 18 of t h e same year raised it to 122,000,000
florins,

prescribing a metallic reserve of 40 per cent

against t h e first 52,000,000 florins and one of 100 per
cent against t h e remainder.

On October 27, 1855, t h e

limit was fixed at 150,000,000 florins, a cash reserve
being prescribed of 40 per cent against the first 50,000,000
florins, one of 60 per cent against t h e next 50,000,000
florins, and one of 100 per cent against t h e remainder.
On

October

23, 1857, t h e reserve against t h e

100,000,000 florins was fixed at 40 per cent.

first

The law of

1863 suppressed t h e m a x i m u m limit and provided t h a t
t h e percentage of reserve should be fixed by royal decree.
The ordinance of 1864 prescribed a metallic reserve of
40 per cent against bank notes and all other demand
liabilities.

The rest of the circulation is covered by bills

and collaterals on loans.

The notes of t h e b a n k play a

great role in t h e monetary circulation of t h e Netherlands.
In the year 1906-7 t h e average volume outstanding was
265,580,000 florins. The notes are redeemable on demand
at t h e main bank, t h e subsidiary b a n k at R o t t e r d a m ,
and t h e branch offices.

The branch offices are, however,

allowed to t a k e as much time as is required t o get t h e
coin needed from t h e main establishment.

The notes

are accepted in t h e p a y m e n t of dues to t h e Government
and are not subject t o t h e stamp tax.

The b a n k is not

responsible in t h e case of t h e loss or destruction of t h e
notes.

Where there is reason to suspect t h e existence of

some fraud t h e bank m a y demand a receipt from a person




49

National

Monetary

Commission

offering notes for redemption. Since 1863 the bank has
been authorized to issue drafts drawn by one of its offices
upon another. It must keep a metallic reserve of 40 per
cent against the aggregate volume of such drafts outstanding. The use of such drafts was for a long time
confined within narrow bounds by a stamp tax of 5 cents
(Dutch, equal to -£$ of a florin) per florin. Since 1883,
however, the stamp tax has been only 5 cents on each
draft irrespective of the amount. A draft is not permitted
to circulate more than eight days. In the year 1906-7,
55,075 drafts were issued to the aggregate amount of
381,590,000 florins.
The charter of 1814 provided for the following kinds of
business: The discounting of bills; the making of loans on
stocks and goods; the purchase and sale of coin and the
precious metals; the taking of deposits on current account.
These branches of business have been retained in a
greatly amplified form. In 1838 the bank was authorized
to discount commercial paper other than bills. In 1863
the discount business was extended so as to embrace
debentures redeemable in the kingdom and maturing
within three months and the coupons of foreign government bonds, as well as the securities of private corporations or companies. Promissory notes and domestic
bills are not discountable if their date of maturity is
more than three and one-half months from the date of
discount. Bills drawn in Europe on America are not
allowed to have more than three months to run before
maturity. Bills drawn on China, Sumatra, British India,
and Australia must be payable within six months from
the date of acceptance. For promissory notes and for




50

The

Bank

of

the

Netherlands

domestic bills having more than three months to run the
rate of discount is, as a rule, higher by one-half of i per
cent than in the case of other bills. Bills drawn by the
agents of mercantile concerns and credit institutions in
the Dutch East Indies (with the exception of the Dutch
Trading Company) on the offices of such concerns in the
Netherlands are discountable only if they are payable
within ten days after sight or two months after date of
acceptance. All paper that is to be discounted must
bear the signature of an individual or firm in the Netherlands or the Dutch colonies and must be payable at one
of the branches of the bank. Paper payable at a place
where the bank does business only through a correspondent is subject to a super-discount of one-eighth of i per
cent.
Foreign securities may be offered as collateral for loans.
The charter of 1814 fixed 5 per cent as the maximum
rate of interest in loan transactions. In 1838 the limit
was abolished, the usury law of 1807, however, not permitting the rate to be above 6 per cent. The limit
thus imposed was abolished by the legislation of 1857.
Advances are, as a rule, made for a term of three months,
but where stocks are offered as collateral a renewal of
the loan for another three months may be granted.
There are also "short loans/' for eight days, on securities
and goods.
In its dealings in the precious metals no fixed purchase price is prescribed for the bank. The price paid
for a kilogram of pure gold since 1881 is 1,648 florins, the
amount obtained at the mint after deduction of the
seigniorage being 1,647.87 florins. The higher price paid




51

National

Monetary

Commission

by the bank has had the effect of bringing to it the bulk
of the gold that is imported, so that the coinage of gold
in the Netherlands is done mainly for account of the bank.
The current-account business of the bank was restricted
by the charter of 1814 to the funds of the Government
and the public authorities. In 1838 this restriction was
removed, but the public has, nevertheless, availed itself
only to a small extent of the facilities offered by this
department of the bank's business, as they have not been
sufficiently ample.
To the four branches of business above described the
bank added a fifth branch in 1869, the safe-keeping of
valuables. At first only " closed deposits " were accepted;
that is to say, sealed packages not exceeding 50 kilograms in weight, with extreme dimensions, in centimeters,
of 70 X 70 X 50. Since 1880 "open deposits" have been
accepted; that is to say, securities in loose parcels. Since
1889 the bank has attended to the cashing of the coupons,
charging a commission of one-fourth of 1 per cent. The
fees for safe deposit of valuables are moderate. Closed
packages are taken only at the main office and in the
offices at Rotterdam, The Hague, and Groningen. Open
packages are taken at the agencies and subagencies.
The law of 1888 added a sixth branch of business, the
purchase and sale of bills payable in foreign countries and
of other foreign paper bearing two or more good signatures. The aggregate amount of money invested in such
foreign paper is not to exceed the metallic reserve for
more than fourteen days in succession. The bank is not
permitted to engage in other kinds of business than those
enumerated. Previous to 1848 the operations of the bank




5*

The

Bank

of

the

Netherlands

were on a very small scale. After that, under the influence of the new secretary (later president), Dr. W. C.
Mees, and as a result of the reform of the coinage (18471852), the diminution of the paper currency, and the
introduction of a limited amount of publicity, business
became somewhat more active. Nevertheless the bank
remained, down to 1863, a local Amsterdam institution.
With the establishment of branches, which was made
obligatory by the law of 1863, a new period in the development of the bank's activities was inaugurated, in the
course of which the Bank of the Netherlands attained to
a very important position in the monetary and credit
systems of the country.
Development of the business of the Bank of the Netherlands since 1864.
[In millions of florins.]

Year.

1864-65
1875-76
1880-81
1890-91
1900-1901- _
1901-2
1902-3
1903-4
1904-5
1905-6
1906-7

Aggre- AggreDegate of gate of
Notes posits M e dis- loans on Gross
(cur- tallic counts
colrecircu- rent
during lateral profits.
lation. a c serve. the
during
count).
year. the year.

105
184
i94
208
223
228
231
235
247
269
270




136

239
396
287
417
387
329
354

6.4

130

410

7- 7

144

6.4

152

5 6

i35

405
428
449

34

82

49

151

19

150

13

119

8 1

128

7
5-8

140

145-7
178.6
227. 1
238. 2
225
245
224.4
200. 1
247-3
289. 1

53

4-3
44
3- 1
4.4
4.4
3-5
3-8
4.5
3-5
3-6
6.2

Average
rate of
Average discount
rate of
for
discount
for bills. promissory
notes.

Dividends.

Per cent. Per cent. Per
5-2
5.61
3- 2
3-7
3
3-5
3- 2
3- 52
3-5
4
3-6
3- 1
3-52
3-02
4
3-5
3- 08
3.58
2. 7
3-2 !
4.66
5.16

cent.
19. 7
21.4
14.3

9-3
10. 4

94
9-7
10. 9

7.8
8
11.6




The Austro-Hungarian Bank
BY

PROFESSOR ZUCKERKANDL

[From Conrad's Handwdrterbuck der Staatswissenschaften, 3d edition]







THE AUSTRO-HUNGARIAN

BANK.
Page.

I.
II.
III.
IV.
V.
VI.

VII.
VIII.
IX.
X.
XI.

XII.

The Chartered Austrian National Bank (1816)
Business of the old National Bank with the Government
The second charter of the National Bank (1841)
The National Bank from 1848 to 1859 __
The third charter of the National Bank (1862)
The National Bank in its relations to Hungary (1867-1878).—
Transformation of the National Bank into the AustroHungarian Bank
The second charter of the Austro-Hungarian Bank (1887)
Introduction of the gold standard in Austria-Hungary
The redemption of the government paper currency
Renewal of the bank charter in 1899 _*
Dealings of the Austro-Hungarian Bank in foreign bills and
foreign metallic currency.—The placing of the monetary
system of Austria-Hungary on a specie basis
Statistical tables

57
66
72
76
83

91
96
97
101
103

no
116

I . — T H E CHARTERED AUSTRIAN NATIONAL BANK (1816).

The Austro-Hungarian Bank was instituted in 1878 as
the successor of the Chartered Austrian National Bank.
This had been established in 1816, mainly for the purpose
of undertaking the withdrawal from circulation of the
paper currency of the Austrian Government. This paper
currency consisted of the so-called "redemption notes"
(Einlosungsscheine), which had been issued in virtue of the
imperial patent of February 20, 1811, in order to take the
place of the then outstanding government paper money,0
and the aggregate volume of which was 208,715,925
a

Redeemed at the ratio of 5 florins of the old paper for 1 florin of the

new.—TRANSLATOR.




57

National

Monetary

Commission

florins, and of the so-called "loan (advance) notes"
(Antizipationsscheine), which were first issued in virtue of
the imperial patent of April 16, 1813, to the amount of
45,000,000 florins and the volume of which had risen by a
succession of increases, which were not announced to the
public, to 470,000,000 florins. The redemption notes were
styled in the law "Viennese currency " (Wiener Wdhrung).
The Antizipationsscheine were placed legally on the same
level with the redemption notes. Both kinds of money
were forced currency, there being no obligation on the
part of the Government to redeem one or the other. They
were at the same discount with respect to coin, the premium on which in the month of May, 1816, was on an
average such that 100 florins " convention coin " (Konventionsmunze), the standard Austrian coin (a Cologne mark
of pure silver being coined into 20 florins), was worth
346 a florins paper currency.
Two imperial patents of the date of June 1, 1816 (not •
quite a year after the termination of the Napoleonic wars),
decreed the voluntary and complete withdrawal of the
government paper currency and the establishment of a
bank of issue, styled from the outset the " Chartered Austrian National Bank," at which institution alone the paper
might be redeemed. Two methods of redemption were
provided for. In the first place paper currency to the
amount of 140 florins, or of a multiple of 140 florins, might
be presented at the bank and the holder would receive
in exchange five-sevenths of the face value in government bonds, bearing interest payable in standard (" convention") coin at the rate of 1 per cent (one 100 florins
o By a misprint the figure in the original is 446.—TRANSLATOR.




58

The

Austro

- Hun gavian

Bank

bond for the ioo florins taken out of each 140 florins),
and two-sevenths in bank notes, which the National
Bank was obliged to redeem, at any time on presentation, in specie. The second way was by means of the
purchase of a share of the National Bank by the payment
of 2,000 florins in paper and 200 florins in convention coin
so long as the 50,000 shares of the National Bank were
not all disposed of. The paper thus handed in at the
bank in the one way or the other was to be destroyed,
and in place of the paper money paid in as capital
by the purchasers of the shares the bank was to
receive an equal amount (nominal value) in 2>^per cent
government bonds. The bank was to come into existence
as soon as 1,000 shares were paid in, but previous to this,
as early as July 1, 1816, business was to be started under
a provisional management instituted by the Government,
and the operation of withdrawing government currency
from circulation in exchange for government bonds and
bank notes was to begin. The bank was to proceed at
once to redeem its notes in coin, to manufacture bank
notes, to issue shares on the payment of the above-mentioned sums, and to destroy the government currency
handed in. The redemption of the bank notes in .coin
was to commence immediately with their issue, and no
larger volume of notes was to be issued than was warranted
by the supply of coin on hand. To provide for the redemption of the bank notes issued in exchange for government
currency, it was decreed in the first of the two imperial
patents of June 1, 1816, that all " moneys due from foreign
powers pursuant to treaty obligations and all available
coin in the imperial treasuries" be turned over to the
218930—11




5

59

National

Monetary

Commission

bank, and the second patent declared that the coin handed
over by the State to the bank for the purpose of redeeming
the government currency was not to be repaid.
The activity of the National Bank, in addition to the
redemption of the government currency and the administration of the sinking fund for the goverment securities
issued in connection with the redemption of the paper currency, was to embrace the discount business and eventually
the granting of credit on mortgage. The payment into
the treasury of the bank of 200 florins standard coin in the
purchase of each share was to provide the necessary working capital. The returns to the stockholders were not to
be restricted, however, to the profits of the discount business. The government bonds, which, as we have seen,
were assigned to them in exchange for the government
currency paid into the bank in the purchase of their shares,
was to yield them an annual interest, payable in standard
coin, at the rate of 2% per cent of the nominal value of
the paper money paid in. These obligations were to be
called in by the Government in yearly installments.
The National Bank was invested by the imperial patents
of June 1, 1816, with extensive privileges. It had the
exclusive right of issuing bank notes, which had the advantage of being made receivable at all the public treasuries
and of being the sole medium in which certain specified
taxes were to be paid, and which were " secured by a
special mortgage on all the mines belonging to the State."
It was provided that the notes received at the public treasuries were not to be presented at the bank for redemption.
The bank had, furthermore, the exclusive right to establish (with the imperial sanction) branches or discount




60

The

A us tro - Hungarian

Bank

offices wherever it seemed advantageous, while no other
concern was permitted to establish a "discount institution." The absolute obligation was, on the other hand,
imposed upon the bank to redeem its notes at all times,
and the notes might be issued only for the purposes mentioned in the imperial patents and never without due
regard for the amount of coin available and the absolute
assurance of their value. The shareholders were made
responsible for the redemption ("the thorough and uninterrupted security") of the notes to the full amount of
the money paid in by them. There were no precise provisions regarding a metallic cover for the notes.
The ministry of finance furnished the coin and the bank
notes and the Government undertook to defray the running expenses. It was, of course, of the greatest importance with respect to the success of the whole operation
that the provisional management should be provided at
the opening of the institution and in the initial period of its
activity with a large supply of standard coin. The Government had accorded unusual advantages to the holders
of the paper currency. For every 2,000 florins paper
money paid in for a share the bank got 2,000 florins in
2]/2 per cent government bonds, the interest on which
was payable in standard coin, which was a much greater
value than the shareholders were entitled to with reference to the premium on silver, 100 florins in standard coin
having been worth on an average 346 florins in paper in
May, 1816, and 283 florins in the month of June. In like
manner the exchanging of government notes for 1 per
cent bonds (to the extent of five-sevenths of the nominal
value of the notes) and bank notes (two-sevenths of the




61

National

Monetary

Commission

amount of the government paper) was a no less profitable transaction. A person presenting 140 florins in government notes at the bank got in exchange a 1 per cent
government bond, the interest on which was payable in
coin, and 40 florins in bank notes, which the bank was
obliged to redeem at any moment in coin. Assuming that
the bond was worth 20 florins in standard coin, 60 florins in
coin would be received in exchange for 140 florins in government currency, or, assuming that the bond would bring
15 florins in coin, the sum (in coin) received in exchange
would be 55 florins. The quotations to which these figures
would correspond would be 233 and 254 florins paper for
100 florins coin, respectively. Even at the figure to which
the premium on coin declined at the close of June, 1816
(261 florins paper for 100 florins coin), it would still pay
to present the government notes for exchange. But even
if there had been no anticipation of profit, it would have
been likely that the public would proceed to exchange
large amounts of the hitherto irredeemable government
notes at the bank for bank notes and government bonds
bearing interest payable in coin. It was likewise almost
certain that a great many persons would immediately
present the bank notes received in exchange for government notes for redemption in standard coin.
The financial administration clid not take adequate
account of these contingencies when the National Bank
was opened on July 1, 1816. The supply of coin placed
at its disposal being insufficient, the bank management
proceeded to restrict the redemption of the government
currency, no more than 7,000 florins being accepted from
any one party from July 8, and applications for redemp-




62

The

Austro

- Hungarian

Bank

tion being required to be made in writing from August 5.
The direct redemption at the bank was suspended on
August 18, and from August 26 the buying up of government notes was done at the Bourse in the name of the
bank. These purchases were discontinued after January
25, 1817. Already in October, 1816, the Government
had proceeded to take a step which meant a departure
from the plan of redemption embodied in the imperial
patents of June 1, 1816, through the issue of a loan, by
means of which 130,000,000 florins of paper currency was
called in. The total amount of government paper currency withdrawn from circulation by the issue of bank
notes and 1 per cent government bonds was 46,325,000
florins.
In the meanwhile the organization of the National
Bank was being effected altogether along the lines laid
down in the imperial patents of June 1, 1816. Its statutes received the approval of the Government on July 15,
1817, and on January 19, 1818, the provisional management was superseded by an elected board of directors.
In the enumeration of the various kinds of business to
be carried on by the bank there is no longer any mention
of the withdrawal of the government paper currency from
circulation. To the discounting of commercial paper
(bills drawn on or payable in Vienna) and loans on mortgages a the new statutes added the following kinds of
business: The issue and redemption of " drafts " drawn by
the bank on itself (bank notes); the giro business (the
effecting of payments by transfers from one account to
another), in which, however, the bank did not engage
a The bank was not to embark in the mortgage business until later on.




63

National

Monetary Commission

during the period of its first charter; the taking of deposits ; and the making of advances and loans on movable
property. The notes issued were to be redeemable in
standard (" convention") coin on demand. The bank
statutes did not prescribe any ratio between circulation
and metallic reserve, nor was there any mention of an
obligation on the part of the bank to provide a cover for
its notes in the way of readily convertible securities.
The bank was permitted to loan money on bullion, articles made of the precious metals, government securities
bearing interest payable in standard coin, etc. Such
loans were to be limited to three months. One kind of
business which the bank carried on that was not enumerated in the statutes was the issuing of ordinary drafts.
The amount of the capital stock was left as it had been
originally fixed, but the shares were reduced to i ,000 florins
paper and 100 florins coin, so that the number of shares
was doubled. The provision was retained by which the
bank was to receive in exchange for the sums paid in by
the purchasers of the shares in government paper currency
an equivalent nominal amount in 2]/2 per cent government
bonds, the interest on which was payable in silver. These
securities were not negotiable and were to be redeemed
by an annual payment to the bank of 500,000 florins in
standard coin, which was to cancel 1,000,000 florins of the
Government's obligations.a The bank was not allowed
freedom of action in the disposition of its net profits.
Thirty florins per share was to be paid out annually as an
ordinary dividend. One-half of the net profits beyond
a

T h e Government was to continue to pay the bank the amount of the
interest on the paid-off bonds, the sums thus paid being applied t o the further reduction of the Government's debt.




64

The Austro ~ Hungarian

Bank

t h a t was t o b e applied t o t h e creation of a surplus fund.
After t h e lapse of one or two years, however, this restriction was rescinded, a n d from 1820 on, the committee of
t h e shareholders determined t h e dividends after a preliminary conference on t h e p a r t of the managers with t h e
ministry

of

finance.

T h e management

of t h e b a n k

consisted of t h e governor and his deputy (both appointed
by t h e Government) a n d of twelve directors, chosen b y
the committee of t h e shareholders, made u p of t h e one
hundred
shares.

shareholders

having

t h e largest

number of

T h e committee was empowered t o examine t h e

statements, t o inquire into t h e management of t h e bank,
to resolve upon changes in t h e statutes suggested b y t h e
board of directors, t o call upon t h e directors for information regarding t h e disposition made of t h e funds, etc.
The supervision of the Government was exercised through
a commissary, who was allowed t o state his views a t t h e
meetings of t h e committee of t h e shareholders a n d t h e
board of directors.

If he protested against a measure

on t h e ground of its being opposed t o t h e statutes of t h e
b a n k or t o t h e public welfare, its operation was suspended.
The b a n k was granted t h e privilege of issuing notes
throughout t h e whole extent of t h e monarchy.

This

was not a n exclusive privilege, but, as a m a t t e r of fact, the
bank enjoyed a practical monopoly of note issue. T h e
notes, which were n o t a legal tender, were t o b e accepted
at all t h e government offices in place of standard coin on
a p a r with such coin.

T h e charter of t h e b a n k was t o

expire in twenty-five years or else when t h e 2% per cent
government bonds were all redeemed.

A new charter

went into operation on October 28, 1841.




65

National

Monetary

Commission

II.—BUSINESS OF THE OLD NATIONAL BANK WITH THE
GOVERNMENT.

In January, 1817, the National Bank engaged in the
business of discounting commercial paper. Out of the
proceeds of this and the interest on the 2}4 per cent government bonds (which had been assigned to the institution in exchange for the sums paid in as capital in paper
currency) dividends were paid to the shareholders for
the years 1816 and 1817. The managers now proceeded
to the remaining kinds of business provided for in the
statutes of the bank (with the exception of the giro
transfer and loans on mortgages) and also to the issue
of drafts. But what was of greatest importance with
respect to the institution and the interests concerned
with a bank of issue were the operations undertaken for
the Government. These were the redemption of the
paper currency and the discounting.of treasury bills. In
connection with the former, the issue of shares was suspended at the close of 1819, when the total number disposed of was 50,621, about one-half of the number constituting the nominal capital therefore remaining unsold.
In 1819 the Government took up once more the original plan of redeeming its paper currency through the
agency of the bank. The conditions of the redemption
and the mutual obligations of the State and of the bank
were fixed otherwise than in the imperial patents of
1816. The bank, by an agreement dated March 3, 1820,
undertook to redeem the paper currency for the Government, the redemption to be effected without compulsion
at the ratio, unalterably fixed by the Government, of 100




66

The

A us tro - Hungarian

Bank

florins convention coin for 250 florins paper. The aggregate of t h e paper currency in circulation a t t h a t date was
estimated b y t h e ministry of finance a t 449,716,000 florins
(the number being rounded off to 450,000,000 florins).
The Government, on its part, assumed the following obligations: To buy back a t once the 2% per cent bonds,
amounting (a fraction having been redeemed) to 23,232,000
florins convention coin; to take over t h e 49,379 shares
which h a d not yet been issued a t the price of 610 florins
convention coin, the amount to be paid being thus
30,121,190 florins; t o hand over to the bank in cash the
sum of 40,000,000 florins convention coin, 10,000,000 florins at once a n d 30,000,000 florins in installments, as the
progress of redemption should demand; to assign to t h e
bank for t h e remaining 140,000,000 florins (180,000,000
florins being t h e total sum required for t h e redemption of
the 450,000,000 florins of paper currency at the ratio
fixed—100 to 250) 4 per cent nonnegotiable government
bonds, along with which the bank was to receive as a subsidiary mortgage 5 per cent government bonds (100 florins
for each 70 florins coin due the bank), negotiable in the
event of the inability of the Government to make the
promised p a y m e n t s ; to redeem the 4 per cent bonds by
means of a 1 per cent amortization. By the close of 1823
t h e Government had delivered to the bank the 40,000,000
florins coin and paid the 23,232,000 florins for the 2 ^ p e r
cent bonds (the paid-in capital represented by the 50,621
shares being made equivalent thereby to 600 florins coin
per share).
In 1821 t h e state of the imperial finances became worse
in consequence of an unexpected expenditure for military




67

National

Monetary

Commission

purposes in Italy and the Government sought to diminish
the burdens assumed in the agreement into which it had
entered on March 3, 1820. The managers of the bank
agreed to the cancellation of the engagement on the part
of the State to take over the 49,379 shares. On November 30, 1822, a new agreement was entered into. At this
date the bank had redeemed in all about 184,000,000 florins
Viennese currency, for which it had issued bank notes to
the amount of 74,000,000 florins and had received from
the Government 40,000,000 florins in convention coin and
60,000,000 florins (convention coin) in 4 per cent bonds,
so that it had in its possession the cover for 250,000,000
florins Viennese currency. For the remaining 200,000,000
florins the Government would have had to turn over to it in
installments 4 per cent bonds to the amount of 80,000,000
florins. In order to avoid the expenditure in the way of
interest on this sum, the ministry of finance substituted for
its previous engagement an obligation to turn over to the
bank 30,000,000 florins in coin, to serve as security for its
notes issued in the redemption of the government currency,
it being at the same time stipulated that the amortization
in the redemption of the 4 per cent bonds be suspended
until 1837 and that the sums which the bank would be
required to pay out in the redemption of the remaining
125,000,000 florins government currency (the maximum
amount needed would be 50,000,000 florins convention
coin, in case all the paper was presented for redemption)
be regarded by the bank as an advance made to the Government in the shape of a noninterest-bearing loan. a The
30,000,000 florins were paid to the bank in the years 1824o The bank was assigned 5 per cent bonds as a subsidiary mortgage.




68

The Austro - Hungarian
1826.

Bank

T h e redemption of t h e paper currency went on

from year t o year in decreasing proportions.

The notes

were destroyed with t h e exception of what was needed
in connection with such government securities t h e interest on which was payable in "Viennese currency."
Next t o t h e redemption of t h e government paper currency, t h e most important business carried on b y t h e
National Bank was t h e discounting of drafts of t h e imperial treasury.

As government expenditures h a d often

to be made then, just as now, before the revenues destined
to cover t h e m h a d come in, and as, moreover, t h e superfluous

funds accumulated in t h e provincial

treasuries

could in those days n o t b e placed quickly enough a t t h e
disposal of t h e central imperial treasury, t h e ministry
cast about for a means of overcoming these n o t very
formidable obstacles, a n d it naturally bethought itself
of t h e idea of invoking t h e aid of t h e bank.

The plan

adopted in t h e agreement of February 28, 1822, was
t h a t t h e b a n k should discount drafts drawn b y t h e central imperial treasury on the revenue offices in Vienna and
such of t h e provincial towns in which was located one of
the exchange offices

{Bank-Verwechslungskassen)

existed in connection with t h e government

which
treasuries

and whose function it was t o exchange bank notes, transact business in connection with drafts, a n d redeem government notes.

The rate of discount was t o b e t h e pre-

vailing rate, and t h e term of the drafts t o b e discounted
was n o t t o exceed three months.

