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A H isto ry o f
M o d e r n B a nks o f I ssu e





l ib r a r y


C o p y r i g h t , 1896, b y

C o p y r i g h t , 1908, b y

C o p y r i g h t , 1909, b y

C o p y r i g h t , 1915, b y


tTbc ftnfcfeerbocfeer ipress, 1Rew HJorfe




the first edition of this work,
in , financial
THEpublished to bemadethatinparamountand economicAmerican
“ the
issues of

politics for many years to come,” has been verified by events.
While the United States have taken some long steps in the
direction of a sound monetary system, the question of a proper
banking currency still remains unsettled and is at this moment
under investigation by a special commission authorized by
Congress. It seems proper, therefore, that a summary of the
experience of the world in banking should be presented to
the public which includes the events of the past twelve years
as well as those of earlier times. The fact stated in the
preface to the first edition, that there is no work in English
covering exactly the ground covered by Modern Banks of
Issue, has remained substantially true. One larger and more
elaborate work, written by different authors, and a few bald
summaries of facts and statistics have been published, but,
apart from these, there is no other volume which brings
together in connected and accessible form the record of the
banking experiences of the world.
Important events have taken place in both banking and
political history during the past twelve years. The United
States have become competitors for the commercial empire
of the Orient to a degree which has justified much more
extended accounts than were given before of banking and
currency conditions in Oriental countries. The note-issuing
systems of Switzerland, Sweden, and Mexico have been
completely reconstructed, and important changes have been



made in Russia, Austria-Hungary, Japan, and other coun­
tries. In this new edition of Modern Banks of Issue, not
only have such events been brought down to date, but more
attention has been given than in the first edition to several
phases of banking development, notably on the side of dis­
count policy and on that of the division of profits between
the bank and the state. In practically every European state,
even where there has been no radical change in monetary
and banking policy, the opportunity which has arisen to
revise the charters of the banks has been availed of, in the
case of the great central banks, to narrow the privileges and
profits which were originally granted to the shareholders.
The facts in this regard are presented in this edition with
much greater approach to completeness than in the earlier
editions of this work.
The past twelve years have contributed much to strictly
monetary as well as to banking history. Questions whose
solution was doubtful and disputed have been settled to the
satisfaction of intelligent men. The gold standard, which
was described twelve years ago as “ a conspiracy against the
human race, ’’ has been adopted in succession within that
time by the United States, Russia, Austria-Hungary, Japan,
and Mexico. Practically the only country remaining upon
the silver standard is China, which is without a national
monetary system, and even as these pages go to press
despatches from China indicate that the government is
planning such a national system to be based ultimately
upon gold.
This history of banking is not intended as a treatise on
coinage, except so far as changes in coinage laws have been
accomplished through banking agencies and have affected
banking history. The great banks of the world have in­
evitably, however, been powerful factors in the monetary
changes which have been accomplished in recent years.
Especially lias this been the case where the new monetary
systems have depended in some degree, as in the case of
British India, the Philippines, Mexico, Russia, and AustriaHungary, upon the control of the market for exchange. In



this field experience has developed what is practically a new
monetary system and has established new principles to
govern the issue and distribution of money. The gold ex­
change system, inaugurated with halting stops in British
India in 1893, has been adopted with various modifications
in other countries and has stood unshaken the test of a crisis
in the world’s markets and a local crisis in production in
India. Those events it has seemed the legitimate function
of this work to set forth.
Owing to the importance of the events of the past dozen
years, and the increased space given to the banking systems
of Mexico and the Orient, it has seemed advisable to confine
the scope of this work to narration. To this end there have
been eliminated the three chapters on banking theory which
appeared in the earlier editions: “ The Theory of a Banking
Currency,” “ Crises and Their Causes,** and “ The Advan­
tages of a Banking Currency.” A more nearly complete
and satisfactory presentation of the author’s views on mone­
tary and banking theory will be found in the separate work
in two volumes on The Principles of Money and Bankings
published in 1905, and issued on the continent of Europe in
the French translation of Dr. Raphael Georges-L6vy.
In sending forth this work again to the public in a con­
dition abreast with recent monetary history, the author can
only renew the hope that it will contribute in some degree
to the diffusion of those sound views of banking whose
adoption into law is essential to the economic progress of
our country.
N ew Y ork, February 1 ,



IGHTEEN years have elapsed since the publication of
the first edition of A History of Modern Banks of
Issue. They have been years of remarkable progress
in monetary science. The United States, which for a long
time lagged behind other advanced commercial countries in
the development of her monetary system, has finally adopted
a comprehensive measure of centralized banking and note
issue, which, if wisely administered, will put her bankers in
a position to compete on something like an equal plane with
bankers of other countries, and which will afford the means
of guarding her gold stock and removing forever the menace
of such humiliating conditions of monetary inefficiency as
were developed in the crisis of 1907.
So important is this step in the progress of American
finance, that a new chapter has been added to this work in
this fifth edition, outlining the scope and effects of the
Federal Reserve Act of December 23 , 1913, by which a sys­
tem of centralized banking has been established. The long
process of evolution in American banking education, begin­
ning just before the appearance of the first edition of A
History of Modern Banks of Issue, in 1896, has not been
ignored. The provisions of the emergency act of May 30 ,
1908, known as the Aldrich-Vreeland Law, are set forth
under the history of the national banking system, and an
analysis is made of the plan of the National Monetary Com­
mission, many of whose provisions were adopted in the
Federal Reserve Act.
In several of the principal foreign countries, revisions of




the national bank charters have occurred during the past few
years, which have emphasized the growing tendency to more
rigid government control over finance and a larger participa­
tion of the state in the profits of note issue. These changes
in the charters of the banks of France, Germany, and AustriaHungary, which have been made since the appearance of the
fourth edition of this work, are set forth, and the statistics
for these countries have been brought up to date.
Changes in the banking law of our Canadian neighbors,
the adoption of a stable monetary system in Nicaragua, and
the revision of the currency system of British India are set
forth as fully as space permits. In this edition, it has not
been attempted to make all the minor corrections in statistics
which might be called for by the lapse of five years since the
appearance of the fourth edition; but the effort has been
made to set forth important changes of law and policy and
serious interruptions to the normal functioning of the
monetary system such as has occurred in Mexico.
The remarkable series of events arising from the war in
Europe, which seemed for a moment likely to shake the
modern structure of credit to its foundations, occurred when
the new edition of this book was nearly ready for vthe press;
and its publication was delayed in order that a chapter might
be added on “ The Banks in the European War.” The war
has been productive of many striking lessons in the field of
monetary history and none more striking than the success of
the system of central banking in sustaining the entire fabric
of money and credit under conditions of strain never before
encountered in the history of the world. The story of this
test and its application to American experience, it is the aim
of the new chapter to set forth.
N ew Y ork, January 15, 1915.

T he

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T h e Ba n k s
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A u t h o r it ie s

In d e x






Credit Instruments not a Modern Invention—Early Forms of Bank­
ing in Assyria, Greece, and Rome—The Baked Clay Tablets of‘
Babylonia—Survival of Banking Methods at Constantinople—
Origin of the Word “ Bank ”—Beginnings of the Bank of Venice
—The Tax Farmers and Financiers of the Middle Ages—The
Prohibition of Loans at Interest and the Functions of the Jews.


HE mechanism of credit dates back to the civilizations
of antiquity. It was much more fully developed in
Assyria and Babylon than in early Greece and Rome,
and after its development in the latter countries during their
periods of military and commercial ascendancy suffered a
new eclipse during the interruption of communications in
the Dark Ages. It was left, however, for the sixteenth
century of our era to develop the bank note in something
like its modern form, and for the nineteenth century to spread
its use over the civilized world.
Assyria, as early as the seventh and even the ninth century
before Christ, possessed a system of commercial instruments,
which included promissory notes, bills of exchange, and
transfer checks, not unlike the modem bank check. As
this system was in operation before the use of coined money,
these documents usually stipulated for the payment of a



given weight of silver or copper.1 They were inscribed, not
on paper, but on small clay tablets about the size of a
piece of toilet soap. After the contract had been written in
the soft earth, it was baked so as to render it unalterable
and indestructible. Such a form of document naturally
could not be subjected to endorsement or acceptance, like
modem commercial paper; but this defect was supplied by
the presence of witnesses, usually having a religious or legal
authority.2 The original was placed for safety in either the
temple or the record chamber of the city, enclosed in a clay
envelope or case, while copies went to one or both the con­
tracting parties. Many of these documents, preserved in
the British Museum, are records of deeds and the partition
of real estate, but some involve loans of silver at interest,
and these become numerous in the reigns of Nebuchadnezzar
and Nabopolassar (625-604 b. c . ) . 8
While the Athenians and Romans were in some respects
less advanced in the mechanism of credit than the Eastern
peoples, their surviving records are more complete. The
first of the Greek bankers referred to in history is Philostephanos, who had the honor of receiving into his custody
at Corinth a deposit of seventy talents from the hands of
Themistokles. The bankers of Athens were among the
most powerful in Greece, and the son of the banker Pasion
was able to boast that he could borrow where he would,
at Lampsakos, at Phasos, at Tenedos, or elsewhere, because
he was the son of Pasion. The first Athenian bankers, how­
ever, were not citizens, but freedmen of Corinthian and
Ionian bankers who had shown skill and acquired wealth
at Athens as the agents of their employers. Wealth did not
throw down social barriers for them until evidence of their
patriotism was afforded by loans at low rates to the state
1 Vide forms of these contracts in Lenormant, La Monnaie dans
V Antiquite, I., 114-117.
2 Iyenormant, I., 118.
3 British Museum : Babylonian and Assyrian Antiquities, 1900*

- .

174 176



in the hour of need. The banking business was mingled
with large speculations in foreign trade and confused with
the function of merchants, until the growth of wealth and
the subdivision of industries gradually erected it into a dis­
tinctive profession.1 Many of the stronger Athenian bankers
attained a high degree of prosperity and their houses endured
for several generations.
One of the first forms of banking was the exchange of
foreign monies for domestic monies and the return of the
foreign monies to the country of origin. The narrow limits
of the Greek and Italian states made the function of the
money-changer essential in international trade, and afforded
large opportunities for profit. There were many prejudices
against making trade too easy by a uniform standard, and
the money of domestic use was often different from that
employed in foreign commerce.3 Xenophon declared that
the larger number of the cities of Greece had money having
value only at home, and that traders at such places were
compelled in consequence to make exchanges in merchan­
dise, but that Athens was an exception and that her silver
drachmas were accepted everywhere.
The bankers in Athens were known as tpa7teQiToa and
those in Rome as argentarii (dealers in silver).3 The bank­
ing business was subjected to official regulation m both
Athens and Rome. The Roman laws required the argen­
tarii to produce their accounts for official inspection, and
prescribed that they should keep a cash-book, a depositbook, and a day-book. The transfer of credits was permitted
at Athens by the law of Solon, and commercial paper from
Phoenicia and Egypt was negotiated upon the Athenian
1 Cruchon, 22.

2 Vide Favre, La Genlse de VArgenty in Revue d'J&conomie Poli­
tique, April, 1899, XIII., 358.

3 Cruchon enumerates more than sixty titles of different classes
of persons dealing with monetary matters at Rome. Some of these
were public officials, and the exact character of the business done
changed from time to time, even where old names were retained.—
Les Banques dans VAntiquile, 35.



market. The fact that bankers conducted the exchange of
money of all countries naturally made them authorities in
monetary matters. At Athens they kept accounts for their
clients, which they were compelled to produce upon requisi­
tion, and their accuracy and technical knowledge led to their
frequent employment for verifying the accounts of the city.
The Greeks taught banking to Rome, and the first names
for bankers there were of Greek origin. The banking busi­
ness at Rome was at first largely in the hands of foreigners
and freedmen, but certain branches of finance were in the
hands of native Romans. It was the usurious rates of inter­
est exacted by the patricians in their business relations with
the plebeians, rather than any acts of regular bankers, which
led to the secession of the plebs to the Sacred Mountain in
494 and to the Janiculum in 278 B.C.1 The regular bankers,
the argentariiy were charged with the organization of the
coinage by Marius Gratidianus in the first century B.C.,
and the work was so well done that statues were raised to
the praetor who had taken the initiative in the reform. Sylla
overturned the statues and put in circulation the filled money
of base metal which was one of the devices of early times.8
The booths of the bankers in the Forum were so conspicuous
that when, in 309 B.C., the bucklers of the Samnites were
brought home by the victorious Roman armies, they were
ordered to be displayed with their incrustations of gold and
silver above these booths in order that the people might view
their splendor.3 In spite of these honors, however, it was
not a source of pride in Roman patrician society to be de­
scended from the argentarii. Marc Antony made it a subject
of derision that Augustus counted an argentarius among his
paternal ancestors and that even on his mother’s side an
argentarius was his grandfather.4
The concentration at Rome of the control of the politics
and business of the world gradually extended the scope of
1 Cruchon, 40.
2 Deloume, Les Manieurs dfArgent d Rome, 156.
3 Cruchon, 43.
4 Ibid., 54.



Roman banking, subdivided the business, and resulted in
the creation of a complete body of jurisprudence, which was
embodied in the Institutes of Justinian. The argentarii were
first money-changers, then receivers of deposits, then lenders
at interest both of their own money and that entrusted to
them, and purchasers of bills of exchange. Deposits were
utilized as the basis of transfers by paper credit, and loans
were made by these instruments without the direct with­
drawal of cash from the hands of the bankers. The first
mention of the argentarii is in Livy, about 350 B.C., but the
later Roman plays are full of references to their methods.
Prescribere or rescribere was to give a check on one’s account
or transfer credit from one account to another. Thus
Demipho says, in the Phormio of Terence, “ But, Phormio,
pray go over to the Forum and order that money be put to
my account/ ’ 1 These transfer orders lacked the character
of modem checks in not being transferable to order, but the
principle of compensation, by setting off one debt against
another between the same persons, was generally recognized.
The publicans or tax-farmers were the strongest organized
financial body of antiquity. They not only farmed the taxes,
but undertook to provide transportation and equipment for
the armies and the means for great public works.8 Some of
the first publicans were men who combined the business of
private trade with usury and money-changing and followed
it in the wake of the Roman armies in their victorious pro­
gress over Northern Europe. Their exactions, supported by
Roman power, made them very unpopular, and one of the
notable incidents of the Gallic insurrection in Caesar’s time
was the massacre of these merchants or negotiatores at
Genabum.3 The Italian merchants were also singled out,
along with the publicans and proconsuls, as the special ob­
jects of the fury of the people of Pontus under Mithridates,
1Sed transi sodes adforum , atque illud mihi argentum rursutnjube
rescribiy Phormio.—This is the rendering of Prof. MacLeod, Theory
and Practice of Bankings I., 162.
2 Deloume, 94.
3 Caesar, De Bello Gallicoy VII., iii.



when fifty thousand Romans were massacred. The publicans
formed powerful associations and held a position in Roman
society similar to that held in the pre-Revolutionary period
in France by the financiers. The commanders of the Roman
armies and proconsuls also engaged in a form of banking
by loaning their capital at usurious rates in the provinces.
Brutus placed his capital in Kypros at 48 per cent,, Verres
placed his in Sicily at 24 per cent., while even Cato watched
carefully over his investments, and Pompey loaned hundreds
of millions of sesterces to the kings and cities of Greece and
It is the opinion of Jannet that the organization of the
greater commerce and of banking as it existed in the Roman
Empire survived the invasions of the barbarians and per­
sisted during the first part of the Middle Ages.8 But lack of
security for property in Western Europe, and the neglect of
the highways of commerce, gradually drove both commerce
and credit within narrower limits and led to the withdrawal
of metallic money for hoarding from its legitimate use in
circulation. The revival of banking in the later Middle
Ages came through the money-changers. The growth of
commerce and the accumulation of capital as early as the
eleventh century began to draw the precious metals from
their hiding-places and led each seigneur to coin his own
money. The diversity of weights and the varying market
ratio between gold and silver made the function of the ex­
changer an important one, and the old cathedral windows
at Bourges, L,e Mans, and elsewhere still portray his booths,
behind which he is represented with a balance weighing the
coins piled at his feet or drawing from a sack those which
he proposes to give in exchange.8 The edicts of Leo the
Wise, the Byzantine Emperor of Constantinople, contained
a series of provisions governing the money-changers. They
were constituted into a corporation, into which admission
1 Deloume, 146.
* Le Credit Populaire et les Banques en Italie, 7, n.
8 Cons, Precis d'Histoire du Commerce, I., 196.

could be obtained only upon the testimony of reputable citi­
zens that the candidate would not debase or counterfeit the
coins and that he would be in the market-place at proper
times by himself or a substitute for the purpose of meeting
his obligations.
Similar money-changers existed in the Arabian cities. In
Italy, when Venice, Florence, Naples, Genoa, and Pisa be­
came great commercial centres, the Lombards became the
bankers and waged a bitter rivalry with the Jews. The
Italian bankers were useful to the church, in transmitting to
Rome contributions collected in Germany, France, and Eng­
land, and in several countries were given special protection
as the representatives of the Pope. General regulations of
the exchange and banking business appear early in the
Italian statutes. The exchangers of Lucca in m i were re­
quired to take an oath not to steal, commit fraud, or falsify.
Those engaged in the business were known in Italy as
campsores, or dealers in foreign money. The chiefs of the
Lombard League obtained from Frederic Barbarossa pledges
that the customs connected with the tables of the exchangers
should be respected. In the organization of industry at Flor­
ence in 1266 the “ art of exchange0 was one of the seven
higher arts, constituting one of the bourgeois corporations
and ranking above the fourteen made up of laborers.1 Even
before this date the art of exchange had been recognized in
1204 in a treaty concluded between Florence and Sienna.
The Jewish and Italian bankers spread their connections
throughout Western Europe, and the Lombards shared with
the Jews the unpopularity of their profession. The in­
habitants of Asti in Lombardy pushed the trade in money
beyond the Alps in 1226. Louis IX. in 1256 ordered 150
Asti money-changers to be thrown into prison and the
money which they had loaned in France confiscated. Twelve
years later they were banished by the same monarch and
allowed only three months in which to collect their debts.8

1 Nys, Recherches sur VHistoire de VEconomie Politique, 155.
8Roscher, Principles of Political Economy, II., 119.



The Florentines and Venetians, who succeeded the Lom­
bards, did much to reorganize credit and formed great
houses with branches directed by the co-partners. The
Medici in the fifteenth century had not less than sixteen
branch houses in the principal commercial cities.1 When
Holland became a centre of capital and enterprise, Amster­
dam superseded Antwerp in commercial influence, and the
available capital of the world was attracted there by the ex­
cellent organization of the Bank of Amsterdam. The Jewish
colony included Jews from Portugal, Spain, Italy, and Ger­
many. At Hamburg the Jewish community, formed from
Portuguese refugees, was credited with a considerable share
in the creation of the public bank.8
The word “ bank ” is derived from the public loans made
by the Italian cities rather than to the business of banking
as understood in later times. The usual Italian name of
a public loan was monte, signifying a joint-stock fund. The
Germans were influential in Italy during the Middle Ages,
especially about the time when a forced loan of one per cent,
was levied by the city of Venice in 1171 upon the property
of all citizens. Their name for a joint-stock fund was banck,
meaning a heap or mound, which the Italians converted
into banco and employed for an accumulation of either stock
or money. The definition of a bank given in an Italian
dictionary in 1659 was “ Monte, a standing Bank, or Mount,
of money, as they have in divers cities in Italy.” A more
recent writer, Cibrario, says: “ Regarding the Theory of
Credit, which I have said was invented by the Italian cities,
it is known that the first Bank, or public debt (tl Prio Banco
o Debito Pubblico), was erected in Venice in 1171.” 3 The word
was adopted into English, meaning indifferently public loans
^Jannet, Le Credit Populaire et les Banques en Italie, 6.
Jannet, Le Capital au XIXe SiZcle, 434.
MacLeod, Theory of Credit, II., 578. Professor MacLeod insists
that the common derivation of the word “ bank ” from the counter
upon which the money-changers kept their money, is without
foundation. He says : “ The Italian money-changers, as such, were
never called Banchieri in the Middle Ages.”



or stocks of money. Benbrigge, in 1646, speaks of the
*i three Bankes ’’ at Venice, meaning the three public loans
or Monti. The issue of paper money directly by the state
was spoken of as “ raising a Banke” in colonial days in
Massachusetts, the word “ bank” standing for the money
rather than the institution which put it in circulation.1
The banks of Venice have attracted wide attention because
of the long-preserved legend, that a public bank issuing
negotiable securities used as money was created there in
1171. This legend has been proved unfounded by recent
investigations of Lattes and Ferrara.2 Banking in Venice
was entirely in private hands during the early centuries and
was a subject of legal regulation from time to time between
1270 and 1584. It was not until the latter year that an
attempt was made to create a public bank. Private banking
acquired a wide scope as the gradual outgrowth of the busi­
ness of the campsores. The latter were required as early as
1270 to give security to the government as the condition of
carrying on their traffic. Tommaso Contarini, in a speech
delivered in the Senate in 1584 in favor of establishing a
public bank, declared that there had been one hundred and
three banks, of which ninety-six had come to a bad end and
only seven had succeeded. Yet, says Professor Dunbar,
“ notwithstanding a train of disasters nearly two centuries
and a half long, the service rendered by the banks to com­
merce had been such, on the whole, as to lead Contarini to
Weeden, Economic and Social History of New England, 318.
The results of their inquiries were printed by Professor Lattes in
La Liberth delle Banche a Venezia dal Secolo XIII. al X VII., pub­
lished at Milan in 1869, and by Professor Ferrara in the Nuova
Antologia for January and February, 1871. They have been care­
fully analyzed and summed up by Professor Dunbar, Economic
Essays, 143-167. The true status of the Venetian banks seems to
have been known to Blanqui, for he says that “ what we know of
the Bank of Venice and that of Genoa does not permit a doubt that
these banks were nothing else than great tax-farming enterprises
(rrandes rigies de perception) for the objects of the Government.”—
Histoire de V Economie Politique, II., 41.



argue that to preserve the trade of the dty without banking
was not only difficult, but impossible.”
These early banks first did business with their own money
and then with deposits, like the London goldsmiths at a
later date. The use of the deposits was not at first intended
to economize cash, but simply to avoid its frequent handling.
The transfer of credits upon the books of the bank trans­
ferred the title to cash in the custody of the bank, and, so
far as this rule had been violated by grants of credit to per­
sons who had not deposited cash, it was treated by Contarini
as a grave abuse. He saw in the banking system only a
method of transfer by book accounts, by which “ buyer and
seller are satisfied in a moment, while the pen moves over
the page, whereas a day would not be enough to complete
the contract for a great mass of merchandise by counting
a great number of coins.” 1 Notwithstanding the attempt
to keep banking within these limits, the bankers employed
the money entrusted to them in more or less speculative
ways, and an act of 1374 forbade dealings in certain specified
commodities or the opening of credits for such dealings.
The banks came by degrees to make advances to the state
and to grant credits to merchants and traders without full
cash security. They thus became substantially banks of
issue. They did not formally issue notes, but banking
credits came to constitute certificates of deposit which
circulated as currency.
The creation of the Bank of St. George at Genoa and the
bank at Milan were due in some degree to the survival of
the Roman system of farming the taxes. A single individual
was hardly equipped with sufficient capital to carry on the
large operations involved, and associations were formed for
dealing with the state on the one hand and the taxpayer on
the other, which became the nucleus of larger banking opera­
tions. Thus great financiers grew up, who dominated the
politics as well as the finance of European states as soon as
centralization had reached a point which called for a paid
D unbar, Quarterly Journal of Economics, April, 1892, VI., 314.



military force and made money the nerve of war. One of the
great houses which wielded a remarkable influence in the
fifteenth and sixteenth centuries was that of the Fuggers.
The founder, Hans Fugger, came to Augsbourg from a
country village in 1367 and died in 1409, leaving a fortune
of 3000 florins. It was Jacob Fugger, his grandson, who
gave the house a national character and international power.
The business of trade in silks and other stuffs was at first
mingled with mining and banking operations. It was in
1487 that Jacob Fugger concluded an arrangement with
Duke Sigismund, by which he acquired the rich silver mines
of the Tyrol as the guarantee of a loan. Maximilian, the
successor of Sigismund, obtained large loans from the Fug­
gers, they had important transactions with Pope Julius II.,
and their operations were extended to Antwerp and India.
The election of the Roman Emperor after the death of
Maximilian afforded the opportunity to dictate world politics.
Francis I. of France had already announced that he would
obtain the Empire at any cost, and it was necessary for
Charles V. to appeal to the Fuggers for money to influence
the electors. The aggregate cost of the election of Charles
was stated at 850,000 florins, of which the Fuggers provided
543,000/ Charles V. endeavored to have the debt assumed
by Spain and had such trouble in raising funds that Francis
I. was able to win from him his German mercenaries. The
Fuggers had great difficulty in recovering their advances to
the Spanish king and in 1524 assumed the farming of a large
part of the Spanish land taxes and the mines. Jacob Fugger
was at this time the most potent financier in the world, with
establishments in Poland, Hungary, Spain, Antwerp, and
Naples. After his day, the prestige of the house gradually
declined. As late as 1560 a “ Fugger bill of exchange ” was
synonymous with cash, but in 1562 it was necessary to bor­
row to meet obligations and the assets of the house only
slightly exceeded its liabilities. The King of Spain in
1 L'&poque des Fugger% Annales de l y Institutes Sciences Soin
dales, III.,





1631 accorded the Fuggers an extension for paying their
debts and their affairs thereafter consisted of a process of
The business of banking was only a branch of the great
affairs of these finance houses of the sixteenth and seven­
teenth centuries. The Fuggers endeavored to acquire large
territories in Chile, and the Welsers of Augsbourg under
Charles V. obtained an entire province of Venezuela. The
bankers of Genoa advanced to the kings of Spain the
amounts required for their destructive wars in Italy, France,
and the Netherlands, upon the guarantee of the product of
the mines of the new world.1 The Hochstetters of Amster­
dam were among the greatest of the Dutch houses and it was
declared by a chronicler that 4‘princes, counts, nobles?
tradesmen, peasants, valets, and servants have placed with
Ambrose Hochstetter all their money, for which he pays five
per cent.” The Hochstetters endeavored between 1511 and
1517 to “ corner” the tin market. They bought up the
entire visible supply, but new mines were opened in Spain
and Hungary which they were unable to control, and they
lost a third of their investment. The house became involved
in further difficulties within another generation and accused
the Greshams of England of overthrowing their credit.5
Banking in France before the experiments of John L,aw
was largely in the hands of the farmers-general and “ finan­
ciers.” The farmers-general have often been confounded
with the other class, but they were for the most part respect­
able officials upon fixed salaries, who were connected with
the financiers only through dealings with them and the
efforts of the financiers to obtain admission to the official
body as a badge of respectability.3 The Ferme Ginirale was
given a permanent organization only in 1680. The finan­
ciers were the adventurers and kings of finance, but lacked
social prestige and were the subjects of many jibes for efforts




Annales de I *Institut des Sciences Sociales, III., 365.
Gomel, Causes Fi?ianci£res de la Revolution, I., 317.



—often successful—to ally themselves with noble families.
Before the Revolution many of the great estates had passed
into their hands.1 They were known under the specific
names of partisans and traitants, the first name referring
to the fact that they advanced money in payment for the
creation of new offices, thereby ‘‘ taking a part ” (un
parti), according to the language of the time. The name of
traitants was derived from their function as negotiators of
financial paper. The financiers made advances to the
farmers-general in anticipation of the collection of the taxes.
The paper given in these transactions, and other evidences of
the public debt, were the subject of quotation and speculation
early in the seventeenth century. A profession of dealers in
exchange, banking, and merchandise had been created by
Charles IX. in 1572, and a distinction between the bankers
and the merchants was made by a decree of the Council in
1638.2 The Caisse des Empruntsy a sort of bank created by
the farmers-general to meet demands for advances by the
Treasury, was established as early as 1674 and received the
deposits of the public at sight at an interest which occasion­
ally reached ten per cent. This bank was seized by the
Controller General, Desmarets, in 1715, and a part of the
money sequestrated was made good by the issue of securities.
Among the most famous of the financiers was Samuel
Bernard, who accumulated a fortune under IyOuis XIV.
estimated at 60,000,000 livres. The Paris brothers were also
prominent at the court of “ the Grand Monarch,” and the
most celebrated, Paris-Duvemay, was charged in 1721 with
the readjustment of the finances after the collapse of the
plans of Law.3
Each phase of banking was an almost necessary evolution
of the conditions of the time. The money-changer followed
the merchant in his voyages over the world, when merchan­
dise and metallic money constituted the only instruments of
Taine, Ancien Regime, 51, note.
Jan net, Le Capital au XIXe SiZcle, 449.
Courtois, Histoire des Banques en France, 64.




exchange. The creation of uniform monetary systems and
wide areas of trade under a single political sovereignty made
his profession less important; but it was principally the or­
ganization of credit, permitting exchanges without metallic
money, which reduced the money-changer to an essentially
subordinate place1 and gave birth to modern banking. The
bill of exchange was one of the earliest forms of credit, and
its use was extended beyond its present purposes in order to
meet the necessities of the Middle Ages. To the Jews were
ascribed the invention and perfection of the bill of exchange,
as a means of evading the confiscation of their property by its
prompt and secret transfer.
Two circumstances contributed to throw into the hands of
the Jews the trade in money in the Middle Ages. One was
the fact that they were shut out from all other trades; the
other was the attitude of the church towards loans at inter­
est. The acquisition of real property was prohibited to the
Jews in nearly every European state. The guilds were
closed to them and they were forbidden to exercise trades
and manufactures.2 The exclusion from real property was
not a hardship, if they were to be subject to constant confis­
cations, since money and its paper representatives were
almost the only forms of property which could be readily
transported and concealed. “ The richest traders,” says
Montesquieu, “ having only invisible goods, they were able
to be sent everywhere and left no trace behind.” 3
The denial of the legitimacy of interest was a natural
evolution from conditions of the time. The rigors of the
church were directed primarily against loans for consump­
tion to persons in need. When saved capital was the ex­
ception, and opportunities for organized industry were rare,
loans for productive purposes were the exception.4 When
1The goldsmiths assumed the functions of the money-changers, as
the latter lost their importance, and in 1514 the changers disappeared
from the list of the six merchant bodies.—Cons, I., 196.
2Nys, 136.
3De PEsprit des Lois, livre XXI., ch. xx.
4 Prof. Jannet points out that the prejudice against loans at interest



the time came for escaping the restrictions of the canonical
laws, several ways were found of doing so. Already, as
early as the thirteenth century, Albert le Grand conceded
that “ if usury is against the perfection of Christian law, it is
at least not contrary to civic interests.” Even St. Thomas
admitted the loss resulting (damnum emergens) to the lender
who was kept out of his money, and the interval of time and
the value lost (quantum ejus intererat) gave birth to the
word interest as a substitute for usury (usura ) .1
Transportation of money from one place to another in­
volved a cost which justified a charge. This charge was
made sufficient to cover a reasonable interest for the use of
money. Hence arose the provisions of many of the Conti­
nental codes of commerce, that the bill of exchange should
be payable in a different place from that where it was drawn.
The bill of exchange was converted into a form of direct loan
called “ dry exchange,” by which the borrower drew a bill
on a fictitious person in some foreign town at the current
rate of exchange, which he delivered to the lender. At
maturity the bill was returned protested and the borrower
charged with re-exchange and incidental expenses, amount­
ing perhaps to 20 or 30 per cent., the bill never having been
out of the country.1
A further step was taken towards modern banking meth­
ods when the Italian bankers received cash under the name
of deposits, but in reality to be made fruitful in the banking
was not without its justification before money came to be borrowed
for the purposes of production, because the proceeds of the loan were
usually consumed instead of multiplied, and if loans at interest had
been universally approved they would soon have resulted in rural
localities in the practical enslavement of the peasants who were un­
able to pay. The distinction between loans for production and for
consumption was early recognized by the church, and the fifth Lateran
Council ( 1512- 17) decreed : “ Ea est propria usurarum interpretatio,
quando videlicet ex usu rei quae non germinat nullo labore, nullo
sumptu, nullove periculo lucrum foetusque conquiri studetur.”—Le
Capital, la Speculation, et la Finance, 81.
1 Rambaud, Histoire des Doctrines £conomiquest 40- 42.
3 Cossa, Introduction to the Study of Political Economy, 154,



and commercial operations in which they were engaged.
These funds were represented by mandates, which differed
little from the checks adopted many centuries later. The
records of bankers regarding transfers of money had a recog­
nized status in courts of justice, derived in some measure
from the survival of their public character under the Roman
Thus gradually emerged from the need for them all the
attributes of modern banking. The individual money­
changer, the Jewish lender, the Lombard banker, gradually
gave way, as centralization advanced in economic and
political life, to public banks doing business under official
authority. Along with this evolution went the develop­
ment of methods suited to the new conditions. The com­
plexity of coinage systems was remedied by the creation of
‘4bank money ” of uniform value by such institutions as the
banks of Venice, Amsterdam, and Hamburg. The bill of
exchange became a means for making productive loans.
Deposits were accepted to be loaned for profit, and in these
profits the depositor was permitted to share. The character
of the loan changed from a specific deposit, transferable only
by the owner, to a loan from the owner to the bank, for
which he received a direct interest. The resources of modern
savings, attracted into the keeping of the banks, became
available for loans to the producing and trading elements in
the form of discounts. Modern credit thus gradually re­
ceived its organization and needed only the creation of the
bank note and the extension of the mechanism of clearings
and co-operation among the banks to stand forth fully
equipped for providing the motive power of commerce.


Italy the Mother of Modern Banking in the West—Conditions before
the Unification of the Kingdom—Specie Suspension and the Era
of Depreciated Paper during the Struggles for Lombardy and
Venetia—Rise of the Bank of Italy—The Bank Scandals of 1893—
Flight of Subsidiary Silver to Other Countries—Recovery of
National Credit in the Twentieth Century.

TALY is the mother of modern banking in the West, not
only as heir of the Roman bankers of antiquity, but as
the first country to develop the mechanism of modern
credit under the light of the Renaissance. Of the Bank of
Venice and of other early Italian banks, the story has already
been briefly told. The disorders which came on the heels
of the French Revolution, wiping out the boundaries of states
and destroying the freedom of the Italian cities, put an end
also to most of the ancient banks. The only one which sur­
vived was a land and mortgage bank called Monte dei Paschi,
at Sienna, which was believed to date back to the seventeenth
century. The first effort to found a modern bank was made
at Genoa upon the foundations of the old Bank of St. George.
The effort was not successful, and, in the opinion of M.
Courcelle-Seneuil, this is not to be regretted, “ for the Bank
of St. George was adapted to customs and commercial usages
which have ceased to exist.” The next attempt to establish
a banking system in Piedmont was made by letters patent
of King Charles Albert, under date of March 16, 1844. The
new bank was to be known as the Bank of Genoa, to have a






capital of 4,000,000 lires ($800,000), and to be under the
supervision of a royal commissioner and sub-commissioner.
The bank received a subvention of 4,000,000 lires from the
government during 1846 and the following years, upon
which it paid interest at two per cent. A bank was founded
at Turin on October 16, 1847, with a capital of 4,000,000
lires, but the political and economic crisis of 1848 checked
its development. A royal ordinance of December 14, 1849,
authorized it to unite with the older bank under the denom­
ination of the National Bank of Sardinia, with head offices at
both Genoa and Turin. The duration of the new establish­
ment was fixed at thirty years, beginning on January 1,
1850, and its capital at 8,000,000 lires, which was afterwards
increased to 32,000,000 lires ($6,200,000).
The government in 1848 resolved upon a loan of 20,000,000
lires, which the Bank of Genoa was required to furnish at
two per cent., upon the pledge of the goods of the Order of
Saints Maurice and Lazarus. Forced legal tender character
was given to the bank-notes and an increase in issues per­
mitted of 20,000,000 lires. The smallest notes were reduced
from 250 lires ($50) to 100 lires ($20) with the condition that
the notes of 100 lires should not be issued to the amount of
more than one-fifth of the total circulation. The loan was
reimbursed to the bank and specie payments were resumed
at the end of 1849.1 The bank from that time followed the
fortunes of the Royal House of Sardinia, and extended its
branches and operations with the success of the Sardinian
arms and the consolidation of the Italian States. It was
necessary in 1856 to authorize the bank to exceed the
maximum note circulation allowed by its statutes, which was
three times the cash reserve. The bills of the bank were
again made legal tender, with suspension of cash payments
on April 27, 1859, on the occasion of the war with Austria,
and the bank was authorized to issue 6,000,000 lires in notes
of twenty lires ($4) and to open a credit for the government
to the amount of 30,000,000 lires at two per cent. The bank

Courcell e-Sen euil,




was prudently conducted, the government did not draw its
full credit, and the notes fell but little below par. Their
circulation was extended on June 11, 1859, to the entire
territory occupied by the Sardinian troops.
The bank was reorganized at this time as the National
Bank of the Kingdom of Italy, in pursuance of the plans of
King Victor Emmanuel for the unification of Italy. Its
capital was increased to 40,000,000 lires ($8,000,000) and
three head offices of equal rank were established at Turin,
Genoa, and Milan, the latter being a new office within the
territory added to the new Kingdom of Italy. The bank
resumed specie payments and opened a credit of 18,000,000
lires in favor of the government. Branches were established
in i860 at Bergama, Brescia, Como, Modena, and afterwards
at Ancona and Perusia. The bank absorbed the leading
banks of Bologna and Parma and established branches at
Ferrara, at Forli, and at Ravenna. The annexation of
Naples to the Kingdom of Italy did not result in the de­
struction of the Banks of Naples and Sicily, but the National
Bank was authorized to establish a principal branch at
Naples and branches at Catana, Messina, Reggio, and other
places in Southern Italy. Branches were also authorized at
this time at Pavia, Cremona, and Piacentia.
The character of the National Bank of the Kingdom of
Italy was not essentially changed until the Act of August
10, 1893, but its relations to the government constantly grew
closer and it was compelled to accept forced legal tender for
its notes in order to comply with demands for advances to
the State. Suspension of specie payments was decreed at
the outbreak of the war in 1866, although the capital of the
Bank had been increased by the decree of June 29, 1865, to
100,000,000 lires ($20,000,000). The provision for the sus­
pension of specie payments, with legal tender quality for the
bank-notes, applied only to the National Bank, but the latter
was required to furnish circulating notes without charge to
other banks of circulation. The depreciation of the bank-notes
drove the subsidiary coins out of circulation, and many small
banks of deposit, commercial houses, and even retailers, issued



certificates of one lire and 50 centimes to take their place.
The government in 1868 sought to drive these notes out of
circulation by authorizing the issue of notes for one lire by
the regular banks of circulation, which were made legal
tender for a limited sum throughout the Kingdom. The
bank made handsome profits, as usual when specie payments
are suspended, made large advances to the government and
again increased its capital to 200,000,000 lires under author­
ity of a law of April 9, 1872.1
The policy of the Italian government to introduce unity
into every branch of Italian affairs was pursued cautiously
in the case of the bank-note circulation and without the
hasty abrogation of the* rights of the banks. No new bank
could be constituted without the authority of a special law,
but five banks of circulation conducted business without
interference by the side of the National Bank of Italy.
The Roman Bank, founded in 1851 with a privilege secured
until December 31, 1889, had a capital of 15,000,000 lires
and while Rome was independent of the Kingdom of Italy was
under the protection in a measure of the Papal power. The
National Bank of Tuscany was established in July, 1857,
with a capital of 30,000,000 lires and the Tuscan Bank of
Credit was established for thirty }~ears in March, i860, with
a capital of 10,000,000 lires, of which only half was paid in.
Both these banks were located at Florence. The Bank of
Naples was founded as early as 1794 and the capital was
contributed in part by the State. It had a head office at
Rome and about a dozen branches. The Bank of Sicily was
also an old establishment, with its headquarters at Palermo,
four principal offices in other parts of Sicily and branches at
Rome and elsewhere in Italy. The capital of the Bank of
Naples was originally 32,500,000 lires and that of the Bank
of Sicily was 8,000,000 lires. The authorized circulation of
these banks under the law of 1874 was 450,000,000 lires for
the National Bank of Italy ; 45,000,000 lires for the Roman
Bank ; 63,000,000 lires for the National Bank of Tuscany ;

Juglar, Article “ Banques,” in Dictionnaire des Finances, I., 344.


15,000,000 lires for the Tuscan Bank of Credit; 146,250,000
lires for the Bank of Naples, and 36,000,000 for the Bank of
Sicily, making a total of 755,250,000 lires ($150,000,000).1
The necessity of maintaining public credit, and some com­
plaints by tlie other banks that they suffered by the special
favors granted to the National Bank, led to legislation in
1874 which established the Consorzio. This arrangement
formed the banks into a syndicate for the withdrawal of the
notes issued directly on behalf of the government and the
substitution of a like sum (840,000,000 lires) in bank bills
of the National Bauk, which were made legal tender through­
out the Kingdom. The notes issued by the provincial banks
on tlieir own account were to be legal tender only within the
province in which the bank was established. The govern­
ment voted itself the authority to increase its loans from the
associated banks to 1,000,000,000 lires ($200,000,000) and to
demand a certain proportion of the amount in gold. The
government pledged itself to deposit five per cent, securities
as the guarantee of the loan and to pay a low rate of inter­
est. The advances actually made to the government under
this arrangement reached 940,000,000 lires, of which 600,000,000 was reimbursed from the product of a specie loan
authorized by the law of April 7, 1881, and the remainder
was transformed into government bills. The Consorzio
came to an end with the abolition of forced legal tender in
1884. The circulation of the banks was slightly increased
by the law of June 30, 1891, which admitted a maximum
limit equal to the mean circulation of 1890.
The suspension of specie payments, the failure of the
Roman Bank, and the almost complete collapse of the bank­
ing system of Italy came about in the latter part of 1892 and
the beginning of 1893 as the result of wilful violations of
law by the banks and the guilty connivance of public offi­
cials. The Roman Bank was accused of exceeding its circu­
lation at almost the same moment that the director of the
Roman branch of the Bank of Naples, Signor Cucciniello,

Alfred Neymarck, Article “ Banque,” in Dictionnaire d' Economie
141- 42.