Out of this relation a

permanent indebtedness t o t h e bank was soon developed,
inasmuch as t h e revenues of t h e Government did n o t
cover t h e expenditures. Under the three-months' discount,




69

National

Monetary

Commission

renewed again and again, an actual loan on the part of the
bank to the Government was concealed. The amount
of the credit thus granted increased from 6,000,000 florins
in 1822 to 30,000,000 florins in 1835. In 1842 it was
24,000,000 florins, and in 1843-1845, 20,000,000 florins,
and it rose again in 1846 to 30,000,000 florins, and in
1847 to 50,000,000 florins. The interest was 5 per cent in
1822, was reduced to 4 per cent in 1823, and after 1834
was 3 per cent. These drafts of the imperial treasury
were, of course, kept out of the channels of ordinary
financial intercourse.
The two kinds of business which we have here described
were highly profitable for the bank. The interest on the 4
per cent bonds yielded, from 1823 to 1836, an annual revenue
of 2,281,190 florins, from which, after the amortization had
been resumed in 1837, there was a decline to 1,646,941 florins
in 1847. The annual profits from the discounting of the
treasury drafts rose from 19,583 florins in 1822 to 612,141
florins in 1826 and to 1,046,909 florins in 1839, and between 1826 and 1847, with the exception of two years, was
never less than 600,000 florins. This splendid showing of
the bank down to 1848 must be ascribed entirely to the payments made by the Government. The business done with
the Government was for the shareholders just what they
were craving for, but nevertheless this whole business
relation can not be designated as anything else than
altogether mistaken and mischievous. On the strength of
it the bank issued large volumes of notes without metallic
cover. By reason of its relatively small cash reserve,
it would not have been able in a political or economic
crisis to redeem its notes in the event of a run upon it.




70

The

Austro

- Hungarian

Bank

The Government's indebtedness was not calculated for
a brief term, a gradual liquidation, at best, being all
that was contemplated, while a severance of the connection through large repayments could not have been
thought of. In the period from 1823 to 1841, as the
annual statements show, there was at no time a one-third
metallic reserve. As a general thing there was not even
a one-fourth reserve, and we find such ratios as 1 to 6.37,
1 to 7.10, and 1 to 10.77. Considering that in the case
of the great bulk of the notes there was no regular reflux
such as is characteristic of sound banking, even a onethird reserve would barely have been sufficient. The
extraordinary nature of the whole situation is revealed
by the fact that the statements regarding the condition of
the bank (circulation, reserve, indebtedness of the Government) were withheld even from the committee of the
bank, remaining a bureaucratic secret of the directors
and a few individuals connected with the bank and the
finance administration. In the addresses delivered by
the governor at the annual meetings of the committee
the discounting of the drafts of the imperial treasury
was not discussed. The redemption of the government
paper currency could, indeed, not be passed over in
silence, as information regarding it had to be given to
the public. The governor felt it imperative to dwell
upon the fact that an arrangement had been entered
into with the Government in regard to this matter, but
he refrained from going into particulars. When at a
meeting of the committee of the shareholders, on January 13, 1823, a member put a question regarding the
new agreement with the Government, the details of




71

National

Monetary

Commission

which had not been communicated to the committee,
the assembly resolved, with only three dissenting votes,
after the imperial commissary had called attention to
the danger involved in replies to such inquiries, that
further information was unnecessary.
I I I . — T H E SECOND CHARTER OF THE NATIONAL BANK

(1841).
The various kinds of business permitted in its statutes
were carried on by the bank until 1841, with the exception
of the giro business (payments effected by transfer from
one account current to another), in which it did not engage
until 1842. In addition to this, it was engaged in the
issue of drafts, a branch of business not mentioned in the
statutes of 1817. The discount business and the granting
of loans were, of course, of more importance than the other
kinds of business (the former considered apart from the
matter of the drafts of the imperial treasury). The rate
of discount was at the outset (January, 1817, to January,
1818) 9 per cent; from May, 1818, to October, 1829, it was
5 per cent; then until March, 1831, it was 4 per cent; from
March, 1831, to April, 1833, it was 5 per cent; after that
it was 4 per cent. The changes from 1829 on were made
at the behest of the minister of finance. In the loan
business the rate of interest was reduced in 1819 from 6
to 5 per cent and subsequently followed the changes in
the rate of discount.
The aggregate of commercial discounts increased from
9,000,000 florins at the close of 1835 to 19,300,000 florins at
the close of 1836. The volume of notes outstanding issued
in connection with discounts and loans amounted on June




72

The

Austro

- Hungarian

Bank

30, 1836, to 26,500,000 florins, and the total circulation a t
t h a t date was 154,300,000 florins, while the cash reserve
was only 20,200,000 florins. At t h e close of 1840 t h e discounts aggregated 31,300,000 florins while t h e metallic
reserve had sunk to 15,500,000 florins. Those who understood the precise import of the figures of t h e b a n k statements condemned the new way of carrying on t h e discount
business, t h e more t h a t they were convinced t h a t t h e
managers favored a few large commercial houses, t h a t the
purpose for which the b a n k notes were wanted was not
scrutinized, and t h a t t h e rate of discount was kept down
purposely in order to benefit the large customers of t h e
bank.

In t h e new charter, t h a t of July 1, 1841, virtually

the entire management of the bank was placed under the
control of t h e ministry of

finance.

The ministry was persuaded t h a t the best security for the
proper conduct of the institution lay in a greatly extended
governmental control, especially as, under t h e circumstances, it was not practicable to prescribe in the statutes
a ratio of metallic reserve or a cover for the notes in the
form of readily convertible securities.

I t was evident t h a t

the b a n k h a d not been successfully managed in recent
years and had more t h a n once been brought into a dangerous situation.
The new statutes, which went into effect on October 28,
1841, provided t h a t t h e b a n k management should from
time to time determine how large a sum should be devoted
to discounts and loans, b u t t h a t t h e new adjunct government commissary should see to it t h a t t h e a m o u n t was
not transcended, t h a t the commercial paper was safe, and
t h a t there was no favoritism.




I t was to be the d u t y of the
73

National

Monetary

Commission

directors to fix from time to time such a ratio of circulation to metallic reserve as was calculated to insure the
redemption of the notes at their face value in silver coin
on demand. The fixing of this ratio, however, and every
change in the ratio, was to be subject to the sanction of
the ministry of finance. In like manner, changes in the
rate of discount and of interest on loans were to be submitted to the imperial financial administration. The
directors were no longer to be chosen by the committee of
the shareholders, but were to be appointed by the Emperor
out of a list of candidates furnished by the committee.
The declaring of an " extraordinary" dividend (one in
excess of 30 florins per share) was to require the sanction
of the ministry of finance. The bank was invested with
the exclusive privilege of note issue throughout the monarchy. It was authorized to carry on the business of
issuing drafts, but was no longer to grant loans on real
estate. The provision in the previous charter interdicting
the establishment of a discount institution at any place
where there was a branch of the bank was dropped. The
new charter was to expire at the close of 1866, but it was
provided that it might be renewed, with the necessary
amendments, should the committee of the shareholders
apply for such renewal.
Order was speedily restored in the course of the year
1841 by a reduction in the amount of commercial discounts, and, with the view of avoiding a recurrence of the
former unsound conditions, the limit of the reserve ratio
was fixed at 1 to 6. The succeeding years, under the new
regime, witnessed an improvement in the condition of the
bank. The debt of the Government, however, on account




74

The

A us tr o - Hungarian

Bank

of drafts discounted, reached in 1847 the sum of 50,000,000
florins. At the close of that year the aggregate of discounts was as much as 43,600,000 florins. The bank was
able at this time to maintain a metallic cover for its note
circulation, amounting to 218,900,000 florins, at the ratio
of 1 to 3 ^ , which was a great remove from the limiting
rate of 1 to 6.
With the close of 1847 terminated a thirty-year period
of the administration of the bank under its own managers,
and the shareholders and the public might contemplate
with a feeling of satisfaction what had been accomplished
in this stretch of time. In its bank notes the institution
had placed at the disposal of the people an unimpeachable
circulating medium. Through its cooperation the government paper money ("Viennese currency") had been
almost entirely called in, so that the Austrian monetary
system since 1820 had been on a stable basis. Along with
this there were splendid returns. Since 1824 the dividends
had never been less than 3,000,000 florins, and there were
five years in which they exceeded 4,000,000 florins. The
capital of 30,372,600 florins paid, therefore,more than 10 per
cent, and the shares, which had been raised to 600 florins
convention coin by the Government and not by the imbursementsof the shareholders, went up as early as 1825 to
1,200 florins, in 1837 to above 1,400 florins, and in 1840 to
above 1,500 florins, a level maintained ever afterwards. A
closer inspection of the figures, however, by reason of the
relations with the Government above described, will tend to
produce a less favorable impression. The greater part of
the profits of these thirty years represented interest paid by
the Government on its indebtedness. Even in the relatively favorable situation at the close of 1847, out of a total
218930—11




6

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Commission

circulation of 218,900,000 florins, the volume of notes issued
in connection with regular discounts and loans amounted to
no more than 53,700,000 florins, while the Government's
debt was 126,700,000 florins. If during these thirty years,
when its condition was generally much less favorable and
its discount policy often unsound, the bank was enabled to
maintain specie payments, this was due to the fact that the
periodical statements were kept secret and that there was
no protracted political crisis.
IV.—THE NATIONAL BANK FROM 1848

TO

1859.

The period from 1848 to 1859 w a s the most stirring in
the history of the National Bank. In consequence of the
revolution of 1848 and the war in Italy it was forced to suspend the redemption of its notes and was repeatedly called
upon to make large loans to the State. The resumption of
specie payments on the part of the bank, which the Government sought to bring about, could not be permanently
effected on account of the large expenditures entailed by
Austria's foreign policy and the unfortunate war of 1859,
in order to meet the cost of which the bank placed its
resources at the disposal of the Government.
At the beginning of March, 1848, the management
resolved, with the sanction of the ministry of finance,
in order to restore confidence in the bank, which had
been shattered by political events, to publish every
month a statement of its condition. The statement for
February 29, 1848, showed a cash reserve of 65,000,000
florins, a circulation of 241,100,000 florins, and an indebtedness on the part of the Government of 81,300,000 florins.
The fact was concealed that the figures of discounts
included 45,000,000 florins of treasury drafts. But such




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Bank

as it was, the information sufficed to show that the bank
was not in a position to redeem the outstanding notes
without speedy and effectual aid from the Government.
By the middle of April the reserve had dwindled down
to 48,600,000 florins. The Government now decreed the
prohibition of the exportation of Austrian silver and
gold coin,a made the bank notes a legal tender, and
authorized the bank to issue notes of the denominations
of 1 florin and 2 florins.5 The bank was empowered to
restrict the amount of coin paid out in exchange for
notes to any one person at one time to 25 florins, but
at the close of May, 1848, even this limited redemption
had to be suspended. c
In order to meet the enormously increased extraordinary expenditures of the State in the years 1848 and
1849, as well as to supplement the diminishing ordinary revenues, the Government was obliged to come
to the National Bank for loans, and the management,
under the stress of the dire political conditions, was of
course ready to grant what was asked, before and after
the suspension of the redemption of the notes. The
paper currency issued by the Government was a particular burden for the bank, as it accumulated there.
The new indebtedness of the Government to the bank,
a The prohibition was revoked in September, 1848.
b The smallest denomination had hitherto been 5 florins.
c The bank redeemed its notes after this occasionally for the benefit of
the Government, of communes, corporations, and of private individuals,
paying out in this way, between 1848 and 1855, nearly 100,000,000 florins in
coin. There is no space to speak of the various kinds of paper currency
successively issued by the Government at this time, some of which were a
legal tender and others not. The premium on silver florins in 1848 reached
17 per cent. In the nine years, 1849 to 1857, the average percentages were
as follows: 14, 20, 26, i9>2» IOM> 28> 2I > 4K> 5K-




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Commission

together with t h e government currency lying in its vaults,
amounted on September i, 1849, t o 99,591,048 florins.
I t was arranged t h a t 60,000,000 florins should be paid back
o u t of the proceeds of a 4 X per cent government
loan and 24,000,000 florins out of t h e war indemnity of
t h e Sardinian government. By t h e close of 1851 this
indebtedness was reduced t o 7,500,000 florins. I n 1852
t h e debt of 50,000,000 florins, represented b y t h e perman e n t advances of t h e b a n k in t h e way of t h e discounting of the drafts of t h e imperial treasury, was reduced to
37,000,000 florins. These two separate debts and t h e debt
t o t h e b a n k represented b y t h e 27,000,000 florins of new
government paper currency t h a t had accumulated in its
vaults were consolidated into a single debt of 71,500,000
florins bearing interest at t h e r a t e of 2 per cent. By t h e
close of 1853 this debt was reduced t o 55,000,000 florins.
I n 1854 t h e ministry of finance entered into an agreem e n t with t h e National Bank b y which t h a t institution
was to redeem all of t h e government paper t h a t was a legal
tender in its own notes. The a m o u n t was t o be repaid in
annual installments of not less t h a n 10,000,000 florins (to
be t a k e n out of t h e receipts of t h e customs, t h e p a y m e n t s t o
be in coin and paper in t h e same ratio as t h a t represented
in such receipts). This was speedily followed b y a
thorough-going measure designed t o place t h e whole
monetary circulation once more on a sound basis and in
particular to bring about t h e redemption of t h e b a n k
notes. For this purpose (as well as t o cover t h e extraordinary expenditures of t h e Government), an imperial
p a t e n t , dated J u n e 26, 1854, decreed t h e institution of a
voluntary loan (a " n a t i o n a l " loan) of not less t h a n




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Bank

350,000,000 florins and not more t h a n 500,000,000 florins.
Out of t h e proceeds of this loan, it was arranged t h a t so
much should b e turned over t o t h e b a n k u p t o August 24,
1858, as would, in connection with t h e regular payments
made on account of t h e original debt of t h e Government
and t h e yearly p a y m e n t of 10,000,000 florins out of t h e customs receipts, reduce t h e total indebtedness of t h e Government a t t h a t d a t e t o 80,000,000 florins. Within this interval of time, a t a d a t e to be fixed by t h e ministry of finance,
t h e b a n k was t o resume t h e redemption of its notes. B u t
even this strenuous measure, as was soon apparent, was
destined t o fail of its effect with respect t o t h e resumption
of specie p a y m e n t s b y t h e National Bank. T h e large
sums expended for military preparations in connection
with t h e Eastern W a r obliged t h e Government t o borrow
from t h e b a n k in 1854 t h e sum of 80,000,000 florins and in
1855 a n additional 20,000,000 florins. The a t t e m p t to restore t o health t h e monetary system in Austria, the success
of which was being assured by t h e national loan, t h u s came
to naught. T h e finance minister, Freiherr von Bruck, had
to start all over again with t h e task of setting t h e monet a r y circulation t o rights. The debt of 55,000,000 florins
(the s u m t o which t h e indebtedness of t h e Government
represented in t h e above-mentioned consolidation of 1852
had been reduced) and t h e 100,000,000 florins represented
by t h e fresh loans from t h e National Bank were consolidated
b y t h e agreement of October 18, 1855, t o a new noninterest-bearing debt of 155,000,000 florins and imperial domains t o t h e value of 156,000,000 florins were assigned t o
t h e bank, t h e revenues derived from which and t h e proceeds
from whose sale should go toward t h e diminution of




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Commission

the debt. The sum due the bank on account of the
withdrawal from circulation of the new government paper
currency (in exchange for which the bank had issued
its own notes), amounting to 44,200,000 florins, was repaid
out of the proceeds of the national loan, this indebtedness being extinguished in 1857. The reduction of the
debt of 155,000,000 florins proved to be an extremely slow
operation, so that the arrangement of October 18, 1855,
turned out to be a very unfavorable one for the bank,
while it was altogether inadequate with respect to the
main object in view.
In the meanwhile, however, the reduction of the period
of time within which it might be possible for redemption
to become an accomplished fact was being effected in
another way.
As early as 1853 the National Bank had increased its
capitalization by the issue of the 49,379 shares lacking in
order to make up the original 100,000 shares at the price of
800 florins in bank notes. It proceeded in 1855 to augment
still further the capital thus greatly enlarged by the
issue of an additional 50,000 shares, which were to be
paid for at the rate of 700 florins in silver coin or an amount
of bank notes corresponding to the premium on silver.
This increase would amount, therefore, to 35,000,000 florins
in silver coin. The issue of the new stock, which took
place in connection with the creation by the bank, at the
order of the Government, of a mortgage department,
brought about a very considerable increase in the stock
of coin, which at the close of 1856 amounted to 87,200,000
florins, there being in addition foreign bills to the amount of
10,900,000 florins. The minister of finance now felt that a




80

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Bank

not distant date should be fixed for the resumption of the
redemption of the bank notes. The monetary convention of January 24, 1857, between Austria and the states
of the German Zollverein which had entered into the
monetary convention of 1838 provided that the parties
to the agreement were to bind themselves not to issue
paper money invested with the character of a legal tender
(or allow such money to be issued) unless arrangements
were made enabling the holder to exchange it at any time
on demand for full-weight silver coin.a The imperial
decree of August 30, 1858, ordered the National Bank from
the first day of November of that year to issue only bank
notes bearing a promise to pay in Austrian standard coin,
in denominations of 1,000, 100, and 10 florins. The notes
payable in Austrian standard coin were to be redeemable
on demand at the main office of the bank in Vienna in
full-weight silver coin. The volume of such notes outstanding was to be covered by a one-third reserve of legal
silver coin or silver bullion or in part (under certain
conditions, with the sanction of the finance minister) of
gold coin or gold bullion and (for the remainder of the sum
total) by securities legally discounted or furnished as collateral. Austrian-standard notes were to be a legal tender
in all cases where payment was stipulated for in money
of that standard. As fast as these notes were issued the
"convention-coin'' notes outstanding were to be withdrawn from circulation (the operation to be completed by
a The monetary convention of 1857 provided for the introduction into
the Austrian monarchy of the 45-florin staridard. A pound (500 grams)
of pure silver was to be coined into 45 florins. This new florin was henceforth the standard monetary unit. The ratio between the old "convent i o n " coin and the new coin was such that 100 florins of the former was equal
to 105 florins of the latter.




81

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Commission

October 31, 1859). The volume of the 5, 2, and 1 florin
convention-coin notes was to be reduced as rapidly as practicable to the aggregate of 100,000,000 florins.® A further
step toward the establishment of the Austrian standard
was the issue of the imperial ordinance of December
26, 1858, decreeing the complete withdrawal from circulation of these small notes by December 31, 1859. The
National Bank was authorized to issue in their place
1-florin notes (Austrian standard) up to the amount of
100,000,000 florins. The Government agreed at the same
time to diminish its indebtedness to the bank by turning
over to it 30,000,000 florins (Austrian standard), which
money the State was to receive in installments (in coin) in
1860-1864 as the purchase price of the South AustrianItalian Railway, and by handing over to it in addition
government debentures to the amount of 23,000,000
florins, secured by obligations on the part of landowners
released from feudal payments to the State.
Whether the resources at the command of the bank at
that time were sufficient for maintaining the redeemability of the notes could not be determined, inasmuch as
the redemption had to be suspended on April 29, 1859,
owing to the war in Italy. The imperial decree of that
date provided for the making of a very considerable loan
by the bank to the Government, which was to make an issue
of 5 per cent bonds to the amount of 200,000,000 florins.
(Austrian standard). As this issue could not be floated
at the time, the minister of finance was authorized to
borrow from the bank (according to the needs of the
imperial exchequer) on the security of the bonds, taken
a The paper money of the "Viennese s t a n d a r d " had ceased to be legal
currency on July 1, 1858.




82

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Bank

at two-thirds of their nominal value. The bank was at the
same time authorized for this purpose to issue 5-florin
notes, Austrian standard, which were to be a legal tender.
In accordance with this arrangement the Government
borrowed from the bank in the course of the year 1859
the sum of 133,000,000 florins, and, in addition, 20,000,000
florins in coin. The unfortunate outcome of the war prevented the immediate repayment of these sums.
In the period 1847-1859, the National Bank established 19 branches in the provincial capitals and in Hungary. The economic conditions enabled the bank to
continue enlarging its discount business down to 1857.
The loan business expanded rapidly until at the close
of 1857 ^ e loans amounted to 86,000,000 florins. Much
favoritism was shown in the granting of credit. The rate
of discount (and the rate of interest on loans) was raised
in 1856 from 4 per cent (which it had been since 1833) to
5 per cent. The annual sum paid out as dividends
increased from 1853 to 1858, but, owing to the increase of
the capital stock, the annual dividends per share decreased
from 85 florins (convention coin) in 1854 to 60.57 florins
(Austrian standard) in 1858.
V.—THE THIRD CHARTER OF THE NATIONAL BANK (1862).

The Government did not hesitate, immediately after
the conclusion of peace, to resume the work of placing
the monetary system of the country on a sound basis.
The first matter to be dealt with was the indebtedness of
the State to the National Bank. By virtue of an agreement of April 1, i860, the Government turned over to the
bank securities from the sinking fund that had been
abolished at the close of 1859 to an amount which reduced




83

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Commission

the recently contracted debt (the interest on which was 2 per
cent) from 133,000,000 florins to 99,000,000 florins. The
issue of the loan of 200,000,000 florins, for which provision
had been made in 1859, was ordered in March, i860. It was
to be in the form of an interest-bearing debt repayable
with prizes (the so-called "i860 drawings")- The 123,000,000 florins of bonds that remained unissued out of the
200,000,000 florins was handed over to the bank as security
for the debt of 99,000,000 florins. The installation in 1861
of a national parliament (Reichsrath), consisting of a
chamber of deputies (the members of which were elected
by the provincial diets) and of an upper house (House of
Lords) created a new authority to deal with the monetary situation. After protracted parliamentary discussions the law of December, 1862, was enacted, providing
for a new agreement with the National Bank regarding
the extension of its charter, new statutes, and a readjustment of the indebtedness of the State to the bank. The
new statutes went into effect on January 6, 1863.
The term of the new charter of the National Bank was
to extend to the close of 1876. It was provided that the
total indebtedness of the Government to the bank should
be discharged by the close of 1866, with the exception of
the sum of 80,000,000 florins, which was to continue as a loan
until the expiration of the new charter. a The bank was
a
The indebtedness of the Government to the bank on November 29,
1862, was as follows: 36,900,000 fl. on account of the redemption of the
so-called "Viennese currency;" the 20,000,000 fl. in silver borrowed from
the bank in 1859; a debt of 77,800,000 fl. (the remnant of the debt of
133,000,000 fl. contracted in 1859), secured by the government debentures
of i860; and a debt of 87,000,000 fl., secured by imperial domains. The
repayment was to be effected in part by cash payments in installments, in
part through the proceeds of the loan of i860, and in part by means of
the revenues from the imperial domains and of the sums realized from the
sale of such lands.




84

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Bank

to resume specie (silver) payments in 1867. The committee of one hundred was to be replaced by a general
assembly of the shareholders owning individually at least
20 shares. The general assembly was to choose from its
midst 14 "directors" (the choice to be subject to the
confirmation of the Emperor) who were to serve for three
years. These directors, with the governor, were to constitute the board of managers. The general assembly
was moreover to choose from its midst a committee of 12
members (the term of service being one year), who were
to have a voice in the deliberations relative to changes
in the rate of interest. The reports of the directors
regarding the management of the institution and those of
the committee regarding the statements were to be submitted to the general assembly for its approval. The
governor was to be appointed by the Emperor and the
two vice-governors were to be chosen by the directors
from their midst for a term of three years. The capital
stock of the bank was fixed at 110,250,000 florins.
The bank was to have the exclusive privilege of issuing
" drafts on itself," noninterest-bearing and payable to the
bearer on demand. The smallest denomination of these
bank notes was to be 10 florins, but the 1-florin and 5-florin
notes outstanding were not to be withdrawn from circulation until legal provision was made for the purpose.
The obligation was imposed on the bank of redeeming its
notes at their face value in legal silver coin, but this provision was declared to be in abeyance for the time being.
The circulation in excess of 200,000,000 florins must be covered by the full amount of silver (gold might be substituted for silver up to one-fourth). The circulation in




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Commission

excess of the metallic reserve was to be covered by discounted bills or securities furnished as collateral, negotiable debentures of the bank, etc. The notes were to be
a legal tender throughout the entire extent of the monarchy, with the exception of the Lombardo-Venetian
Kingdom. The bank was to publish monthly statements.
The provisions regarding the relations with the Government were completely changed. The control exercised
by the State was henceforth to be restricted to a supervision of the management of the bank by a commissary,
with reference to a due observance of the statutes and
rbglement. The business between the Government and
the bank was to be confined to the discounting of bills
presented by the minister of finance and to transactions
executed by the bank on commission.
It appeared certain down to April, 1866, that if nothing
interfered with the carrying out of the agreement of 1862,
the resumption of specie payments in the year 1867 might
be accomplished. At the close of 1866 the bank-note circulation was estimated at 298,000,000 florins, against which
there was a metallic reserve of 148,200,000 florins. Conformably to the provision in the charter regarding reserve
against circulation, this left a note reserve of 50,200,000
florins. The prospect of resumption in 1867 was, however,
dispelled by the issue of irredeemable legal-tender paper
currency by the Government in 1866 for the expenses of the
war against Prussia and Italy—paper money that was
kept in circulation after the close of the war. The law of
May 5, 1866, declared the 1-florin and 5-florin bank notes
a legal tender government currency and relieved the
National Bank from the obligation of redeeming them in




86

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Bank

silver. The maximum volume of such notes was fixed at
150,000,000 florins. It was provided that the bank should
furnish the Government, on account of the notes thus
taken over, an equivalent amount of bank notes of larger
denominations. By the law of July 7, 1866, the minister
of finance was authorized to borrow 200,000,000 florins, and
the National Bank was charged, until the conditions should
admit of the floating of a loan or the issue of regular government currency, to advance provisionally the requisite funds
in bank notes up to the sum of 60,000,000 florins, it being
provided that the sums thus advanced should be repaid
in bank notes within a year after the conclusion of peace.
The law of August 25, 1866, provided for a further increase
in the paper currency of the Government and at the same
time for a limitation of the total circulation. The minister
of finance was instructed to make a fresh issue of 90,000,000
florins in 1 -florin and 5-florin government notes and an additional issue of 60,000,000 florins, which should enable it to
repay the National Bank for its advances. The aggregate
of the government paper currency was thus increased to
300,000,000 florins, and it was provided that this sum should
not be exceeded.a The government notes were declared
a legal tender. The 60,000,000 florins was repaid to the
National Bank in 1867, so that the indebtedness of the
State to the bank was restored to the former figure of
80,000,000 florins. In order to pay the war indemnity to
a Kxcept in so far as it was provided that in case the total volume of
treasury bills secured by a mortgage on the imperial salt works (Salinenscheine) should sink below the maximum of 100,000,000 florins, the difference
should be made up by an additional issue of government notes. The
departure from the maximum limit down to the redemption operations of
1894 did not exceed 12,000,000 florins.