Politique, I.,



fled with his secretary, leaving obligations of 2,000,000 lires
($400,000) and compelling the branch to close. It was found
that the excess of note issues had been distributed among
the politicians by the thousands and hundreds of thousands.
A Roman deputy had received 4,000,000 lires; a former
minister, 2,000,000 lires ; a well-known financier, 1,500,000;
a newly elected deputy, 1,000,000 ; a former editor, 150,000 ;
and others, various sums from 1,000 to 500,000 lires.1 Some
of these sums were put in the form of loans and advances,
but the security was nominal, many of the loans were long
over-due, and Signor Tanglongo of the bank management
declared that he had been compelled to retain these people
by the orders of several ministers and of a president of the
An official investigation was ordered and the report by
Senator Finali showed that three of the banks had exceeded
the legal limit of their circulation and that all had tied up
their assets to an alarming extent in securities which could
not be readily negotiated. The excess of circulation in the
case of the Roman Bank was 64,543,230 lires ; the Bank of
Sicily, 14,917,203 lires; and the Bank of Naples, 2,041,501
lires. It was found that the National Bank also had issued
53>7oo,ooo lires illegally by order of the administration.
The funds not readily negotiable at sight were reported as
628,620,686 lires, or nearly twice the capital and reserves of
the banks, the Tuscan Bank of Credit alone being in a sound
condition.2 The loans upon mortgages and other securities
slow to realize were 199,756,000 lires, and what were called
the “ Direct Employments ’’ of the funds, in Treasury bonds
and other paper below par or of doubtful value, were 172,343,000 lires. The deputies who had paper over-due were
found to number sixteen, and the amount of the paper was
5,922,410 lires, some of it going back to 1878. There were
nine more deputies who had obtained renewals to the amount
of 641,670 lires. Among the latter was Premier Crispi, with
loans of 244,000 lires which had been renewed since 1887.

Revue des Banquesy March, 1893, XII., 335.
Revue des Banquesy May, 1893, XII., 378.


It was stated that a report of August 30, 1889, had shown a
clandestine circulation of 9,000,000 lires by the Roman Bank,
and that it was known to Signor Crispi, then President of
the Council of Ministers, as well as to Signor Giolitti.1
These discoveries were a death-blow to the Italian bank­
ing system as it then existed. The Roman Bank was com­
pelled to liquidate, and its affairs were taken in charge by
the National Bank. The privilege of the banks expired in
1889 and 1890, but had been renewed for brief periods until
the close of 1892. A law was then pending, proposed by
Signor Grimaldi, which provided for a renewal for six years,
and that every bank should accept the notes of the others.
But this project went by the board when the rottenness of
the existing banking system was discovered, and the gov­
ernment seized the opportunity to push a step further the
policy of unity and consolidation. The National Bank of
the Kingdom was badly compromised, and the redemption
of its notes in specie was indefinitely suspended, but it was
made the basis of the new institution founded by the law of
August 10, 1893.
The new law provided for the fusion of the National Bank
of the Kingdom of Italy with the National Bank of Tus­
cany and the Tuscan Bank of Credit. The name of the
new institution is simply the Bank of Italy, and it is required
to establish offices or branches wherever they have been
established by the National Bank of Tuscany. The capital
of the new bank was fixed at 300,000,000 lires ($60,000,000)
and its privileges were confirmed for twenty years. The
Roman Bank was already in process of liquidation when this
act was passed, so that the only remaining banks of issue
are those of Naples and Sicily. The maximum limit of cir­
culation during the continuance of the forced legal tender
policy, was fixed at 800,000,000 lires for the Bank of Italy,
242,000,000 lires for the Bank of Naples, and 55,000,000 lires
for the Bank of Sicily. This circulation is to be reduced
every two years after 1897, and until in 1907 it shall stand

Le Marche Financier en 1893- 94, 131.



*\t 630,000,000 lires for the Bank of Italy, 190,000,000 for the
Bank of Naples, and 44,000,000 lires for the Bank of Sicily,
making a total of 864,000,000 lires. If either bank, at the
end of fourteen years from the date of the law, lacked a reserve
corresponding to one-third of its circulation, the circulation
was to be reduced within three months, and the amount of
the reduction transferred to the banks which held or paid
in the necessary reserve.1 The banks are authorized to
increase their circulation beyond the legal limits when their
notes are entirely covered by legal coin or by gold bullion,
and notes may be issued beyond the limit for the purpose of
advances to the government.
The reserves of the banks, when on a specie basis, are fixed
at forty per cent, of the circulation, including thirty-three
per cent, in coin or bullion and the remainder in foreign
bills of exchange approved by the Minister of the Treasury.
The metallic reserve is required to consist of gold in the
proportion of at least three-quarters. The law provided that
bills then in circulation should cease to be a legal tender after
December 31, 1897, anc*should no longer be redeemable after
December 31, 1902. A permanent supervision over banks
of issue is established through a board consisting of the Min­
ister of Agriculture, Industry and Commerce, and the Minis­
ter of the Treasury. A special inspection is to be made
under the authority of these ministers every two years, and
the results reported to Parliament within three months. The
nomination of the director general of the Bank of Italy
must be approved by the government. One of the provisions
of the law provided that if the deposits exceeded a certain
figure, the bank must reduce its circulation by three-quarters
of the deposits bearing interest in excess of the lim it; but
this provision was suspended by decree of January 23, 1894.8
The new banking law did not rescue Italy from the regime
of depreciated currency and was probably not expected to
do so. The government was reduced to subterfuges to in­

Section 2, Law of August 10, 1893, Bulletin de Siatistique, XXXIV.,


- Bulletin de Statistique, February, 1894, XXXV., 207.


crease the volume of paper money and provide itself with
funds to meet pressing obligations. The decree of January
23, 1894, permitted a supplementary issue of bank-notes to
the amount of 90,000,000 lires for the Bank of Italy, 28,000,000 for the Bank of Naples, and 7,000,000 for the Bank of
Sicily. These new issues were not directly authorized, but
the penal tax imposed by the banking law was reduced to
two-thirds of the rate of discount up to the limit of the pro­
posed new issue. A decree a month later, February 21,
*894, purported to put a limit of 600,000,000 lires on the
circulation of State notes, and Article 5 of the same decree
provided that the banks might redeem their notes on pre­
sentation at the market rate of depreciation. This favor
was only to be accorded, however, to the banks which com­
plied with the requirement of Article 2, that they transfer to
the credit of the government 200,000,000 lires in gold and
accept a new issue of government notes as a substitute.1 The
new notes, of which 145,000,000 lires were apportioned to
the Bank of Italy, 45,000,000 lires to the Bank of Naples,
and 10,000,000 lires to the Bank of Sicily, were thus nomi­
nally covered by gold, but no provision was made for reduc­
ing the volume of outstanding bank-notes or for replacing
the gold withdrawn from the bank reserves.
The result of measures like these was to drag Italy deeper
and deeper into the mire, make the rates of foreign exchange
more and more unfavorable and the receipts of the Treasury
of constantly diminishing value in gold. The additional
issue of bank-notes authorized by the decree of January 23,
1894, was avowedly for the purpose of meeting the demands
of the depositors in the savings banks, who upon demanding
the restoration of the deposits they had made in good money
were reduced to the choice of leaving their deposits in the
hands of a discredited government or accepting the paper
promises of the suspended banks. One of the expedients
adopted to protect the Treasury was the levy of a tax of
twenty per cent, on the interest of the public debt, which was

Bulletin de Statistique, March, 1894, XXXV., 335.



only an indirect way of scaling the interest on the consoli­
dated five per cents, to four per cent.1 The depreciation of
the paper currency became so great as to drive all subsi­
diary coins out of the country and make it difficult to get
change for a note of a few lires. Twenty million lires was
issued during 1894 hi nickel pieces of twenty centimes, and
the government congratulated themselves on a profit of
17,500,000 lires by means of the seignorage.
The flight of subsidiary money from Italy carried it to
France, Switzerland, and, to some extent, to Belgium, where
it passed in ordinary transactions upon the same terms as
the money of those countries. So much Italian silver drifted
into Southern France that the French government made an
investigation of the amount received on a given day at some
of the leading banks and found that Italian pieces consti­
tuted 28.78 per cent, of the entire subsidiary circulation.
Belgian, Swiss, and Greek pieces constituted 12.30 per cent.,
so that the proportion of French coins was only 58.92 per
cent. Italian subsidiary coin constituted more than seventy
per cent, of the circulation in Savoie and the Maritime Alps
and from 45 to 60 per cent, in eight other departments be­
tween the Rhone and the Alps.2 A conference of the states
of the Latin Union, held at Paris, reached an agreement on
November 15, 1893, by which the Italian subsidiary coins
were to cease in four months to be received by public deposi­
taries in France. Those in the Bank of France were, upon
presentation to the Italian government, to be redeemed half
in gold and half by bills of exchange. The amount thus
presented up to the close of 1894 was 57,222,279 lires.3 The
policy adopted by the Italian government for preventing the
continued exportation of the silver, of locking it up in the
Treasury and issuing small notes against it, was sanctioned
by the conference upon the condition that the subsidiary
Le Marchk Financier en 1893- 94., 136.
Le Marchi Financier en 1893- 94, 348- 68.
Assemblke Genkrale des Actionnaires de la Banque de France du
3 1 Janvier, 1895, p. 9.

silver of Italy should never exceed the limit of six lires per
head originally fixed by the Latin Union.
The report of the Minister of the Treasury, Sidney Sonnino, to the Chamber of Deputies, on December 10, 1894,
offered only a distant hope of the restoration of sound finan­
cial conditions in Italy. The result of the special examina­
tion of the banks in February was, in his own words, “ not
very favorable. ’’ The Minister proposed a somewhat elabo­
rate scheme of law to put in effect a convention between the
bank and the Treasury. The period of liquidating the un­
available assets of all the banks was extended to fifteen
years. The Bank of Italy assumed the liquidation of the
affairs of the Roman Bank and received in return the cus­
tody of the public funds in the provinces, paying interest at
one and a half per cent, on sums above 40,000,000 lires.
The bank was required to deposit with the Treasury a guar­
antee fund of 50,000,000 lires in national securities and to
increase the amount within six years to 90,000,000 lires ; to
increase the limit of advances to the Treasury from 90,000,000 to 100,000,000 lires ; to call upon shareholders for an
assessment of 100 lires per share, amounting to 30,000,000
lires, and to reduce the capital by an equal amount. The
bank was required to set aside 4,000,000 lires in 1894, 5>000»“
000 lires in 1895, and thereafter 6,000,000 lires annually, to
be invested in national securities to form a reserve fund
to cover the losses by the Roman Bank, ?nd any profit
which might remain was allowed to be divided among the
shareholders to a maximum limit of 40 lires per share.1
This remarkable method of liquidation, —by converting
locked-up assets into a new form of such assets, instead
of paying off liabilities,—was approved by the shareholders
of the Bank of Italy on February 25, 1895, for they
practically had no option but to accept the proposals of
the government.9

1 Bulletin de Statistique, December, 1894, XXXVI., 587- 89.
2Raffalovich, Le Marchk Financier en 1894- 95, J77*



Out of these difficulties Italy was lifted within a few years
by the constructive ability of her leading statesmen and the
recuperative energy of her people. Already, before the out­
break of the bank scandals of 1893, Signor Rudini, the
Premier of the day, had urged the adoption of rigid econo­
mies in all branches of the public administration and had
deplored the “ multiplied and gigantic projects, out of pro­
portion to her powers,” which had been saddled upon the
budget of the kingdom.1 The first efforts at reform were
counteracted by the cost of the expedition to Erythrea,
which failed so disastrously in 1896; but with the advent
of Signor L,uzzatti to the head of the finances a surplus of
9.000.000 lires took the place in 1898 of the recurring deficits
which had so complicated the relations of the Treasury with
the banks. Reciprocit}T with Prance, abandoned in 1887
with disastrous results to Italian exports, was reestablished
November 21, 1898, and was followed by an increase in total
exports from 1,091,000,000 lires ($210,000,000) in 1897 to
1.472.000.000 lires ($284,000,000) in 1902.2 Remittances to
meet the interest on the national debt held abroad were
reduced for several years by the drastic process of the return
of the debt to Italy, until interest payments abroad fell
from 192,000,000 lires in 1893 to 105,000,000 lires in
But these measures of rectification began to produce re­
sults. From 1891 to 1902 public revenue advanced by 203,400,000 lires, while expenditures advanced only by 62,560,000
lires, and the total surplus of the budgets for five years ending
with 1902 was 212,300,000 lires ($41,000,000).4 Exchange on
Paris, which reached a maximum in 1894 of 115.70, fell to
a minimum in 1901 of 101.50, and in August, 1902, it was
hailed as a notable event that the premium was only 80
Fochier, in Questions MonHaires Contemporaines, 454.
The denunciation of the treaty with France was due partly to
political motives and was accompanied by withdrawals of French
capital from Italian investments.—Brouet, 14.
3 Vide the author’s Principles of Money and Bankings II., 346.
4Thery, Situation fLconomique et Financiere de I *Italie> 82.


centimes, or four-fifths of one per cent.1 Then came in
October the restoration of parity, which has ever since been
substantially maintained.
Both the Treasury and the banks aided in the restoration
of sound conditions. The Treasury began in 1898 the re­
tirement of the small notes which had driven silver across
the French and Swiss borders, and by 1903 had reduced the
amount from 110,000,000 lires to 2,358,000 lires. A decree of
February 18, 1899, restored to circulation 20,000,000 lires in
subsidiary silver, and a law of March 3d reduced by 45,000,000
lires the special circulation of the Treasury.2 Customs duties
were collected in gold, with the result of a rapid increase of
gold resources. On behalf of the failed banks, the Bank
of Italy addressed itself resolutely to reducing the mass of
locked up or unliquid assets, which amounted in 1894 to
about 501,000,000 lires ($96,700,000). This amount was
reduced by the close of 1899 to 245,000,000 lires, in spite of
some friction with the government in the latter year over
the proposal to create a special corporation to take the
matter in hand.8 The Minister of the Treasury, at the be­
ginning of 1903, in his presentation of the budget, declared
that it was “ an immense advantage for the general economy
of the country to possess, like other great states, a potent
organism which knows how to exercise the double function
of regulator of the money market and of a faithful and
trustworthy aid to the public finances.” 4
Some changes were made by a law of 1900 in the statutes
of the banks of Italy affecting their note circulation. The
legal limit of issue not fully covered by the reserve was to
be subjected to an annual reduction which should leave the
total in 1906 for the Bank of Italy at 630,000,000 lires; Bank
of Naples, 190,000,000 lires; and Bank of Sicily, 44,000,000
lires.5 The banks were required to accumulate a reserve of
Fochier, 467.
Raffalovich, Le Marche Financier en 1898- 99, 593.
3 Economiste Europten (April 6, 1900), XVII., 443.
4 Thdry, 148.
5 Arnaune, La Monnaie, le Cridit et le Change, third edition, 446.

forty per cent., part of which might be in foreign securities.
Excess issues subject to tax continued to be permitted, sub­
stantially as provided by the law of 1893. This law, how­
ever, imposing a charge of two-thirds of the rate of discount
011 the amount of the circulation in excess of the legal limit,
was modified by a law of December 31, 1907, so as to afford
a little greater elasticity to the movement of the circulation.1
The time seemed at length to have come when the danger
was passed that the circulation would be unduly expanded
and when the legitimate business demands of the country
had more than grown up to the limits imposed by law. The
bank was subjected to severe pressure during the crisis in
America. Discounts rose from 398,290,560 lires on July 31,
1907, to 494,988,781 lires on November 30th, and advances
rose in the same interval from 40,002,533 lires to 75,257,128
lires. The discount rate was advanced to five and a half
per cent.—the highest rate touched since 1894. The demand
for accommodation, while it swelled note issues from 1,265,692,550 lires on June 30th to 1,412,418,450 lires on Novem­
ber 30th, did not at any time cause a reduction of reserves,
which increased during the same interval from 932,014,944
lires to 1,099,995,262 lires ($212,300,000). Only during five
weeks of this period was circulation issued under the special
tax and the maximum subject to tax was only 48,619,046
lires ($9,480,000).
The adequacy of the reserve was no longer in question at
the Bank of Italy in 1907. The gold held at the close of
that year was 896,307,000 lires ($173,000,000) and the silver
122,475,000 lires ($23,640,000). Between the maximum and
minimum circulation there was a difference of 304,000,000
lires, or 21.4 per cent, of the maximum.2
The Bank of Italy, like the Bank of France, rediscounts
much paper for small amounts for the benefit of retail trades­
men. The classification of the paper discounted during
1907, which reached a total value of 2,261,968,257 lires
($436,500,000), showed that 232,387 pieces were for amounts

Adunanza Generale Ordinaria degli Azionisti, 1908, 9.
Ibidem, 35.


up to 100 lires ($19.30) and 1,147,640 pieces for amounts
from 100 lires up to 1000 lires ($193), leaving only 268,534
pieces for larger amounts.1 The average value per piece of
paper discounted was 1397.52 lires and the average term 59
days. The average value in 1904 was 959.41; in 1905,
1140.75 ; and in 1906, 1204.44 lires.
The following table shows the principal items of the
balance sheet of the Bank of Italy for representative years
since the failures of 1893 :







(in millio;ns of lires)



I 9<>5



IO l8



14 11




' l 9I





The Bank of Naples has shared in some degree the pro­
sperity of the national bank. Material progress was made
after 1900 in the liquidation of mortgage obligations, and
savings deposits attained a volume second to those of only
one other institution in Italy.8 Total assets at the close of
1907 were 590,597,829 lires ($114,000,000), of which 181,153,631 lires was in gold, 15,810,131 in silver, 107,255,871 in
commercial paper, and 80,285,532 in government securities.
Circulation was 360,319,200 lires ($59,500,000) and current
debtor accounts were 88,921,791 lires.

Adunanza Generate Ordinaria degli Azionisti, igo8, 27.
£conomiste Europken, May 1, 1908, XXXIII., 572.


The Events Out of Which the Bank of France has Grown—The Mis­
sissippi Bubble of John Law and its Collapse—The Banks of
Paris before the Revolution—Failure of the Assignats and the
Revival of Commercial Banking—Birth of the Bank of France
and its Absorption of the Departmental Banks—The Latin Union
and the Embarrassments Caused by the Fall in the Price of Silver
—The Recent Renewal of the Bank Charter.