87

National

Monetary

Commission

Prussia, the metallic reserve of the bank had to be temporarily appropriated by the Government. A syndicate
of financiers obtained from the bank through the channel of
discounts the sum of 30,000,000 florins in silver, which was
lent to the Government and which was promptly repaid."
This issue of government paper currency assailed the
chartered privileges of the bank and was a menace to its
business, the injury to which was soon apparent in a
decline in the volume of commercial discounts for many
months together, due no doubt to the increased circulation
of the new notes. In 1867 the National Bank was unable
for the first time since 1819 to pay its shareholders a
dividend of 7 per cent. It had recourse to a provision in the
agreement of 1862 by which the Government bound itself
on account of the loan of 80,000,000 florins (the remnant
of its indebtedness to the bank), the term of which was to
extend to the expiration of the new charter, in case the
dividends in any year should sink below 7 per cent, to
make up the deficiency in whole, or in the event of its
exceeding 1,000,000 florins, in part up to that sum.6 The
bank naturally put forward a claim for indemnity, and
secured from the Government a modification of the statutes
such as was calculated to insure an increase in its earnings.
The act of October 13, 1868, reduced the capital stock to
90,000,000 florins, and the quota that was to go t o t h e s u r ff<The premium on silver florins, which, from 1862 to February, 1866, had
declined from 38.67 to 1.75 per cent, rose again in the latter year to 29.75.
The averages for the years 1867-1873 were 23.95, 14.43, 21.02, 21.89, 20-38,
9.27, 8.14.
&The Government paid the sum demanded, b u t when, in 1868, the
dividends were again below 7 per cent the complementary payment was not
made. The result was a lawsuit which was terminated in 1878 by an
agreement in which the bank withdrew.its claim.




88

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Bank

plus from 25 to 10 per cent, and authorized the bank to take
deposits on certificate with or without the payment of
interest and to allow interest in connection with accounts
current. The loan business was extended (Hungarian
securities being now included in the admissible collateral)
and more scope was given to discount transactions and
the commission business. The discount business expanded steadily from 1868 to 1873 as a result of the great
economic development that was manifesting itself in
Austria. Under these conditions the bank was obliged to
mobilize its resources and to take every precaution to
insure the required metallic reserve against a large note
circulation.
In the years 1871 and 1872 the National Bank converted
a considerable part of its metallic reserve from silver to
gold, a step which was of great moment with respect to the
monetary standard of the country. At the close of 1869 the
gold holdings of the bank amounted to 20,435,000 florins
(all but 235,000 florins being in the shape of foreign bills)
and the silver holdings (Vereinstaler, Prussian talers, Austrian florins, bullion, etc.) to 126,900,000 florins. At the
closeof 1872 the figures for the gold had grown to 74,100,000
florins (only 4,600,000 florins being foreign bills), while those
for the silver had declined to 83,500,000 florins. In order to
permit of this change, which was effected quietly without
any disturbance of the money market, the provision in the
bank statutes according to which the substitution of gold for
silver in the metallic reserve was restricted to one-fourth of
the total had to be rescinded (act of March 18,1872). The
union of the two halves of the Austro-Hungarian monarchy
in the matter of customs and commerce consummated by




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Commission

the agreement of December 24, 1867, contemplated the
speedy introduction of the gold standard according to the
principles laid down at the Paris monetary conference,
and the act of March 9,18 70, had decreed the coinage of gold
pieces of 8 and 4 florins (equivalent to 20 and 10 francs),
it being provided that the exchange value of these coins
should be left to the determination of the market until
the introduction of the gold standard. a It was not this,
however, that compelled the action of the bank management in changing from silver to gold. It was determined,
rather, by the pessimistic view (which proved to be welljustified) entertained by the managers regarding the future
of silver. It was the intention of the secretary-general of
the bank to convert the entire metallic reserve of the bank
from silver into gold, but the decline in the price of silver
forced a suspension of such operations in 1875.
The industrial and commercial expansion in Austria
that had set in in 1868 brought on a great crash at the
Bourse in May, 1873, which precipitated an economic
crisis. The demands upon the bank had been steadily
increasing, and on May 13, 1873, with notes outstanding
to the amount of 329,800,000 florins, its reserve was only
13,300,000 florins. The fact that the bank was unable,
with due observance of its statutes, to grant any further
credit, even to individuals whose credit was the best and
who offered the safest securities as collateral, would
have sufficed to destroy public confidence, already so
badly shattered. In order to avert such a catastrophe
the Government found itself constrained to suspend by
<*> It was not until 1892 that provision was made for the establishment of
the gold standard by the parliaments of the dual monarchy.




90

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Bank

an imperial decree the provision of the statutes regarding
the metallic reserve against circulation. This ordinance
remained in force until October, 1874.
In the following years of economic depression the discounts of the bank decreased from 181,700,000 florins at
the close of 1873 to 117,100,000 florins at the close of 1875.
The dividends increased steadily from 1869 to 1873,
owing to the increasing demands of the business world
which the bank was called upon to meet, until they
exceeded 11 per cent. After that there was a drop, the
dividends for 1875 being 8^3 per cent.
VI.—THE

NATIONAL

BANK

IN

ITS RELATIONS TO

HUNGARY,

1867-1878.—TRANSFORMATION

NATIONAL

BANK

INTO

THE

OF THE

AUSTRO-HUNGARIAN

BANK.

In the year 1867 the so-called Ausgleich was concluded between Austria and the lands of the Hungarian
Crown, changing fundamentally the parliamentary regime
inaugurated in 1861. As under the new order the system of coinage and the monetary unit were to be adjusted
on the same basis in the two halves of the monarchy, it
was provided that the Austrian standard, until the law
regarding it was changed, should remain the common
standard. The debt represented by the government notes
was placed under the joint guaranty of the Austrian
and Hungarian governments. The system of banks of
issue was not embraced in the matters that were to
be adjusted according to identical principles in the two
halves of the monarchy. The provisions of the agreement between Austria and Hungary made no mention
2i893°-~u




7

9i

National

Monetary

Commission

of the bank notes that were in circulation by the side
of the government notes and were invested with the
same privileges, or of the charter of the National Bank,
which had been granted with reference to the entire
monarchy for a term extending to the close of 1876, or
of Hungary's share in the debt of 80,000,000 florins to the
bank. Some understanding in regard to these matters
had, however, to be arrived at, and, as a matter of fact,
the bank was at the time the subject of agreements
between the Austrian and Hungarian governments, as
it afterwards developed. In an arrangement concluded
between the ministries of the two halves of the monarchy
on September 12, 1867, the Hungarian ministry assumed
the obligation, so long as no legal provisions regarding
banks and paper money were enacted by mutual agreement for the monarchy as a whole, not to allow any
bank of issue in Hungary, and to permit the notes of the
National Bank to remain a legal tender in the kingdom
(receivable for all dues to the Government), a necessary
condition being that the National Bank be bound to
establish branches in Hungary wherever the Government
should deem it necessary, and to grant loans on the
securities of both halves of the monarchy. This agreement was not formally communicated to the bank until
the beginning of 1870.
This arrangement led to an ever-increasing complication of the bank question, and it was not until May,
1876, that the two governments could come to a definite
understanding regarding the basis of a settlement. It
was agreed that the issue of bank notes should be assigned
by the two governments as an exclusive privilege to a




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single banking corporation, which should establish two
banking institutions, having equal privileges, at Vienna
and at Budapest, and in whose central governing body
the two halves of the monarchy should be equally represented. Of the legally permissible note issue, 70 per
cent was to be assigned to the institution at Vienna
and 30 per cent to the one at Budapest. This scheme
was embodied in the legislation of 1878. The National
Bank was transformed into the Austro-Hungarian Bank
and the term of the new charter was to extend from July 1,
1878, to the close of 1887, for which period the two
governments renounced the privilege of creating independent banks of issue. The matter of the debt of
80,000,000 florins was adjusted at the same time.
The central managing body of the Austro-Hungarian
Bank, styled the general council, was to consist of the
governor, appointed by the Emperor upon the joint nomination of the Austrian and Hungarian ministers of finance,
an Austrian and a Hungarian vice-governor, appointed
by the Emperor from a list submitted by the general
assembly of the shareholders, and twelve councilors.
The councilors were to be chosen by the general assembly—two from a list of candidates submitted by the directorate at Vienna, two from a list submitted by the directorate at Budapest, and eight from the midst of the assembly
itself. Their nomination was to be subject to the Emperor's confirmation. The directorates, or managing boards
of the institutions at Vienna and Budapest, were to consist
of eight members, and were to be presided over by the
Austrian and Hungarian vice-governors, respectively.
Two of the directors were in each case to be the councilors




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chosen by the general assembly from the aforesaid list and
the remaining six were to be named by the general council.
Supervision over the entire management of the bank was
to be exercised by the secretary-general. The parity of the
two halves of the monarchy was to be evidenced, among
other things, by the bilingual character of the bank notes.
The notes of the Government were to be included in the
nonmetallic reserve against circulation. Interest was not
to be allowed on money deposited on certificate. It was
provided that the redemption of the bank notes should be
suspended until the time when the government notes were
deprived of their legal-tender quality. A feature of the
new charter was the participation of the two governments
in the profits of the bank. In the first place such a fraction
of the net annual profits was to be distributed among the
shareholders as amounted to 5 per cent of the paid-in
capital; 10 per cent of the remainder was to be assigned to
the surplus; so much of what was left was to go to the
shareholders as was required to make the annual dividends
equal to 7 per cent of the paid-in capital; of what remained
after that one-half was to be turned over to the shareholders and one-half to the two governments in the proportion of 70 per cent for Austria and 30 per cent for Hungary.
The profits of the two governments during the continuance
of the charter were to be devoted to the diminution of the
debt of 80,000,000 florins to the bank, which during this
period was not to bear any interest. Hungary was to pay
Austria after the expiration of the charter an amount equal
to 30 per cent of what remained of this indebtedness (in
50 annual installments). While the legislation of 1878
placed the two halves of the monarchy on an ostensible




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parity as regards the share of influence in the management
of the bank, no provision was in reality made to establish
actual parity with respect to the general council, eight of
the twelve members of which the general assembly was
allowed to choose from among its own members, irrespective of whether they were Austrian or Hungarian citizens.
It was to be expected that the choice would fall upon Austrian citizens, which would mean an Austrian majority in
the general council. And so it came to pass, parity being
therefore not realized to this extent. This arrangement,
by which the ultimate composition of the general council
was left to the shareholders, although at variance with the
original standpoint of the two governments, worked perfectly well. The statutes in which it was embodied existed
for more than twenty years, to the satisfaction even of the
Hungarians, who are extremely sensitive with respect to
such matters.
In the period of the first charter of the Austro-Hungarian Bank (1878-1887) its holdings of silver increased
from about 70,000,000 florins to 145,000,000 florins. This
was due to the fact that, owing to the fall in the price of the
metal (after 1873),° arbitrageurs set to work (from 1876
on) to import it into Austria-Hungary in order to have
it converted into coin, an importation which assumed
very large dimensions, especially in the years 1878 and
1879. The bank was obliged by its statutes to pay on
demand 45 florins in bank notes for a pound of pure silver.
° T h e premium on silver florins (taking the average for the year) in
the five years 1874-1878, was as follows: 5%, 32/5, 43/5, 92/5, and 31/5 per
cent. I t disappeared at the close of 1878. The price of gold, as expressed in Austrian paper money did not, of course, partake of this
movement.




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From the year 1876 the bank declined to abide by this
provision on the ground of the inability of the mint at
Vienna to undertake the coinage. The statutes of 1878
provided that the obligation to buy should last only
so long as the coinage of silver on private account was
not suspended. Its suspension was decreed in March,
1879. The governments of Austria and Hungary continued, however, to coin silver, and so the volume of
silver florins went on increasing from year to year, and
as they were not in demand in business they kept pouring into the vaults of the bank. In spite of the efforts
made to get rid of them by selling at favorable moments
the stock grew larger and larger, the increase continuing
after 1887.
V I I . — T H E SECOND CHARTER OF THE AUSTRO-HUNGARIAN
BANK

(1887).

By the legislation of May, 1887, the charter of the
Austro-Hungarian Bank was renewed for a term of ten
years. During the period of the first charter it became evident that the maximum volume of notes unsecured by a metallic reserve that the bank was permitted by its statutes to issue—200,000,000 florins—was
insufficient. Its discount business increased greatly from
1880 to 1884, and the newly established branches brought
a large increase in the volume of its transactions, so
that at times the institution was barely able to meet
the demands for credit made upon it. The management petitioned to have the provision regarding the
metallic reserve amended and to have the system intro-




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duced that obtained in the case of the German Reichsbank. a The new statutes provided that if the circulation exceeded the metallic reserve (in which foreign
bills up to 30,000,000 florins might be included) by more
than 200,000,000 florins, the bank was to pay a tax of 5 per
cent on the excess, of which tax 70 per cent was to go
to the Austrian Government and 30 per cent to the
Hungarian. 6 The total circulation was to be secured
by a reserve of silver or gold of not less than two-fifths
and by readily convertible securities for the remainder. 0
The statutes of 1887 paved the way for a great development of the giro business d of the Austro-Hungarian
Bank.
VIII.—INTRODUCTION OF THE GOLD STANDARD I N A U S TRIA-HUNGARY.

The measures instituted by the governments of Austria
and Hungary for the introduction of the gold standard
inaugurated the great period in the history of the AustroHungarian Bank. The fixing of the coinage system and
of the monetary unit was, according to the spirit of the
agreement of 1867, establishing the relations between the
two governments, a matter to be dealt with according to
identical principles in the two halves of the monarchy.
a

The system which allows an unsecured note circulation u p to a prescribed maximum, which may be exceeded on the condition of the payment of a t a x on the excess.—TRANSLATOR.
&
The proceeds of the tax were to be applied to the liquidation of the
80,000,000 fl. debt to the bank.
c
Deposits repayable on demand were likewise to be covered by securities.
^The system which provides for the method of payment by means of
transfers to and deductions from accounts current.—TRANSLATOR.




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By the legislation of 1892 a the governments of Austria
and Hungary substituted for the Austrian standard (so
called) the gold standard, the monetary unit of which was
to be the crown.
As the introduction of the new standard could be consummated only after the lapse of a considerable interval
of time, no change was ordained for the time being in the
valence of the various kinds of money of the Austrian
standard, and it was provided that the new coins should
be a legal tender in the case of all obligations in which payment in the Austrian standard was contracted for and, vice
versa, the florin being reckoned equal to two crowns. The
enforced universal adoption of the crown standard in connection with the reconstitution of the coinage system as a
whole, the disposition to be made of the coins of the Austrian standard of the two halves of the monarchy, the
redemption of the government notes, the adjustment of
the paper currency, and the instituting of specie payments
were to be provided for by special legislation. In accordance with the new standard 1 kilogram of pure gold was
to be coined into 3,280 crowns. The current coins were to
be 20-crown and 10-crown pieces; 6 as one florin was made
o By the side of the laws enacted a treaty making those laws mutually
binding was concluded between the two governments on August 11, 1892.
I t placed the coins t h a t were to issue from the mints of the two governments
on a perfect equality in either half of trie monarchy in all private transactions as well as in payments into the public treasuries. The cost of redeeming the coins of the Austrian standard and of the government paper currency was to be borne by the governments of Austria and Hungary in the
ratio of 70 per cent and 30 per cent. The terms of the treaty were to remain in effect until 1910, or, if neither party gave notice of withdrawal,
until 1920.
&A 100-crown piece was added in 1907




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Bank

equal to two crowns, the relative values of gold and silver
according to which the transition from the Austrian to
the gold standard was effected were in the ratio of i to
18.22. The value of the crown as expressed in the franc,
the mark, and the English penny is approximately 1.05,
.85, and 9.99. The crown was divided into 100 hellers.
There were to be bronze coins of 1 and 2 hellers, nickel
coins of 10 and 20 hellers, and silver pieces of 1 crown.
From 1899 there were also silver pieces of 5 crowns. The
coinage of the silver money of the Austrian standard of
the separate halves of the monarchy, as well as of the gold
pieces of 8 and 4 florins (trade coins, 42 gold florins equal
to 100 crowns), was to be discontinued. The coins of the
Austrian and of the "convention" standard have ceased
to be current coin long ago with the exception of the silver
florin piece, which continues to be regular money, equivalent to 2 crowns. The date fixed for the introduction of
the gold standard as the legal standard was January 1,
1900.
The reform of the monetary standard brought in its
train important changes in the Austro-Hungarian Bank.
It was provided that the bank should be obliged to buy
on demand at its main establishments legal gold coins (at
their nominal value) and gold bullion in accordance with
the monetary unit of the crown standard, with the deduction of the seigniorage fixed by the laws of the two governments—6 crowns per kilogram of pure gold in the case
of private individuals and 4 crowns in that of the AustroHungarian Bank. The bank published a schedule of the
rates governing the purchase of foreign coins and of trade




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coins.a The acquisition of gold was facilitated by the reduction in 1903 of the seigniorage in the case of coinage
for the bank to 2 crowns. As a rule, the Austro-Hungarian
Bank pays the highest rate after the Bank of Russia. By
utilizing the means afforded it—taking advantage of times
when the state of foreign exchange favored such operations and often making advances without charging interest
to the importers of gold—the bank has been able to lay in a
large stock of gold in the course of years. 6 The bank obligated itself in 1892 not to buy silver bullion without the
sanction of the two governments. In the absence of a
legally established or prescribed ratio, the bank had been
appraising its stock of gold in florins of the Austrian
standard according to the gold-silver ratio of 1 to 15^2.
But in 1892, when a legal basis for the valuation was
afforded,, it made a new appraisement in accordance with
the ratio of 1 to 18.22. As against the book valuation of
79,392,613 florins, there was a resultant gain of 13,525,167
florins, by way of exchange, which sum the bank incorporated in its surplus, carrying over to it a like amount of
foreign bills taken out of the stock reckoned as part of the
metallic reserve.6
a F r o m 1902 the management of the bank was authorized to raise or
lower the schedule figures for certain specified kinds of coin within certain
limits, so as to be in a position, according to the state of the money market
or the market for foreign bills, to encourage the inflow of the kinds of coin
most in demand and hinder the importation of the kinds not easily absorbed by the market. I t soon raised the price of the French coins in denominations of francs, so useful in the settlement of international obligations on the part of the monarchy, and later it lowered the price of the eagle.
&The purchases of the bank in the years 1892-1907 aggregated 647,500,000 crowns.
c This amount of foreign bills was consequently no longer available as a
cover for note circulation.




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IX.—THE

- Hungarian

REDEMPTION OF THE

GOVERNMENT

Bank
PAPER

CURRENCY.

Soon after the enactment of the laws that were to pave
the way for the introduction of the gold standard the
Austro-Hungarian Bank was called upon to cooperate in
the redemption of the notes of the Government. This
was accomplished by means of two successive operations.
The legislation of 1894 (in Austria and Hungary) provided
for the redemption of 200,000,000 fl., and the redemption
of the remainder was decreed by an imperial ordinance in
1899. In the first operation all the 1 -florin notes were
called in and as much of the 5-florin and 50-florin notes as
made up the sum of 200,000,000 fl. Up to the sum of
40,000,000 fl. the notes were replaced by silver coin of the
denomination of 1 crown, the material for which was
lying in the treasuries of the two governments in the shape of
superannuated coins,"union"dollars {Vereinstaler), "convention" coins, etc. The remaining 159,328,000 florinsa
were replaced up to the sum of 38,841,300 florins by silver
florins which the two governments obtained from the bank;
and for the rest (120,486,700 florins) by notes likewise furnished by the bank, which received from the two governments the equivalent in 20-crown gold pieces. The governments supplied the necessary gold out of the proceeds of
loans (gold rentes), which they had been empowered to issue
by the legislation of 1892, and out of the stocks in their
treasuries. It was provided that the bank should use the
gold received in exchange for its notes only as a reserve
a One-florin notes to the number of 672,000 were not presented for payment.




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against these notes. The i-florin notes had to be presented
for redemption before the close of 1899. By the close of
1897 the 5-florin and 50-florin notes were redeemed up to
the requisite figure. In pursuance of an imperial decree
issued in 1899 the redemption of 112,000,000 florins was undertaken. They were replaced by 5-florin pieces up to the
sum of 32,000,000 florins, and for the remainder (80,000,000
florins), by notes of the Austro-Hungarian Bank of the denomination of 10 crowns. The bank furnished the silver to
the two ministries of finance in the shape of florin pieces and
received from them 112,000,000 florins in 20-crown gold
pieces, of which 80,000,000 florins (160,000,000 crowns) was
to be set aside as a reserve against the bank notes. The gold
had been all transferred to the bank by August, 1901.
The government currency was redeemed at the bank.
What still remained of government paper money
(11,312,000 florins) had been substituted for treasury bills
based on the security of the government salt works
(Partial-Hypothekaranweisungen, popularly known as Salinenscheine) and the cost of its redemption had to be
borne by the Austrian Government exclusively. The
Austrian ministry of finance redeemed this paper in
1899-1900, issuing in place of it treasury bills of the kind
here described. The obligation to accept government
notes in payment of debts terminated in 1903.
The withdrawal of the government paper currency
from circulation was a measure eminently calculated to
bring the problem of the gold cover for the bank notes
nearer to a solution. The bank received in all from the
two governments in the above-mentioned transactions
542,600,000 crowns in gold coin. At the close of 1899 the




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Bank

Austrian Government paid the bank in addition 30,000,000
florins in the new gold coins on account of the so-called
80,000,000-florin debt, the bank agreeing in consideration of
this payment to scale down the debt to 30,000,000 florins,
charging its surplus fund with the amount thus deducted
(28,291,000 crowns). The metallic reserve was further
strengthened by the transfer to it from the surplus of
15,000,000 fl. in foreign bills in connection with the enlargement of the capital stock of the bank on the occasion
of the renewal of its charter in 1899. Thus the tax-free
circulation might be increased by 90,000,000 crowns.
X.—RENEWAL OF THE BANK CHARTER IN

1899.

The charter of the Austro-Hungarian Bank was renewed in 1899 (by legislation in Hungary and by imperial
decree in Austria) for a term extending to the close of 1910
(or, under certain conditions, to the close of 1907). The
term of the charter had expired in 1897, but its provisions
had twice been declared to remain in force for another
year. a The statutes were amended in important respects
and the modifications expressed the full recognition of the
claims of Hungary. The parity of the two halves of the
monarchy with respect to the bank was secured by various
innovations. It was provided that six of the twelve members of the general council elected by the shareholders
must be Austrian citizens and six Hungarian. The general
council was to consist of the governor, the twelve elective
a The Ausgleich ("settlement") between Austria and Hungary was extended in 1899 until the close of 1907. The main subjects of the so-called
"economic settlement" were those relating to customs and trade, the participation of the two governments in the common expenditures of the
monarchy, and the system of bank-note circulation. In 1907 the Ausgleich was extended until 1917.




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members, the Austrian vice-governor and his deputy, and
the Hungarian vice-governor and his deputy. The executive committee and the committees of the general council chosen to deal with the various branches of business
were to be composed equally of Austrian and Hungarian
citizens. The meetings of the executive committee and of
the other committees were to be held at Vienna and Budapest (according to the instructions of the governor) and,
as far as practicable, alternately at the two cities. The
meetings of the general assembly of the shareholders were
to be held at Vienna or Budapest according as to whether
the majority were Austrian or Hungarian citizens.
Owing to the greatly superior number of the Austrian
shareholders, this provision has instituted no practical
change.
The governmental control over the management of the
bank was extended in various ways. The number of representatives of the two governments in the general council
was increased by the addition of the two deputy vicegovernors. The vice-governors were henceforth to be
appointed by the Emperor not from a list submitted by
the general council but on the nomination of the respective
ministers of finance. It was provided that the resolutions
of the general council, the executive committee, and the
various standing committees of the general council must
receive the approval of the governor in order to become
effective, and that in like manner the resolutions of the two
directorates (at Vienna and Budapest) must be submitted
to the presiding officer, that is to say, the vice-governor
or his deputy. The two government commissaries were




104

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Bank

empowered to take part in the deliberations of the executive committee and the standing committees. It was
made the duty of each of these commissaries to protest
against any resolutions of the general assembly of the
shareholders, the general council, the executive committee,
a standing committee of the general council, or the directorate that he might consider opposed to the interests of
that part of the monarchy which he represented. They
were to be permitted to acquaint themselves with the
details of the management of the bank. In case of a protest the matter was to be left to the decision of the common ministry. The new statutes provided that the governor, the vice-governors, and the deputy vice-governors
should be appointed for a term of five years only. They
might, however, be reappointed.
The ministers of finance of Austria and Hungary, in an
identical note addressed to the Austro-Hungarian Bank
under date of August i, 1894, had expressed the desire
that the bank, in order to further the reform of the monetary standard, should extend as far as possible its dealings
in foreign bills and all kinds of metallic currency. The
statutes were remodeled so as to provide for the bank a
broader legal basis for its activity in this direction. The
institution was authorized to open interest-bearing accounts so as to enable it in case of need to draw money
from abroad by the payment of interest in place of putting
up the rate of discount. One of the provisions of the
new statutes imposed upon the bank the obligation to
receive moneys for account of the two fiscal administrations and to make payments for account of either up to the
amount of its credit balance. The bank had repeatedly




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represented to the two governments the desirability of
having the free cash of the central government treasuries
transferred to its vaults in order that it might exercise
a greater influence on the domestic money market. The
new arrangement contemplated the simplification of the
business of the government treasuries by the exploitation
of banking facilities in the matter of payments. A large
number of the government treasuries have linked themselves to the giro system of the Austro-Hungarian Bank
as well as to that of the postal savings banks. The proper
policy would be to place all the disposable government
moneys in the hands of the bank in order to afford it the
means of exerting that influence which it is absolutely
necessary that it should have with respect to the money
market and the rate of discount. One of the functions
with which the bank was invested was that of effecting
the gold transactions of the governments of the two halves
of the monarchy, as well as those of the common authorities, a matter that was of great importance with respect
to the conduct of its foreign-bill business. The bank was
obliged by the new statutes to attend to the moneychanging business of the two ministries of finance and to
perform this task gratuitously, it being part of the "regulation of the monetary circulation/' which is designated
in article i of the statutes as the duty of the bank. The
bank is obliged to place at the disposal of the business
community the kinds of ^noney that it asks for and to
try to remove, as far as it is practicable, interlocal differences in value.




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Bank

In the readjustment of the matters pertaining to the
monetary standard and the Austro-Hungarian Bank in
1899, it was assumed that the reform of the monetary
standard through the initiation of the compulsory redemption of the notes of the bank would probably be consummated in the course of the term of the bank's charter, and
regard was had for this in the drafting of the provisions
relative to the denominations of the bank notes. It was
provided that the lowest denomination should be 50
crowns in place of the previous 10 crowns. The reason
assigned for this new restriction was that business would
not need any small notes as soon as it was possible to
reckon on a sufficient supply of coin, and that the unrestricted issue of small notes would drive coin from circulation. The bank was permitted to issue 20-crown notes,
but only during the interval until the instituting of specie
payments, it being provided, moreover, that the volume
of such notes should be fixed at any time by the ministers
of finance of the joint governments. As a matter of fact,
the issue of 10-crown notes was provided for, but this was
done by the enactment of a special law, so that the bank
could be obliged at any time to withdraw these notes partially or entirely on the demand of the joint governments,
made with the sanction of the two parliaments. The
bank notes were to retain the legal-tender quality.
According to the former statutes, the obligation of the bank
to redeem its notes was to remain in abeyance so long as the
government notes were not divested of their legal-tender
quality in both halves of the monarchy. According to
the new statutes, this obligation was not to ensue of itself

21893 0 —11




8

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Monetary

Commission

on the abolition of the legal-tender quality of the government notes, but it was provided that as soon as these
notes ceased to be a legal tender the two parliaments
might decree that article 83 of the statutes should go into
effect.
The sphere of activity of the two directorates was extended. The Austrian and Hungarian directorates were
to consist, respectively, of the Austrian and Hungarian
vice-governor and deputy vice-governor and of the
Austrian and Hungarian members of the general council.
To each of the directorates was to be attached a " central
inspector" appointed by the general council, who was to
be a member of the " management." a
The new arrangements relative to the participation of
the State in the profits of the bank were less favorable
to the institution than the previous ones. Out of the net
annual earnings a sum was first of all to be distributed
among the shareholders equal to 4 per cent of the paid-in
capital; 6 after that 10 per cent of the net earnings was
to be allotted to the surplus and 2 per cent to the pension
fund; of the remainder, in so far as the total dividends
did not exceed 6 per cent of the paid-in capital, one-half
was to be assigned to the shareholders and one-half to the
joint governments; of what remained after that, onethird was to be distributed in dividends to the shareholders and two-thirds were to go to the two governments.
The share of the State in the profits was no longer to be
divided between Austria and Hungary in the ratio of 70
to 30. This division was at first too favorable to Huna

The advisory council of the secretary general of the bank, consisting
of the chief officials.
& This was raised by the new statutes from 90,000,000 fl. to 105,000,000 fl.




108

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- Hungavian

Bank

gary, but the situation had changed, inasmuch as in the
ten years, 1888-1897, 3 6 ^ per cent of the earnings of the
bank subject to tax had come from its Hungarian business. The Hungarian Government made it a condition
of its entering into negotiations regarding the renewal
of the bank charter that its share of the profits should
be proportioned to the earnings of the bank in the Hungarian half of the monarchy.
It was provided that the joint governments should have
the right (the sanction of the two parliaments having
been previously obtained), on the expiration of the term
of the bank's charter, or in the event of the dissolution
of the corporation prior to the expiration of the charter,
to take over the whole banking concern that constituted
the object of the charter (with the exception of the mortgage department, which was to be left to the company)
in the shape and form in which it existed on the balance
sheet and according to the valuation expressed by the
balance sheet. The shareholders were to receive 1,520
crowns for each share and, in addition, the amount of the
surplus. This joint right of acquisition was, however,
not to be regarded as involving an agreement between the
two governments for the preservation of a single bank of
issue for the two halves of the monarchy. The term of
the new charter was made to date from January 1, 1900,
and its duration was to extend (with reference to the duration of the agreement between the two governments
relative to the coinage and the monetary standard) to
the close of 1910. It was provided that in case the duration of the customs union of the two halves of the monarchy was not prolonged by the legislatures beyond the




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Commission

close of 1910, the term of the charter was to expire at the
close of 1907.
XI.—DEALINGS

OF THE AUSTRO-HUNGARIAN BANK IN

FOREIGN BILLS AND FOREIGN METALLIC CURRENCY.—
T H E PLACING OF THE MONETARY SYSTEM OF AUSTRIAHUNGARY ON A SPECIE BASIS.

The Austro-Hungarian Bank has, since 1896 and more
especially since 1901, expanded the volume of its dealings
in foreign bills and all kinds of metallic currency to vast
dimensions, a policy closely connected with the reform
of the monetary standard. The activity of the bank in
this direction is directed toward the steadying of the
foreign exchanges and the maintenance of the relative
values of the crown (the unit of the Austro-Hungarian
gold standard) and the standard gold coins of other countries, as established in 1892. It is universally admitted
that the bank has developed its foreign exchange and
foreign coin business along model lines with the achievement of the complete control of the market, and it has
done this, not for the sake of profit, but solely in the interest
of the public. The maintenance of a rate of exchange
as close as possible to parity is rightly considered as a
matter to be dealt with by the national administration
and as a function appertaining to the central bank of
issue, which is not supposed to act in this capacity as an
institution organized for profit, but as an organ of the
Government instituted for the purpose in question, and
which, it is presumed, will be ready to incur losses should
circumstances demand it. With reference to the object
aimed at, it was of the utmost importance that the joint




no

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A us tr o - Hungarian

Bank

governments should lodge their gold with the bank and
assign to it the task of effecting their gold transactions.
The specie paid into the government treasuries had
previously been deposited with private bankers, who
allowed a low rate of interest and who bound themselves
to furnish the sums needed for the foreign payments of
the governments at particular dates in the kinds of coin
required up to the amount of the credit balances. This
led to periodical excessive rises in the exchanges, perhaps
often artificially induced, which were detrimental with
respect to fiscal conditions and the monetary standard.
The banks, besides, made use of the government funds in
international speculations. In order to remedy this
unsatisfactory state of things, the two ministers of finance
entered in 1901 into an agreement with the Austro-Hungarian Bank by which they contracted to hand over to it
in future the gold that came into the government treasuries and to effect their international payments through
its channels. The bank contracted in return to pay
interest on the deposits and to administer the funds—not
merely by making payments for account of the governments directly out of the money deposited, but also by purchasing with its notes foreign metallic currency whenever
commissioned to do so—and bound itself, furthermore,
although as yet no laws had been enacted providing for
compulsory specie payments, to get gold into circulation.
This agreement was ratified by the common ministry of
the monarchy.
As early as August, 1901, the bank began to take steps
to get the Austrian and Hungarian gold coins into circulation, and it has continued to discharge this function ever




in

National

Monetary

Commission

since, paying out gold and redeeming bank notes in gold
on demand. As international settlements are effected by
means of gold payments, the action of the bank meant
practically the inauguration of specie payments. By the
close of 1906 gold coin of the two governments to the
amount of 1,250,000,000 crowns had been paid out, only
one-fourth of which remained in the hands of the public.
The remainder was neither hoarded up nor exported, but
found its way back to the bank in a perfectly normal manner, just like bank notes, by means of payments or through
the process of exchange. Professor von Bilinski, governor
of the Austro-Hungarian Bank, remarked in his interesting
lecture on "International Payments" (1906): "The fact
that in the course of five years a whole billion in gold in
full-weight coins could be kept in the country and returned
to the vaults of the bank instead of being used in international payments is perhaps the best evidence of the
eflfectiveness of the bank's activities in the very domain of
such payments."
Having assumed the function of effecting for the State
all payments that were required to be made in gold, the
Austro-Hungarian Bank organized its foreign-bill department in such a way as to be able to serve the Government
on the one hand and on the other to meet the legitimate
needs of the public with respect to the international
market by enabling it at all times to buy and sell foreign
bills of exchange and coin of all nations on the most favorable terms. " I t s action in either direction must, however, be so exerted," says Bilinski, "that the metallic
stock of the bank shall remain as far as possible undisturbed. Foreign bills are to be used to the greatest prac-




112

The Austro - Hungarian

Bank

ticable extent in international payments, and compensatory payments from abroad are to be made to take place
as often as possible, so that, in spite of all the efflux and
reflux in international payments, any unfavorable change
in the value of the standard coin of the country relatively
to foreign money (in other words, a premium on foreign
coin), bringing with it a rise in the rate of discount, may
be averted. The performance of such a task demands a
widely ramified activity. While permanently maintaining assured credit balances at all the more important banks
and banking houses all over the world, the bank must
make it its constant and daily concern to manage its
foreign-bill business in such a way as to make it conform
to the needs of the existing situation. In accordance with
the state of the market and the quotations for metallic
currency, as well as the needs of the public, the bank
either buys foreign bills, paying with its own notes or with
checks drawn against credit balances abroad, or else it
sells foreign bills, receiving in exchange its own notes or
foreign checks, or, in certain cases, foreign bank notes and
foreign gold." The total volume of transactions in the
department of foreign bills in a single day has reached the
sum of 71,900,000 crowns. In the conduct of that part
of its business which consists in the purchase and sale of
foreign bills and metallic currency the element of profit
has not been permitted to be more than an ulterior object
in the policy of the Austro-Hungarian Bank. The main
thing held in view has been to guard the monetary standard of the monarchy. The excellent results of the policy
pursued by the bank in its dealings in foreign bills have
been clearly indicated by the course of exchange. After




113

National

Monetary

Commission

the high premium of the years 1893 and 1894, the foreign
exchanges since 1896 have been very satisfactory. In the
years 1901-1906 the average rate of exchange (taking each
year by itself) did not fluctuate up or down by more than
one-fifth of 1 per cent, and the average deviation from
parity during any one month did not exceed three-tenths
of 1 per cent. In the year 1907, when an extraordinary
stringency prevailed in the monetary market, the maximum premium on bills drawn on London, Paris, and
Berlin was, respectively, .97, .79, and .24 per cent. This
result is all the more satisfactory in that the bank's rate of
discount in that year was on an average only 4.9 per cent,
being finally put up in November from 5 to 6 per cent. 0
In 1903 the governments of Austria and Hungary submitted to their respective parliaments a bill providing for
the inauguration in the near future of the compulsory
redemption of bank notes. It soon became evident that
there was very little chance of its being enacted into a law
at an early date as the Lower House of the Hungarian Diet
was at the time involved in a critical situation by reason of
the Nationalist demands with respect to the common army.
The partisans of national independence adopted a policy
of obstruction, and there was no prospect of permanently
normal parliamentary activity on the part of the Hungarian Lower House for years to come. A serious and protracted political crisis ensued. The Liberal party, which
had constituted the majority in the Lower House ever since
1867, w a s beaten in the elections in January, 1905, and for
a considerable time there was no parliamentary ministry.
a The rate was therefore considerably below that of the German Reichsbank.




114

The Austro - Hungarian

Bank

It was not until April, 1906, that a ministry was installed
representing the great majority of the members of the
house. The new Hungarian Government had, however,
much weightier cares than the redemption of the bank notes
in specie,a for the Ausgleich between the two halves of the
monarchy was to expire at the close of 1907, and it was
necessary to make a new arrangement. An agreement
between the two governments was arrived at in October,
1907, providing for the renewal of the customs union for a
period of ten years. Usually the question of the bank was
settled simultaneously with the main matters involved in
the Ausgleich, but on this occasion such settlement was not
imperative, inasmuch as the charter of the bank, in consequence of the legislative enactment relative to the customs
union, could remain in force till the close of 1910.* It
would have been a good thing if a decision had been reached
to renew the charter of the bank, but it happened otherwise. It is certain that a considerable section of the Hungarian Parliament was, at that time, at least, not desirous
of such a solution. A separate bank of issue was as much
a part of the programme of the party of independence as
the separation from Austria in the matter of customs. A
compromise was finally effected, by which the bank question was to remain for a time in abeyance, a parliamentary
committee being appointed to undertake a preliminary
discussion of the matter.
a

The bill submitted to the Austrian Parliament was withdrawn on July
7, 1906.
& According to the provisions regarding the bank which went into operation on J a n u a r y 1, 1900, its charter was to expire a t the close of 1907 in
case the customs union was not extended beyond the close of 1910.—TRANSLATOR.




115

National

Monetary

Commission

XII.—STATISTICAL TABLES.
Business of the Austro-Hungarian Bank since 1880.
[In millions of crowns.]

At the end of-

Capital.

180.0

1880

Discounts.

278. 2

Loans.

41.8

1885

180. o

272. 8

54-4

1890

180.0

333 2

82.6

1895

180. o

438.8

92.4

1900

210. O
2IO O
2IO. O
2IO. O

455-5

67. 1

641. 2

68.2

770.9

98.9

748.0

1253

1905
1906
1907

Note circulation.

Deposits.

Metallic
cash.

6572
727. 2
891.8
.2396
.494.o
.846.9
.982. o
. 028.0

10. 4
53
13-o

346.6

25. 2

3974
439-o
741.2

48.7
160. 6

.158.0
.365.0

205.4

.394-3
.380.8

151.7

Dividends
for the
year.
Per cent.
6.38
6.•45
7-.88.
7-.36
5-.69
5.01
6.45
7.67

<»From 1900 the fractional currency of the crown standard is included in the metallic
cash.

The discount business.
[Aggregate of discounts in each year in millions of crowns.]

Year.

Number
of
offices
in A u s tria.

Number Total Aggregate Aggregate Aggregate
of disof disof
•
of discounts
counts
counts
offices J number
of
at the
at the
in Hun- offices.
at all the
Austrian Hungarian
offices.
gary, j
offices.
offices.

1880
1890
1900

103

1907

50
180
203
254

82
132




Il6

992. 6
1.3244
1.889.8
3.494-8

324.8
555.o
1,008.8
2.243. i

1.317. 4
1.879. 4
2.898.6
5.737-9

The

Austro

- Hungarian

Bank

Note reserve and excess circulation.

Year.

Reserve of
circulation!
not subCirculation subject to tax (in milject to tax
lions of crowns). 0
(in millions
of crowns).
End of End of End of End of
Septem- October. Novem- December.
ber.
ber.

End of
year.

1888.

25-4
24. o
15.0

18891890.

46.4
23.8

1892-

37-4
3i.8
14-5

18931894189s1896-

3-8

13-4
4.0
75-9
144

1891-

62. 4
13.0

18971898.

i 6. o
19.4

18991900.

80.4

18.0

28.2

89.9
19.8

555
233-5
225. 2
88.6
135.s

1901.
19021903190419051906.
1907-

45-S
167. 1

7-3
130.8
242. 1

19. 7
98.4

.24.S
130. 2
187. 1

« Prior to 1907 the only months in which there was a circulation subject to tax were
September, October, November, and December. In that year there was an excess circulation in March, June, July, and August (as much as 92,500,000 crowns in the lastnamed month).

Metallic cash of the bank.
[In millions of crowns.]
At the end of-

1890
189S
1897




Gold.
130.0
ro8. o
488.0
727.4

Silver.

At the end of—

216. 4
330.8
253- 2
246. 6

117

Gold.

1900
1901
1905
1907

9196
r,116.1
1,074. i
1.099.3

National

Monetary

Commission

Rates of exchange for bills drawn on Berlin, Paris, and London.
[The average per cent for each year is given. Above par is indicated by + ; below par
by - . ]
Berlin.

Paris.

1892

-5

1893

+3.2

-0.5
+ 3-2

1894

+4

+ 4.1

189s

+ 1-5

1896

+ 1.4
+ 0.1

1897

— 0. 1

j London.

— 0. 1
— 0. 1

+ 0. 2

1898

+ 0.1

1899

+ 0.3

+ 0. 4

1900

+ 0.6

+ 1. 1

1901

— 0. 2

+ 0.1

1902

— 0.3

-fo.i

1903

-0.3

0

1904

-0.3

1905

— 0. 17

1906

- 0 . 15

+ 0. 23
+ 0.30

1907

+ 0. 02

+ 0. 44

0

The rate of discount.
t

Lowest
rate.

Highest
rate.

1886
1887
1888
1889
1890
1891
1892
1893
1894
189S
1896

Year.

4
AA

AA
5
SA
SA
5
5
5
5
5

Lowest
rate.

1897
1898
1899
1900
1901
1902
1903
1904
190s
1906
1907

4
4

AA
AA
4

3A
3*A
3lA
3A
4

AA

Development of the giro business of the bank.
Year.

Year.

Crowns.

1887

1,634,000,000

1890

8,953,000,000

Crowns.




118

24,517,000,000

1907

__

63,626,000,000

The Banking System of Japan




BY

MARQUIS KATSURA
Premier and Finance Minister of Japan

BARON SAKATANI
Ex-Minister of Finance

S. NARUSE
Financier
and

PROFESSOR 0. M. W. SPRAGUE
of Harvard University

119




THE BANKING SYSTEM OF JAPAN.
i.
BY

MARQUIS KATSURA.
Premier and Finance Minister of Japan.
The introduction of the new regime, following the
restoration of the Throne to the actual rulership of Japan,
in 1868, ushered in an era of extensive development and
advance in various branches of industry. National finance
formed no exception; indeed it exhibited remarkable progress. But to place the entire system of national finance
on a sound basis involved great difficulties and was necessarily a gradual process, each phase requiring its full
period of evolution.
HISTORY OF THE JAPANESE BANKING SYSTEM.

During the early portion of the Meiji era (dating from
A. D. 1868) the financial system of Japan was primitive,
and, as it then existed, was local and limited. The
amount of capital was insufficient, and the rate of interest constantly rising. Private loans were hampered,
and the balance of trade was always unfavorable. After
the establishment of the national banks and of the
Specie Bank some improvement was made in the finan-




121

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Monetary

Commission

cial system of the country, but this was only a beginning
when judged by a national standard. The improvements
and developments were along collateral lines, and with
the growth of the branches the necessity of a trunk powerful and strong enough to support them came to be felt.
In other words, there arose an urgent demand for the
establishment of a great central banking institution. We
shall now proceed to give more fully the reasons for the
establishment of the Central Bank in Japan.
The banking business in Japan dates from the eleventh
month of the fifth year of Meiji (1872). (The Gregorian
calendar came into use the following year.) The bank
regulations were promulgated at that time, and in August
of the ninth year (1876) amendments were introduced to
those regulations and the number of banks increased to
over 150. During the first ten years, however, the banks
suffered from the disadvantages of small capital and lack
of cooperative facilities.
As a remedy for some of the existing evils, public
opinion rapidly crystallized in favor of a Central Bank
which might bring about fuller cooperation among the
financial institutions by securing control of the essential
machinery of the national finance. By establishing a
Central Bank, it was expected that the evils of the financial system in vogue, which might be termed the feudal
system, would be obviated, and it was also hoped that by
converting the national banks into agencies or branches
of the central banking institution, having a complete
system of communication, an even operation would be
attained, and the working of the entire machinery facilitated throughout the whole Empire. It was further




122

The

Banking

System

of

Japan

believed that the small banks would come to rely upon
the Central Bank and realize the advantage of cooperation with it.
The capital of most of the banks in those days was very
limited, and they were totally unable to cope with any
sudden demand for large amounts of money. When,
on the occasion of a flurry in the money market, the demand for the discounting of bills assumed unusual proportions, or when deposits were extensively withdrawn,
suspension of payment was not infrequent. Credit consequently was impaired, or at least was uncertain, the result
being that money was kept in private hands. Under
such conditions no financial system could be expected to
work smoothly. As long as this state of things prevailed
it was impossible to inspire confidence or to draw out
into circulation the volume of money individually hoarded.
It was expected that with the establishment of a Central Bank, empowered to make adequate advances, the
danger of a serious crisis or panic following financial stress
would be averted, and the development and advancement of commercial interests, which would attract increased
capital, would be amply provided for. It was believed
that as a result of the aid extended by the Central Bank
to the smaller banks the suspension of industrial or commercial development on account of lack of necessary
capital would be avoided.
In early days in Japan the issue and volume of currency, when compared with the standard of living and
the state of commerce and industry, were rather excessive,
but the circulation of that currency was far from being
uniform and ample. The rate of interest was ever on the
21893 0 —ii




9

123

National

Monetary

Commission

increase, due to the withdrawal of capital from circulation and the fact that the banks were advancing large
sums on long-term loans. But, with a Central Bank exclusively engaged in discounting bills and in making
advances for short periods on the best bills, capital would
be active and interest low. Such an institution would,
in fact, regulate the rate of discount and largely that of
interest.
In European countries the Government extends protection and assistance to a Central Bank, and government
money is deposited in that bank, which devotes the surplus standing to the Government's credit to the purchasing of foreign drafts or bullion. No effort is spared
looking to the importation of specie.
In Japan also it was seen that, should a Central Bank
be firmly established, the monetary transactions of the
Treasury and the redemption of government bonds
would be transferred to such a bank, and any surplus
would be devoted to the purchase of national and foreign
coins and bullion, which would be ultimately employed
in converting the government notes. This accomplished,
a way would surely be opened for concentrating specie,
and, eventually, notes would be placed on a convertible
basis. The money paid locally in the form of taxes being
mostly brought to the Central Government, leaving only
such a portion of it as was required for local governmental expenses and other small items, a deficiency in
circulating currency was felt severely each year at the
tax-paying period, and the interest on money always
rose. But it was felt that if the monetary transactions
of the Treasury should be intrusted to a Central Bank




124

The

Banking

System

of

Japan

the volume of currency temporarily in the one bank
would be more speedily reduced by the discounting of
bills and other processes, and the money market would
be relieved promptly. Thus it was expected that the
bank's operations would be adjusted to the actual needs
of the market.
Financial troubles in those days were generally attributable to the outflow of gold abroad, caused by the unfavorable state of the balance of foreign trade. But the
experience of excess of imports over exports is not limited
to Japan. There are times when European countries have
a like experience, and the reason why, in those countries,
the deficiency of specie is not severely felt, even under an
unfavorable balance, may be found in the fact that there
exists a financial institution for importing specie from
abroad. Japan, in those days, had no such institution.
There was an exit for specie, but no inlet for it; in other
words, foreign goods were paid for in Japanese specie
alone, and no other means were available for making the
payment. It was realized that the establishment of a
Central Bank would open the way for bringing in foreign
money. In Europe the banks, by holding correspondence
with other banks, are in close touch as to the volume of
specie in different countries and are constantly adjusting
the balance by rate of discount. Such work can be undertaken only by a central banking institution, and such a
bank once established, a financial organ would be brought
into existence which could maintain a constant watch on
the financial and commercial conditions of the world,
and would be able on the one hand to help smaller banks,
and on the other to open a gate for the incoming of




125

National

Monetary

Commission

foreign specie, so that, even in case of import exceeding
export, causing the outflow of specie, no apprehension
need be entertained.
WHY THE BELGIAN SYSTEM WAS ADOPTED IN JAPAN.

After careful study and comparison of the central
banking systems of Europe we found that, although in
extent of business, power, and influence in the financial
world the Bank of France and the Bank of England
were unrivaled institutions, yet in point of perfection
of organization the Bank of Belgium was peerless. With
the exception of the Imperial Bank of Germany, the
Bank of Belgium is the most modern creation. It was
organized after careful comparison of the banking systems of England, France, Austria, America, and other
countries, and the best in all those systems was adopted,
while the weak points were carefully avoided; consequently it was decided by Japan to adopt the Belgian
system.
The Imperial Bank of Germany, being an institution
adapted to the needs of a federation of States, was
found unsuitable for Japanese purposes, while the Bank
of England and the Bank of France had all the characteristics born of long usages and history, and consequently
it was not possible to adopt their system in a country like
Japan where no similar conditions exist.
Though the Belgian system was adopted, yet in noteissuing capacity and the rate of reserve a method resembling the German one was included.




126

The

Banking

System

of

Japan

THE BANKING SYSTEM IN GENERAL AND WHY THE SYSTEM
WAS ADOPTED.