HE Bank of France is the greatest and in many respects
the strongest of the banks of the world, and its devel­
opment exhibits many of the most interesting phases
of banking history outside of Great Britain. French bank­
ing is done pre-eminently through the issue of circulating
notes, and the per capita monetary circulation of France is
greater than that of any other country. Th^j>rigins of
hanking in France go back to the 4‘ Mississippi plan ’’ of
John Law, but its history during the present century has
been essentially one of prudence and moderation, if not al­
ways of the most enlightened financial policy. Monopoly
of the power of note issue now belongs to the Bank of France,
but is far from having been its immemorial right. The
rigime of the independent departmental banks, which were
absorbed by the central institution in 1848, is still recalled
with pride by many French economists, and the most recent
expiration of the charter of the Bank of France inspired
them to a renewal of the contest then so warmly waged
between “ monopoly” and “ liberty.’’
The first French bank of issue was created by John Law
under the regency of the Duke of Orleans, at the beginning




of the eighteenth century. Scotland, which gave to the
world the founder of the classical school of political economy
in Adam Smith, was also the birthplace of Law, the author
of ‘‘ The System ’’ which introduced the use of negotiable
securities on a broad scale into France. The name of Law
has been synonymous with the most reckless speculation and
brazen fraud, but the bank which he founded was at the out­
set conducted upon conservative principles, and even the sys­
tem of the “ Company of the West ’’ (Compagnie dyOccident),
more generally known as the Mississippi Company, was
conceived upon broad and not impossible lines before the
stock was made the plaything of speculation. Law desired
to establish a royal bank of state, but the government was
only willing to grant a charter for an institution managed by
private citizens. The bank thus founded by letters patent
May 2, 1716, was authorized to issue bills in crowns of
specie under the name of “ bank crowns,5’ redeemable in
money of the weight and denomination of the day of issue.1
This was intended to guard the bank-notes against the possi­
ble fluctuations and changes in the metallic standard and
give them some such preference as that given to the ‘4bank
money” of the Bank of Amsterdam. The feature which
rapidly attracted subscriptions to the stock was Law’s offer
to accept payment at the rate of twenty-five per cent, in
specie and seventy-five per cent, in bills of state, which
were at a discount of about seventy-five per cent.
Discount was granted by the bank at the rate of five per
cent., and officers of the finances received orders in October,
1716, to make their remittances upon Paris in bank-bills,
and to redeem these bills at sight when presented to them.
Another official decree of April 10, 1717, authorized the
receipt of the bills as money for the payment of public
revenues. If the bank had continued upon the sound
basis of a bank discounting commercial paper and acting
as the fiscal agent of the Treasury, France would have
been under a great debt of gratitude to Law for introducing
into her commercial relations the methods of the modern

Coiirtois, 10.



business world. Prof. H. Dunning MacLeod, as keen a
thinker and acute a critic as has written upon monetary sub­
jects, says :

Nothing could be more extraordinary than the restoration of pros­
perity caused by the foundation of Law’s Bank in 1716. It is proba­
bly one of the most marvellous transitions from the depths of
misery to the height of prosperity in so short a space of time in the
annals of any nation. And, if Law had confined himself to that, he
would have been one of the greatest benefactors any nation ever had .1

But Law had much more comprehensive schemes than the
creation of a bank of discount. He determined to unite
into a single great monopoly the various commercial compa­
nies which had been incorporated since the discovery of
America, for the purpose of trade and the extension of
French influence. Courtois enumerates no less than thirty
of these corporations which had been authorized during the
previous century, but many of them had languished, run in
debt, and been consolidated with others. Law proposed a
stock company with a capital of 100,000,000 livres, divided
into 200,000 shares of 500 livres each, payable in bills of
state which were still at a discount of about sixty-six per
cent.2 The State was to pay the company an annual interest
of four per cent, on the principal of the bills withdrawn by
this means from circulation.
The Compagnie d' Occident was incorporated by a decree
of August 28, 1717, registered by the Parliament on Sep­
tember 6th, for a duration of twenty-five years. Four compa­
nies were consolidated at the outset, which controlled the
commerce of Louisiana, Canada, and the Western Coast of
Africa, and the new company was to enjo}' all the rights of
sovereignty over the lands which it possessed. The shares,
which were made out in certificates of one share or ten,
Theory and Practice of Banking, II., 254.
The variations in the coinage at this time were such as to make a
statement of the value of coins an almost impossible task, but the
livre may be taken in a general way as about the equivalent of the
later franc—19.3 cents in United States gold coin. For a full account
of the changes in the coinage system, see Shaw, 396- 423.



were transferable by bearer, a system for the first time intro­
duced into France, so far as known ; for even the shares of
bank were made out to the owners. Law proceeded to
make negotiations with the government through his friend,
the Regent, for farming the taxes, for coining money, for
managing the tobacco monopoly, which had been under the
control of the State, and for assuming the entire public debt.
He introduced a number of reforms into the collection of the
taxes by discontinuing the collection of those which were
disproportionately costly and vexatious in proportion to the
amount obtained, and he proposed more sweeping changes
which would have abolished needless offices, consolidated
various imposts into one, and removed some of the fetters
from French commerce.
The attribution of all these public functions to a single
company, as well as the management of the commerce of
two continents, would in themselves probably, as Law’s
great opponent, Paris-Duverney, pointed out, have caused
the organization to break down of its own weight, and have
attracted the jealousy of the government. But Law, and
those who were carried away with him by the grandeur of
the new scheme, did not wait for the slow operation of com­
mercial causes to sow the seeds of destruction of their enter­
prise. He succeeded in having the bank transformed into
a public institution (Banque Royale) by a decree of December
27, 1718, and had the stockholders reimbursed in specie
for their subscriptions. Redemption of the notes in bank
crowns was abandoned by the decree which made the bank a
public one, and redemption was required only in the official
money of the country. This move created a degree of dis­
trust which led to a new decree of April 22, 1719, that bills
payable in the existing standard should not be subject to the
diminutions which might affect specie. The tendency of such
a decree was to put the bank-bills at a premium over cur­
rent coins, which were being perpetually debased and altered
by the wretched administration of the finances. The total
circulation of bills in April, 1719, the date of the last decree,
was 110,000,000 livres ($22,000,000).



Meantime the shares of the Compagnie d' Occident were
undergoing a remarkable experience. They were sold
rather slowly at first and the principal subscription was by
the former stockholders of the bank, who subscribed their
receipts from the bank shares (1,125,000 livres in bills of
state and 375,000 livres in specie) for the stock of the new
company. I^aw found it necessary, in order to stimulate the
sale of the shares, to buy publicly some two hundred shares
at par, of which 200 livres per share was paid as a margin,
with the option of completing the transaction in six months.
Dealing in options (marchi ci prime) was thus brought into
general practice for the first time in France. The making
of the contracts for the tobacco monopoly, the extension of the
commercial operations of the company and the wresting of
the farming of the revenues from the Paris brothers, who
had formerly controlled it, gave a great stimulus to the mar­
ket value of the stock, and Iyaw was authorized to issue fifty
thousand new shares at a premium of one hundred per cent.,
to pay the government the sum guaranteed by the new con­
tracts. The value of the old shares was maintained by
requiring their presentation to obtain the new ones. The
original issue thus came to be known as the ‘cmothers ’’
(mZres) of the second, which were called the “ daughters”
(/illes), while the third issue was known as the “ grand­
daughters” (petites-jilles). The contract with the govern­
ment for assuming the entire public debt upon a pledge by
the state to pay annually three per cent, interest was author­
ized October 12, 1719, and the payment of the interest was
assured to the company by its contract for collecting the
revenues. Three successive issues of one hundred thousand
shares in the Compagnie des Indes1 were thought necessary to
carry through this gigantic operation. The new shares were
of a par value of 500 livres each but were issued at a price of
1 The name of the Compagnie d ’Occident was changed to the
Compagnie des Indes in May, 1719, when the privileges of the two

companies of the West Indies and of China were absorbed by Law’s
Company, and the new name was retained until the dissolution of
the company in 1769.—Courtois, 20.



5000 livres, payable ten per cent, a month. The presentation
of the old shares was not required for the purchase of these
last issues and the price was rapidly forced upward until
10,000 livres per share was attained in November, 1719.
Whatever might have been the success of so comprehensive
a scheme under sound management, the fever of speculation
had forced the shares to a point where a reasonable dividend
was impossible. Law announced at a general meeting of
the shareholders on December 30, 1719, a total revenue of
91.000.000 livres,—48,000,000 from the interest on the pub­
lic debt, to be retained from the taxes ; 12,000,000 from
profit on the farming of the taxes; 6,000,000 from tobacco ;
1.000.000 from general taxes not covered by the farming of
the revenues; 12,000,000 from profits of the coinage ; and
12.000.000 from the commercial operations of the company.
The actual par value of the outstanding shares was 312,000,000 livres, which would have afforded a profit of nearly
thirty per cent., and a dividend of 200 livres per share
was actually declared on January 1, 1720 ; but the shares
had been selling at 12,000 livres, or twenty-four times their
par value, which afforded an actual dividend of only one
and two-thirds per cent. Notwithstanding the doubtful
character of some of the profits claimed and their palpable
insufficiency to pay large dividends upon such an inflated
investment, the phrenzy of speculation forced the shares by
January 6, to 18,000 livres—thirty-six times their nominal
par value. The Rue Quincampoix, between the Rue SaintDenis and the Rue Saint-Martin, had been since the close
of the reign of Louis XIV. the meeting place of speculators
and dealers in the public stocks. Such operations attained
a new extension by the speculations in the shares of the
Comfiagnie des Indes. Fortunes were won and lost in a day
and feeling became so violent that the place was closed by
the government and the speculators were driven into obscure
corners in other parts of the city, where they were constantly
on the watch for the police.1
1 The decree of October 25, 1720, forbidding speculative operations
in the public streets is of interest because it established the sixty



The New Year of 1720 and the declaration of the dividend
marked the apogee of Law’s system. The craze had sub­
stantially run its course and the reaction was setting in.
Prices were rising under the impulse of the excessive issues
of bank-bills and the more prudent speculators were endeav­
oring to convert their gains into more solid property by the
purchase of real estate or by shipping gold abroad. The
bank had already been authorized to issue 1,000,000,000
livres and there had been issues without authority and
counterfeits, which were easily made because the genuine
bills were so rapidly and crudely turned out. Specie began
to disappear and the subsidence of speculation made the bills
redundant. Law adopted the now familiar argument in
favor of paper money, that it was to be preferred over coin
because it was non-exportable. A series of decrees during
the early months of 1720 sought to discredit coined money
and maintain the currency of the bank-bills. The nominal
value of coin was reduced ; the quantity of specie which an
individual was permitted to hold was limited ; the sale of
vessels of gold or silver was prohibited ; the carrying of
diamonds and precious stones was prohibited ; the circulation
of bills throughout the realm as legal tender was decreed ;
an advantage was accorded those who paid certain taxes in
bills rather than specie ; and special jurisdiction was given
the Council of State for causes concerning bank-bills.1 All
these measures failed to maintain confidence in the super­
agents of exchange {agents de change) who still form the legal body
of the Paris Bourse. Their places are transmissible and hereditary.
The Bourse decides what stocks shall be admitted to its lists and only
those representing a large capital are ever listed. The corporation
which has been formed by the members inspires absolute confidence
in its operations by voluntarily assuming corporate responsibility for
the acts of its members in their legitimate capacity as brokers. This
corporation has instituted a clearing house and was strong enough in
the crisis of 1882 to borrow 80,000,000 francs ($16,000, 000) from the
Bank of France, guaranteed, by the Rothschilds to the amount of
40,000,000 francs and by the leading societies of credit for 40,000,000
-Jannet, 347- 48.
1 Courtois, 44.



abundant mass of paper and the control of the bank was
turned over to the Compagnie des Indes. The company was
authorized to convert at the will of the holders shares in
the company into bank-bills or to redeem bills in shares, at
a fixed price of 9000 livres per share. The contest of paper
money against the metals was continued by a decree of
March nth, suppressing gold and silver as legal tender and
providing for the confiscation of gold or silver, whether coin,
bullion, or vessels, when found in the possession of subjects.
But the tide had turned and could no longer be stemmed.
The fall in the stock continued, the company suffered in its
commercial operations by the pest, which closed the free
port of Marseilles, and a decree of May 1, 1720, scaled the
value of shares from month to month until they should be
reduced on December 1st, to 5500 livres and bank-bills should
be reduced to fifty per cent, of their par value. Panic seized
upon every holder of either form of paper, as he saw the
values of his property shrinking under legal decree with
every passing day. A commission was appointed to exam­
ine the bank and found that against 3,000,000,000 livres of
circulation it held 21,000,000 livres in coin, 28,000,000 in
bullion and 240,000,000 in commercial bills,—less than ten
per cent, of assets in all against its outstanding notes. A
run upon the bank began on the night of July 16th, and the
crowd was so dense that a dozen unfortunates were choked
or trampled under foot. The corpses were placed upon
litters and borne to the residence of the Regent. Law
escaped from the crowd into the palace, but his carriage was
broken in pieces and the coachman thrown from his seat
and dragged upon the ground. The bank was closed, the
forced legal tender of the bank-bills was suspended, the con­
tracts of the company with the government were cancelled,
and the stock was called in for readjustment.
A decree appeared on January 26, 1721, known under the
name of the visa, providing for the liquidation of the affairs
of the company and of the bank and the readjustment of the
public debt. The decree was attributed to Paris-Duverney,
from whom Law had taken the fanning of the revenues, and



was confided to him for execution. The attempt was made
to readjust private fortunes as well as public obligations
upon the basis which had prevailed before the period of
paper inflation which Law had inaugurated. Those who
had fled the country with their winnings transmuted into
gold, those who could command the royal favor, and those
who were able to keep their gains in hiding were the only
ones who escaped. The mere transfer of speculative gains
into real property did not prevent the exercise of arbitrary
power to transfer the property back to its original owners
and remit the new owner to his original poverty. A regular
scale of readjustment was prepared by which the public
debt was reduced to its original volume and the holders of
bills and the stock of the company were given new public
obligations ranging from one hundred per cent, of their
holdings in certain cases down to five per cent., according as
they were supposed to represent real values or the profits of
stock gambling.
The lesson of Law’s disastrous schemes and the painful
readjustment which followed them prevented for half a cen­
tury the creation of any^ new bank of issue in France. The
success of the Bank of England, however, and the necessity
of some aid to commerce, led to a futile attempt to found a
bank under a decree of the Council of State of January i,
1767,1 and the establishment, during the ministry of Turgot,
by a decree of March 24, 1776, of the Caisse d'Escompte du
Commerce (The Bank of Commercial Discount). The new
institution was limited to a strictly banking business, and
forbidden to borrow except by its notes payable at sight.
It was authorized to begin operations with a capital of
15,000,000 livres ($3,000,000), of which it was intended that
two-thirds should be loaned to the Treasury. The loan to
the Treasury not having been completed as proposed, the
capital of the bank was reduced to 12,000,000 livres, repre­
1 The proposed institution was to be known as the Caisse d*Escompte
and to have a capital of 60,000,000 livres, but it never entered upon
active operations and was suppressed by a decree of March 21, 1769.
—Courtois, 84.



sented by four thousand shares of 3000 livres each. Some
of the most eminent public men and financiers of Paris
served on the board of directors of the bank, and while
they were not directly responsible for its management,1 its
note issues were kept within prudent limits and annual
dividends were declared for the first six years, ranging from
five to eight per cent.
The first blow to the bank’s credit came from the demands
of the government. The growing social and economic diffi­
culties of France were brought to a climax by the bad crops
of 1783 and caused a great scarcity of metallic money. The
new bank, after having considerably expanded its commer­
cial discounts, made an advance to the government at the
demand of D’Ormesson, of 6,000,000 livres. It was brought
face to face with the crisis with a circulation of 45,000,000
livres and with a cash reserve of but little more than 4,000,000. There was a sudden rush for the redemption of the
notes and the bank appealed to the Treasury to reimburse
the 6,000,000 livres recently loaned. The government was
in no condition to comply with this demand, but it was
ready to employ its sovereign power to enable the bank to
suspend specie payments and to authorize the redemption of
bills in commercial paper or their non-payment until Jan­
uary 1, 1784, (Decree of September 27, 1783). The bank
was solvent, however, and had the courageous support of
the private bankers of Paris, who held a large proportion
of its bills. A report presented by the lieutenant of police,
M. L,e Noir, showed that the bills in circulation, amounting
to 44,724,000 livres, were offset by 47,700,000 livres in good
commercial paper, 4,121,700 livres in gold and silver coin
and bullion, and 6,000,000 livres held by the Treasury,
1 The bank really constituted a partnership en commandite, for
which a few individuals were legally responsible, and the use of the
names of leading financiers as directors was somewhat akin to the
modern fraud of paying men of high station for the use of their names
to float irresponsible enterprises ; but the practice in this case appears
to have grown out of the lack of experience with stock companies
and to have involved no intentional deception.



making total assets of 57,821,700 livres and affording a
favorable balance of 13,097,700 livres.1
The loan to the government was soon repaid, specie pay­
ments were resumed under a decree of November 23, 1783,
and the bank was authorized to increase its capital to 15,000,000 livres, and for four years it continued to operate free from
government interference and with advantage to the business
community. Its growing prosperity attracted the attention
of Calonne, then Controller General, and he determined to
turn it to account for the benefit of the State by requiring
the deposit of a guarantee fund with the Treasury. The
capital was raised from 15,000,000 to 100,000,000 livres and
the net receipts in cash, amounting to 80,000,000 livres, were
deposited to the amount of 70,000,000 with the Treasury and
10,000,000 were carried to the reserve. A new run set in in
August, 1787, but the directors refused to accept a decree for
the suspension of specie payments, which Iyom^nie de Brienne,
Chief of the Royal Council of Finance, was preparing, de­
manded help from the guarantee fund in the possession of
the government, and promptly met every obligation.
But the government was sinking into the sloughs of bank­
ruptcy and determined to drag the bank with it, so that there
should be no stronger credit than its own to put it to shame.
August 18, 1788, appeared a decree authorizing the bank to
redeem its bills in part in commercial paper. The decree
was unsought and its existence was unknown until it was
affixed to the doors of the bank, and the permission to sus­
pend was not embraced by the directors. But Necker, who
became Finance Minister on May 25,1789, continued to insist
upon secret loans to the Treasury, and the government and
the bank soon became so involved with each other that
Necker proposed to transform it into a national bank. The
Constituent Assembly had already assumed the power to
regulate the bank, as it regulated all the established institu­
tions of France, and ordered it to pay into the Treasury 80, ~
000,000 livres of its bills against a deposit of interest-bearing
assignats. The bank lost its credit with the business commu­

Noel, I., 90.



nity, the redemption of its notes in assignats was de­
creed in 1790, bank-note issues were forbidden by the
law of August 17, 1792, and the institution was sup­
pressed by a decree of the National Convention 011 August
24 , *793The next three years were those of the consummation of
the Reign of Terror, the execution of the King and Queen,
the fall of Danton and Robespierre, and the restoration of
order under the Directory. “ What institution of credit,”
asks M. Horn, “ could have braved the tempest which agi­
tated the end of the eighteenth century ? What instru­
ment of credit could have maintained itself against the
assignats, which destroyed alike the notions of value and of
money? ” 1 But the Saturnalia of fiat money lasted but lit­
tle longer than in the time of Law. The same sort of enact­
ments,—making the paper money legal tender for debts at
its nominal value, fixing maximum prices, punishing those
who discredited the assignats in conversation,2 and inflicting
the penalty of death upon those who kept their produce from
the market,—quickly ran their course. The assignats in
circulation amounted on January 1, 1796, to 27,565,237,396
francs, and had increased on September 7, to 45,578,810,040
francs, when they were worth one one-thousandth part of
their nominal value. The whole fabric disappeared at a
blow when the National Assembly decreed on July 16, 1796,
that every one might transact business in whatever money
he chose and that the mandates, which had superseded the
assignats, should be taken only at their current value. The
effect of this removal of the restrictions upon the natural laws
of money is thus strikingly portrayed by Professor MacLeod :
No sooner was this great blow struck at the paper currency, of mak­
ing it pass at its current value, than specie immediately reappeared in
circulation. Immense hoards came forth from their hiding places ;
goods and commodities of all sorts being very cheap from the anxiety
of their owners to possess money, caused immense sums to be im­
ported from foreign countries. The exchanges immediately turned
1 La Liberte des Banques, 317.
2 Courtois, 99.



in favor of France, and in a short time a metallic currency was
permanently restored. And during all the terrific wars of Napoleon
the metallic standard was always maintained at its full value.1

The end of the paper money phrensy saw credit again
raising her head and several new banking institutions under
way. The first one, founded in 1796, was known as the
Caisse des Comptes Courants (Bank of Current Accounts), and
had a capital of 5,000,000 francs ($1,000,000). The circula­
tion was 20,000,000 francs in bills of 500 and 1000 francs,
and bills of exchange running for ninety days were dis­
counted at six per cent.2 The Caisse des Comptes Courants
was created largely by bankers for bankers, and a party of
business men, to escape what they regarded as a certain de­
gree of favoritism, determined to found a banking associa­
tion of their own. They established, November 24, 1797, for a
term of three years, the Cazsse d' Escompte du Co?nmerce (Bank
of Commercial Discounts), which proved so successful that it
was renewed for an unlimited term. There was no fixed
capital, but each new subscriber for a share of 10,000 francs
($2000) increased the capital by so much until in less than
four years it had reached 12,000,000 francs. Five thousand
francs were paid on each share in cash and five thousand
francs in bank-bills were endorsed by the subscriber with his
own signature and afterwards countersigned by the bank.3
The plan proved so successful that it was imitated by the
retailers, who organized the Comptoir Commercial (Commer­
cial Bank). The Caisse des Comptes Courants and the Caisse
d'Escompte accepted reciprocally each others bills and were
doing an active and safe banking business when a new turn
was given to the economic history of France by the coup
d'Stat of the Eighteenth Brumaire (November 9, 1799), which
made Napoleon Bonaparte First Consul and virtually the
supreme ruler of France.
Bonaparte had hardly grasped power before he turned to
his financial advisers for a plan for a national bank. They

Theory and Practice of Banking, II.,

Courtois, 109.
Horn, 322.





had one ready for his immediate consideration, bearing a
striking resemblance to the plan of the Notary Rouen which
had been before the Council of Five Hundred under the
government of the Directory. Less than three months after
the Eighteenth Brumaire appeared the decree of January 18,
1800 (28 Nivose, An VIII), constituting the Bank of France,
with a capital of 30,000,000 francs in shares of 1000 francs
each. The decree provided that one-sixth of the capital
should be furnished by the Treasury by an investment of
half the funds given as bonds by the receivers general, and
Napoleon, members of his family, and personal friends lent
their support by subscribing for the shares.1 This support
was necessary to the success of the bank, and it was not
until 1802 that all the shares were taken. Vitality was
given the institution by the decision of the general assembly
of the Caisse des Comptes Courants to consolidate with it and
the transfer of their offices in the Place des Victoires. Febru­
ary 20, 1800, the bank began its operations as a bank of
issue and of discount. It was at the outset a private insti­
tution, free from government interference and its right to
issue notes was far from exclusive.
But Bonaparte did not view with patience this situation.
“ One bank is easier to watch than several,” was his com­
ment, and after the Caisse d* Escompie du Commerce had
refused to loan money to the government, he took vigorous
measures to drive it to the wall. The law of April 14, 1803
(24. Germinal, An XI), gave the Bank of France the exclu­
sive privilege of issuing bank-bills at Paris, raised the capital
from 30,000,000 to 45,000,000 francs and decreed that no
bank should be established in the departments without the
authority of the government. The stockholders of the
Caisse d 1Escompie du Commerce filed an emphatic protest
against the abrogation of their right to issue notes. Their
complaints did not prevent the passage of the law, but the
1 Napoleon took thirty shares, Joseph Bonaparte took one share,
Murat two, Hortense Beauharnais ten, Duroc five, General Clark, who
married Napoleon’s sister and died in San Domingo, one, and Bourienne, five.—Noel, I., 97, note.