With the establishment of the Meiji Government, one of
the policies followed was to perfect as far as possible the
financial system of the country and to promote and
encourage production throughout the Empire.
As early as the first year of Meiji (1868) a commercial
office was established with the object of encouraging commercial and industrial development. The organization
of the office was afterwards placed on a more efficient
basis. Under its jurisdiction were placed the mercantile
companies and the exchanges, which were the banks in
those days. These exchanges (Kwase) were the first
real bankers in this country. The capital was supplied
by wealthy merchants by subscription, while the Government also advanced funds. The exchange received deposits, advanced loans, and issued drafts. It was also
authorized to issue notes against the reserves.
The object sought in the establishment of these exchanges was good, but their organization and regulations
were very defective, and moreover they constituted an
identification, or at least a combination, of the Government
with private interests. Therefore the system was soon
found to be unsuitable at a time when the country was
undergoing a rapid transformation on account of the new
regime; and after several failures among the exchanges,
hope of success was abandoned, and, in about 1870, the
Government realized the necessity of establishing a more
perfect system.
In the fifth year of Meiji (1872) the regulations for
national banks were promulgated. The American system




127

National

Monetary

Commission

had been adopted, and in March of the following year
the regulations for national bonds convertible into gold
were enacted. With the establishment of the national
bank system the exchanges were dissolved, except one
in Yokohama, which was allowed to continue business
after having been converted into a national bank; thus
was the Second National Bank established. This bank,
besides the privilege of issuing ordinary notes, was
clothed with authority to issue foreign silver notes, which,
however, was forfeited when the Bank of Japan was established and issued convertible notes.
Four banks were established at the time of the promulgation of the banking regulations of 1872, the First National Bank being one. The amount of capital was 3,450,000 yen, with right to issue notes to the extent of 2,070,000
yen.
The volume of inconvertible government notes steadily
increased, specie began to command a premium, and
showed a tendency to leave the country. In those days
bank notes were immediately brought to the issuing bank
for conversion, and there was no prospect of a smooth or
general circulation of the notes issued by the banks.
Consequently the note-issuing privilege granted to the
banks proved useless; indeed it constituted a detriment
to the business of banking. Thus the first object of the
Government in promulgating the banking regulations,
namely the adjustment of the inconvertible notes, failed
utterly.
In 1876 the Government introduced important amendments in the banking regulations, and, instead of requiring
the conversion of the bank notes into gold, made it possible




128

The

Banking

System

of

Japan

to convert them with currency. In other words, the banks
could convert their notes with those of the Government,
and the result was the introduction of inconvertible notes.
The banks were also authorized to deposit eight-tenths of
their capital in the form of government bonds valued at the
market price and to issue notes equal to the amount of their
deposits, while the remaining two-tenths of the capital was
to be reserved in the form of currency to meet the demand
for conversion. These amendments proved to be of great
advantage, and the number of banks suddenly increased to
152, representing capital of 42,110,000 yen, the notes
issued reaching the sum of 34,390,000 yen.
The Satsuma rebellion of 1877 caused the Government
to increase the issue of its inconvertible notes, and the new
notes thus emitted amounted to over 27,000,000 yen.
Besides, the Government also issued reserve notes to the
amount of over 20,000,000 yen. The bank notes, as
already stated, also increased, and reached the amount of
over 34,000,000 yen. The total of inconvertible notes
rose to 160,000,000 yen. Specie began to command a
premium, and with the depreciation of the value of
the notes, uneasiness spread on every side. It was immediately and plainly apparent that there was an
urgent necessity for changing this state of affairs by a
reform of the note-issuing system. This brought about
the introduction of further fundamental reforms in the
banking system of Japan.
With the increase in the volume of the bank notes
the Government became apprehensive and saw the necessity for limiting the right of establishing banks. In 1877
the bank regulations underwent fresh amendment. The




129

National

Monetary

Commission

Minister of Finance was invested with authority to place
restrictions on the establishment of banks, to limit the
amount of capital, and to lower the note-issuing capacity.
This was followed by the policy of redeeming the inconvertible notes, which was consistently carried out, nor
were the bank notes left unredeemed.
In 1883 the bank regulations were again amended, and
a clause was introduced whereby it was made impossible
for a bank to continue as a national bank after the term
of its charter expired, and it was also provided that no
bank should have power to issue notes. Simultaneously
measures were taken whereby the bank notes should
be redeemed gradually. With the expiration of the terms
of charter of the national banks an attempt was made to
have the charters made renewable, but, this proving
futile, the national banks very smoothly changed into private banks, so that by February, 1899, the former completely went out of existence. The disappearance of the
national banks, however, did not mean complete withdrawal from circulation of the notes issued by them, but
by placing a limit on the period of their circulation they
were completely withdrawn by December, 1904, after
which the government and bank notes ceased to circulate, and the unification of the paper currency was thus
effected.
THE YOKOHAMA SPECIE BANK.

The Yokohama Specie Bank was established in 1880,
and the Bank of Japan came into existence in 1882. The
former was organized on the joint-stock principle for the
purpose of facilitating foreign trade and also of issuing
convertible notes as the circulation of specie increased.




130

The

Banking

System

of

Japan

But as the notes showed signs of depreciating, the noteissuing license was not granted to the Specie Bank. From
the time of its establishment the Specie Bank was devoted to foreign exchange and issuing drafts on commercial commodities. The history of the Bank has not
been untroubled, but with foresight as to developments it
increased its capital in 1887 to 6,000,000 yen. The Government extended special protection to the Bank under
its Yokohama Specie Bank regulations, and since that
time the Bank made steady progress and developed without
a hitch, until by 1896 its capital was doubled and became
12,000,000 yen. With this increase of its capital, necessity
was felt for extending the sphere of its operations, and
this called for further increase of its capital by 2,000,000
yen, making a total of 14,000,000 yen. The business of
the Bank is now in a thriving condition.
The present regulations for the Yokohama Specie Bank
limit its business to the following:
(1) Foreign exchange and issuing of drafts on commercial
commodities.
(2) Inland exchange and issuing of drafts on commercial
commodities.
(3) Advancing loans.
(4) Deposits of money and custody of articles of value.
(5) Discount and collection of bills of exchange, promissory notes, and other securities.
(6) Exchange of coins.
THE BANK OF JAPAN.

The Bank of Japan is organized and modeled after the
Central Bank of Belgium. The purpose of the Bank was
to withdraw inconvertible notes from circulation, thereby




131

National

Monetary

Commission

unifying the paper currency of the country; to facilitate
the handling and disposition of money belonging to the
Treasury and of the National Bonds; to adjust the monetary conditions prevailing at home and abroad, and regulate the rate of interest. The Bank was established in
1882 by virtue of Imperial Ordinance No. 32. Its authorized capital now stands at 30,000,000 yen and it is
privileged to issue convertible bank notes. The maximum of the notes to be issued against the reserve was at
first 70,000,000 yen, which was afterwards increased to
85,000,000 yen, and is now further increased to 120,000,000.
The governor and vice-governor are appointed by the
Government. The Bank is placed under several restrictions. The Government reserves the right to attach
supervising officials, thus bringing the institution under
the strictest governmental surveillance.
As already stated, the first Exchange Company ended
in failure, while the national banks did not achieve what
had been expected of them. The amendments to the
bank regulations resulted in the increase of inconvertible
notes, and this called for further amendments of the regulations. The Yokohama Specie Bank was confronted
with difficulties almost immediately after its establishment, so that, in view of the existing financial condition
of the country, the establishment of the Bank of Japan
was epoch making: it not only placed the fiscal policy of
the Government on an entirely new footing, but it also
exercised a wholesome and beneficial influence on the
economics and finance of the entire country.




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Japan

The business now transacted by the Bank of Japan is as
follows:
(i) To discount or purchase government bills, bills of
exchange, and commercial bills.
(2) To buy or sell gold or silver bullion.
(3) To make loans on security of gold and silver coins and
bullion.
(4) To collect bills for banks, companies, and merchants
who are its regular customers.
(5) To receive deposits in current account and to accept
the custody of articles of value, such as gold, silver,
and precious metals, and documents.
(6) To make advances in current accounts or loans for
fixed period on security of government bonds,
treasury bills, and other bonds and shares guaranteed by the Government. The amount of such
loans and the rate of interest are to be decided from
time to time by the conference of governors, vicegovernors, directors, and supervisors, subject to the
approval of the Minister of Finance.
The Bank of Japan, besides engaging in the abovestated business, is disqualified from engaging in the following transactions:
(1) Making loans on the security of real estate or shares
of banks or corporations.
(2) Making loans on the security of shares of the Bank
of Japan, or purchasing the same.
(3) Becoming a shareholder of industrial corporations,
or engaging, either directly or indirectly, in industrial enterprises of any kind.
(4) Becoming the owner of real estate, except so far as
is necessary for establishing the head office and
branches of the bank.




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In 1890 ordinary bank regulations were enacted by
Law No. 72, which was followed by savings banks regulations Law No. 73. The promulgation of these regulations opened a new epoch in the history of banking in
Japan. By the new regulations the banking business
was clearly defined, and all those engaged in that and
similar business were brought under special contract
by those regulations. Before the law came into force
there existed no instrument for the control of private
banks. Only special institutions, such as the Bank of
Japan, the Yokohama Specie Bank, and national banks,
were under the control of the Government. When the
national banks became private banks, after the expiration
of their charters, they passed out of the control of the
Government. The new regulations changed all this.
The necessity of creating a banking center in order to
facilitate the management of national finance, and the
importance of government control and supervision and of
insuring a wholesome development, were what led to the
new regulations; for it was feared that the national banks
which were formerly under government control and supervision would, when they passed beyond that supervision,
prove obstacles to such development.
THE SAVINGS BANKS.

The savings bank, above all other banks, requires most
careful supervision by the Government. In Japan the
Government has a Postal Savings department and also
a deposit section in the Department of Finance. But
the amount of the deposit being found too small when
compared with the population and the standard of eco-




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System

of

Japan

nomics in general, the Government enacted a new regulation for savings banks, with a view to increasing the
amount of the deposit by initiating a method for supervising, controlling, and improving the business of the private institutions. According to these regulations, banks
that receive deposits at compound interest are classed
as savings banks, and their organization must be on the
joint-stock principle. It is also made obligatory on such
banks to keep a reserve as security for repayment amounting to not less than one-quarter of the whole amount of the
deposit, in the form of interest-bearing national or local
bonds, and to have them deposited in the place authorized
to receive them. In other respects the provisions of the
ordinary bank regulations apply to the savings banks.
In 1896 the Hypothec Bank of Japan was created by
Law No. 82, and in the same year the Agricultural and
Industrial Bank was also established under the Law No.
83. These laws opened another epoch in the history of
Japanese banking. The banks so far were engaged in making loans and receiving deposits for short terms, and also in
discounting commercial bills, so that they were principally
organs for commercial transactions. But the credit
system not being fully developed in the country, the
need was strongly felt of an institution where long-term
loans could be obtained on security of movable and
immovable property. Such loans being incompatible with
the practical working of ordinary banks, difficulties were
experienced in some cases.
Of recent years, however, the commercial credit system
having considerably developed and the necessity being felt
of establishing a special institution for making long-term




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loans for the benefit of agricultural and industrial interests,
the Government made the necessary investigations to
meet this requirement. Then the war with China broke
out, with the result that a very large sum of money was
scattered among the people. On the other hand, the postbellum measures called for a large amount of capital to
be devoted to unproductive works, and it was thought
most timely and necessary to open a way for absorbing
small funds widely distributed throughout the country,
and devote them to developing agricultural and industrial
interests. With this object the Hypothec Bank and
the Agricultural and Industrial Bank were organized and
established by the law issued in 1895.
The Hypothec Bank of Japan, created by the law relating thereto, has for its object the advancing of funds
for the purpose of improving and developing agricultural
and industrial enterprises, and the Bank is organized on
joint-stock principles, with the president and vice-president appointed by the Government. Its principal business is to advance loans on mortgage of immovable property which shall be redeemable by annual installments, the
Bank being placed under severe restrictions in other lines
of business. It is authorized to issue mortgage debentures bearing premiums to an amount not exceeding ten
times its paid-up capital, provided the amount of such
debentures does not exceed the total amount of outstanding loans redeemable by annual installments. The Bank
enjoys a government subsidy to the extent of guaranteeing 5 per cent dividend for ten years after its establishment, in case its profits fail to realize that standard of
dividend.




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Japan

The Agricultural and Industrial Bank is a joint stock
company established in every prefecture. These banks
have for their object the advancing of loans for the purpose of improving and developing agricultural and industrial interests. Their business is similar to that of the
Hypothec Bank, only on a small scale. The banks are also
placed under the same restrictions and government supervision as the Hypothec Bank. They are authorized to
issue agricultural and industrial debentures to an amount
not exceeding five times the paid-up capital. The Government delivered a sum of about 10,000,000 yen to the prefectural authorities for taking up the shares of .the agricultural and industrial banks of their localities, and on
this amount the Bank is exempted from paying a dividend.
The two banks above described being exclusively engaged in making long-term loans on the security of immovable property, the need arose for a financial organ
which could advance long-term loans on the security of
government bonds, shares, and movable property. It was
also deemed advisable to combine in such an organ the
business of a trust company. The institution born of
these requirements is the Industrial Bank of Japan,
organized under the law relating thereto and enacted in
March, 1900, as Law No. 70.
The Industrial Bank is a joint stock company, and
the governor and deputy governor are appointed by the
Government. The capital of the Bank is 17,500,000 yen,
and foreigners own no small portion of the shares. It
acts as a medium for the introduction of foreign capital,
and is thus engaged in adjusting and facilitating circulation of capital at home and abroad. The Bank is




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authorized to issue debentures to an amount not exceeding
ten times its paid-up capital, provided the amount of such
debentures does not exceed the total amount of outstanding loans and negotiable instruments actually in hand.
The Bank has a government subsidy to the extent of
guaranteeing a 5 per cent dividend for five years after its
establishment in case its profit fails to come up to that
dividend.
THE BANK OF FORMOSA.

The Bank of Taiwan (or Formosa) was established
under the law relating thereto and promulgated in 1900
as Law No. 38. The Bank is a private stock company
with a capital of 5,000,000 yen, and its president is appointed by the Government. It is placed under several
restrictions, and the Government exercises strict supervision over the management. The privileges granted to
the Bank consist in the Government taking up 1,000,000
yen of its capital, for which no dividend is claimed for
five years; in the authorization to issue notes against the
guaranteed reserve to the amount of 5,000,000 yen free
of tax, and in the loan from the Government of 2,000,000
yen without interest for five years, to be used as a reserve
against the issuing of notes. The purpose of the establishment of the Bank was to reform the currency system
of Formosa, to facilitate the receipts and disbursements
of the Treasury, to develop the working of the process of
exchange, and to facilitate the investment and subscription for the Formosa public-works bonds.
In the colonial policy of Japan the adjustment of finance
is of prime importance, and it was at first thought that it
could be carried out by intrusting the work to the Bank of




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System

of

Japan

Japan or to the Yokohama Specie Bank, but Formosa
being a new territory, where special conditions prevail, it
was thought better to establish a special institution. The
result was the establishment of the Bank of Taiwan.
T H E HOKKAIDO COLONIAL

BANK.

The Hokkaido Colonial Bank was established as a jointstock company, with a capital of 5,000,000 yen, in 1899.
The Government has an official attached to the Bank, and
exercises strict supervision. The object of the Bank is to
supply the capital necessary for colonizing and developing the Hokkaido, by making long-term loans on the
security of immovable property, payable in annual installments. It can also make other loans and issue drafts
on commercial commodities. The Hokkaido being still
undeveloped in agriculture and other industries, and
being subject to conditions different from other parts of
the Empire, it had been deemed necessary to establish
this bank in place of the Agricultural and Industrial Bank,
in order to meet the special requirements of the island.
The system and working of different kinds of banks in
Japan, and the reasons for their adoption, are as briefly
stated above. The table on page 140 shows the number,
the amount of capital, etc., of these banks. It is based
on actual conditions prevailing in December, 1907,

21893 0 —11




10

139

Number of offices.
Authorized
capital.

Kinds of bank.

Capital
paid up.

Reserve.

When established.
Head.

Yen.

Yen.

Branch.

Yen.

Bank of Japan
Yokohama Specie Bank
Hypothec Bank of Japan

30,000,000
24, 0 0 0 . 000
10,000,000

30,000,000
24,000,000
4,250,000

Agricultural and Industrial Bank

29.320,000

28,620.000

4, 5 9 6 , 3 1 0

5.000,000
5,000,000

3,500,000
3,750,000

17,500,000

16, 250, 000

830,000
381,000
623,200

416,687,230

2 9 1 , 5 9 9 . 745
42.234,296

84, 1 8 2 , 9 8 2

69.688,600
6.595.000

5.285,719

607,195,830

444,204,041

October, 1882.
February, 1880.
June, 1897.
JNovember, 1897.0

21,500,000

Bank of Taiwan or Formosa
Hokkaido Colonial Bank
Industrial Bank of Japan
Ordinary banks
Savings banks
Same, combining ordinary banking




Total

a Earliest estimated.

14,591.707
1,503,481
46

[ A u g u s t , 1900.&
9
5
1
162

n,421,423

1,658
484
192

711
281

1 3 9 . 6 3 0 , 103

2, 194

921

& Latest.

June, 1899.
March, 1900.
February, 1902.
March, 1876.0

THE BANKING SYSTEM OF JAPAN.
ii.
OPINIONS OF BARON SAKATANI,
Ex-Minister of Finance.
The banking system in Japan was at first modeled after
the national - bank system of the United States. The
banking regulations promulgated in 1872 closely followed
the American system, being almost a translation into Japanese of the American regulations. As it was found, however, that such a system did not work well on account
of its being unsuitable to national conditions, the regulations were amended in 1876 and in 1882, when the central bank system was adopted. The Bank of Japan was
then established, and the national banks, at the expiration of their charter of twenty years, were not allowed to
exist as national banks, but such as wished to carry on a
banking business became ordinary banks.
In 1890 the regulations for ordinary banks and savings
banks were promulgated, but the Bank of Japan, the
Yokohama Specie Bank, the Hypothec Bank, the Agricultural and Industrial Banks, the Industrial Bank of
Japan, the Bank of Formosa, and the Hokkaido Colonial
Bank are placed under special laws, enacted to meet
their respective requirements.
The Bank of Japan is modeled after the Central Bank
of Belgium; the regulations concerning the issue of
convertible notes were, however, copied from the German system in order to secure sufficient elasticity in
operation.




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RELATIONS OF THE BANK OF JAPAN TO OTHER BANKS.

The relations of the Government to the ordinary banks
are very simple. The Government for the purpose of protecting the interests of the creditors exercises supervision
over the business of those banks. It is within the province
of the Minister of Finance to give official recognition to
their establishment and to inspect at any time the
actual state of the banks' business. The banks are also
obliged to publish periodical balance sheets.
The relations between the Government and the Bank
of Japan are of a very close character. When the latter
was first established, the Government was a very large
shareholder, but these shares were afterwards transferred
to the Imperial Household Department. The Bank of
Japan is responsible for the custody of the Government's
cash and negotiable instruments. It is intrusted with
the management of the treasury receipts and disbursements ; the investment of the treasury funds and the management of national bonds are also committed to the
Bank of Japan. In this respect the Bank is almost a part
of the Department of Finance, and performs • valuable
services in simplifying and facilitating the work of that
department. In consideration of the privilege of being
intrusted with the receipts and disbursements of the Treasury the Bank is obliged to transact that business without
remuneration, except in special instances. The business
of the Bank of Japan is placed under well defined limitations by law, in order to insure the stability of its business
and also to prevent the misuse of its influence. The
Government's supervision is very strict. It appoints the




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System

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Japan

governor and the deputy governor; the directors are also
appointed by the Government from among candidates
elected by the shareholders; the Government appoints
official inspectors from among the officials of the Department of Finance, these official inspectors having a voice in
the directors' meetings and also in the meetings of the
shareholders, but they have no vote in either of those
meetings.
The Bank of Japan has the privilege of issuing convertible notes. This is considered its most important
function. The mode of issuing such notes and the duty
to be paid thereon are governed by very strict laws.
T H E YOKOHAMA SPECIE

BANK.

The Yokohama Specie Bank was established largely
through the influence of Count Okuma, then Minister of
Finance. Japan's national finances were at that time in
a very bad state. The inconvertible government notes
had depreciated, and specie was withdrawn from the
market. In order to remedy this condition of the
money market a bank for transacting business in specie
was established, so as to absorb the specie of the country.
But the attempt being fundamentally erroneous, and its
method of operation faulty, the Specie Bank suffered
great loss and was reduced to very sore straits. Afterwards, however, great improvements were introduced in
the Bank's business methods by the efforts of Count
Matsukata, Minister of Finance, and since that time
the Bank has recovered from the losses then sustained
and is at present in a prosperous state.




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The directors of the Yokohama Specie Bank are
elected by the shareholders and are subject to approval
by the Government, which appoints ofl&cial inspectors for
the Bank's business. The Government was at first a
large shareholder, but its shares have since been transferred to the Imperial Household Department.
The Yokohama Specie Bank has very close relations
with the Bank of Japan, the latter exercising strict supervision over the business of the former. Under the law
the deputy governor of the Bank of Japan acts as governor of the Yokohama Specie Bank, and the deputy
governor of the latter acts as director of the Bank of
Japan.
The Yokohama Specie Bank is an organ of foreign
exchange established to foster foreign trade and to absorb
specie from abroad. For that purpose the Bank of Japan
advances funds to the Yokohama Specie Bank at a
specially low rate, and also rediscounts bills at the request
of the Specie Bank. The Bank of Japan never engages
directly in foreign exchange or in sending money abroad.
Government bonds abroad and receipts and disbursements of the treasury funds abroad are managed by the
Yokohama Specie Bank under the supervision of the
Bank of Japan. Such funds of the latter as are kept
abroad are placed under the management of the Specie
Bank. It is not privileged to issue notes at home, but its
agencies in China and Manchuria are authorized by the
Japanese Government to issue silver notes payable on
demand.
The entire banking system of Japan centers in the
Bank of Japan, with ordinary banks and savings banks,




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The

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Japan

as well as the Yokohama Specie Bank, for foreign exchange.
For mortgaging immovable property, and especially
for the benefit of agricultural interests, the Industrial
Bank of Japan and the Banks for Agriculture and
Industry were established. For the issue of shares and
debentures and for trust business, and especially for introducing foreign capital into this country, there is the
Hypothec Bank. Besides those banks, there are the Bank
of Formosa and the Hokkaido Bank, which act as finanr
cial organs for the colonies. Financial negotiations between Japan and Korea will be transacted by the newly
established Central Bank of Korea. Another system, developed to a very high degree of perfection, is that of
Postal Savings, distributed throughout the country, for
transacting small exchanges, and also for receiving small
deposits.
The banking system of Japan may be considered perfect
at present and adequate to meet the prevailing condition
of the country, and the efficiency of the Bank of Japan
as the center of the banks of the whole country is very
marked. As a matter of fact, however, in spite of the
power and authority absolutely vested in the Government to inspect the banks' business, the method of exercising that authority is still imperfect and leaves much to
be desired in the way of its enforcement.
There is also another point which calls for improvement, namely, the imperfect and undeveloped condition of
the stock exchange of this country. The present system
is liable to abuse, and consequently a considerable degree
of inconvenience is felt in mercantile transactions involving




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negotiable instruments, which are so closely related to
financial business in general.
AMENDMENTS PROPOSED BY BARON SAKATANI.

Regarding the present system of the Bank of Japan as
the Central Bank, I propose the following three amendments :
(i) The augmentation of its capital. The present capital
of the Bank is 30,000,000 yen. This capital was
decided on fourteen years ago. Japan's commerce
and industry have since developed very rapidly,
and the financial expansion has been correspondingly great. Government bonds and treasury
funds have increased several times over. Moreover, by the alteration of the currency system the
original 1 yen now corresponds to 2 yen, which
necessitates at least the doubling of the amount of
the capital of the Bank.
(2) The extension of the limit placed on the note-issuing
capacity of the Bank against the security reserve.
According to the present law, the amount of notes
to be issued by the Bank of Japan without specie
reserve, but against commercial bills and national
bonds (which are classed as security reserve), is
limited to 120,000,000 yen. This regulation is ten
years old, and the present condition calls for an
extension on the same grounds as stated in the
preceding paragraph. It would be proper to increase the sum to 150,000,000 yen.
(3) Alteration of the amount of the tax to be paid by the
Bank for the notes issued.
According to the present law, the Bank has to pay a
tax corresponding to 12/1,000 per annum of the average
amount of the notes issued every month against the secur-




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System

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Japan

ity reserve; and on notes beyond the maximum amount,
issued under sanction of the Government, the Bank has
to pay a tax at the rate of not less than 5 per cent per
annum. Of the above two kinds of taxes the one which
is levied on account of the issue of notes beyond the maximum amount requires no alteration, for this provision
induces the Bank to withdraw the issue as soon as possible;
but with respect to the other, the tax obligation is apt
to impair more or less the efficiency of the Bank's operations. It would be better to rescind this regulation and
replace it with an arrangement whereby the Bank, on
realizing an excess of profit over a certain fixed rate, should
be made to pay a certain amount to the Government.
Such a method would be quite a proper one in taxing
a privileged juridical person like the Bank of Japan.
CERTAIN COMPARISONS MADE.

The system followed in the Bank of Japan having been
modeled after the system in vogue on the European
continent, as already stated, there is no very great difference from the European system in its operation as regards
the issue of convertible notes, the maintenance of specie
reserve, the method of absorbing bullion, and the adjustment of the rate of interest. There are, however, minor
differences, according to the peculiar conditions prevalent
in each of the countries where a similar system is followed.
The Yokohama Specie Bank is an institution peculiar
to Japan. When the country, after a long seclusion, was
suddenly opened to foreign intercourse fifty years ago,
there existed no financial organ for the newly created
foreign trade, and it was for the purpose of affording the




H7

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Monetary

Commission

necessary medium that the Bank was established. Consequently there is no bank in any other country that
can be compared with it.
Finally, I venture to say that without a Central Bank
I do not see any way whereby national finances and
the economic system can be consistently developed. I
have studied American finance for some years, and have
come to the conclusion that the solution of the problem
may best be sought in the unification of the system by
the issue of convertible notes and the establishment of a
Central Bank.