management of the Bank of France did what they could to
prevent a crisis by fusion with existing banks of issue. A
consolidation was arranged with the Caisse d'Escompte du
Commerce, which turned over its assets and received bills of
the Bank of France in exchange. The shareholders had the
option of becoming shareholders of the Bank of France with
all the privileges of the original shareholders.
The financial crisis which broke out upon the formation of
the third coalition against France, after the rupture of the
Peace of Amiens, resulted in radical changes in the constitu­
tion of the Bank of France. The preparations for the cam­
paign of Austerlitz required large expenditures by the
government and the syndicate of contractors for supplies for
the armies obtained large loans from the bank in the form of
bills. The bills began to be presented for redemption at the
rate of two or three million francs a week. The coin reserve
of the bank was reduced, specie was demanded by the bank
in the settlement of its balances with bankers in the depart­
ments, and accommodation bills of exchange were largely
drawn by the contractors to obtain new loans, with the result
of new note issues and new demands for redemption. The
circulation, which before 1803 had never exceeded 30,000,000
francs, surpassed 80,000,000 and the bills began to fall below
par. The council of the regency limited redemptions to a
fixed sum per day, and in course of time the contraction of
discounts and the settlement of balances due the bank re­
established equilibrium. The victory of Austerlitz (Decem­
ber 2, 1805) assisted in restoring confidence, and Napoleon,
the morning after his return to Paris, summoned a council to
discuss the crisis which had absorbed his thoughts even upon
the field of battle.1
The Emperor was convinced that bad management had
much to do with the crisis, and within twenty-four hours of
the council M. Mollien succeeded M. de Barb£-Marbois as
Minister of the Treasury and was charged with the prepara­
tion of a new plan of organization for the bank. He recom­
mended that the bank be linked with the State and that it

Noel, I.,





be the only institution in the country authorized to issue
credit paper. “ The bank,” he declared, “ does not belong
only to its stockholders; it belongs also to the State, since
the latter has given it the privilege of creating money.”
This policy was very pleasing to the Emperor and was
promptly put in practice. The law of April 22, 1806, in­
creased the capital of the bank from 45,000,000 to 90,000,000
francs and confided its direction to a governor and two sub­
governors named by the head of the State, but paid by the
bank. The duration of the privileges of the bank was
extended fifteen years beyond the date fixed by the Act of
1803, until September 24, 1843. It was the purpose of Napo­
leon to make the bank national in its operations as well as
in name, and a decree of May 18, 1808, gave the exclusive
privilege of note issues to the bank in every town in which
it established branches.
The fall of Napoleon caused a temporary suspension of the
operations of the bank. The council ordered the burning of
the bills which were in the vaults ready for issue and the
withdrawal of current accounts by depositors. The reserves
fell to 5,000,000 francs ($1,000,000) the circulation to 10,000,000 francs and current accounts to 1,300,000 francs. The
prompt return of peace restored confidence, the circulation
was increased to 70,000,000 francs and the reserves rose to
93,000,000 francs. The government of the restoration, how­
ever, was not especially friendly to the financial creation of
the Napoleonic dynasty. The management of the bank
themselves were ready to renounce exclusive privileges in
the departments, provided the stockholders were allowed to
resume the selection of the governor and his assistants. This
project was not accepted by the Chambers, but the branches
at Rouen and Lyon were abandoned and were succeeded by
departmental banks of a type which soon spread to the lead­
ing cities of France.
These departmental banks were entirely independent of
the Bank of France, and were authorized to issue their own
notes. They accommodated themselves to local necessities,
their officers were acquainted with local credits, their profits

augmented, and their operation contributed greatly to the
development of the industrial activity of the nineteenth cen­
tury in France. Institutions of this sort were founded in
nine principal cities, and some idea of the extent of their
operations and of their success may be formed from the fol­
lowing table of the principal items of their balance sheets
for 1847 :1

T oulouse,





Per Cent.













1 1 .7


This exhibit shows a circulation for these nine banks in
1847 of about $17,500,000 secured by a coin reserve of
$8,000,000, by means of which loans had been made to the
amount of $18,000,000. The large profits obtained by these
departmental banks (indicated in the table of dividends)
were reflected in the high prices of their capital stock. The
shares all had a par value of 1000 francs ($200), and the
quotations in 1847 were : Bank of Rouen, 2650 francs;
Nantes, 1750 ft. ; Bordeaux, 2200ft. ; Lyon, 3770ft. ; Mar­
seilles, 1970ft. ; Havre, 1330 ft. ; Lille, 1700 fr. ; Toulouse,
1200 fr. ; Orleans, 1810 fr. The deposits were comparatively
small, amounting at their maximum in 1847 to 16,800,000
francs ($3,250,000). Deposit banking was almost unknown
in the smaller cities of France and these departmental banks
1 This table is compiled from the appendix to Courtois’s Histoire
des Banques en France, 338- 41, and is given in round figures because
the tables appear there in millions of francs, instead of being fully
carried out. The same figures appear in Horn’s La Libertk des BanqueSy 361- 64.



could never have made substantial dividends or acquired any
considerable volume of business without the power to trans­
mute their assets into circulating notes.
The majority of the departmental banks were founded
between 1835 and 1840,—the period when the failure of
the Bank of France to meet expanding commercial needs
began to be most keenly felt. The Bank of France was
generally regarded as an institution for bankers rather than
for merchants and the latter obtained their discounts at the
bank through the intervention of private discount houses.
Many of these houses suspended during the political dis­
turbances of 1830, and it became necessary to appoint a royal
commission to report upon the commercial and industrial
situation and “ to propose measures suitable to restore to
business transactions and the circulation their usual regular­
ity.” The proposition which became law on October 17,
1830, proposed to make loans directly from the Treasury
and fixed the amount at 30,000,000 francs ($6,000,000). A
discount office (Comptoir d yEscompte) was established at Paris
with a capital of 1,300,000 francs, which it was authorized
to lend at four per cent, on bills upon Paris and at five
per cent, on those upon the provinces. Various amounts
were afterwards added to the capital and the comptoir was
continued with the guarantee of the City of Paris until
September 30, 1832. The total discounts from December
31, 1830, covered 59,928 pieces of commercial paper amount­
ing to 33,191,433 francs. Similar offices were established
in many of the departments and contributed with the di­
rect government loans towards the accommodation of in­
dustry. The government commission made loans in Paris
for periods of twelve, eighteen, and twenty-four months, dis­
tributing them with some reference to the number of laborers
employed, and assisted nearly 450 establishments in fifty-three
departments outside of Paris, employing more than eighty
thousand men.1 The amount of these loans reported still
bad or doubtful in 1870 was 905,312 francs ($180,000).
A similar device was resorted to again after the revolution
1 Courtois, 137-45*



of 1848. The country was then emerging from the effects
of a financial crisis and the discount houses had again lost
public confidence. The government on this occasion sought
the co-operation of the business community in establishing
discount offices. They required that a third of the capital
be furnished by individuals or municipalities, the other two
thirds being represented by Treasury bonds and municipal
obligations. Some of the offices received in addition a loan
in specie, upon which they were required to pay four per
cent, interest to the Treasury. Most of these loans were
reimbursed at the end of two years and several of the dis­
count offices afterwards repaid the capital advanced by the
State and became private banks. The Paris office became
the Comptoir d ’Escompte, which established branches in
India, Japan, and the Antilles,1 and carried on some large
operations in finance. It was wrecked by advances of 130,000,000 francs to the great copper syndicate in 1888, and its
ruin was proclaimed by the suicide of the director, M.
Denfert-Rochereau, on March 5, 1889.2 The Bank of France
was compelled from 1848 to 1852 to make many renewals
of its discounts, but the amount thus outstanding was re­
duced on December 31, 1856, to 772,500 francs ($150,000).8
The success of the departmental banks was already so
great before 1840 that the Bank of France was stimulated to
avail itself again of the right to establish branches in the
leading cities of the country and a contest which has not yet
ended arose among bankers and economists as to the relative
wisdom of granting a monopoly of note issues to a single
institution or permitting such issues by local banks. The
advocates of monopoly won a partial triumph by the Act of
June 30, 1840, which prolonged the privileges of the Bank
of France until December. 31, 1867, and declared that no
departmental bank should thenceforth be established, nor
the privileges of existing banks prolonged, except by virtue
of a special law. The ordinance of March 25.
T 8 4 .1 ,

1 Courcelle-Senueil, 194.
2Jannet, 325-26.
3 Courtois, 178-187.



fixed the status of the branches, is the law still in force, and
gave to the branches the exclusive privilege of issuing notes
in the cities where they were established. Even the increase
in the number of the departmental banks and in the branches
of the Bank of France had not been adequate to supply the
growing demand for discounts, and in 1837 Jacques Laffitte
founded the Caisse Generate du Commerce et de V Industrie
(General Bank of Commerce and Industry),1 with a capital
of 15,000,000 francs. The absence of authority to issue
circulating notes was evaded by the issue of bills payable to
order after five, fifteen, and thirty days, with interest, and
for three months without interest. The bills payable after
five days were the most sought for and were circulated
with an indorsement in blank which permitted them to pass
from hand to hand.
The overthrow of the government of Louis Philippe in
February, 1848, came on the heels of the financial crisis of
1847, an^ the combination of the two events caused a long
list of failures and the general suspension of specie pay­
ments by authority of the provisional government. The
suspension of specie payments was accompanied by decrees
giving forced legal tender character to bank-notes, both those
issued by the Bank of France and those issued by depart­
mental banks,8 but legal tender circulation was given the
notes of the departmental banks only within the departments
1 The Bank of France was unwilling that the name Banque should
be assumed by any other institutions than itself and the departmental
banks. There was no law on the subject, as in England and the
United States, but the object was attained by the suggestion that
cordial relations would not be established with the new institution if
it called itself a bank.—Courtois, 155, note.
2 The opponents of monopoly lay stress upon the fact that the Bank
of France was forced first to seek the suspension of specie payments,
and it was not until ten days later (March 25, 1848) that the same
privilege was extended to the departmental banks, which had thus
far steadily met all demands. The circulation of the Bank of France
was fixed by legal decree at a maximum of 350,000,000 francs ($70,000,000) and limits were fixed for each of the departmental banks, amount­
ing to an aggregrate of 102,000,000 francs ($20,400,000).—Horn, 368-70.



in which they were established. This policy, whether inten­
tionally or not, paralyzed the action of the independent
banks and gave a color of justification for the decrees of
April 27 and May 2, 1848, providing for the fusion of the
departmental banks with the Bank of France and limiting
the issue of bills to the central institution and its branches.
The language of the decree based the consolidation upon the
ground ‘‘ that the bills of the departmental banks form in
certain localities special monetary signs, whose existence
injects a deplorable perturbation into all transactions; and
that the essential interests of the country imperiously demand
that every bank-bill declared to be legal money shall be able
to circulate equally in all parts of the land.” 1 The govern­
ment thus touched upon the weakest feature of the depart­
mental system—the lack of interchangeability of the various
note issues. This was in part the result of the government’s
own action in limiting the legal tender quality of the notes,
but it was also true that there was no association among the
banks which might have kept their notes in circulation
without the legal tender quality.2 The Bank of France was
given the aggregate circulation of the pre-existing banks
and the maximum was raised by decree of December 22,
1849, to 525,000,000 francs.
The fusion of the departmental banks with the Bank of
France resulted in an increase of the capital of the central
institution by the exact amount of the capital of the nine
departmental banks. The capital of the central bank had
been reduced in 1823 by the purchase of outstanding shares
to 67,900,000 francs and was increased by the absorption of
the departmental banks to 91,250,000 francs ($18,000,000).
So strongly did the current of centralization run that it was
proposed to unite the bank to the public domain under the
name of the National Bank of France, but the Assembly was
unwilling to increase the distrust already felt in business
circles by so radical a departure and rejected the proposals.8
Lois et Statuts,

2Courtois, 175-6.
3Noel, I., 114.



The forced legal tender of the bills came to an end by the
law of August 6, 1850. A new increase of capital was made
by the law of the Empire of June 9, 1857, and the charter of
the bank was extended to December 31, 1897.
privileges were confirmed and a concession was made to the
recent growth of economic opinion, in favor of controlling
the foreign exchanges through the discount rate, by exempt­
ing the bank from the usury laws.1 The new charter re­
quired that branches be established within ten years in all
the departments, but it was not until fifteen years after the
time set that this requirement was fully complied with. The
increase of capital was justified by the immense expansion
of industry by machinery and the building of railroads, and
the requirement of a branch in every department made it the
more imperative. The capital was therefore doubled and
the 91,250 new shares were issued at 1100 francs, of which
the premium of 100 francs was destined to strengthen the
reserve. The government borrowed 100,000,000 francs of
the money subscribed for the increase of capital upon a
pledge of three per cent, securities.
The strength of the bank proved a powerful support for
the railway enterprises which were now being floated in
nearly every department. The quotation of the stock of the
new companies, which had not yet had time to complete
their lines, had fallen very low when ten of the leading com­
panies formed a syndicate and appealed to the bank for
assistance. A contract was signed by which the bank
opened a credit in favor of the companies on the deposit of
their obligations and agreed to market them under favorable
conditions. Two hundred and forty million of francs ($46,300,000) of obligations were disposed of, 150,000,000 by
private sales and 90,000,000 by public subscription, during
1858, and the quotations were carried upward from 260 francs
to 290 francs within the year. The only benefit derived by
the bank from this operation was the interest on the advances
1Lois et Statuts, 81. The earnings above six per cent, were required
to be carried to a permanent surplus fund, which stood for more than
twenty years at 8,002,313 francs.



to the companies, which amounted to 449,600 francs, but
the operation was so successful that sales through the
agency of the bank were continued in 1859 and the bank
charged a commission of 50 centimes for each obligation
sold, deriving a premium of 440,000 francs from the transac­
tion. Similar operations were continued for several years,
with handsome profits to the bank and great benefit to the
railways in placing their obligations and obtaining the neces­
sary capital for construction.
The history of the Bank of France since 1870 is deeply
colored by the national struggle with Germany. The bank
lent its support to the government at the outset; it received
the privilege of legal tender for its notes and the suspension
of specie payments ; it suffered from the ravages of the
Commune, and it played a large part in the settlement of
the great war indemnity. The management of the bank
was prudent, and its credit suffered but slight impairment
under the strain of national disaster and civil discord. The
bank advanced 50,000,000 francs to the government on July
18, 1870, four days after hostilities were voted, secured by
Treasury bonds running for three months. Other advances
up to the close of the war carried the total to 1,470,000,000
francs ($280,000,000). The suspension of specie payments
was authorized on August 12th, with only one dissenting vote
in the Chamber of Deputies. This step was not taken at
the request of the bank, or because of any severe pressure
upon it for gold, but with the view of tying up the gold
reserve for the benefit of the government in case of military
The restoration of specie payments in 1850 had been ac­
companied by the removal of any limitation upon note
issues, which had gradually expanded with increasing com­
mercial development to 1,439,000,000 francs ($275,000,000)
in 1869. A limit of 1,800,000,000 francs was imposed by
the law of August 12,1870, which was raised two days later
to 2,400,000,000 francs. Gold jumped to a premium of one
and one half per cent., but the premium fell in a few days to
*Courtois, 258.



one per cent, or even less and did not rise materially, in
spite of the disasters of the army, until the great demand for
foreign exchange in paying the war indemnity. The pre­
mium then rose as high as two and a half per cent, represent­
ing apparently one of the few cases where the price of gold has
risen as the result of a special demand without affecting the
prices of commodities or the credit of the paper circulation.
The necessity of a large circulating medium led to a further
extension of the limit of issue on December 29, 1871, to
2.800.000.000 francs, and the great loan of three milliards
was the occasion for another extension, July 15, 1872, to francs. The law of December 29, 1871, author­
ized the issue of notes for five francs and ten francs. The
limit of circulation was not again raised until after the re­
sumption of specie payments. Resumption was set by the
law of August 3, 1875, for the time when the debt of the
government to the bank should be reduced to 300,000,000
francs. This condition was formally complied with by a
payment to the bank of 10,000,000 francs on December 31,
1877, t^ bank had already been paying five-franc pieces
in silver since November 7, 1873, and twenty-franc gold
pieces since November, 1874.1
The Bank of Prance was saved from complete destruction
during the reign of the Commune in Paris, in the spring of
1871, by appeasing with small sums the appetites of the
hungry Communist leaders. The latter first drew out in
instalments the sum of 9,401,819 francs, which was on de­
posit to the credit of the City of Paris, and when this was
exhausted demanded several millions more. The bank
yielded grudgingly under the compulsion of force and with
the approval of the Ministry of Finance at Versailles. The
Communists, after the capture of one of the gates of Paris
by the regular army on May 22d, set fire to the Tuileries and
sent one of their officers to the bank to demand the imme­
diate payment of 700,000 francs for the wages of the National
Guard. The Marquis de Ploeuc, the Assistant Governor,
temporized as far as possible by advancing 200,000 francs
1 Arnaun£, 429.


and refusing the remainder upon the ground that so large an
advance required the consent of the Council of Regents of
the bank. The refusal exasperated the Communist leaders,
who threatened to bring the bank to terms by two battalions
and two pieces of cannon. The bank yielded, upon the
written demand of the Committee of Public Safety, endorsed
by M. Jourde, the financial delegate of the Commune, that
“ If this sum is not delivered, the bank will be immediately
invaded by the Communal Guard. ’’ 1 M. Jourde was obliging
enough, when a new demand was made for 500,000 francs
on May 23d, to deliver a receipt endorsed with the declaration
that “ The refusal of this sum would involve the seizure of
the bank/’ The next day the regular army of Versailles
was in the heart of Paris and the bank was safe from further
robbery. The advances on behalf of the City of Paris were
recognized as a debt of the city and counted into the loan
for 210,000,000 francs contracted with the bank on August
30, 1871. The bank was less successful with the general
government and, after a long course of negotiations, was
obliged to charge 7,293,383 francs to the account of profit
and loss.2
The Bank of France played an important part in the most
remarkable transaction in the history of foreign exchange—
the payment of the great war indemnity levied upon France
by Germany. A detailed account of the process of payment
was submitted to the National Assembly in 1875 by M. L6011
Say, and forms one of the most instructive chapters of mod­
ern financial history. The definitive treaty of peace, signed
at Frankfort on May 10, 1871, called for the payment by
France to Germany of five milliards of francs ($1,000,000,000). Five hundred millions were to be paid thirty days
after the restoration of order in Paris, one thousand millions
during the year 1871, five hundred millions on May 1, 1872,
and three thousand millions on March 2, 1874, with five per
cent, interest on the last payment. The framers of the
treaty appreciated the difficulty of making such an immense
1 Noel, I., 122.

2 Noel,

I., 200.



transfer of credit without upsetting the financial fabric of
Europe and provision was made that payment might be
made in gold or silver, in notes of the banks of England,
Prussia, Holland, or Belgium, or in first class bills of ex­
change. Bills not payable in Germany were to be valued at
their net proceeds after deducting the cost of collection. It
was afterwards agreed that the portion of the Eastern Rail­
way of France which was situated in the ceded province of
Alsace, and was the property of the French government,
should be accepted for 325,000,000 francs of the indemnity,
and that 125,000,000 francs should be received in notes of
the Bank of France.
Three things had to be accomplished in order to pay the
indemnity within the time set. The credits had to be trans­
ferred to the French government by taxation or the sale of
securities ; the proceeds had to be converted into obligations
acceptable to the German government; and these obligations
had to be paid or transferred to the credit of Germany. The
first step was taken by means of an advance from the Bank
of France and the placing of public loans. The bank
advanced 1,530,000,000 francs ($300,000,000) to enable the
government to meet promptly the two payments required
during 1871. One of the conditions of the payment of the
indemnity was that German troops should occupy French
soil until the payments were completed. M. Thiers, the
president of the new republic, determined to free the coun­
try from foreign occupation at the earliest possible moment
by anticipating the payments. Two loans were authorized,
—one for 2,225,994,045 francs ($430,000,000) in the summer
of 1871, and one of 3,498,744,639 francs ($675,000,000) in
the summer of 1872. They were subscribed many times
over and the government thereby obtained the funds for
completing the payments and liberating French soil in the
summer of 1873.
One of the striking results of this loan was to bring from
the hoards of the French peasants and small shop-keepers
the gold and silver which had been accumulating for genera­
tions. It was the initiation of whole classes of the French

people into dealing with negotiable securities. The time
was nearly ripe in the progress of modern financiering for
this change in the habits of the people, but it required a loan
which appealed to their patriotism and carried a high guaran­
tee of safety to definitely break down the old habit of
hoarding and establish the new habit of investment.1 The
subscriptions to the second loan were 934,276, and the
amount subscribed was 13,252,455,930 francs at Paris, 4,513,445,566 francs in the provinces, and 26,050,195,054 francs in
foreign countries. The foreign subscriptions, numbering
107,612, were largely speculative and the majority were made
by the great financial houses as a means of supporting their
correspondents in Paris. The bulk of the loan tended
eventually into the hands of Frenchmen. The hoards of
gold and silver brought into the market from the provincial
subscribers went to swell the monetary circulation and
enabled the Bank of France within a few years to accumu­
late a coin reserve nearly twice as large as it had ever
before held. While 375,000,000 francs ($73,000,000) in gold
left the country in the three years 1871-73 and the reserve of
the Bank of France declined as low in 1871 as 399,000,000
francs, the yellow metal came pouring back in the next few
years, and in 1876 the reserve of gold alone in the bank stood
at 1,530,400,000 francs ($300,000,000).
Another striking feature of the payment of the war in­
demnity was the development of the use of commercial
credit for transferring funds from one country to another.

1 M. Leroy-Beaulieu computes an increase in French fund-holders
from 550,000 in 1870 to 1,000,000 in 1876, counting only permanent
investors and excluding speculative holdings. This would represent
about one in eight of the heads of families in France. The sales of
public securities in the departments increased from 4,299,425 in 1869
to 24,272,094 in 1873.—La Science des Finances, II., 220-25. The ef­
fect of the popular subscriptions may be traced also in the reduction
of the balances in the Caisse d'fcpargne (Savings Bank) of Paris,
which fell from 54,180,747 francs ($10,500,000) on January 1, 1870, to
35,454,124 francs ($7,000,ooo)on January 1, 1873, the latter being the
lowest point reached since 1850.—Vide Bulletin de Statistiquey Oct.,
1895, x x x v iii., 374-77.



The aggregate payments consisted of only 742,334,079 francs
($143,000,000) in all forms of currency, including bank-notes,
and 4,248,326,374 francs ($820,000,000) in bills of exchange.
The loss in the monetary circulation of France was less than
the sum of coin and bank-notes, because some of the bank­
notes were purchased by exchange in foreign countries and
others were German notes which had drifted into France
with the German army. The real specie payments were
273,003,058 francs ($52,600,000) in French gold and 239,29i,875 francs ($46,000,000) in French silver. The essential
work of completing the payments was done b}' the purchase
by the government of bills of exchange drawn by French­
men upon their credits in every quarter of the world. Brit­
ish bills were the most plentiful upon the Paris market and
the heavy purchases of the French government threw much
of the monetary stress upon England and compelled the
Bank of England to maintain high discount rates all through
1872 and 1873.1 The purchase by the government of a bill
drawn by a French merchant upon an English customer
permitted the transmission of the bill to the German gov­
ernment, which could then draw upon London for the gold
or simply direct the deposit of the proceeds to their credit in
the London Joint Stock Bank, which was their London
agent. If the Frenchman who sold his bill of exchange to
the government was a purchaser of the new public loan, the
result of the process was the transformation of his claim
against his English customer into a claim against his own
One of the incidents of this great operation in exchange
was the fall in the price of foreign securities on the Paris
market and their flight to other countries, where their quo­
tations remained comparatively undisturbed. These influ­
ences operated most directly upon what are known on the
European exchanges as ‘‘ international securities, ’’ because
they are known and quoted in the leading markets of the
world. The cause of their decline on the Paris market in
1871 was the eagerness of Frenchmen to transfer their capi­
1 Gilbart, II., 349-



tal into the obligations of their own country. The result
of the decline was not only the sale of the securities offered
to brokers, but a flood of foreign money and foreign credits
to Paris to take advantage of the reduced prices of “ the
internationals.’’ M. Say, in his report, attributed to these
arbitrage transactions in international stocks and their cou­
pons much of the facility with which the indemnity was
paid. The sales of Italian five per cent, securities alone on
the Paris Bourse from July i, 1871, to December 31, 1873,
were 46,115,000 francs ($9,000,000), not including sales by
private brokers. The proof that these sales were largely on
foreign account was furnished by the decline in the interest
payments made at Paris on Italian securities from 40,150,000 francs on July 1,1871, to 25,604,000 francs on January
1, 1874.1
The Bank of France was embarrassed as early as i860 by
the fluctuations in the relative value of gold and silver and
their departure from the ratio of fifteen and a half to one
fixed by the French coinage law of 1803. Silver had be­
come the more valuable metal, because of the immense addi­
tion to the gold stock by the discoveries in California and
Australia. The value of silver, in other words, was greater
in proportion to gold than the price paid for bullion at the
mint. It was obvious that if the bank continued the policy
of redemption of its notes in gold or silver at the option of
the holder, silver coin would always be preferred, and would
be withdrawn for speculative purposes as long as it could be
obtained, because it could be sold as bullion at a profit above
its face value in gold. The situation became so serious that
the bank asserted the option to pay only in gold and was
obliged to borrow that metal from the Bank of England in
order to be well supplied. Gold had been flowing into
France since the opening of the California mines and silver
1 Leroy-Beaulieu, II., 236. M. Leroy-Beaulieu admits that sales for

report are included in the first item, but the decline in interest pay­

ments at Paris seems to sustain his argument that Italian securities
left France in order that their proceeds might be invested in the indemnity loan.

flowing out in an uninterrupted stream,1 but the Bank of
France had held on to the dearer metal, silver, and redeemed
in the cheaper until its gold reserve was reduced in i860 to
about 100,000,000 francs, while its silver stood at about 325,000,000 francs. About ^2,000,000 in gold was obtained from
the Bank of England, which was not averse to exchanging
the less valuable metal for the dearer, even though the latter
was not a money metal in England.
The departure of the market ratio of gold and silver from
the mint ratio by the depreciation of gold was the occasion
of the formation of the Latin Union. Belgium, Italy, and
Switzerland had already adopted the French decimal system
of coinage before the formation of the Union, and the coins
of each country circulated freely in the others. The proposi­
tion for a conference came from Belgium, but was cordially
accepted by the French government and the meeting called
at Paris. The most pressing problem to be confronted was
the disappearance of the subsidiary silver coins because of
the premium upon silver. Switzerland had already reduced
her silver coins, except the five-franc piece, by the law of
January 31, i860, from nine-tenths fine to eight-tenths;
Italy, by the law of August 24, 1862, had lowered to 0.835
fine the franc and smaller pieces ; and France had adopted
the standard of 0.835 for her pieces of 20 and 50 centimes.
The change of all but the five-franc piece was recommended
by a commission appointed by the French government in
1861, but the Corps Legislatif in passing the law of May 25,
1864, refused to reduce the one- and two-franc pieces.2 Bel­
gium was on the point of taking legislative action when the
advantages of an international conference suggested them­
The refusal of the French legislative body to reduce the
fineness of the larger silver pieces, so as to bring their bullion

1 The net imports of gold into France from 1848 to 1870 were 5,153,000,000 francs ($1,000,000,000) and only one year (1861) showed net
exports. The years 1852 to 1864 showed uninterrupted net exports of
silver amounting to 1,726,000,000 francs ($340,000,000).—Shaw, 184-86.
2 Arnaun6, 227.



value down to their face value, was rapidly driving them out
of circulation and silver had long ceased to be offered in any
considerable quantities for coinage at the mints.1 The con­
ference decided that all silver coins below the five-franc piece
should be reduced to 0.835 fine, that their coinage should be
limited in each country to six francs per capita, that the sub­
sidiary silver should be received in the public depositaries of
each country in amounts not exceeding one hundred francs
($I9-3°) and should be a legal tender in the country where
coined in amounts of not more than fifty francs ($9.65). The
Belgian, Swiss, and Italian delegates strongly urged the adop­
tion of the single gold standard, but the proposition was re­
sisted by the French delegates and was not acted upon. The
convention putting in effect the decisions reached in the con­
ference was adopted 011 December 23,1865, and Greece soon
after became a party to it. A monetary conference was held at
Paris in connection with the international exposition, which
recommended the adoption of the gold standard by the coun­
tries taking part, and it was in pursuance of this action that
the French government concluded the preliminary conven­
tion of July 31, 1867, with Austria, establishing a fixed rela­
tion between the franc and the gold florin.2
The formation of the Latin Union, so generally treated to­
day as a plan to maintain bimetallism, was, in the language
of a high authority, “ a measure of defence against the ac­
tion of the bimetallic system in those countries which had
adopted the monetary system of France, and lay exposed to
all its disastrous fluctuations.” 8 The effect of the action of
the countries forming the Union, in the language of the
French monetary commission of 1867, “ places in the front
rank gold money, and reduces the pieces of silver of two
francs and less to the r61e of token money. It therefore
1 The total coinage of silver at the French mint in 1863 was 329,610
francs ($65,000), while the gold coinage was 210,230,640 francs ($41,000,000). The largest silver coinage since 1856 had been 8,663,568
francs in 1858, and the largest gold coinage 702,697,790 francs in 1859.
2 Vide Ch. viii. and ix.
3 Shaw, 190



definitely determines the ascendency of the gold franc and
solves practical difficulties arising from the double stand­
ard.’’ The Latin Union, so far from establishing bimetal­
lism, adopted the gold franc as the standard because gold
was then the money of general circulation within the coun­
tries of the Union. The mints continued open to the free
coinage of both metals, but silver was not offered on private
account for coinage into five-franc pieces at the legal ratio,
any more than gold would be offered at the present day in a
country where silver at the old ratio was the common medium
of circulation.
It was because the ratio tilted backwards to a higher bul­
lion value for gold and a declining value for silver that the
aspect of the monetary problem was reversed and that the
purpose of the Latin Union has come to be misunderstood.
The members of the union from the outset, however, have
done no more than seek to maintain the circulation of silver
by limiting its coinage. Silver first dropped below par in
1867, when the commercial ratio of gold to silver was 1 to
15.57, t>ut it was not until 1873, when the quotation was
1 to 15.92,1 that it began to be noticed that an excessive quan­
tity of silver was being minted and that gold was disappear­
ing from circulation. The problem was complicated by the
fact that France, Italy, and Greece were under the rigime
of paper money, leaving only Belgium and Switzerland in
full enjoyment of the bimetallic coinage system. The latter
1 The statement of these differences in the terms of the ratio makes
them look much more trifling than is really the case. Stated in terms
of percentage, the depreciation of silver in 1867 was a little less than
one-half of one per cent. (0.45) and in 1873 was 2.7 per cent, of the par
value. The depreciation in 1872 was 0.97 per cent. It is interesting
to note that the changes prior to 1873 took place, and that their effect
was visible in the bullion offerings at the mints, before the adoption
of the gold standard in Germany or the United States or the limitation
of coinage by the Latin Union. The depreciation of nearly one per
cent, in 1872 was sufficient to afford a large profit on bullion operations,
in view of the fact that the usual element in such computations—
the time consumed in earning interest—did not need to be considered.

country, with a keen appreciation of actual conditions,
almost entirely suspended silver coinage and received her
circulation from the other countries of the union.1 The
presentation of gold for coinage at the French mints ceased
during 1872 and 1873, and the silver coinage was 26,838,369
francs in the former and 156,270,160 francs in the latter year.
The mint of Belgium was besieged by the owners of silver
bullion and 111,000,000 francs in five-franc pieces were
coined in 1873, while even Italy, though on a paper basis,
coined 42,000,000 lires, which were refused acceptance by
the Bank of France.2
The limitation of the coinage was resorted to for the four
years ending with 1877 as the only means of averting the
single silver standard. Conferences were held annually and
the maximum coinage of five-franc pieces was fixed for each
country. The aggregate of these allowances for the four
years was 45,200,000 francs for Belgium, 216,000,000 francs
for France, 18,000,000 francs for Greece, 164,000,000 francs
for Italy, and 28,800,000 francs for Switzerland. Italy was
allowed to coin 29,000,000 francs in 1878 and 1879, on condi­
tion that the sum should be retained in the Bank of Italy as
a metallic reserve against the circulating paper money.
Silver continued to fall in price and the policy of limitation
was succeeded in 1878 by the policy of absolute suspension
of the coinage of five-franc pieces. The monetary union
was renewed from 1878 to January 1, 1886, and was ex­
tended in 1885 to January 1, 1891, since when it has
been prolonged annually by mutual agreement. The con­
vention of 1885 not only bound each of the contracting
parties not to resume the coinage of five-franc pieces without
the consent of the union, but provided that if such coinage
should be resumed the coins should be redeemable by the
nation coining them in gold on demand, and that if such

1 Her entire coinage of five-franc pieces, from the first limitation
to the final suspension of silver coinage, was only 7,978,000 francs
($1,500,000).—Haupt, 85-86.
2 Arnaund, 231.



redemption should be refused the coins might be refused by
the public depositaries of the other parties to the union.1
It was such conditions which confronted the Bank of
France when it prepared to resume specie payments in 1877
with a gold reserve of 1,202,400,000 francs ($232,000,000) and
a silver reserve of 860,900,000 francs ($165,000,000). The
situation was exactly the same as in i860, except that the
position of the two metals was reversed. The bank found
itself well stocked with the more valuable metal, but re­
strained from using it for redemption purposes because of
the certainty that it would soon be drawn away and sold as
bullion. The policy was adopted, and has been steadily
adhered to, of redeeming in gold or silver at the discretion
of the bank and charging a premium for gold. It is impos­
sible to obtain gold at the bank in the quantity desired for
exportation and it has to be taken from the domestic circu­
lation. This means of protecting its gold reserve has been
treated by the bank in some measure as a substitute for rais­
ing the rate of discount in a monetary pressure and while it
protects the gold of the bank it has none of the advantages
upon the money market which follow the different policy of the
Bank of England. The bullion shippers were shrewd enough
when discount was low and gold at a premium in 1857, to.
draw gold by discounting accommodation bills at the bank
rate of four per cent, and selling the gold for the premium
for exportation. The bank prevents this under its present
practice by paying for discounted paper in silver, which is
not exportable for monetary purposes. The result,—“ to
defend the reserve of the bank to the detriment of the reserve
of the country,” in the language of M. Arnaun6—“ is an
error which may have melancholy consequences.” 2
The excessive quantity of silver in the reserve of the bank
has contributed in a measure to its large note circulation.
The bank has tried to force silver five-franc pieces into cir1 For the arrangements regarding the liquidation in gold of the
excess of foreign silver coins in France, see Chapter xi., under the
Bank of Belgium.
2 La Monnaie, le Credit, etle Change, 492.

culation, but they have drifted as steadily back upon its
hands as standard silver dollars, in spite of the efforts of
Treasurer Jordan, drifted back into the Treasury of the
United States in 1885 and 1886. People have preferred to
take notes resting upon the security of both the gold and
silver in the bank reserves. The bank, in the language of
an eminent Scotch financier, has had to ‘‘ relieve the public
of ^50,000,000 of silver, which was coined, and was in ex­
cess of the silver required for the purposes of the people.”1
The government proposed the removal of the limit on circu­
lation in 1884 and while this was refused, the maximum was
carried up by the law of January 30, 1884, from 3,200,000,000
francs to 3,500,000,000 francs. The actual circulation at
this time was 3,162,000,000 francs, but it continued to rise
in response to the demand of the public for notes. The ex­
cess of notes in circulation over gold and silver was 1,210,000 francs in 1884 and was reduced in 1893 to 695,000,000
francs, while the circulation had climbed upwards on Jan­
uary 12, 1893, to 3,473,000,000 francs. Another extension
of the legal limit was demanded for the accommodation of
commerce and it was carried upward by the law of January
25, 1893, to 4,000,000,000 francs. It was found necessary
in the extension of the charter in 1897 to advance the limit
to 5,000,000,000 francs and again by a law of February 9,
1906, to 5,800,000,000 francs *
The Bank of France faced a serious problem at the close
of the nineteenth century in the struggle over the renewal of
its charter. The renewal was proposed in 1891, but the
opposition was so strong in the Chambers that the bill for
the purpose was withdrawn by the ministry for fear of defeat.
The bank then pursued a Fabian policy, awaiting the near
approach of the expiration of the charter at the close of 1897,
in the apparent belief that opposition would be silenced in

1 Mr. Charles Gairdner, manager of the Union Bank of Scotland,
before the Indian Currency Committee. Sen. Misc. Doc. 23, 52d
Cong., 1st Sess., 150.
2 Bulletin de Statistique, February, 1906, U X ., 119.

Ba n k in g


Fr a n c e ,


& measure by the lack of time for framing a workable project
for a new institution. The new charter was laid before the
Chamber of Deputies on October 31, 1896, and was referred
to a committee of twenty-two for examination. This com­
mittee did not report until winter and their report was not
taken up for consideration in the Chamber until May 15,
1897. The bill passed the Chamber on July 1, by a vote of
419 to 97,1 and went to the Senate, where it was passed at
the October session and became a law on November 17, 1897.
The vote upon the passage of the bill in the Chamber of
Deputies did not indicate the full strength of the opposition
to the charter. The proposition to convert the bank into a
state institution was rejected by a vote of 118 to 422, but the
proposition that the bank should provide capital for an agri­
cultural bank to the amount of 60,000,000 francs was rejected
only by a vote of 287 against 258.
The new charter, which was not greatly changed from the
form in which it was submitted by the government, extended
the privileges of the bank until December 31, 1920, subject
to the power of termination by the Chambers on December
31, 1912, if they should see fit to so vote during the year
1911. The essential features of the old charter were not
changed, but the limit of circulation was increased to 5,000,000,000 francs, the bank renounced interest upon two exist­
ing loans to the government amounting to 140,000,000 francs,
and made a further advance to the government of 40,000,000
francs free of interest. These renunciations of interest are
offset by the fact that the government carries in its current
account at the bank a sum which is usually equal to the
amount of these loans. The bank was required to create at
least one new auxiliary bureau each year up to the number
of fifteen. The most important of the new obligations im­
posed upon the bank was the payment of a tax equal to
one-eighth of the rate of discount upon that portion of the
circulation which exceeds the metallic reserve. This tax
1 feconomiste

Europien , July 2, 1897, XII., 15.



was never to be less than 2,000,000 francs ($400,000) per
The Bank of France enjoys the advantage of an owner­
ship and credit independent of that of the government, in
spite of the close official supervision which is exercised over
it. This financial independence proved as useful to the
country midst national disasters and changes of government
in 1870-71 as dependence upon the government proved
dangerous during the similar changes of 1814-15. The bank
was able to assist the government by advances when its own
arms were paralyzed.2 None of the 182,500,000 francs of
the bank capital are owned by the State, but the government
since 1806 has had a share in the management through the
appointment of the governor and two deputy governors,
removable at the will of the Minister of Finance. The bank
receives the public monies on deposit and performs other
public services free of charge, but does not act as an agent
of the State to the same extent as many other European
banks. By the charter of 1897, the duty was imposed upon
the bank of paying coupons of the public debt and issuing
new loans.*
The governing board of the bank is a general council,
which consists of fifteen regents and three inspectors or
auditors (censeurs). The members are elected at a general
meeting of the stockholders, but three of the regents must
be selected from the treasury disbursing agents, and three
inspectors and five regents must be chosen from among the
business portion of the shareholders.4 The only share­
holders entitled to participate in the annual meetings in
January are the two hundred who hold the largest number
of shares, and at the present value of the shares no share­
holder worth much less than 500,000 francs ($100,000) is able
1 Bulletin de Statistique, December, 1897, XlylL, 582.
2 Noel, I., 240. M. Thiers summed up one of the lessons of sound
banking in a sentence: “ The bank saved us because it was not a
bank of state.’*
3 Pommier, 329.
4 Lois et Statuts, Art. 9, loi du 22 Avril, 1806.



to participate.1 A full statement of operations is furnished by
the bank to the government every six months and a balance
sheet is published in the official journal every Friday.
The governor and deputy governors of the bank are the
direct representatives of the State, and most of the measures
taken by the bank are taken on their initiative. It is from
them that proposals usually come for raising or lowering the
rate of interest. It was declared by M. Rouland, who was
governor at the time of the official inquiry of 1865, that
“ nothing of any description which concerns the great inter­
est of the public, nothing which concerns the larger duties
which the bank has to perform towards commerce and in­
dustry,—nothing of all that class of business is left to the
discretion of what is called the interested party.” He inti­
mated that it had not perhaps happened twice in sixty-two
years that the proposal to change the rate of discount had
come from the council.3 The bank has had only thirteen
governors since 1806, several of these serving only ad interim.
The most important functions of the Bank of France con­
cern the issue of bank-notes. This is plain from the fact
that of its liabilities of 6,987,955,990 francs at the close of
1913, the sum of 5,713,551,290 francs represented outstand­
ing notes, while on the other side of the account the assets
included coin and bullion to the amount of 4,157,454,629
iNeymarck, 15. This provision has been the subject of much
criticism in connection with the renewal of the charter and it has been
pointed out that the bank is the only one of the great European
institutions where the number entitled to vote in the general meet­
ings of the shareholders is thus definitely limited. A minimum num­
ber of shares is the usual qualification, being only one in the Imperial
Bank of Germany, five in Holland and Servia, ten in Belgium, fifteen
in Italy, twenty in Austria-Hungary, and fifty in Spain.—Noel, I., 222.
* Palgrave, 147. It is declared by Fachan that this mixed system
gives satisfaction both to those who wish to withdraw from the manip­
ulations of the State the accumulated resources of a private bank,
constituting individual property, and those who believe that the right
to issue notes is so dangerous that the manner of its use and the pre­
vention of abuses of it should be under state regulation .—Historique
de la Rente Fran$aise> 259.

francs. Commercial paper represented only 1,526,383,115
francs and advances on securities 742,442,772 francs. To a
large extent the function of the bank is that of rediscount
It performs this function even for paper representing very
small transactions and has in this field done much to benefit
small producers and shop-keepers. Thus during the year
1913, at Paris alone, the number of pieces of paper discounted
by the bank was 9,056,424, and of these 4,563,306 were for
100 francs ($19.30) or less. The number of pieces for these
small amounts discounted at Paris in 1881 was 1,160,495;
in 1894, 2,188,957; and in 1907, 3,646,229. The total number
of pieces discounted at all offices was 30,041,247. The
average maturity of paper discounted, which in 1912 was
25.45 days, rose in 1913 to 30 days.1
The discounts given in the following table of the principal
items of the bank’s accounts, from the official reports to the
government, represent the aggregate of the bills discounted
during the year rather than the amount outstanding on any
given date:





(In millions of francs)





2 ,311.4

3 423.0
3 495.0
3 473.0



1, 399.3
1, 537.4
1 ,1 7 1 .0
3 , 765.2



3.12 7 .7


1 ,5 4 1.1


9 , 549-7
9 924.6




1 AssembUe GenZrale des Adionnaires, 1914, 13.
*From 1895 the figures of the metallic reserve, instead of the
mean, are the figures of the end of the year, as better representing
the progression from year to year.