148

THE BANKING SYSTEM OF JAPAN.
in.
OPINIONS OF S. NARUSE,
Financier.
Any discussion of our present banking system must
begin with the origin and history of the banking business
in this country, and involve a statement of the original
laws forming the bases for the present system.
There were in operation in feudal days some organs
resembling banks, under the names of Kwase-Gumi
(Exchange Company), Kwase Goyotashi (Exchange Contractors) , Kake-ya (Credit House), etc., conducting business connected with the receipts and disbursements of
the Feudal Government, or acting as financial agents for
feudal lords, as well as giving pecuniary assistance to
business men. But the history of real banking in Japan
begins with the promulgation of the National Bank Regulations in November, the 5th year of Meiji (1872).
The National Bank Regulations were based mainly
upon the National Bank Act of the United States of
America. The regulations, in their original form, provided that the national banks should deposit with the
Government paper equal to 60 per cent of their capital,
for which amount the Government gave the Kinsatsu
(paper money, or, literally, gold notes) exchange bonds,
on the security of which bank notes to the same amount
were to be issued. On the other hand, a specie reserve
equal in amount to 40 per cent of their capital was to be
provided for the conversion of these bank notes. By this




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means the Government aimed at a speedy withdrawal of
inconvertible notes and at meeting the needs of the
financial world. In those days there was no difference
in value between paper and specie, and the system worked
well and smoothly.
The conditions, however, became changed when, with
the 7th year of Meiji (1874), the evil effects of the overissue of government paper money began to be felt, and
as a natural result of the increase of the imports of
the country there began to take place a greatly increased
export of specie. In consequence of this the price of
gold coin rose daily, and the depreciation of paper money
rapidly set in.
Government paper money, in June of the 8th year of
Meiji (1875), showed an exchange rate of 1,017-1,018 yen
for 1,000 gold yen. The demand for the conversion of
notes, made upon the specie reserve of the national banks,
became very large. The notes issued were immediately
returned for conversion, having no time for circulation,
and the banks sustained considerable losses because of
the necessity for keeping a supply of specie on hand
for the purposes of exchange. The notes intended for
circulation lay useless in their vaults, and one of the four
banks then existing had not been able to issue a note since
opening for business. Such being the case, the specie reserves in the banks almost disappeared and paper money
was gradually decreasing in circulation and losing its usefulness. The business of the banks became difficult, and
no one dared to apply for the establishment of a national
bank. What the Government at first hoped for was not
realized, and it was apparent to everybody that the system




150

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System

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Japan

of bank notes, convertible with specie, could not permanently be maintained.
At this time the Government determined to apply the
Hereditary Pension Bonds—by way of reforming the Han
(Clan) system as a result of the restoration—to the Kwazoku (Nobles) and the Shizoku (Gentry or Samurai) for
their hereditary pensions or their pensions for merit. This
necessitated an issue of government loan bonds amounting to 174,000,000 yen, and in order to create a demand
for these bonds, and also to stimulate the establishment
of national banks, the national-bank regulations were
revised in August, the 9th year of Meiji (1876), chiefly
to the effect that bank notes should be issued by the
banks to the amount of, and on the security of, government loan bonds of over 4 per cent interest, deposited to
an amount equal to 80 per cent of their capital, and that
a currency reserve for conversion should be provided to
the extent of 20 per cent of the capital, or a quarter of
the actual amount of issue. But this currency reserve
meant in reality government paper money, to which the
bank notes became convertible. By this reform the convertibility of the bank notes with gold was changed to
their convertibility with currency. The bank notes thus
becoming inconvertible notes, and conditions being thus
changed, the establishment of national banks was greatly
encouraged, and in a few years their number increased to
150. When this number tended to increase still further,
the Government, seeing that if more establishments were
granted the inevitable result would be the expansion of
inconvertible notes, and that the evils involved would be
disastrous, issued special regulations, with a view to




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restricting the number of national banks, and when they
numbered in all 153 no more were established.
On the other hand, there remained in circulation government paper money to the amount of over 100,000,000
yen, besides the national-bank notes of inconvertible
character issued recently owing to the revision of the
national-bank regulations. The difference between paper
and specie became greater and greater. Prices rose
and bonds depreciated in consequence of the depreciation of paper, so that both the Government and the
people began to regard with suspicion the circulation of
the inconvertible notes, as well as the bank notes. The
adjustment of paper currency had become an object of
prime importance, and it was generally felt that the unification of the currency system necessitated the establishment of a Central Bank, which should alone be privileged
to issue convertible bank notes. The outcome was the
Bank of Japan.
Central Banks in other countries differ one from another
in their organization, but they are all alike in that
they serve as supreme organs for the regulation of the
monetary circulation of the countries in which they are
established. In introducing into this country the central-bank system the Government studied the systems in
Europe and America, and finally decided to adopt that
of the Central Bank of Belgium. It is needless to say
that at the same time the Government, while framing
the new central-bank system after the system prevailing
in western lands, fully considered the particular conditions prevailing in Japan. Thus in June, the 15th year
of Meiji (1882), the regulations concerning the Bank of




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Japan

Japan were issued, and its foundation followed immediately. In May, the 17th year of Meiji (1884), the convertible bank-note regulations were also issued.
The circulation of the Bank of Japan convertible notes
gradually increased, and the withdrawal of the government paper money and the national-bank notes was
simultaneously carried out. Although in July, the 21st
year of Meiji (1888), some amendments were introduced
into the convertible bank-note regulations, and there were
several other subsequent reforms, yet this date marks
the foundation of the present currency system of Japan.
The following is the gist of the present Bank of Japan
convertible-note regulations:
The Bank of Japan shall keep gold or silver coins, or
bullion of those metals, as a conversion reserve, equal in
amount to the convertible bank notes issued. The
amount of silver coin and silver bullion shall not exceed
one-quarter of the whole amount of conversion reserve.
The Bank of Japan may, outside the provisions of the
preceding paragraph, further issue convertible bank notes,
on the security of government bonds or treasury bills, or
other bonds and commercial bills of a reliable nature,
within the limit of 120,000,000 yen; of this amount, however, 27,000,000 yen shall be set apart to be issued after
the first day of January, the 22d year of Meiji (1889), in installments, from time to time, in proportion to the amount
of the national-bank notes redeemed.
The Bank of Japan may, outside the provisions of the
two preceding paragraphs, make a still further increase
of convertible bank notes, in order to meet special emergencies of the market, and, with the special permission of




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the Minister of Finance, on the security of government
bonds or treasury bills, or other bonds or commercial
bills of a reliable nature. The notes shall be subject to a
special tax of not less than 5 per cent per annum, the rate
of interest to be fixed in each case by the Minister of
Finance.
The Bank of Japan shall supply by way of loan not more
than 22,000,000 yen to the Government, without interest,
for the purpose of redeeming the government paper
money. The period of time within which this loan shall
be repaid by the Government and the rate of annual installment shall be fixed by the Minister of Finance.
Now that the business organization of the Bank of Japan
was complete, the regulations were revised so that the
national banks' term of business should expire at the end
of twenty years, and that if they desired to continue
their business thereafter they might do so only by becoming private banks. At the same time the rules for
redeeming the national-bank notes were laid down and put
into operation. At the expiration of their term of business most of the national banks were reorganized and
have continued their business till this day purely as private commercial banks, acting as organs of general trade,
in accordance with the bank regulations promulgated in
August, the 23d year of Meiji (1890).
The revision of the national-bank regulations in the
ninth year of Meiji (1876), side by side with the issue of
the hereditary pension bonds, gave an impetus to the
establishment of banks, and in about the twelfth year
of Meiji (1879) the financial organs of the country for
domestic purposes were nearly complete; but for foreign




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trade purposes there existed only two or three branches
or agencies of foreign banks. At this time the paper
money increased in circulation, the difference in value
between paper and silver became considerable, resulting in the outflow of specie abroad, which brought about
a scarcity of gold and silver coins and consequent distress
in commercial and financial circles.
In order, therefore, to lay the foundations of the financial
welfare of the country, the establishment of an organ for
facilitating the operations of the money market became of
paramount importance, and in November, the twelfth
year of Meiji (1879), the Yokohama Specie Bank was
established. This bank was created after the promulgation of the national-bank regulations, and was for the
time being subject to their control. But, with the
gradual expansion of its business, and in order to distinguish it in connection with foreign commercial intercourse from the ordinary banks, the Government issued
the Yokohama Specie Bank Regulations in the twentieth year of Meiji (1887), and gave the Bank a special
position of its own. The new regulations have since
placed the Bank under government control, and its chief
object is to act as a financial organ for foreign trade. It
is now one of the most important cogs in the financial
machinery of the country.
Seeing that the Central Bank was aheady founded,
with numerous ordinary banks under it scattered all
over the country, and that a foreign trade organ, the
Yokohama Specie Bank, was also established, it looked
as if the mechanism for commercial purposes was nearly

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complete. These provisions, however, from the viewpoint of scarcity of capital, were found to be still insufficient, as no such organs existed for the benefit of
agriculture and industry. To correct this defect, the Government established the Hypothec Bank of Japan and the
Agricultural and Industrial Banks as monetary organs
for agriculture, and the Industrial Bank of Japan as a
parallel institution for industry.
The Hypothec Bank of Japan acts mainly as the financial medium of agriculture, and was founded on the lines
of the Credit Foncier de France. Its principal business
consists in making long-period loans at low rates of interest
on the security of real estate, for the purpose of the improvement and development of agriculture and industry.
It has as its local organs the Agricultural and Industrial
Banks established for the same purpose, and they cooperate to provide financial facilities for agriculture and
industry, and by this means to enhance the national
wealth. To obtain the funds for loans, these banks are
authorized to issue debentures, their business being conducted under strict governmental supervision.
The organization of the Industrial Bank of Japan is
based largely on that of the Credit Mobilier of France,
being designed as a financial organ for industry just as the
Hypothec Bank is for agriculture. Its scope is limited,
in the main, to making loans on the security of national
loan bonds, local loan bonds, or shares of companies,
receiving deposits of money, and taking charge of goods
intrusted to it for safe-keeping. It undertakes a trust
business in relation to local loan bonds or the debentures
and shares of companies, and makes loans to public




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bodies organized by law. The Bank is thus precluded,
to a certain extent, from carrying on business similar to
that of ordinary banks, but it is endowed with the privilege of issuing debentures to an amount of ten times its
capital. The business management of this bank is also
under the direct control of the Government.
Besides the above-named banks there are the Colonial
Bank of Hokkaido and the Bank of Taiwan (Formosa),
but as these are special organs, essentially colonial in their
nature, and have little relation to the general economic
situation, they will not be dealt with here.
To explain the relation of the Government to the Bank
of Japan, it must be premised that it differs from ordinary banks in having the privilege of issuing currency
notes, and it is through this privilege that the Bank has
various dealings with the Government. As already stated,
the Bank of Japan was originally created for the purpose
of withdrawing government paper money and nationalbank notes, changing and unifying these into paper notes
having specie reserve. The Bank is therefore legally bound
to make loans without interest to the Government to a
limit of 22,000,000 yen for the purpose of redeeming the
government paper money. It manages free of charge
the receipts and expenditures of the National Treasury
and transacts all business concerning the national loans.
Formerly the receiving of moneys of the National Treasury and their disbursement were intrusted to the so-called
exchange dealers. These exchange dealers, however, were
a group of private individuals, private banks, and national banks, and their ability and credit were considered




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doubtful. As the volume of cash receipts and disbursements increased the domination of these exchange dealers became objectionable, and in the Bank of Japan act it
was specified, in article 13, that the Government might
intrust to the Bank of Japan the function of receiving and
disbursing state funds. According to the government
treasury regulations there are the central, the main, and
the branch treasuries. The Central Treasury is located
in Tokyo, a main treasury in each of the municipalities
and prefectures and in Sapporo, Hakodate, and Nemuro,
and the branch treasuries in various places where the Minister of Finance deems their location necessary. The
branch treasuries are supervised by the main treasuries;
the Minister of Finance exercises superintendence over
all the treasuries, and, as occasion may require, he dispatches officials to any treasury office for the inspection
of treasury books. Now this treasury business is managed by the Bank of Japan, and the Bank is solely
responsible for the custody, receipts, and disbursements
of cash. The affairs of the main and branch treasuries
in various places are dealt with at the local branches or
agencies of the Bank of Japan. The governor of the Bank
is the cashier of the government treasury, and the heads
of the Bank's branches or agencies are his proxies.
On the convertible notes issued by the Bank of Japan
on security reserve the Government imposed a tax at the
annual rate of 1.25 per cent for the total issue, less the
amounts lent to the Government or others without interest
or at any annual rate of interest not exceeding 1 per cent.
As regards the issues in excess of the limits specified by
law, a tax is levied at a rate of not less than 5 per cent




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per annum, fixed by the Minister of Finance at the time
of such issue.
Among the relations of the Government with the Bank
of Japan, those specified by the Bank's act are as follows:
(i) Any person desiring to become a shareholder of the
Bank of Japan shall obtain the permission of the
Minister of Finance. (Art. 6 of the act.)
(2) For the purpose of buying or selling government bonds
the Bank shall obtain the permission of the Minister
of Finance. (Art. 16 of the act.)
(3) The governor and vice-governor of the Bank of Japan
shall be appointed by the Government. The
directors of the Bank shall be selected by the shareholders of the Bank at their general meeting and
shall be approved and appointed by the Minister of
Finance.
(Arts. 18 and 19 of the act.)
(4) In making advances in current accounts or loans for
a fixed period the Bank of Japan shall obtain the
sanction of the Minister of Finance as to the amount
of such advances and loans and the rates of interest
to be charged. (Item C of Art. II of the act.)
(5) The Government superintends all the business of the
Bank of Japan and restricts or forbids the acts of
the Bank not conforming to the Bank's act or articles of association or contrary to the interests of
the Government. (Art. 24 of the act.)
The Yokohama Specie Bank is not directly endowed
with any privilege by the Government, but is entitled to a
loan of 20,000,000 yen at the low interest of 2 per cent
from the Bank of Japan as a fund for foreign exchange.
Although this constitutes a connection between the Specie
Bank and the Bank of Japan, it should be noted that this
is a special arrangement made by the Government. The




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Bank is charged, on the other hand, with the duty of
handling, by the Government's order, matters concerning
the government loans and moneys in connection with foreign countries. Thus the Yokohama Specie Bank's connection with the Government is less than that of the Bank
of Japan, but it is under the control of the Minister of
Finance, who has the right of supervision and approval in
all the business matters of the Bank, as well as in the
appointment of its directors.
Let us now glance at the relations between the Bank of
Japan and the ordinary banks. It goes without saying
that the business of ordinary banks consists principally
in handling their own capital and the deposits of the
public, but in case of further need of capital they approach
the Bank of Japan for the discounting of commercial bills
or loans on security. The Bank of Japan, since its establishment, has made a practice of aiding the ordinary
banks, and there exists a considerable gulf between its
rate of interest and that of ordinary banks—that is, the
discount rate of the Bank of Japan is, as a rule, much
lower than that of the ordinary banks. The unavoidable
result of this was that some banks, taking advantage of the
situation, made it their chief business to earn the amount of
the difference for themselves by becoming intermediaries
between private individuals and the Bank of Japan. We
must here observe that the relations between our Central
Bank and our ordinary banks differ greatly from those in
foreign countries, especially from those in England, Germany, and France. This difference lies in the special circumstances under which the Bank of Japan was first
established, which, indeed, have influenced the general




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banking system of this country not a little. The business
methods of the Bank of Japan always tend to affect those
of the ordinary banks. For instance, if, in consequence
of the Government's financial condition, the capital of
the Bank of Japan becomes tight, the money market will
soon be affected thereby. Thanks, however, to the steady
evolution of this country's economic conditions, the practice adopted at the earlier stages by ordinary banks of
making profit by the difference of interest is gradually
disappearing.
In considering the advantages and disadvantages of the
banking system in this country, we shall consider the
two following questions:
(i) Whether there should be special banks respectively
for agriculture, industry, and commerce, or whether
one bank should act for all three lines.
(2) Whether the banks should be separately and independently established, or whether the branch system should be adopted.
In England and America one bank performs the financial functions for agriculture, industry, and commerce, but
on the Continent of Europe there are special monetary
organs for each of the three branches. To arrive at a conclusion as to which of the two systems is the better, we
shall discuss the different ways in which the capital is
utilized in the three cases. The following are the three
points in which the nature of the capital varies in the
three lines:
(1) As regards the period of redemption, capital has the
quickest return in commerce. The money invested
is brought back immediately by the disposal of




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the merchandise, and is again used for other goods,
with the result that the term of credit is not necessarily long. In industry the capital becomes
fixed in machinery, factories, etc., but the money
invested in raw materials is restored as soon as
the materials are manufactured and sold. On the
other hand, the capital for agricultural purposes
is all spent on land, implements, etc., and becomes
fixed, except a small portion spent on fertilizers,
seeds, labor, etc. The return of capital is slowest
in agriculture, being effected gradually and by
annual installments.
(2) Regarding the certainty of redemption, the capital
invested in commerce is influenced only by artificial market fluctuations, which govern the business profits, while agricultural pursuits are affected by natural causes, uncontrollable by human
energies, so that, to this extent, the return of capital in agriculture is uncertain.
(3) As regards the renewal of capital, agricultural pursuits, unlike the other two lines, require little, the
period for which the capital becomes fixed being
long, unless the land purchased meets with some
catastrophe. In industry, renewal is necessary to
a certain extent owing to the wearing out of plants
and buildings and to the sale of the articles of
manufacture. In commerce the term of fixed capital is shortest, renewal being necessitated on the
sale of goods.
As the operations of capital vary thus in the three
pursuits, there should accordingly be various kinds of
banks for supplying the capital.
In Japan we have as mercantile banks the ordinary
banks, with the Bank of Japan as their center; as industrial




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bank, the Industrial Bank of Japan; as agricultural bank,
the Hypothec Bank of Japan. We believe that, in this
respect, our system of monetary organs is perfect.
With regard to the single and branch systems of banks,
practice differs in different countries according to the circumstances under which the banks have developed. In
some countries there are numerous independent banks,
and in others a few large, banks have branches under
them. For instance, the United States of America belong
to the former and Scotland to the latter. There are advantages and disadvantages in both systems, but to the
unbiased mind it would seem that the disadvantages of
the branch system are outweighed by its advantages.
Among the latter may be mentioned:
(i) The increased efficiency of capital: the kinds of capital may be augmented and also may be easily
altered. Sudden change in the rate of interest
may consequently be avoided and elasticity in
business management may be secured.
(2) The extension of the advantages of the banking system
to remote parts of the country.
(3) Elimination of rash competition among banks.
(4) Reliable and timely reports on economic conditions
from various districts.
(5) Economy in business expenses.
The above are the advantageous points of the branch
system, and the following may be stated as its disadvantages :
(1) The difficulty of controlling the branches.
(2) The possibility that the failure of one branch may
affect the main bank as well as the other branches.




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The advantages of the branch system as above pointed
out are, in the main, inherently beneficial to the public
interests, while the disadvantages are rather evils that
may be avoided if proper care is exercised.
In the banking system of Japan, independent banks
of small means are widespread, owing to circumstances
special to the country, many of them being bequeathed
by the old national-bank system. Men of experience
early urged the necessity of amalgamating banks, and a
special law known as the I^aw for the Amalgamation of
Banks has been enacted. The number of branch banks
has recently increased, but we are not yet at the stage
of the perfect branch system.
We have so far reviewed the general features of our
banking system; we shall now proceed to treat of our
central bank system.
Our Central Bank, the Bank of Japan, is the only organ
in the country for issuing paper notes, and is based on the
so-called centralization system of issue.
A note-issuing bank system may be established on one
of two principles—centralization or separation. To decide
on their relative merits, we will here enumerate the different points in the former that are positively beneficial to
the interests of the financial as well as the political world.
Viewed from the financial standpoint, the centralization
system is superior in the following respects:
(i) A country has at times to make large payments in
specie to foreign countries in connection with trade
or loans raised. In such cases, if the separation
system is adopted, the specie reserves in different
banks are collected, thereby affecting the money




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market in the same way as an outflow of specie
would affect it. If the Central Bank system is
adopted, and the specie reserve remains concentrated from time to time to provide for such
emergencies, the bad effects will be minimized.
(2) In the centralization system, the Central Bank has the
power of influencing the other banks, and can
readily accumulate the specie reserve by means of
discounts, the elasticity of currencies being thus
amply secured.
(3) As the Central Bank handles immense capital, it has
real power to supply capital, and its responsibility
for the money market is unique, since it clearly
stands as a public organ. If a panic sets in, the
Central Bank will be able to restore order much
more easily and more effectively than in the case
where banks with little credit abound.
Viewed from political and economic standpoints, the
centralization system is also superior in the following
respects:
(4) If the Central Bank carries on its business as the
central organ in the market and continues to receive the public credit, the Government will be
enabled in time of serious emergencies to meet its
own requirements by borrowing the funds the
Central Bank collects on its own credit.
(5) As a country's finances expand, the receipts and disbursements of the National Treasury will surely
have a most important effect on the monetary interests of the country, and if the Government makes
the National Treasury the custodian of taxes collected and all the other revenue, and continues to
do so without moving them till their due dates of
disbursement, it will, as a matter of course,
greatly hinder the circulation of capital. In the




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separation system of banks, the above contingency may become unavoidable, but under the
centralization system there is the reliable Central
Bank, to which the Government intrusts the
national treasury receipts and disbursements, and
the Bank may utilize the receipts in the market till
their due dates of disbursement, the bad effects on
the markets of the accumulation of receipts in the
National Treasury being thereby minimized.
The above are the general advantages attending the
centralization system, which have led our Government to
endow the Bank of Japan with the exclusive privilege of
issuing paper money, at the same time maintaining a
strict supervision of the Bank's business management and
the appointment of the governor, directors, etc.
As is the case with ordinary banks, the Central Bank
attaches special importance to loans and discounts, and
these form its chief source of profit. Government interference may inconvenience the Bank, but is, nevertheless,
necessary, as the bills, bonds, etc., received by the Bank
in making loans and discounts, constitute a part of the
reserve fund for convertible notes. As the credit of convertible notes is secured and established by the regulations for issuing bank notes, the Government must control the selection of bills, bonds, etc., to be received,
directing the business of the Bank and controlling the
nomination of its staff.
We shall now further touch upon our methods of issuing
convertible bank notes. In the convertible-note regulations of our Central Bank the principle followed is to provide the full amount of specie reserve. A fixed amount
of issue is also allowed against securities, an excess issue




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being permitted, in case of necessity, on the payment of
a tax at a rate of not less than 5 per cent per annum.
This is what is called the elastic-limitation mode of issuing, and much resembles the German method, on which it
was originally modeled. But the point in which our mode
excels all others is that the percentage of the tax imposed
for excess issue is on each occasion fixed by the Minister
of Finance according to the circumstances then obtaining.
The object of taxing excess issue is to check over-issue in
meeting the urgent requirements of the time when the
money market becomes tight and the rate of interest
tends to rise. Under the regime of a fixed rate, if the
rate is too low, the excess issue will be made at even
ordinary times; if the rate is too high, the excess issue
will be made only after the abnormal rise of interest, and
the proper time of making excess issue will be missed.
The rate of the tax should not therefore be a fixed one,
but should be, as in our own case, buoyant and flexible
according to the needs of the time.
In the German system commercial bills only are available for the reserve, but in our system government bonds,
treasury bonds, or other bonds of reliable nature are used
for the purpose, besides commercial bills. Experience
having shown the uncertainty of refunding public loans
in critical moments, the exclusive use of commercial bills
may be ultimately desirable; but here in this country,
where commercial transactions are not yet fully developed and the supply of bills is insufficient, the use of
public bonds as reserves can not for the time being be
entirely abandoned.




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Considering all points here explained, our banking system may be said to be nearly perfect in the main, though
in its details there is room for improvement. However,
we are still backward in our banking achievements as compared with Europe and America. This is to be attributed
to the fact that our banking system is only a little over
thirty years old, and its development is not complete, and
that our commerce and industry in general, though they
have made gigantic strides, can not yet vie with those of
western lands.
We shall now recapitulate the system, administration,
and business of our Central Bank, comparing them with
those of the Central Banks in foreign countries, especially
in England, France, and Germany.
The Bank of Japan may issue notes on the security of
government bonds, treasury bills, commercial bills, etc.,
to a limited amount, besides issuing convertible notes
with specie reserve; further, if the market needs more
currency for circulation, the Bank is also enabled to issue
notes with security, provided the Government permits
it, and a tax of 5 per cent or over per annum is paid.
In the case of the Bank of England the issue with specie
reserve and the limited issue with security reserve are alone
permissible, and the excess issue of our system is not
allowed. It is customary in the Bank of England for its
issuing department always to maintain the security reserve at its full amount, and the notes are issued to their
full amount, which always remains without any increase
or decrease, the elasticity of notes being insured by virtue
of the deposit reserve in its business department. If a large
amount of specie is required owing to a special market con-




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dition, the increase is invited by means of a movement in
the interest rates.
The system of our Central Bank is very much like that
of the Imperial Bank of Germany. While in our system
the providing of full amount specie reserve is the principle,
the proportional reserve system of providing specie to
the minimum amount of one-third of the amount of convertible notes issued is to a certain extent adopted by the
German bank; and whereas the minimum rate of tax
on excess issue is 5 per cent in ours, the rate being fixed
by our Minister of Finance on each occasion, the same is
fixed at 5 per cent per annum all around in the German
bank.
The Bank of France differs totally in principle from
the central banks of Japan, Germany, and England. In
France the maximum emission system of notes is followed,
and the maximum amount of notes to be emitted is fixed.
The kinds and amounts of conversion reserve are left
entirely to the discretion of the note-emitting bank, there
being no legal restrictions thereon.
As to the administration of Central Banks, they are in
all countries under the strict and careful supervision of
the respective Governments. In the manner of electing
and appointing the principal officials, the Bank of Japan
closely resembles the Bank of France. In both cases the
nomination of the governor and vice-governor is made by
the Government, the directors and officials under them
being elected by the shareholders, and the discount committee for examining the bills to be discounted is elected
from among the stockholders. The points of detail in
which they differ are that where there are one governor




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and two vice-governors in the Bank of France, the former
being elected from among the stockholders holding ioo
shares or over, and the latter from among those holding
50 shares or over, there are in our Bank one governor and
one vice-governor, nominated by the Government, and
only the directors and the officials under them are chosen
from among the shareholders and appointed by the Government. In our system there is also a special provision
whereby the members of the discount committee discharge
the duties of comptrollers. In the Imperial Bank of Germany the organization is like that of a government office,
the regulations being very rigorously drawn up. Its supervision is vested in a board of inspection, with the Imperial
Chancellor as chairman, and four councillors, one of whom
is appointed by Imperial nomination, the other three being
nominated by the Bundesrat, or Federal Council. The
administrative board, under the control of the Imperial
Chancellor, manages the business of the Bank, which,
in its dealings with the public, is represented by this
board, consisting of a president and a few directors, whose
decisions, made by a majority and approved by the Imperial Chancellor, are final. The president and directors
of the administrative board are chosen by the Bundesrat
and appointed by Imperial nomination. In the Imperial
Bank of Germany the shareholders merely elect a committee consisting of fifteen of their number, who express
the opinions of the shareholders regarding the Bank's
business for submission to the administration. In the Bank
of England the court of directors consists of the governor,
deputy governor, and twenty-four directors, the latter
being elected from among the stockholders, but the




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governor and deputy governor from among the directors.
According to the custom of the Bank of England, the
governor consults with the cashiers regarding the management of the affairs of the bank. The cashiers are
appointed and organized by one who was formerly the
governor or deputy governor, or who is in position to
succeed to either of the two positions.
As regards the details of management in the Central Banks
in Japan and abroad, we can not here make particular
comparisons; still in all countries the Central Bank serves
as the supreme organ in the money market and the center
of financial operations, also as a medium for developing
the country's commerce and industry. Thus the principal object of a Central Bank is the same everywhere.
The kinds of business transacted by the Central Banks in
different countries are as follows:
THE BANK OF JAPAN.