3, 742.0

5 , 197.7


(In millions of francs)


3, 615-3
3 ,972.1


9 ,555.8



The discount policy of the Bank of France has been as
conservative as its administrative policy. While the average
rate has been very close to that of the Bank of England, or
about 3.60 per cent, from 1844 to 1900, the changes have
been much less frequent and advances in the rate have been
much less radical in periods of stringency. During the
period from 1844 to 1900, the Bank of England altered its
rate four hundred times; the Bank of France altered its rate
h i times. Nor has the tendency of recent years been less
favorable to the conservatism of the French bank. From
1890 to 1900 inclusive, the changes at the English institu­
tion were sixty-six; at the French, nine.1 During the
earlier years of the history of the French bank, from Jan­
uary 13, 1820, to January 14, 1847, the rate was kept uni­
formly at four per cent. In more recent years, the rates
fixed on May 19, 1892,—two and a half per cent, for com­
mercial discounts and three and a half per cent, for advances
on securities,—remained for nearly three years unchanged,
when they were reduced on March 14, 1895, to two and
three per cent. There were changes resulting from the
South African War in 1898, which carried the rate for dis­
counts as high as four and a half per cent, for very brief in­
tervals in 1899 and 1900, but on May 25, 1900, the rate for
discounts was fixed at three per cent, and for advances at
three and a half per cent. These rates remained unchanged

Palgrave, 151.



for nearly seven years, until the growing pressure for capital
at the beginning of 1907 led to an increase. The discount
rate was fixed on January 17, 1907, at three and a half per
cent., on March 21st, at three percent., and on November 7th,
at four per cent., while at London it stood at seven per cent,
and at Berlin at seven and a half. With the passing of the
storm, the rate went down on January 9, 1908, to three
and a half per cent., and on January 23d, to three per
cent., which remained unchanged for many months.1
The comparative uniformity of the discount rate at the
Bank of France has been the result of three factors,—the
magnitude of the metallic reserve; the less variable de­
mands upon the bank than those which fall upon the Bank
of England; and definite adherence to a different policy of
maintaining the reserve.
A large reserve has made the Bank of France less sensitive
than it might otherwise have been to temporary demands for
gold. Since the suspension of silver coinage on private ac­
count the gold hoard of the bank has, with few interruptions,
steadily grown until it was for a time the largest accumula­
tion of gold in the world. The outpour of the yellow metal
from the mines of South Africa accelerated the upward move­
ment in spite of the large demands made by Russia and the
United States. By the close of 1902 the gold in the bank
stood at 2,542,700,000 francs, which was an increase of
fully fifty per cent, over the amount ten years before. This
amount was considerably increased in the following years, in
spite of the monetary pressure of 1907. For a time the ac­
cumulation of silver was in excess of requirements, but after
1892 there was a gradual decline in the volume of the white
metal, which in fifteen years reduced the amount by about
twenty-five per cent.8
* Assemble Ginirale des Adionnaires, 1908, 9.
2 M. Pallain, the governor of the bank, points out that the diminu­
tion of the reserve which took place during the trying period of 1907
was wholly in silver and arose “ from the demands of the colonies or
from our allies in the Latin Union of whom we have every interest in


The maximum and minimum holdings of gold and silver
at the bank, for representative years since its foundation,
appear in the following table, in francs:

l8 ll




I »959»500>000
3 >503,900>0 °0

S IL V E R .





Though willingly surrendering a part of its gold to Lon­
don in the fall of 1907 to counteract the effects of the Ameri­
can crisis, the Bank of France began to draw it back again
after the crisis was over, and by June 25, 1908, had accumu­
lated a gold stock of 3,151,392,000 francs ($608,250,000), the
largest ever held in its history. The discount rate remained
facilitating their re-stocking.” Of the 400,000,000 francs lost since
1892, he computed that half had gone since 1904.—Assemblte G&ntrale
des ActionnaireSy 1908, 15.

fixed at three per cent, in the face of demands in some
quarters that it be further reduced 1; but even this rate gave
point to the declaration of the annual report for 1906, that if
the bank was reproached for locking up so much unpro­
ductive capital, a little reflection would show that its pres­
ence in the bank vaults had procured for several thousands
of millions of commercial paper circulating in France a rate
of discount lower by three and sometimes by four per cent,
than that of neighboring countries and that by this means
a material profit had been assured to the merchants and
manufacturers of the country.*
While the metallic reserve of the Bank of France sustains
a large volume of outstanding notes, and the bank stands
ready to rediscount paper for the joint stock banks, there are
fewer and smaller sudden demands for money than in Lon­
don. Foreign trade, the demand for exchange, and the
investment of capital abroad plays a smaller part than on
the London market.3 At the close of 1907 deposits and
creditor current accounts in the five principal French stock
banks were about 3,500,000,000 francs ($700,000,000) and
reserves in currency or on deposit in other banks were
330,000,000 francs ($66,000,000). The corresponding figures
for English joint stock banks were deposits of $4,200,000,000
and cash resources of $850,000,000. Obviously, to meet
possible demands of such magnitude it is essential for the
Bank of England to take resolute action when its reserve
is threatened. The English institution, moreover, lacks the
power to meet emergencies by the issue of its notes, which is

1It was pointed out that even this great reserve, including 921,072,000 francs in silver, was less in proportion to note and deposit liabili­
ties than in 1896, being 72 per cent, as against 75 per cent, at the
earlier date; but the ratio of the reserve was as 3078 million francs
gold to 914 million francs silver in May, 1908, against 1962 to 1247
in May, 1896, which afforded an immensely stronger gold position.—
Moniteur des Inthits Matiriels, June 7, 1908, 1871.
2Bulletin de Statistique, February, 1907, IyXI., 221.
8Palgrave, 149.


one of the chief resources of the Bank of France. It is the
knowledge that this power of note issue can be availed of for
making rediscounts, practically without limit, which enables
the joint stock banks of France to do business in safety with
slender cash reserves, and has made the central bank a
refuge in time of trouble. It was declared by L,eon Say that
“ in times of crisis the r61e of the Bank of France was to
liquidate all other banks,” meaning thereby that on such
occasions paper suitable for discount and good securities are
brought freely to the bank in the knowledge that they can
be exchanged for notes.1 The largest of the joint stock
banks is the Credit Lyonnais, with deposits at the close of
1907 amounting to 1,542,800,000 francs ($298,000,000). The
other two of chief importance are the Sociiti Ghiirale and
Comptoir Nationale d' Escompte, each with deposit obligations
of over 800,000,000 francs.8
Apart from these differences in its position, however, the
Bank of France has for many years pursued deliberately the
policy of protecting its reserve under certain conditions by
buying gold at a loss rather than by imposing upon commerce
the burden of an increase in the discount rate. It is recog­
nized that this method is not efficient in an economic crisis,
because it does not operate upon the whole commercial
structure to restrict loans and speculation and to attract
capital from abroad. There are occasions on which the
French method may properly be used, however, as when
credit is not unduly expanded and where a demand for
gold has arisen from special and recognizable causes. While
this method of protecting the gold reserve was at first con­
demned by economists, and while their censure was well
founded so far as it applied to its use to counteract the drain
of a crisis and to redress the balance of the foreign exchanges,
it has come to be recognized in recent years that it may be
combined in a cautious manner with the English method of
’Neymarck, Finances Contemporaines, 493.
2Economists Europ&en^ March 6, 1903, XXXIII., 295.



advancing the discount rate, with benefits to legitimate busi­
ness. The choice of either method, or the prudent use of
both methods in conjunction with each other, depend largely
upon the ability of bankers to judge whether the drastic
pressure of sharp advances in the discount rate is required in
order to arrest the expansion of credit and check dangerous
While the project of direct profit-sharing is not enforced
so avowedly by the government upon the Bank of France as
upon some other European banks, the Treasury receives a
liberal proportion of the earnings of the bank. By various
forms of taxation the government in 1907 collected thirteen
per cent, of gross earnings and more than twenty-three per
cent, of net earnings. The total amount thus absorbed
was 11,082,218 francs ($2,140,000) of which about 7,357,141
francs ($1,420,000) came under the head of the return to the
State as fixed by the charter of 1897. Up to that time an
annual tax had been paid of 2,500,000 francs. The new law
provided that the government should receive one-eighth of the
rate of discount upon the productive operations of the bank,
but in no case less than 2,000,000 francs per year. The
productive operations were based upon the difference between
the metallic reserve and total operations.1 Another provision
of the charter of 1897 provided that profits arising from a
discount rate above five per cent, should be covered to the
proportion of three-fourths into the public Treasury. The
object of this provision was to discourage the advance of the
discount rate as a means of retaining gold. It did not be­
come operative, however, until 1907, when certain special
discounts of English paper were consented to at a rate above
five per cent.
1 Calculations summed up by Pommier showed that from 1874
to 1896 the new plan would have yielded the government about
37,000,000 francs more than the old, even though in certain years
the return would have fallen below 2,500,000 francs.— La Banque de
France et PEtat, 402-403. The total payments under the new provision
and the amendment of 1911, to the close of 1913, were 95,765,133 francs.

The permission given to the government to revise the bank
charter during the year 1911 was availed of to impose upon
the Bank of France several new charges and obligations.
An agreement was made between the government and the
bank in November, which became law on December 30, 1911,
embodying the new arrangements. Although the circula­
tion was still more than 500,000,000 francs below the legal
maximum under the law of 1897, the maximum was raised
by the new law to 6,800,000,000 francs ($1,312,400,000).
The provision of the law of 1897, by which the government
was granted one-eightli of the proceeds of discounts upon
the productive operations of the bank, was modified so that
whenever a rate of discount prevailed higher than three and
a half per cent., the proportion paid to the government
should be one-seventh, and when a rate higher than four per
cent, prevailed, the proportion should be one-sixth. The
amount of the advance to the Treasury, without interest,
was increased by 20,000,000 francs to a total of 200,000,000
francs ($38,600,000). The bank was required to relieve of all
charges the transfer of funds for depositors between different
places and to discount under proper conditions drafts payable
abroad and in the French colonies.1
The number of branches and other banking offices of the
Bank of France has been increased from time to time, from
249 at the close of 1894, to 467 at the close of 1907, and 583
at the close of 1913. The number of employees increased
from 2332 in 1894 to 3827 in 1913.

1 Aconomiste

Europeen, January 5, 1912, XI*!., 13.


The Economic and Financial Conditions Out of Which the Bank
Grew—Early Difficulties and the First Suspension of Specie Pay­
ments—The Loans of the Napoleonic Wars and the Restriction
of 1797—Pitt’s Enormous Drafts upon the Bank.


HE Bank of England, like many of the Continental
banks, had its origin in the needs of the State. The
institution which resulted has been several times the
victim of the monetary necessities of the government, but
has not been dragged quite so persistently as the banks
of Italy, Austria, and Russia through the mire of depreciated
money and forced legal tender. The Bank of England has
come to enjoy, by a series of changes in the law, the substan­
tial monopoly of note issue in England and Wales, and has
proved one of the strongest banking institutions of the world.
The note circulation, since the Act of 1844, is based wholly
upon securities and deposits of coin and bullion. The rigidity
of the English system, by which expansion is prevented to
meet changing conditions of business, has received the con­
demnation of most students of political economy, but this has
not kept it from becoming to some extent the model of
national banks of later foundation on the Continent of
Europe. The defects of the English system of note issues
are those which are most apparent in a country where deposit
banking is in its infancy. They are less obvious and oppres­
sive in England than they would otherwise be because of
her small area, the wide use of credit instruments and the
closely-knit commercial relations of her people.


The creation of the Bank of England is involved with
both the political and fiscal history of the close of the seven­
teenth century. England was behind Italy and Holland in
the development of the mechanism of modern commerce, and
the proposition to establish a banking system was sharply
resisted by Gerard Malynes, who published in 1601 a
Treatise of the Canker of England ’s Commonwealth. Malynes
described the Continental method of banking with a fairness
and precision which enable its leading features to be readily
understood, in spite of his opinion that payments by the
banks by transfers upon their books were “ almost or rather
altogether imaginative or figurative.” 1 English merchants
deposited their cash for a time in London Tower, but ^120,000 was seized by Charles I., in 1640, and only repaid after
violent protests and long delay.2 The goldsmiths then be­
came the bankers for the community and paid interest for
the money left in their custody. There was much opposition
to the new system at first and, strange to say, one of the
last to adhere to the old method of keeping his cash in a
strong box at home was Sir Dudley North, one of the most
progressive thinkers on political economy of his time. As
Macaulay graphically recounts North’s experience, “ He
found that he could not go on Change without being fol­
lowed around the piazza by goldsmiths, who, with low bows,
begged to have the honor of serving him. He lost his
temper when his friends asked where he kept his cash.
‘Where should I keep it,’ he asked, 4but in my own
house? ’ ” 8
While commerce was coming to feel more and more the
need of a banking institution, the government was also feel­
ing the necessity of some method of raising money beyond
the precarious plan of sending agents to individual mer­
chants to see what they would lend. The historic legend
that King James I. attempted out of a spirit of pure wanton­
ness to levy excessive and unusual taxes upon the people of
1 Cunningham, II., 98.
2 MacLeod, Theory and Practice of Banking, I., 435.
8History of England, Chap. xx.



England is not fully borne out by the facts. The method
of taxation which he sought to introduce was simply a phase
of the transition from feudal to modern methods of carrying
on public affairs. As a careful student of the economic his­
tory of England puts i t :
According to ancient usage the King had been able to live of his
own, and had recourse to Parliament in emergencies. The chief
problem of the seventeenth century was to find a source of revenue
which would supply a regular income, that might adequately corre­
spond to the increased responsibilities of government in these more
modern times. The first attempt to do this was in the Great Con­
tract, proposed to the Parliament in 1610 ; by this James proposed to
relinquish all the occasional payments from feudal tenures, in return
for a regular income of ^200,000 to be derived from parliamentary
As this bargain broke down, James was a considerable sufferer;
Charles I., to whom Tunnage and Poundage were not voted for life,
was left in a position of direct dependence on parliamentary grants,
and he did not conceal his resentment. During both of these reigns
every effort was made to secure supplies from extra-parliamentary
sources; while the Commons, who were eagerly anxious to assert
their position and exercise a real control over the foreign as well as
the domestic policy of the realm, were always on the alert to thwart
these attempts.1

The parliamentary party succeeded in organizing a system
of taxation by means of customs duties, monthly levies upon
real estate and excises on internal trade, which continued in
full force after the restoration of the Stuarts. These taxes
laid the foundation of the modern method of defraying the
expenses of government, but they were inadequate for many
extra expenses and for carrying on the wars in which
Charles II. and William III. found themselves involved.
Charles II. turned for assistance to the goldsmiths. But his
rapacity soon outran his borrowing capacit}^ and he gave a
violent shock to credit by a proclamation of January 2, 1672,
refusing payment out of the Exchequer of money advanced
and sequestrating ^1,328,526 to his own use. The money,
although lent by the goldsmiths to the King, was the prop1 Cunningham, II., 215.


erty of some 10,000 depositors and its loss spread ruin and
suffering throughout London. A long course of litigation
ensued, which finally ended in the reign of William by the
consolidation of the indebtedness with other portions of the
permanent national debt.1 This conduct on the part of the
Stuart King made the people and the bankers cautious
about loaning to the government, and William III. was
driven to desperate expedients to obtain revenue to carry
on the war with France. A poll tax was imposed, stamp
duties were levied which have never been entirely repealed,
and enormous prizes, in the form of annuities on the ton­
tine plan, were offered to those who would lend to the State.
A plan was presented to the Committee of the House of
Commons, while they were considering the claims of the
goldsmiths in the autumn of 1691, which contained the
germs of the organization of the Bank of England. William
Paterson, himself an obscure Scotchman, but supported by
several wealthy London merchants, offered to advance
^1,000,000 to the government on condition of receiving
^65,000 a year as interest and the costs of management and
authority to issue bills which should be legal tender. The
government refused to give forced currency to the bills and
the matter fell through until 1694. Montague, the ingenious
and enterprising minister of William, then sent for Paterson
and requested him to organize a plan. The new project
contemplated a loan of ,£2,000,000 to the government at
seven per cent., but the ministry, who were accustomed to
discounts and commissions of forty per cent, on short loans,
could not be made to believe that a loan with no fixed date
of maturity could be floated at such a low rate. The gov­
ernment turned to other plans, but Paterson persevered and
presently obtained the help of Mr. Michael Godfrey, who
carried the scheme to a successful conclusion. It was put
in definite shape by Montague and was saddled upon the
Ways and Means bill (Statutes 1694, ch. 20), in a form
which would be characterized in modern legislation as
“ a rider.**
1 MacLeod, Theory and Practice of Banking, I., 441- 44.



“ The Governor and Company of the Bank of England ”
was the official designation of the new bank, but it was
called by its enemies the Tonnage Bank, because the bill
levied certain tonnage dues as well as customs and other
taxes. The necessity of money was so great that the bill
passed without a division in the Commons, and in a very
thin house. There was some opposition in the House of
Lords, and much criticism of the action of the Commons in
attaching the provisions for the bank to a tax bill. It was
already May, according to the new style, when the final
struggle occurred, and the debate of the last day continued
from nine in the morning till six in the evening. It was
proposed to strike out all the clauses relating to the bank,
but its defenders suggested that this would be to invite a con­
test with the Commons over the old political issue, whether
the Lords had the right to amend a money bill. This
argument prevailed, the amendment was rejected, thirtyone votes in its favor to forty-three in the negative, and a
few hours later the bill1 received the royal assent and Parlia­
ment was prorogued.
The new bank was to be organized upon the loan by the
stockholders of ^1,200,000 ($6,000,000) 9to the government,
and was authorized to issue notes, to deal in bullion and
commercial bills and to make advances on merchandise. Sub­
scriptions were opened on Thursday, June 21st, in the Mer­
cer’s Chapel, and one-quarter of the capital was subscribed
the first day. Half was subscribed within three days, and
by Monday noon, July 2d, the entire subscription was com­
pleted. Among the subscribers were Sir John Houblon, the
first Governor, who was descended from a Flemish refugee ;
1 The date was April 24, 1694, old style; May 4, new style. The
dates here given are from the contemporary records and are old style.
2 The value of the English pound sterling is so generally known
that I have not thought it necessary in this and the following chapter
to give the equivalents in United States money for the sums named.
The value of the pound sterling as reported by the Director of the
Mint of the United States is $4.8665, but for the purpose of computing
round figures is usually taken at $5.00.



Michael Godfrey, one of the most active organizers of the
bank and the first Deputy Governor ; Queen Mary; the
Duke of Leeds, the Duke of Devonshire, the Earl of Port­
land, the Countess of Carlisle, Lord Godolphin, Lady Ann
Mason, Sir Stephen Fox, and Sir John Trenchard. The
new bank began the discharge of its pledges to the govern­
ment by paying into the Exchequer ;£ 112,000 in bank-bills,
sealed with the seal of their corporation, which bore the
figure of Britannia sitting on a bank of money.1 The busi­
ness of the bank was described by Godfrey, who wrote a
tract in its support, as follows :
They lend money on mortgages and real securities at five per cent,
per annum. If the titles of land were made more secure, money
would be lent on land at four per cent, per annum, and in time of
peace at three per cent. Foreign bills of exchange are discounted
at four and a-half per cent. ; inland bills and notes for debts at six
per cent. They who keep their cash in the bank have the first of
these discounted at three per cent., and the other at four and a-half.
Money is lent on pawns of such commodities as are not perishable at
five per cent., and on the Fund of the City of London Orphans at five
per cent.2

The stock of the bank was at par on December 13, 1695,
little more than a year after it began actual operation, but
within the next two years it had to deal with a combination
of difficulties which caused the suspension of specie pay­
ments, and required all the courage and ability of the
directors to surmount. The bank was essentially a Whig
institution and a representative of the commercial interests
of London; and it encountered the same sort of jealous
hostility from the landed interest which has prevailed in
more recent times against the moneyed interests of ‘‘Wall
Street” and “ Lombard Street.’9 The fate of the bank was
so closely bound up with that of the Revolutionary govern­
ment that it was compelled to lend its support on all occa­
sions of emergencj', or run the risk of seeing the entire debt
due by the government repudiated by the restoration of the
1 Rogers, The First Nine Years of the Bank of England, 3.
2 Rogers, 20.