Discounting or purchasing bills; buying and selling
gold and silver bullion; receiving deposits of all kinds;
accepting the custody of coins and documents; making
advances in current account or loans for a fixed period on
the security of government bonds, treasury bills, or other
bonds guaranteed by the Government. The bills discounted by the Bank of Japan shall be such as are indorsed by two or more persons and payable within one
hundred days; provided that goods or warehouse certificates for the goods have been surrendered as security, the
bank may discount bills carrying only one indorsement.

218930—11




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\
THE BANK OF ENGLAND.

Buying and selling specie, bullion, and bills of exchange;
discounting bills; receiving deposits; making loans on
securities.
THE BANK OF FRANCE.

Discounting bills payable within three months; receiving deposits; accepting the custody of coins, precious
metals, and documents; making loans on the security of
government bonds and company debentures; issuing
short-term bills.
THE IMPERIAL BANK OF GERMANY.

Buying and selling gold and silver bullion and coins;
discount, purchase, and sale of bills payable within three
months and carrying two or more reliable indorsements,
and of the debentures issued by juridical persons in the
realm or states of Germany and redeemable for face
value within three months; making loans with interest
for not more than three months and on the security of
movables; receiving deposits.
Besides the above, the receipts and disbursements of
the national treasury funds and the handling of principal
and interest of the national loans are intrusted to the
Central Bank in every country. The kinds of business
transacted by the Bank of Japan are as already mentioned, but twenty years ago, when the money market was
in straitened circumstances, the discounting of bills with
security of company shares was undertaken in order to
facilitate the supply of capital for the company shares;
and as the shares of companies of reliable standing are




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now accepted as securities for bills discounted, the restriction on company shares as securities has been practically done away with.
With reference to the discount tariff, the central
banks in England, France, and Germany generally put
the official rate at a higher point than the rate of ordinary
banks, and if the market becomes tight and the rate of
ordinary banks rises above that of the Central Bank
owing to the scarcity of funds in the market, then the
Central Banks, in these countries, come to the rescue of
ordinary banks; but on the contrary, the Bank of Japan
keeps the rate at a low point at all times, and makes it
her constant object to prop up the ordinary banks. In
regulating the influx and outflow of specie consequent
upon international relations, the Bank of Japan, the
Bank of England, and the Imperial Bank of Germany
all act alike in varying the discount rate—a device which
has proved effectual. The Bank of France alone follows
a different course and strives to keep a fixed rate. To
control the outflow of specie, however, the Bank of France
charges a certain rate of commission on the conversion of
notes to gold. Although this conversion premium seldom
exceeds seven or eight thousandths of the amount of conversion, it has successfully controlled the specie outflow
and protected the specie reserve of the Bank. The
measure seems to be one that is necessitated in France
by the coinage system of that country.
The Yokohama Specie Bank is a special bank carrying
on business under regulations differing from those for
ordinary banks. Its business is, however, similar to that
of an ordinary bank, except that its main object is to aid




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Commission

foreign trade. The only reason of its being under government control, with special regulations, is that the Bank
is privileged to borrow funds from the Bank of Japan at
a low rate of interest for the purpose of facilitating foreign
trade, and also that it deals with the government moneys
abroad. The Yokohama Specie Bank is not the only bank
in Japan engaged in foreign transactions, nor is it confined to such transactions; it does business as an ordinary
bank as well. We can not here compare in detail this bank
with the large financial organs in foreign countries, but
must be content to give the essential points of the regulations and the articles of association of the Yokohama
Specie Bank, as follows:
"The Yokohama Specie Bank shall be a limited association. The capital of the Bank shall be 24,000,000 yen.
The shareholders of the Bank shall be Japanese subjects
only.
"The number of directors shall not be less than five,
the number of inspectors shall not be more than three, and
they shall be elected at an ordinary general meeting of
shareholders from among the shareholders. The election
of the directors shall be sanctioned by the Minister of
Finance.
"The president and vice-president shall be chosen by
the directors from among themselves. Their election
shall be sanctioned by the Minister of Finance."
The business of the Bank is: The purchase and sale of
foreign bills of exchange, credits and documentary; the
purchase and sale of inland bills of exchange, credits and
documentary; loans; deposits of all kinds, and custodies;
discounting and collecting bills of exchange, promissory
notes, and other negotiable paper; exchange of coins or




174

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System

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Japan

moneys; purchase and sale of public bonds, gold and silver bullion, and foreign coin. The Bank shall, when so
ordered by the Government, act in all matters connected
with public loans or government moneys in foreign
countries.




175




THE BANKING SYSTEM OF JAPAN.
IV.
BY

O. M. W. SPRAGUE,
of Harvard University,
INTRODUCTION.

It is not my purpose in these pages to present a comprehensive survey of the history and methods of banking
in Japan. To do so would involve needless repetition of
matters which have been set forth by distinguished Japanese contributors to the publications of the National
Monetary Commission, whose knowledge and understanding of the subject must be far greater than a foreign
observer could possibly possess. I shall concentrate
attention upon a very few aspects of Japanese banking,
selecting those which seem most likely to be of value or
interest to American readers and those the significance
of which can best be understood when considered in comparison with banking methods and practice in the United
States or in Europe. I shall try to explain why, after a
short trial of a banking system modeled upon that of this
country, it was transformed into one with a central bank
as its guiding force. I shall then consider the relations
between the Bank of Japan and the other banks of the
country. This is a matter of the first importance because,
owing to the rather slight development of branch banking, Japan affords a unique instance of a central bank




177

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Commission

working among a numerous company of other banks. A
central bank established in this country would find itself
in a similar situation. It therefore seems desirable to
make the relations between the Dank of Japan and the
other banks the central problem for analysis in studying
the operation of the Japanese money market.
NATIONAL BANKS IN JAPAN.

The reopening of Japan to intercourse with the Western world dates from the commercial treaty with the
United States negotiated by Commodore Perry in 1854.
During the following fifteen years little apparent advance
was made toward the adoption of any part of the alien
civilization aside from its methods of making war. Opposition to the foreigner was still well-nigh universal among
the people, and the country was almost constantly in turmoil, which culminated in 1868 in the overthrow of the
Tokugawa Shogunate and the restoration of power to the
Imperial line of rulers. Then came a sudden change.
In Japan power has always been exercised by a comparatively small class. After the restoration the handful of
individuals conducting affairs recognized that the organization of both state and society in Japan needed to be
transformed from a feudal to a modern basis. Since that
time the Japanese have industriously adapted to their
needs (not merely copied) those customs, methods, and
institutions of the West which have seemed to them of
practical utility. No one country has at any time been
exclusively drawn upon, though at successive intervals
there seems to have been a perceptible predilection for




178

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System

of

Japan

the ways and devices of particular nationalities. In the
seventies the United States was taken as a model for
many things, and among others for the law under which
the first modern banking system was established in Japan.
It can not be said that this step was taken as a result of
a thoroughgoing analysis of the working of our banking
system in comparison with those of other countries.
Indeed, many of its fundamental characteristics had not
become apparent at that time. It had been in operation
less than ten years and had not been subjected to a
period of severe financial strain. In the autumn of 1870
Assistant Secretary of Finance Ito (later Prince Ito) was
sent to the United States to study our banking and
financial arrangements. After a brief examination he
reported in favor of the establishment in Japan of a banking system modeled upon that of this country. Although
the English system was not without its adherents, the
Government adopted Ito's suggestion, being apparently
much influenced by the means which it seemed to provide
for substituting a convertible bank note for the inconvertible paper money then in circulation.
The Imperial ordinance authorizing the establishment
of national banks was promulgated in November, 1872.
Since its provisions regarding the issue of notes were the
determining factor in the development of the system,
other provisions of the ordinance do not call for special
notice. Banks were authorized to issue notes to 60 per
cent of their capital, secured by government bonds.
These bonds were to be issued to the banks for an equivalent amount of the government paper money, which was




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then to be retired from circulation. In addition, the
banks were required to hold the remaining 40 per cent of
their capital in gold as a reserve. This was not to be a
special reserve against notes, but in the infancy of deposit
banking it meant practically that the banks would hold
a reserve of 66^3 per cent against their circulation. It is
doubtful whether a sufficient number of banks would in
any circumstances have been established under these
onerous conditions to bring about the retirement of the
government paper, which then amounted to about
68,000,000 yen. As it happened, an insuperable obstacle
was soon encountered.
As the Government had issued its inconvertible paper
in rather moderate quantity the depreciation of the
paper was but slight and at times entirely absent. But
the simplest and most direct means of securing specie
was the presentation of the convertible bank notes.
Accordingly, when the course of trade required specie
exports the banks found that their notes would not
remain in circulation. This difficulty became apparent
in 1874 when only four banks had been established with
an authorized issue of about 2,000,000 yen. No more
banks were opened and by 1876 the circulation of the four
banks which reached its maximum of 1,356,000 yen in
May, 1874, had been practically all retired.
In these circumstances a demand to which the Government could hardly refuse to accede arose for some
modification of the banking law which would permit the
further growth of the banking business. To this demand




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The

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System

of

Japan

the Government was the more willing to accede on account of the pressing difficulties of its own financial
position. The hereditary pensions of the nobles and
samurai (the military class) were about to be commuted
into bonds. If these bonds should fall appreciably in
price, the stability of the Government would be seriously
threatened. Accordingly, the banking law was modified, its provisions regarding note issue being radically
relaxed. Under the new law notes might be issued to
80 per cent of capital against the deposit of bonds already
issued, not as before against bonds issued in exchange
for the inconvertible government paper in circulation.
The reserve against the notes was cut down from 40
per cent of capital in gold (two-thirds of notes) to 20
per cent of capital in government paper (one-fourth of
note issue). Finally, in a supplementary law of the
following year the total circulation was fixed at 34,000,000
yen. New banks were now organized rapidly. By 1879
there were 153 banks and all of the authorized circulation had been taken out. Further growth of the system
was therefore impossible. In the meantime financial
exigencies had led to a further issue of government
paper. Currency became rapidly more and more redundant with the inevitable consequence of constantly
increasing depreciation. The situation of affairs is
clearly shown in the table following, which gives the
amount of government paper, the authorized amount of
bank notes, and the depreciation of the paper in terms
of the silver yen at the end of each year from 1872 to 1879.




18?

National

Monetary

Commission

[Amounts expressed in millions of yen.]

Government
paper.

Year.

1872

Bank notes
(authorized
issue).

Rate of exchange of
paper for
silver.
1. 066

68.4
88.3

1 4

1. 027

101.8

1 9

99- 1

i873
1874
187s
1876
1877
1878
1879

1 4

1.037
1. 009

105.4
105.8

1 7
13

6

.981
1.030

139.4

20 3

1. 217

130.3

34

0

1336

The banks were but slightly responsible for the depreciation since the Government had borrowed 15,000,000 yen
in bank notes from one bank (the Fifteenth National Bank)
organized by the nobles, which in capital and consequently
in right of issue nearly equaled all the other banks taken
together. For nearly three years following 1878 there
was little pronounced change in the total volume of paper
money in circulation. Government issues reached their
highest point in January, 1880, at 136,000,000 yen.
Thereafter, by the adoption of moderate economics the
Government was able to retire about 16,000,000 yen by
October, 1881, the volume of banknotes remaining stationary. Depreciation, however, had continued, the
reduced demand for money on account of inactive business more than offsetting the reduction in the amount
of paper money afloat. The most extreme point of
depreciation was reached in April, 1881, 1.815 for the
silver yen, and there was but little improvement to
October of that year. At that time Mr. (later Count)
Matsukata became minister of finance. At once rigid




182

The

Banking

System

of

Japan

economies were introduced and the volume of government paper was rapidly diminished from 120,000,000 yen
to 93,000,000 yen at the end of 1884. This was accompanied by a slight reduction of 3,000,000 yen in
the volume of bank notes. At the same time a specie
reserve was accumulated by the Government in preparation for the resumption of specie payments. This reserve
was only 7,000,000 yen when Count Matsukata became
minister of finance. At the end of 1884 it was 34,000,000
yen and a year later 42,000,000 yen. Depreciation was
of course checked; it diminished slowly during 1882 and
then more rapidly until at the end of 1884 it had virtually
disappeared. With the growth of population and business dealings the supply of paper had been reduced to a
point that permitted its entire absorption at par.
REASONS FOR A CENTRAL BANK.

In the meantime preparations were being made to
relieve the Government entirely from direct responsibility for the circulating medium. In March, 1882, less
than six months after entering upon his duties as minister
of finance, Count Matsukata submitted a memorandum
to the Government urging the establishment of a central
bank. This memorandum, about fifteen thousand words
in length, is indeed a notable state paper. The general
arguments in favor of central banks were marshalled in
a masterly fashion, as well as those bearing upon the
special circumstances of Japan. a It is never possible
from an examination of a voluminous state paper to
a
This memorandum will be found in the Report on the Adoption of a
Gold System in Japan, 1899, pp. 43-67.




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determine the relative importance in bringing about the
adoption of a given policy to be attached to the various
arguments brought forward. In this particular instance,
although the report itself was concerned almost entirely
with the purely banking aspects of the question, there are
certain other considerations which it may be reasonably
assumed had very great weight. The establishment of
a central bank was certainly regarded as a means through
which the Government might ultimately be relieved of
all direct responsibility for the circulating medium and
also from the temptation to issue paper money on future
occasions of financial need. A central bank was, moreover1, peculiarly in keeping with the general character of
the governmental system of the country, the activities
of which are to an unusual extent centralized in Tokyo.
On the purely banking side a number of reasons which
seem to have been regarded as specially important may
be mentioned. The system of national banks did not
indeed have a fair trial. Its extension after 1879 w a s
completely checked, at least until the Government should
resume specie payments. On the other hand, leaving
out of view the familiar defects of a bond secured currency, it was not a system favorable to the immediate
development of an efficient banking organization throughout the country. Up to a certain point it had indeed
accomplished this result and probably more quickly than
would have been possible if a central bank had been
established at the outset. The bonds received by the
military class in commutation of its pensions were widely
held throughout the country. It was therefore easy to




184

The

Banking

System

of

Japan

establish banks until the limit of 34,000,000 yen in the
total circulation was reached. Banks were established
throughout the country to an extent entirely unlikely
had deposit banking alone been permitted. A beginning
once made, it was possible later to transfer to the central
bank the monopoly of issue without causing the general
disappearance of these banks. They continued as deposit banks, though many of them probably would not
have been established as such institutions.
Beyond this initial stage the purely banking advantages
which might be gained through a central bank were of
the very greatest importance. There was an almost
entire absence of arrangements between the banks for
transferring idle funds to those sections of the country
in which there might be a peculiarly urgent demand for
accommodation. Standards of right judgment regarding
the nature and function of banks were still exceedingly
imperfect in most parts of the country. By means of *a
central bank it was possible to provide at least one institution managed in accordance with the best principles of
banking practice in the Western world.0
In the second place, through a central bank it was
hoped that a positive increase in the available banking
capital would be secured large enough to have a pronounced effect upon lending rates. The supply of capital
in Japan was increasing slowly and interest rates were
exceedingly high. Even in Tokyo rates for bank loans
were upon the average in the neighborhood of 12 per
a

A few of the national banks and some of the large private banks, such
as those of the Mitsui and Konoike families, left nothing to be desired in
this respect, but they were almost entirely found in Tokyo and Osaka.




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Commission

cent, often rising as high as 18 per cent. Unlike central
banks in other countries, it was expected that at all times
the Bank of Japan would supply funds to the other banks,
lending to them at rates somewhat below those secured
by them from the business community.
Finally, it was expected that the monetary position
in relation to other countries would be strengthened. In
a country eager to employ all available capital in developing its resources a comparatively small amount of cash
is ordinarily set aside as a foundation for its monetary
and credit structure. An unfavorable balance of trade
involving even moderate specie exports may seriously
weaken this foundation. Particularly is this true of a
country the exports of which are largely commodities
which may be classed as luxuries. This is the case with
Japan, the most important export of which is silk. In
these circumstances, by the Japanese, and rightly, it has
been deemed the wiser policy to provide means for the
skillful handling of the foreign exchanges than to set aside
a very considerable portion of the meager supply of capital as a foundation for the monetary and credit structure.
In handling the foreign exchanges the Bank of Japan,
with the closely affiliated institution the Yokohama Specie
Bank, certainly promised, and has proved, to be exceedingly effective.
THE BANK OF JAPAN.

The Bank of Japan was founded in October, 1882, in
accordance with an Imperial ordinance of July of that
year. Its charter and by-laws were, closely modeled
upon those of the National Bank of Belgium, with the




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The

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System

of

Japan

exception of provisions regarding the issue of notes, as to
which the example of the Reichsbank was taken. At the
outset the Bank possessed no right of issue, that right
being deferred until the volume of paper money should
be sufficiently reduced to make resumption feasible. In
July, 1884, the Bank was authorized to issue notes, but
on account of unexpected and unfavorable conditions
in the foreign exchange market no notes were actually
issued until July, 1885. A law of May, 1883, provided
for the gradual retirement of the notes of the national
banks. These banks were required to deposit their
reserve of 25 per cent of their note issues with the
Bank of Japan and to add to this amount 2% per cent
semiannually thereafter. The Bank of Japan thereupon became responsible for their redemption. Specie
payments were resumed by the Government in January, 1886, the operation being carried through without
difficulty. By June, 1888, the government paper was
reduced to 49,000,000 yen and the time had apparently
arrived to place the entire circulating medium in charge
of the central bank. Up to this time it had issued notes
under no special provisions, but, on the other hand, under
the direct supervision of the Minister of Finance, Count
Matsukata. As a preliminary to greater freedom of action
upon the part of the management of the Bank, it seemed
proper to place the right of issue upon a more definite
footing. An untaxed issue of 70,000,000 yen above the
specie reserve of the Bank was authorized, though
27,000,000 of this amount was only to be issued as the
notes of the other banks were retired. This untaxed

21893 °—11




13

i87

National

Monetary Commission

issue was increased to 85,000,000 yen in 1890 and to
120,000,000 yen in 1899. The capital of the Bank was
originally 10,000,000 yen. I t was increased to 22,500,000
yen in 1895, to 30,000,000 yen in 1898, and in 1910 the
authorized capital was further increased to 60,000,000^
yen.
DEPOSIT BANKS IN JAPAN.
The loss of the privilege of note issue proved no obstacle
to the establishment of numerous banks throughout
Japan. During the nineties this growth was very rapid,
being, however, in considerable part due to the transformation of numerous private banks into incorporated
companies. Since 1900 there has been a slow reduction
in the total number of banks. There were 2,355 banks
in 1901 and 2,155 in 1909.0
The decline in the number of banks has entailed no
diminution in banking facilities. Branch banking is
allowed in Japan and has made some progress, but much
less than in most other countries. In 1900 the 2,340
banks had 1,875 branches, while in 1909 the 2,155 banks
had 2,739 branches. There is still nothing in Japan like
the European or Canadian banks, with hundreds of
branches in places of every size. Some of the large banks
in Japan have branches in various commercial centers of
° Nearly 500 of these are savings banks, but they differ from ordinary
banks only in being required to invest one-fourth of their savings deposits
in bonds of the Government or of local governing bodies. Many of these
banks are of very small size and there have been numerous failures among
them during the last few years. I am informed, however, that the Government is about to bring forward a measure which will safeguard the interests
of savings depositors more adequately. It will remove a particularly
unfortunate, even though not serious, element of weakness in the Japanese
banking system.




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System

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Japan

the country. As for the rest, branch banking is a local
affair. Doubtless the future will witness the same
course of development that has taken place in all other
countries where branch banking is permitted. There is
in Japan the usual local objection to absorption, but the
chief reason for the slight development of branch banking
would seem to be the enormous number of things which
have had to be done in a short space of time in developing
a modern industrial regime. Business organization and
methods, especially on the accounting side, lag behind the
responsibilities which have been shouldered, and for successful operation of branches these are most essential. It
is not surprising, then, that branch banking is still an
almost unworked field. On account of this absence of
branch banking Japan provides an example of a central
bank working in this respect under conditions which
would also confront the management of a central bank
established in this country.
THE BALANCE SHEET OF THE BANK OF JAPAN.

The nature of the business of the Bank of Japan may
perhaps best be introduced by an examination of the
table following, which contains in a somewhat abridged
form the balance sheet of the bank at the close of 1903,
1905, and 1909.




1S9

National

Monetary

Commission

[Amounts expressed in millions of yen.]
1903.

1905-

1909

LIABILITIES.

Capital
Surplus and undivided profits
Government deposits
Other deposits
Notes issued

30.0
21. I

30.0

19.7
12.9

438.0

182.2

3-5
232.9

11.3
312.8

5-6
352-8

299.0

814.3

615.0

43-o

764

34-8

22. o
31-3

120. s
.8

62.4
94.o
152
SO-9
.6
17.8
373-6
33
119.6
.4

299. o

814.2

30.0

44-4

ASSETS.

Loans to Government
Loans and advances. .
....
Domestic bills
Foreign bills
Government securities
Due from other banks
Deposits with agencies in J a p a n . .
Deposits with foreign agencies. .
Bank buildings, etc
Gold coin and bullion. .
Silver coin, etc

32-2

12.2
471

.8
4-8
2.8

23.9
14.8
43-7
.2
24.4
228. o
5.2
221.5
.1
615.0

The most superficial examination of this table will show
certain marked peculiarities in the operations of the Bank
of Japan. Deposits are insignificant in amount except
those of the Government, which have been of large, though
varying, proportions since the outbreak of the war with
Russia in February, 1904. Practically all of the credit
operations of the Bank involve an issue of its notes. On
the asset side may be first noted the enormous foreign
balances, dating also from the beginning of the recent war,
which have enabled the Bank to protect its gold holdings
by supplying foreign exchange. These foreign balances
are handled by officials of the Bank stationed abroad working through the various foreign branches of the Yokohama
Specie Bank, especially those in London and New York;




190

The

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System

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Japan

and they have been used, among other purposes, to give
some stability to the market for the foreign bond issues
of the Government. A considerable portion of the
resources of the Bank have at all times been placed in
government securities, and in addition the Government
has ordinarily borrowed considerable sums from the Bank,
though at present such advances have been reduced to
22,000,000 yen, a permanent loan without interest, which
is a part of the price of its charter. Loans to banks and
the business community, while subject to very great variations, are not normally more than 75,000,000 yen. The
amount which the Bank itself contributes to the available
supply of credit in the country certainly does not seem
to be so much as was expected when its establishment was
proposed. The management of the Bank apparently regard
it primarily as an organ for regulating the currency, for
handling the financial business of the Government, and as
a resource in emergencies rather than an instrument for
directly assisting in the development of business activities.
This statement is not intended necessarily as a criticism of
the management of the Bank, but rather as a criticism of
some of the hopes which were raised at the time of its establishment and which were emphasized in the memorandum
of Count Matsukata already referred to. After these introductory observations suggested by the examination of the
balance sheet of the Bank we may now turn to a somewhat
more detailed analysis of its operations, especially those
which bring it into relation with the other banks.




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THE LOANS OF THE BANK OF JAPAN.

In addition to the head office in Tokyo the Bank of
Japan now has 9 branches in the most important domestic
commercial centers of the country. There are no branches
in important ports like Yokohama and Kobe, because
foreign business is handled by the Yokohama Specie Bank.
It will thus be seen that the Bank has not endeavored to
cover the country with a network of branches after the
manner of the Bank of France or the Bank of Germany.
There has been no attempt by its means to furnish the
people generally with banking facilities. Until 1897 the
Bank confined its lending operations entirely to dealings
with other banks, and since that time its loans to individuals do not seem to have assumed very much general
importance. By no means all of the banks have entered
into direct relations with the central institution. The
more important of the other banks have established close
relations with some of the smaller banks, but a considerable
number of the latter seem to stand entirely alone with no
means of securing assistance in emergencies. It would
seem that the Bank of Japan by the development of a
giro-verkehr system, such as that of the Reichsbank,
and in other ways might have done more to unify banking
operations and to assist in the adoption of sound banking
methods among the smaller banks."
On the other hand, it must be admitted that obstacles
to successful results of this sort by means of a central bank
are so great as to seem well-nigh insuperable. Owing to
o The Bank does not seem to be properly equipped for such a task.
has less than 40 officials above the rank of clerk.




192

It

The

Banking

System

of

Japan

the inadequate supply of investment-capital banks in
Japan, especially the small local banks are largely resorted
to for more or less permanent accommodation. This
condition can hardly be remedied by the Bank of Japan,
which very likely is well advised in keeping clear of institutions which, though their obligations are payable on
demand, employ their funds chiefly in mortgages and
investment loans.
Unlike central banks elsewhere the lending business of
the Bank of Japan is chiefly upon collateral security and
not the discounting of commercial bills of exchange and
promissory notes. A preferential rate is indeed accorded
the latter, a but they have remained a comparatively small
part of the total business. By the charter of the Bank
direct collateral loans are restricted to those secured by
government bonds and securities guaranteed by the Government. Loans secured in this way are of two kinds,
loans proper and loans on current account. In the case of
the latter variety a fixed maximum is agreed upon, but the
borrower only pays interest upon so much of the amount
as he actually uses. The number of customers having
such accounts is small (51 at the head office and 98 at the
branches in 1909) and the total allowed maximum is about
11,000,000 yen. The number of direct loans is surprisingly
small, but 23 in 1909, a year of inactive business, and only
85 in 1908, a year of very general demand for accommodation. These loans would seem to be of a more or less
permanent character, as the total in 1909, 6,970,000 yen,
was only 485,000 yen less than at the end of 1908, although
a The minimum rate is also granted upon loans secured by government
bonds.




193

National

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Commission

the total of loans made in 1909 was only 1,583,000 yen.
Taking the two classes of secured loans together they
account for about 10 per cent of the lending business, not
including loans to the Government.
These loans do not by any means include all of the
collateral loans made by the Bank. Bills of exchange and
promissory notes must, according to the statutes of the
Bank, have two indorsements, but the place of one of
these may be taken by securities deposited as collateral,
and the security need not be government security as in
the case of ordinary loans. The annual balance sheet
published by the Bank does not distinguish between bills
and notes secured by collateral and those of the ordinary
commercial variety. Figures are, however, published
giving the total amount of the different kinds of bills discounted each year. In 1909 out of a total of 107,000,000
yen, 91,000,000 yen, or 85 per cent, were bills secured
with collateral. Further analysis of these figures throws
a flood of light upon the general character of the business
of the Bank. These secured bills are of large average
size. In 1909 there were only 320 of them taken at the
head office, the average value of which was 150,000
yen, while at the branches the 864 bills taken averaged
about 40,000 yen in size. These loans are the most
variable element in the business of the Bank. In 1908, a
year of financial strain, they reached the large amount of
489,000,000 yen, while in 1909, a year of depression, the
amount discounted was only 91,000,000 yen.
Attention is called to these figures because they are an
evidence of the preponderant position of the collateral




194

The

Banking

System

of

Japan

loan in Japanese banking operations generally. Although
the Bank of Japan gives the commercial bill a preferential rate its influence has not been sufficient to bring
about the development of a broad commercial bill market such as is found in European countries which have
central banks. The loans of the other banks in Japan
are probably to an even greater extent than those of
the Bank of Japan of the collateral variety, though no
exact figures are available. This is not merely an impression derived from current expressions of Japanese
opinion; it is an inevitable inference from the character
of the business of the Bank of Japan. In seeking accommodation from the Bank the other banks would certainly
make use of their commercial bills, if they had them, on
account of the preferential rate. The failure to do so
indicates that they must make an abundance of collateral loans and hold a comparatively small amount of
commercial bills. Explanation of this situation is to be
looked for in the special circumstances of the country.
Japan presents striking contrasts between the most
modern and the very primitive in the organization of its
economic activities. On the one side there are a few
large businesses most of which have taken a corporate
form. In some instances the later stage of combination
has already been reached. Without the many gradual
steps found in other countries we go at once to the other
extreme of production and distribution carried on upon
an exceedingly minute scale by individuals with little business experience, making use of capital to a most insignificant extent. The economic development of the country




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Commission

provides opportunities for the permanent employment of
considerable capital relative to the amount available for
investment in the large scale industries, the requirements
of which for purely temporary purposes seem to be more
than met by the existing supply of credit. Loans to
small producers are not regarded favorably because of
the small amount of capital which they own and because
of their business inexperience. Banking funds are, therefore, employed to a very considerable extent, directly
or indirectly, for long-time investment purposes in industries which have taken the corporate form.
Turning now to commercial paper proper, it may first
be noted that the promissory note rather than the bill
of exchange is in Japan, as in the United States, the negotiable instrument in general use for domestic transactions. In 1909 the Bank of Japan discounted only
99 domestic bills of exchange, the average value of which
was in the neighborhood of 30,000 yen. In the case of
promissory notes, 3,329 were taken at the head office
and 3,454 at the branches, averaging in value 2,623 yen
at the former and 3,108 yen at the latter. Contrasted
with the total of all kinds of loans, not including those
to the Government which will be considered later, the
amount of these two kinds of commercial loans was less
than 20 per cent at the head office in Tokyo and but 8
per cent at the branches.
Finally, in order to complete the picture of the domestic
business of the Bank of Japan, the following table is
appended, showing the total volume of the different
kinds of loans in the successive years from 1900 to 1909.




196

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Japan

[Expressed in millions of yen.]
Loans on
Current acLoans to
counts, maxGovernment. government imum limits.
securities.

Year.

1900......
1901 . . . .

Commercial
bills.

16
1

1902
1903

Bills with
collateral.

..

20

62

8

37
26

5

93

71

2

91

50

14
12

33o
248

223
129

249

10

ISI

85

1905 . . .

244

9

251

Si

1906 . . .

173

3

147

23

8

8

374

21

9

489

58
66

27

2

9i

16

1904.

• •

1908. . . .

One further line of business, partially of a domestic
character, remains for examination. It appears among
the assets of the balance sheet as deposits, and is a little
more definitely described in the annual reports of the
bank as " Loans to other banks as deposits." No indication, however, is given as to the particular banks to
which accommodation is granted in this way. This item
is of considerable magnitude, reaching a maximum of
52,000,000 yen in the balance sheet for 1905, but in general the amount has fluctuated between 20,000,000 and
30,000,000 yen. It includes a permanent loan of
20,000,000 yen, at 2 per cent, to the Yokohama Specie
Bank, and also advances which have occasionally been
made for rather long periods in connection with the
rehabilitation of banking institutions which would otherwise have been forced into liquidation. The advances to
the Yokohama Specie Bank should not of course be included in any estimate of the contribution of the Bank of
Japan to amount of credit available for Japanese domestic
industrial development.




197

National

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Commission

To complete this analysis of the loans of the Bank of
Japan, there remains for consideration its foreign bill
holdings. These bills come entirely from the Yokohama
Specie Bank and are discounted for it at the special fixed
rate of 2 per cent, a rate far less than that at which any
other kind of business has at any time been taken, except
the permanent loan of 20,000,000 yen, also to the Specie
Bank at the same rate. The domestic discount rate of the
Bank of Japan was at the minimum in 1903 and in 1909 at
5.8 per cent. Market rates, it will be recalled, have been
normally somewhat above bank rates. Two purposes led
to the adoption of a special low rate for foreign bills. It
was deemed advisable that the Bank should hold a supply
of foreign bills in its portfolio in order to be able to supply exchange and thus prevent the sudden depletion of its
specie reserve through gold exports. This has, however,
been a matter of no importance of late years, the foreign
loans of the Government during the war with Russia having provided the Bank with enormous balances in foreign
countries. The low rate of 2 per cent was allowed upon rediscounts for the Specie Bank and also upon the permanent
loan to it, because otherwise it would have been impossible
for that bank to engage in the business of financing Japanese foreign trade in competition with the branches of
foreign banks in Yokohama and Kobe. The foreign trade
of the United States is almost entirely financed abroad
because rates for loans are regularly higher in this country
than in western Europe. There is an even greater difference between rates in Japan and those in western countries.
Much unreasonable criticism has been poured out upon
this practice by foreign traders in the Far Bast on the




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The

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System

of

Japan

ground that it is an indirect and unfair mode of subsidizing
competition. It would be more accurate to say that it
merely places the Japanese on an equal footing with their
competitors. If Japan is to finance any portion of its
foreign trade a special rate is absolutely essential. It may,
indeed, be questioned whether it is desirable (though
within moderate limits it seems to be so to the writer) to
employ a portion of the small available amount of Japanese
capital in this way. But that it gives an unfair advantage
to the Japanese trader is a conclusion which does not
stand impartial examination.
The business of the Bank of Japan in foreign bills, like
that of the Specie Bank, is almost entirely concerned with
bills drawn against exports. Imports are still largely
brought to the country by foreign firms established in
the treaty ports which finance this business through the
branches of foreign banks. The volume of the business
in foreign bills naturally fluctuates with changes in the
amount of the export trade of the country. The aggregate amount of foreign bills taken by the Bank of Japan
for each year since 1900 and the amount held on balance
at the close of each year are shown in the following table:
[Expressed in millions of y e n ]
Value of
foreign bills.

Year.

Balance
at close of
year.

1900
1901
1902 . . . .

35

i

17-3

3i

0

15.0

34 4

13.6

1903

9
48 6

21.5

55 7
42 8

23-9

21

1904
1905
1906. .

.

1907. . .
1908 . .

56 1
37 6

1909

27




199

7

12. 2

i5-i

36.9
18.4
14.8

National

Monetary

Commission

The loans of the Bank of Japan, like those of other
central banks, fluctuate very greatly during any period
of years covering a complete trade cycle. Large lending
power is normally kept in reserve to be used freely to
meet extraordinary requirements in periods of financial
strain. In any one year, also, there are apt to be wide
seasonal variations, the volume of loans being particularly great in the early autumn and at the end of the
quarters of the year. As the published balance sheet
of the Bank of Japan is for the end of each year, the
figures which have been made use of in the preceding
tables show a volume of business considerably in excess
of the amount of credit which is constantly supplied
by the Bank throughout any one year. Making allowance for this factor, it would seem that the Bank of
Japan has added but slightly to the resources furnished
through banks to the business community. Statistics
bearing upon the matter are only available for the years
before 1906.** The following table gives the maximum
and minimum amount of loans made by the Bank of
Japan in each year from 1900 to 1906:
[Expressed in millions of yen.]
Year.

Maximum
amount.
H4-9

1904

86. 7
54-6
Si-3
793

1905

119. 2

1901
1903•••

Month.

January.. .
January..,
December
January
December.
. .
December.
. .

Minimum
amount.
87.2
46. s
30. 2

18.7
24.8
52-5

Month.

February.
November.
February.
May.
May.
February.

a Prior to 1906 a summary of the weekly statements of the Bank of Japan was published
in the Financial and Economic Annual of Japan issued by the Japanese government.




200

The

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System

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Japan

Loans to the Government and loans to the banks as
deposits are not included, but as the latter are largely
made to the Yokohama Specie Bank, and as foreign bills
are included, the table gives a fairly accurate account of
the amount of loans of a purely domestic nature made
by the Bank. The loans of the Bank are subject to
somewhat wider fluctuations than is the case with those
of European central banks. Explanation is probably
found in the insignificant amount of bankers' deposits
held by the Bank. Any unusual demand for cash,
however small, makes it necessary for the other banks
to resort to it for loans. As regards the permanent contribution of the Bank of Japan to the available supply
of credit in the country, some amount between the maximum and minimum figures of the table would seem to
be the proper quantity. As much as 50,000,000 yen,
but certainly not more than 75,000,000 yen, may be
taken as a sufficiently liberal estimate.
It would doubtless be generally agreed that the provision of a part of the credit upon which the business of the
country is carried on is not one of the primary functions
of a central bank. Its duties are to safeguard the banking reserve and to supply urgent requirements of an
extraordinary or seasonal nature. Still, there would at
first sight seem to be no good reason why the resources of
such a bank should not be used within safe limits to further
active enterprise rather than be invested in government
bonds, the holdings.of which in the particular case of the
Bank of Japan have in general not been very much less
than the normal volume of its domestic loans and dis-




201

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Monetary Commission

counts. The Bank of Japan, however, probably could
not have granted loans more freely with advantage to the
business community and consistent with its own safety.
Until the recent war with Russia the specie reserve of the
Bank was hardly sufficient to permit expansion. During
the period between 1900 and 1904 the issue of notes was
frequently beyond the untaxed limit of 120,000,000 yen
above specie holdings. Moreover, the ratio of reserve to
demand obligations (deposits and notes) was during
much of the time under 30 per cent, a ratio certainly
not large considering the responsibilities of the Bank.
Directly after the war the reserve of the Bank was much
enlarged from the proceeds of foreign loans negotiated by
the Government, but the extension of operations by the
Bank at that time was out of the question. Rendered
optimistic by successes in war and a rather fictitious
abundance of capital, the business community, including
most of the other banks, engaged for nearly two years in
wild and reckless activities, which culminated in the
latter part of 1907 in a general collapse, followed by a
period of depression which has hardly reached its term at
the present time.
THE LOANS OF THE OTHER BANKS.

While the business of the Bank of Japan has remained
about stationary, that of the other banks has shown
marked growth. As in other countries, the relative
importance of the central bank in normal lending dealings
has diminished. Elsewhere the failure of central banks
to secure a constant proportion in the total volume of
business has been due to the ability of the other banks to




202

The

Banking

System

of

Japan

meet most, if not all, of the demand for loans at rates
below the official rates of the central banks. In Japan,
where rates of the Bank of Japan have ordinarily been
below market rates, the explanation would seem to have
been the inability of the central bank consistent with its
own safety to have granted a larger steady volume of accommodation. The growth of the other banks is shown
in the following table, a which gives the paid-up capital
and surplus, the deposits and the loans and discounts of
the ordinary banks, and also the savings banks, at the
end of each year since 1900:
[Stated in millions of yen.]

Capital and
surplus.

Year.

Deposits.
ts.

Loans and
discounts of
the other
banks.

293
317
330

1902.
1903.
1904.
1905.
1906.
1907.
1908.
1909.

516

716

524

690

621

750

339
338
353
372
424
447
460

1900.
1901.

673

796

726

816

846

885

234

1,218

163
153

1,247
1, 231

238

1,230

a The table does not include the agricultural and industrial banks and the Hypothec
Bank, which make long-time loans with funds principally secured by the sale of debentures.
The Yokohoma Specie Bank, also, is not included, because its business is mostly of a special
character, being concerned with the financing of foreign trade. For the sake of completeness, however, the following figures are presented for that bank:
Capital and
surplus.

Year.

Deposits.

Loans and
discounts.

1900

26.6

53-o

1906

34.9

120.3

44.8
97.3

1907
1908

38.6

121. 0

J05.0

39-5

116.8

83.6

1909

40.5

145-0

71.1

21893 ° — I I




14

203

National

Monetary Commission

The extraordinary increase of the loans of these banks
in 1906 calls for some notice. The war with Russia, like
other wars, involved some redistribution of wealth within
the country tending toward its greater concentration.
The proceeds of taxes drawn from all classes are at such
times paid out very largely to those furnishing supplies for
the army and navy. A larger portion of the money thus
secured is more likely to be lodged in banks than when it is
scattered among the people at large. In the second place,
there was a considerable increase in the purchasing medium within the country in the form both of notes issued
by the Bank of Japan and of the proceeds of such part of
the foreign loans of the Government as were brought to
the country in the form of specie. Finally, it is probable
that the banks themselves had strained their own credit
in granting loans freely, with a consequent increase of
their deposit liabilities. I t should, however, be observed
that this remarkable increase in loans and deposits was
almost entirely held during the period of strain and depression which began in 1907.
THE BANK OF JAPAN AND CRISES.

The Bank of Japan found itself powerless to check to
any appreciable extent the dangerously rapid expansion
of credit on the part of the other banks, as well as the
generally unsound and feverish economic activities which
characterized the two years following the close of the
war with Russia. This is a matter which would hardly
deserve notice were it not for the prevalence in this
country of the entirely unfounded belief that central
banks are by some means able to prevent the creation of




204

The

Banking

System

of

Japan

those unsound conditions which render crises inevitable.
The Bank of Japan did keep its own resources well in
hand and was able to furnish adequate assistance when
the boom which followed the war collapsed, but it was
able to do no more than that. The following passage, taken
from the address of the president of the Bank of Japan
before the meeting of shareholders in February, 1908, is
most suggestive in this connection:
"With regard to economic conditions last year, a violent fall in the share market during the first half of the
year produced evil effects in all directions, and although
the second half witnessed a slight recovery, a panic in
America and the depreciation of silver again induced a
state of depression, so that the year passed amid symptoms of general dullness in the money market and in trade.
From the second half of the preceding year, when the
fever of enterprise rose high and when various causes
contributed to aggravate it, so that share quotations
attained an extraordinary level, men of judgment had
already begun to look askance at the state of affairs.
But as there were no means to check the trend of public
feeling, it continued without abatement until the middle
of January in last year. In the last part of that month,
however, some factors making for a reaction showed
themselves, and at once the market prices of shares displayed a disposition to decline rapidly from the abnormal
heights they had reached, with the result that not a few
of those concerned were involved in signal embarrassments by these vicissitudes. Nor were the effects confined to those directly interested. The banks connected




205

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Monetary

Commission

with them also felt the pinch, and various rumors being
set on foot, some runs took place in the confusion. In
extreme cases even banks whose condition was altogether
sound saw themselves suddenly exposed to runs, and not
a few were obliged to have recourse to the Bank of Japan
for assistance. The Bank, having apprehended the coming of such times, had done what it could to inculcate
caution by emphasizing the difference of attitude which
ought to exist between those that project enterprises
and those upon whom the function of supplying capital
devolves. Nevertheless, things having reached this condition, mere warnings could not have much effect, and
accordingly the Bank adopted the policy of rendering
the necessary assistance, so far as circumstances permitted, to banks which were considered to be in a sound
condition, and it carried that policy into effect in several
instances. To our deep regret, nevertheless, in May and
June some banks were compelled to suspend payments,
because, the root of their trouble being deep-seated, no
means of getting efficient succor were available/'
The effectiveness of the Bank of Japan as a resource in
emergencies has been exhibited on a number of occasions.
There has never been any question of the power of the
Bank to render all the assistance needed at such times.
The problem has indeed not been one of very great magnitude. Even at the present time the loans of the other
banks amount to only about 1,200,000,000 yen and their
deposits to about 1,000,000,000 yen, a considerable portion of which is payable at notice. Although an extremely
useful institution and rendering important services both




206

The

Banking

System

of

Japan

to the Government and to the business community, the
Bank of Japan certainly has not had to contend with
problems which, relative to its resources, have had anything like the complication or difficulty of those which
have at times confronted either the Bank of England or
the Bank of Germany.
In handling emergencies the Bank of Japan does not
take the immediate direction of affairs. Its staff is composed of officials rather than business men. It is skillful
in handling monetary problems and the wider questions of
policy, but is hardly well fitted to organize the particular
means for relieving a strained situation. As has already
been noted, the advances of the Bank are made principally
to an extremely small number of borrowers. Probably
the bulk of its business is with the comparatively small
number of large banks, about forty in all, in Tokyo, Osaka,
Kyoto, and Yokohama, whose business makes up about
one-third that of all the banks. In coping with difficulties
the lead is usually taken by representatives of some of
these large banks and of the financial interests by which
they are controlled. One example may be taken as more
or less typical. In June, 1904, the One Hundred Thirtieth Bank, with head office in Osaka and thirteen branches
with deposits of about 8,000,000 yen, was forced to suspend. Something like a tenth of its resources had been
permanently sunk in a single enterprise, the successful
issue of which could not be determined for years to come.
The effect of this suspension was thus described in the
Kobe Chronicle for June 30, 1904:
" When the suspension of payments by the One Hundred
Thirtieth Bank of Osaka was first announced a great deal




207

National

Monetary

Commission

of uneasiness was naturally aroused in banking circles in the
city. Other banks sought advances from the Bank of
Japan and made preparations to meet emergencies. The
consequence was that advances made by the Premier
Bank in Osaka increased to 10,253,000 yen on the 21st
instant, but it having been soon ascertained that the
effect of the suspension was confined to a small section of
the business circle, the banks adopted a little easier policy,
and the advances made by the Bank of Japan fell to
9,413,000 yen on Saturday last, the 23d. "
The One Hundred Thirtieth Bank of Osaka was able
to resume during the following month, its affairs being
placed under the control of the Yasuda Bank, a loan of
6,000,000 yen having been secured for the purpose by it
from the Bank of Japan. The Yasuda Bank, though an
incorporated institution, is, like numbers of the other
most important Japanese banks, the creation of a single
man of rare business capacity. This particular bank
has been especially active in the rehabilitation of banks
and other companies which would otherwise have been
forced into liquidation and bankruptcy. Operating in
close relation to the Bank of Japan, results have been
accomplished which would probably never have been
attempted by the Bank upon its own initiative.
THE INFLUENCE OF THE BANK OF JAPAN ON RATES FOR
LOANS.

One of the results expected from the establishment of
the Bank of Japan was the lowering of the extremely
high rates then prevailing for banking accommodation.
Whether the operations of the Bank have had any very




208

The

Banking

System

of

Japan

pronounced effect in this direction can not be determined
with certainty. Judging from the comparatively small
amount of loans regularly made by the Bank it might
seem that its influence must have been very slight. On
the other hand, it is certain that the presence of the Bank
has diminished the tendency of rates to advance to
extremely high levels in periods of seasonal or extraordinary strain. This is in itself a very great gain. Indeed,
it is evidence of the successful performance by a central
bank of its primary function on the banking side. It is
also possible that the operations of the Bank of Japan,
by diminishing for other banks the risks arising out of
general causes to which the business is subject, may have
fostered the investment of capital in banking.
An examination of the actual course of rates for loans
does not enable one to determine the effect upon them of
the single influence of the Bank of Japan. Too many
other influences were at work. Rates for loans reached
about as high levels in 1898 as in 1882 before the establishment of the Bank and were not much less at any time
during the first fifteen years of its history than they were
in 1883. Throughout this period the minimum rates at
which the Bank of Japan granted accommodation ranged
from two-fifths of 1 per cent to more than 1 per cent above
minimum market rates and there was in each year an even
greater discrepancy between the maxima of these rates.
Since 1900 a new situation of affairs is beginning to make
itself apparent. Market rates have at times in every year
since 1903 ruled below the official rates of the Bank of
Japan. It is still true, however, that market rates in all




209

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Monetary

Commission

of these years have been above bank rates during a part
the time. But evidently the Bank is approaching in this
respect the situation of similar institutions in other countries. It may be predicted with confidence that in the not
distant future the rates of the Bank will be normally above,
occasionally at a level with, market rates and practically
never below them. Rates are still high in Japan judged
by western standards. In 1909 a discount rate of 4 per
cent was for the first time quoted in Tokyo. The rates of
the Bank of Japan have never been less than 5.8 per cent,
and during the last ten years the maximum discount rate
has been between 8.8 per cent and 6.2 per cent. Seven
and three-tenths per cent may be taken as a fair average. 0
Another expectation from the establishment of the
Bank of Japan was the equalization of rates throughout
the country. This was not realized during the first
twenty years of its history. The bank lent at different
rates at its various branches and charged a premium on
exchange to prevent the proceeds of loans made where its
rate was low from being transferred to localities where
its rate was high. In 1906 this practice was changed,
apparently not as a result of anything which had been
accomplished by the bank itself but, because with the
development of banking facilities furnished by other
banks, rates had of themselves become more even throughout the country.
At the outset it was stated that the operations of the
Bank of Japan seemed especially worthy of study by
Americans, because they presented the only instance of
o Rates for loans in Japan are quoted in sen for 100 yen for one day.




210

The

Banking

System

of

Japan

a central bank working among a numerous company of
other banks. It will, however, have been observed that
the experience of the Bank affords little or no indication
of the probable results from the establishment of a central
bank in this country. Public opinion is not as yet a
powerful force in Japan, and in particular it does not
concern itself with banking matters. The Bank has been
free to confine itself to a comparatively small number of
borrowers, far less than the total number of banks, and
has been under no pressure to extend its credits in periods
of active business. Moreover, relative to the total of
credit operations of all of the banks, the Bank of Japan
has kept a sufficiently large lending power in reserve so
that it has been able to meet periods of financial strain
without difficulty. Relative to its resources the banking
problems with which it has been concerned have not been
of anything like the magnitude of those which have confronted such central banks as those of England and
Germany. Further, the chief preoccupation of the bank
has been of a monetary rather than a banking nature.
It rendered great service in 1897 when Japan changed
from the silver to the gold standard, and it has skillfully
protected the specie foundation of the monetary and
credit fabric from disturbance through specie exports.
In fact, aside from emergencies, it is rather as an organ
of the Government in relation both to the monetary system of the country and the government finances that the
Bank may be said to have rendered its greatest service
and not as a part of the banking system of the country.




211

National

Monetary Commission

THE BANK OF JAPAN AND GOVERNMENT FINANCES.
The utility of the Bank of Japan to the Government was
strikingly shown in the course of the war with Russia between February, 1904, and September, 1905. At the outset
the Government borrowed largely from the Bank, its loans
to the Government, including its holdings of government
bonds advancing from 43,000,000 yen in December, 1903, to
116,000,000 yen at the end of 1904. Some increase, which
may also be attributed to activities connected with the war,
took place in the other loans of the Bank. Its entire lending power was put to use in the course of the first months
of the contest. Its note issue was increased by 54,000,000
yen to 286,000,000 yen, and was then 83,000,000 yen in
excess of the untaxed limit. At the same time its specie
reserve fell from 113,000,000 yen to 83,000,000 yen and
was only 25.5 per cent of its demand liabilities. The bank
had evidently exhausted its lending power. The financial
situation both of the Government and of the Bank was
placed upon a more secure footing in 1905 by means of the
foreign loans negotiated by the Government. The loans
of the Government to the Bank were reduced by 46,000,000
yen while government deposits were increased from
33,000,000 yen to 438,000,000 yen. This enormous increase was reflected on the other side of the account of the
Bank chiefly in balances abroad which amounted to
373,000,000 yen, by an increase in specie holdings of
33,000,000 yen. There was also a further increase in note
issue of 26,000,000 yen. The large government balances
were, of course, much reduced during the remainder of the
war and immediately thereafter. At the same time the




212

The Banking

System of Japan

foreign balances of the Bank had been reduced, but by no
means to so great an extent. During the four years to
the end of 1909 government balances were reduced by
250,000,000 yen while foreign balances of the Bank were
reduced by only 145,000,000 yen. Evidently the Government must have used a part of its funds secured in
foreign countries in making payments in Japan. This
will explain the increase in specie holdings of the Bank
by 102,000,000 yen during the four years, which gave the
Bank at the end of 1909 a specie reserve of 218,000,000 yen.
This increase is partly accounted for by a reduction of
loans to the Government and government bonds held by
the Bank amounting to 55,000,000 yen, and, further, by
an increase in note issue of 40,000,000 yen.
CONCLUSION.

The total increase of the note issue from 232,000,000
yen in 1903 to 352,000,000 yen at the end of 1909 was in
large measure a result of financial transactions with the
government arising out of the war. But the present
supply of notes does not seem to be excessive; it represents in large measure Japan's share in the increasing gold
supply of the world. Like the Bank of France the Bank
of Japan has been strengthened through the exchange of
gold for its notes which is due to the preference of the
people for a paper circulating medium. Like the Bank of
France, also, the Bank of Japan has not increased the
normal volume of its loans because of this increase in its
gold holdings. The Bank is now in position to aid in the
development of the country by judicious advances to afar
greater extent than was possible for it at any time in the




213

National

Monetary

Commission

past. If this policy should be adopted the problem of
handling the loan account of the Bank will probably
become far more complex than ever before. Loans in
large volume to other banks at rates less than those exacted
by them from individual borrowers would seem to be
neither possible nor desirable. The time is, however,
still distant when the Bank will experience that difficulty
in making its rate of discount effective which has been
encountered by European central banks. It would seem
probable that an increase in its loans to individual borrowers in normal times would enable the bank to restrain
excessive credit expansion in years of unhealthy speculative activity. By contracting its own loans at such
times, the demand for accommodation at the other
banks would be increased and many of the more undesirable loans would probably be refused.
In conclusion, it may be repeated, the experience of
the Bank of Japan, while interesting in itself, does not
yield much in the way of guidance for this country. Differences in political organization and in the influence of
public opinion could hardly be more extreme. The
foreign exchange position of the two countries is quite
unlike. It is altogether unlikely that a United States
central bank would lend at rates below those of the
other banks, since the supply of credit is already ample
for all ordinary requirements. And finally it should be
noted that the credit structure of the other banks relative
to that of a central bank would be so many many times
greater in the United States than it is in Japan as to make
the problem which would confront its management and
the methods which would prove effective entirely different
in character.




214

&

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