Stuarts. The Bank, in the forcible language of Macaulay,
44Was Whig not accidentally, but necessarily. It must have
instantly stopped payment if it had ceased to receive the
interest on the sum which it had advanced to the govern­
ment ; and of that interest James would not have paid one
farthing.’, Mr. Bagehot declares that without the aid of the
Our national debt could not have been borrowed ; and if we had
not been able to raise that money we should have been conquered by
France and compelled to take back James II. And for many years
afterwards, the existence of that debt was a main reason why the
industrial classes never would think of recalling the Pretender or
of upsetting the Revolution settlem ent: the “ fundholder ” is always
considered in the books of that time as opposed to his “ legitimate ”

The political enemies of the bank were supported by the
goldsmiths and other financial men whose monopoly of
money lending was assailed by the new institution. The
managers of the bank enjoyed from the outset three privi­
leges which gave them an immense superiority over all
competitors and enabled them to reduce the charges for bank­
ing. They received the government balances ; they enjoyed
alone the privilege of limited liability, by which the share­
holders were liable for the debts of the bank only to the
amount of their investment and not for its entire liability ;
and they were able to loan money in excess of their deposits
by reason of the circulating notes they were allowed to issue
against the government debt. The goldsmiths were able to
do only the business of deposit banking, and were supposed
to lend only coin, or credit for which they held coin in their
vaults.3 The goldsmiths, therefore, undoubtedly felt justi­
fied by reasons of self-preservation in lending their support
to any plan which would break down their powerful rival.
Such a plan was presented in the scheme of a Land Bank
which was brought before Parliament by Hugh Chamberlain
in 1695.
1Lombard Street, Works, V., 64.
2 Cunningham, II., 396.


Chamberlain’s scheme was to issue notes upon landed
property to one hundred times the annual rental, lend the
notes to the owner of the land, and in some unexplained
way furnish money to the government at the same time.
The absolute absurdity of calculating the money value of a
piece of real estate at one hundred times the rental, when
the fee simple was worth only twenty times the rental, or
one-fifth as much, was demonstrated over and over again,
but the opponents of the Land Bank were answered that
they were ‘‘ usurers, ’’ and the enemies of the Bank of Eng­
land were ready to catch at any scheme which promised to
promote their projects. Notwithstanding its folly the scheme
was authorized by law and received the royal assent on April
27,1696, (7 and 8 William III., c. 31). The Land Bank pro­
posed to advance to the government ,£2,564,000, on which
interest was to be paid at the rate of seven per cent, annu­
ally, secured by a special tax on salt. The King was au­
thorized to appoint a body of commissioners to receive
subscriptions, half of which were required to be subscribed
before August 1, 1696, and the whole before January 1, 1697.
Subscriptions did not materialize, however, with such rapidity
as expressions of sympathy for the enterprise. The Lords
of the Treasury subscribed ^5000 on behalf of the King,
but the other subscriptions never exceeded ^2100, and it is
recorded about three years later that Dr. Chamberlain, “ sole
contriver and manager of the Land Bank, is retired to
Holland, on suspicion of debt.” 1
The immediate effect of the new legislation was to depress
the price of bank shares, which fell from 107 on January 31st,
to 83 on February 14th.2 Capital was not so abundant then
as now and the mere offer of a new public stock was sufficient
to divert investment from the old and depress its value. It
was argued even by the friends of the bank that it must be
the sole institution of its kind, like the banks of Venice,
Amsterdam, and Hamburg, in order to retain strength and
usefulness. The experience that the stocks of an existing
1 Rogers, 56.
2 Rogers, 50.



company declined under the influence of competition was
illustrated in a striking manner by the history of the East
India Company, whose stock stood at 158 in the beginning
of 1692, but sank to 38 after Montague brought forward his
plan for the new or English East India Company. The
close calculations which are now made regarding the earn­
ing capacity and value of stocks were little understood at
that time and the unreasonable declines as well as extrava­
gant advances which occurred are illustrated a little later by
the history of the Mississippi scheme in France and the
South Sea Bubble.
The bank had real financial difficulties to cope with as
well as those arising from political distrust and competition.
The recoinage which was ordered by the Act of 7 William
III., ch. 1, to take full effect 011 February i. 1697, found
the bank with a large quantity of clipped coin on hand for
which they were bound to pay in new pieces of full weight.
The new coinage was progressing too slowly to meet de­
mands, the smallest denomination of bank-notes was ^20,
and the result was a run upon the bank for cash during the
week beginning May 4, 1696. The goldsmiths were charged
with gathering together ^30,000 in notes for the purpose of
breaking the bank. The directors, knowing the purpose of
the demand, refused to redeem these notes, but voted to con­
tinue their payments to their ordinary customers. Sir John
Houblon, who was Lord Mayor as well as Governor of the
bank, succeeded in reassuring the applicants for cash for a
time, and the proprietors of the bank agreed to put off their
dividend. The government failed, however, to make an ex­
pected payment of ,£80,000 and the bank was compelled to
accept an order of the Lords of the Treasury on July 13,
1696, that no public notary should enter a protest upon any
bill of the Bank of England for fourteen days. As a protest
could only be effective at that time when thus entered, the
effect of the order was a practical suspension of specie pay­
ments, which lasted until the autumn of 1697.
It is not surprising that the bank was unable to cope with
its difficulties and that many impracticable and speculative


schemes were set on foot, for the time was essentially a period
of transition. The industrial and commercial world had
barely set foot upon the threshold of the wonderful develop­
ment of the eighteenth and ninteenth centuries. Great
Britain until the time of Elizabeth had been only a second
or third rate power in Europe, overshadowed by the great
Kingdoms of France and Spain, by the ancient prestige of
the German Emperor, and by the power of the Pope. Her
influence was raised by the defeat of the Spanish Armada,
but the population of England and Wales at the Revolution
of 1688 was only five and a half millions, and the supremacy
in the money markets and trade of the world still belonged
to the bankers and merchants of Holland and Italy. The
use of bank-notes, except as mere certificates against which
coin and bullion was held to the full amount, had begun only
thirty years before the Revolution, and the proper manage­
ment of a banking currency was almost purely a problem of
abstract theory rather than of practical experience. If mer­
chant princes and the kings of finance stood upon the threshold
of an unknown world, the mass of the community but dimly
viewed it from afar. They were easily deluded by extrava­
gant hopes and easily misled by the fairy tales of the splendid
riches and possibilities of the Western Continent. Least of
all could the general public be expected to grasp instantly
the fact, which is not accepted by great masses of people
to-day, that a paper currency, in order to have a steady
purchasing power, must be redeemable on demand in coin.
As Mr. Cunningham acutely says, regarding the run upon
the Bank of England in 1696 :

This was a principle which men did not find it easy to recognize.
They saw that the man who had wealth in any shape had credit;
but they did not apparently understand that bills can only be cir­
culated, when there is a certainty that they can be met on presenta­
tion, and that wealth, in forms which cannot be readily realized, is
not a satisfactory basis for a credit circulation.1

The suspension of specie payments was naturally followed
by a depreciation in the bank-notes. The discount on July
1 Growth of English Industry and Commerce, II., 397.



28, 1696, was ten per cent, and October 10th, twenty per cent.
The Bullion Report, discussing this subject in 1810, declared
that “ the quantity of the notes became excessive, their
relative value was depreciated, and they fell to a discount of
seventeen per cent.” This opinion, that the note issues
were excessive, is supported also by the high authority of
Professor Rogers,1 but is disproved by Professor MacLeod,
in so far as excess of issues is to be interpreted as implying a
larger supply of money than could be absorbed by the demands
of commerce. That the issues of the bank were excessive
in proportion to its coin reserve is hardly a subject for dis­
pute, in view of the account submitted to the House of
Commons on December 4, 1696, showing the amount due on
notes for running cash to be ^764,196, and the actual cash
held ^35,664, in addition to ,£9,636 in goldsmiths’ notes.
That the issues were excessive in this sense is proved by the
suspension of specie payments, but that they were excessive
in the sense implied by the Bullion Report is shown to
be untrue by the state of exchange on Hamburg, which
promptly became favorable to England upon the reform of
the coinage and while bank-notes were still at a discount.
The test whether issues were in excess of the necessities of
trade was the state of the foreign exchanges, which were at
par in coin, and the depreciation in the bank-notes was
plainly due to the fact that they had ceased to be redeem­
able in coin on demand.9
The collapse of the Land Bank and the necessity for new
government loans led to the legislation of February 3, 1697,
to increase the capital of the Bank of England and give it
wider privileges. The charter was renewed until the expi­
ration of twelve months notice after August 1, 1710, and the
bank was authorized to issue notes to the amount of the sub­
scriptions for the new loan, provided the notes were made
payable to bearer on demand. It was declared that in
case of default in redemption, the notes might be paid at the
1 First Nine Years of the Bank of England\ 88.
2 McLeod, Theory and Practice of Bankings I., 479-484.



Exchequer out of the annuity due the bank, and a trace of
the theory of the legislation of 1844 appears in the provision
that all notes above the sum of ;£ 1,200,000 were to bear a
distinguishing mark. The new subscriptions for the capital
amounted to ^1,001,171; and ^200,000 in bank-notes and
,£800,000 in Exchequer tallies, which were both below par,
were taken out of circulation. The notes previously issued
had borne interest, and now rose above par, while the bank
was able to issue non-interest bearing notes which circulated
at par. The subscriptions to the additional stock in 1697
seem to have been made by the original shareholders and
were repaid to them between 1697 an(^ l7°7 from the profits
of the bank.
The government was again in serious need of money when
the charter was renewed in 1708 until August 1, 1732, and
the bank was authorized to double its capital of ,£2,201,171,
and to circulate ,£2,500,000 in Exchequer bills. The next
extension of the charter was made in 1713 (Statute I., c. 11)
and continued the bank until twelve months notice to be
given after August 1, 1742. The subscription lists for the
new stock were opened on February 22, 1709, and the whole
sum was subscribed before one o’clock. The bank under
this arrangement advanced ,£400,000 to the government
without interest and surrendered .£1,500,000 in Exchequer
bills to be cancelled, upon condition of receiving an annuity
of ,£106,501. The principal of both these items was added
to the permanent debt, which afterwards became the basis
of the note circulation of the bank. Calls for additional
capital were made upon the stockholders to the amount of
,£656,204 in 1709 and ,£501,448 in 1710. Several of the
debts of the government to the bank were consolidated in
1716 and reduced from six to five per cent., and £2,000,000
in Exchequer bills were cancelled in 1718 and added to the
permanent debt due the bank by the government. The
settlement of the affairs of the South Sea Company in 1721
resulted in the purchase of ,£200,000 in annuities by the
bank at twenty years’ purchase, making a new addition to
the permanent debt of ,£4,000,000. These loans increased



the permanent debt to ,£9,375,027, exclusive of various ad­
vances of a different character which had been repaid.
The South Sea Company was essentially a Tory institution
and they proposed as early as 1717 to increase their capital
from ,£10,000,000 to ,£12,000,000 for the purpose of wiping
out the debt due the Bank of England and several minor
obligations. The bank made counter propositions, but the
real contest occurred in 1719 and 1720 over the proposition
of the South Sea directors to assume the entire national debt.
It was estimated at ,£30,981,712 and was to be consolidated
into one fund, to be added to the capital of the company at
five per cent, interest annually. The company proposed to
pay a bonus of ,£3,500,000 to the government in four in­
stalments, beginning in 1721. The bank met this remark­
able proposition by an offer of its own to assume the entire
debt on terms which were calculated to be about ,£2,000,000
more advantageous than those of their rivals. The South
Sea Company obtained three days to amend their offer and
increased the bonus to ,£7,567,500. The bank rejoined with
another offer of ,£1,700 in bank stock for every annuity of
£\oo for ninety-six and ninety-nine }rears and the reduction
of the interest on the consolidated debt after June 24, 1727,
to four per cent.
The South Sea bill passed the House of Commons April 2,
1720, by a vote of 172 to 55 and passed the Lords by a vote
of 83 to 17.1 The South Sea stock was forced upward to a
preposterous figure under the influence of the same fever of
speculation which raged at about the same time in France
over the Mississippi scheme, but capital was soon sunk in
this and other unproductive enterprises and the reaction
wrecked the credit of the company and came near wrecking
that of the bank. The directors of the South Sea Company
appealed to the bank for help, goldsmiths and private bank­
ers began to fail, and a run upon the bank itself began, which
was only staved off by payments in light sixpences and
shillings and by engaging men to fill up the line, draw
1 MacLeod, Theory and Practice o f Banking , I., 496- 99.


money and re-deposit it at another window. Fortunately
the festival of Michaelmas, during which the bank was
usually closed, intervened and when it was over the public
alarm had subsided.
The bank had weathered severe storms, had seen two
powerful rivals crushed and its own monopoly confirmed, and
justly felt that it had proved its capacity to endure. Thirtyeight years after its foundation, on Thursday, August 3,
1732, the corner-stone of a new building was laid in the
presence of the Governor and other officials of the bank in
Threadneedle Street. The directors moved from their old
quarters in Grocers’ Hall on June 5, 1734, and from that day
“ The Old Lady of Threadneedle Street” occupied the
massive building which is still consecrated to her use.1 A
statue of King William, under whom the first charter was
granted, stands in the hall, with a Latin inscription which
accords to him the honor of official founder of the bank.
When the time approached for a renewal of the charter in
1742, the bank advanced ^1,600,000 to the government
without interest by a call upon their proprietors for ^840,004, which raised their capital stock to ^9,800,000. The
advance without interest was substantially part of a pro­
cess of conversion by which the interest on the original
advance to the government at the foundation of the bank
and on ,£400,000 advanced in 1708 was reduced from six to
three per cent. The bank simply continued to receive the
old interest payment, but doubled the principal of the loan.
The charter was extended at this time until twelve months
notice after August 1, 1764. Another adjustment with the
government in 1746 led to the cancellation of ^986,000 of
Exchequer bills, upon which the bank was to receive an
1 The buildings have been much enlarged since and now cover the
whole area between Threadneedle Street, Princes Street, Lothbury
and Bartholomew Lane,—a space of more than three acres. The
bank originally employed about fifty clerks, but the number is now
about fifteen hundred and the pay-roll amounts to about ^300,000,
exclusive of ^50,000 paid annually in pensions.—H. J. W. Dam,
The Bank of England, McClure's Magazine, IV. 460.



annuity of four per cent., and a call upon the proprietors for
ten per cent., which made the bank capital ,£10,780,000.
The rate of interest on portions of the debt amounting to
,£8,486,000, which had not yet been reduced, was changed
to three and a half per cent, in 1749 for the seven years
beginning with Christmas, 1750, and thereafter to three per
cent. 1 The charter was renewed in 1764 until twelve months
notice after August 1, 1786, upon the conditions of a direct
payment to the Exchequer of ,£110,000 and a loan for two
years on Exchequer bills of £ 1,000,000 at three per cent. The
next renewal, in 1781, carried the charter along until twelve
months notice after August 1, 1812, and provided for a loan
for three years of ,£2,000,000 at three per cent. A call upon
the proprietors for £"862,400 in 1782 advanced the capital of
the bank to ,£11,642,400, at which it remained until 1816,
when it was increased to ,£14,553,000 by adding twenty-five
per cent, to the stock of each proprietor from the reserved
profits or “ rest.”
The Bank of England at its institution enjoyed no monop­
oly of note issues, so that Chamberlain’s plan for a Land
Bank was not a violation of the privileges of the older estab­
lishment. The managers of the Bank of England endeavored
to protect themselves in the legislation of 1697 an(^ secured
a provision that during the continuance of the corporation
110 other institution in the nature of a bank should be erected
or countenanced within the Kingdom by act of Parliament
by bodies exceeding six persons. This provision was calcu­
lated to prevent the formation of strong joint stock banks,
and dangerous rivalry was not feared from private firms of
six persons with unlimited liability. An effort to narrow
the limits still more closely was made in the Act of 1709 by
making it unlawful “ for any body politico!* corporate what­
soever, created or to be created (other than the said Gover­
nor and Company of the Bank of England), or for any other
1 The operation of 1752, by which the balance of annuities granted
in 1721 were consolidated with other three per cent, stocks, gave rise
to the familiar designation, “ Three per cent, consols,” the latter word
being a contraction of “ consolidated.”—Gilbart, I., 43,


persons whatsoever, united or to be united in covenants or
partnership, exceeding the number of six persons, in that
part of Great Britain called England, to borrow, owe, or
take up any sum or sums of money on their bills or notes,
payable at demand, or at any less time than six months from
the borrowing thereof.’’ This clause was repeated in 1716,
when the usury laws were suspended as to the Bank of
England and the directors were authorized, ‘‘ at their own
good liking” to borrow or take up money at any rate of
interest they pleased. The conception of banking at this
time involved necessarily the privilege of issuing circulating
notes, and it was determined to close all loop-holes in this
matter upon the renewal of the charter in 1742. It was
accordingly provided (15 George II., c. 13, s. 5) :
And to prevent any doubts that may arise concerning the privi­
lege or power given by former Acts of Parliament, to the said Governor
and Company of exclusive banking, and also in regard to the erecting
of any other bank or banks by Parliament, or restraining other per­
sons from banking during the continuance of the said privilege
granted to the Governor and Company of the Bank of England, as
before recited, it is hereby further enacted and declared, by the
authority aforesaid, that it is the true intent and meaning of the Act
that no other bank shall be erected, established or allowed by Parlia­
ment, and that it shall not be lawful for any body politic or corporate
whatsoever, erected or to be erected, or for any other persons what­
soever, united or to be united, in covenants or partnership, exceeding
the number of six persons, in that part of Great Britain called England,
to borrow, owe, or take up any sum or sums of money, on their bills
or notes, payable at demand, or at any less time than six months
from the borrowing thereof during the continuance of such said privi­
lege of the said Governor and Company, who are hereby declared
to be and remain a corporation with the privilege of exclusive bank­
ing, as before recited.

This limitation upon the power of other corporations did
not prevent the issue of promissory notes and checks; nor
did it prevent the issue of bank-notes by individuals and
firms of not exceeding six persons. The opportunity which
this afforded for the creation of joint stock banks of dis­
count and deposit was not understood and availed of till



much later, but the opportunity for the issue of circulating
notes by individuals and small firms was availed of. The
notes of the Bank of England had little circulation outside
of London and the rapid development of canal building and
other enterprises during the last half of the eighteenth cen­
tury created a demand for a larger credit currency. Professor
MacLeod declares, in speaking of the principle of monopoly
embodied in the charter of 1697, that “ The frightful con­
vulsions and collapses of public credit which have taken
place during the last three-quarters of a century are chiefly
due to this great wrong.” 1 The effect was not felt until
nearly a century later, when England began to take her
place at the head of the commercial nations, but after the
crisis of 1782 “ multitudes of miserable shopkeepers in the
country, grocers, tailors, drapers, started up like mushrooms
and turned bankers, and issued their notes, inundating the
country with their miserable rags.” Burke said that when
he came to England in 1750 there were not twelve bankers
out of London ; in 1793 there were nearly four hundred.
The Bank of England began to issue notes for £10 and ^15
as early as 1759, but the private bankers issued them for
smaller amounts, and in 1775 an act was passed to prohibit
notes of less than twenty shillings, and two years afterwards
the limit was raised to ^5.
The prohibition upon note issues was probably one of the
causes which contributed to the use of checks. The notes
issued by private bankers were at first written on paper for
any odd sum, like promissory notes. The practice was in­
troduced by Child and Co., in 1729, of having the notes
partly printed and partly written, like a modern check.
These notes continued to be issued till about 1793, when the
existing system was introduced, of giving the depositor a
credit for the full amount of his deposit and authorizing him
to draw checks at his convenience against it.2 The issue of
1 Theory and Practice of Bankings I., 479.
2 MacLeod, Theory and Practice of Banking, I., 331, 515. M.
Juglar (343) says that the use of checks replaced the use of bills in

17 72.


notes by private bankers was not forbidden until the Bank
Act of 1844, but their use gradually diminished as the
greater convenience of checks came to be understood. The
Act of 1742 would probably have prohibited joint stock banks
of discount and deposit, if it had been supposed that they
could be carried on without the issue of notes, but note
issues were then regarded as a necessary part of successful
The Bank of England had to face serious financial crises
in 1772, 1782, and 1792. Their policy in 1772 and 1782 was
to support credit and to make advances to solvent merchants,
with the result that the foreign exchanges turned in their
favor and general bankruptcy was avoided. Mr. Bosanquet
wT Governor of the bank and he adopted the policy of con­
tracting issues while the drain of specie was going on and
expanding them when the tide turned. The crisis of 1793
was precipitated by the breaking out of wT with France,
and was quickly followed by the stoppage of about one hun­
dred country banks and the serious embarrassment of many
others. The directors of the bank became alarmed, refused
credit to strong houses and created a great scarcity in the
circulating medium by the discredit cast on the notes of the
country banks. The policy of contracting issues was not
justified by the state of the exchanges, for gold and silver
were pouring into England from France in consequence of
the issue of the assignats, which rapidly drove coin out of
circulation, and exchange was favorable with both Amster­
dam and Hamburg. The absolute refusal of the bank to
lend its support to credit compelled the issue of Exchequer
bills by the government, which quickly improved the situa­
The long suspension of specie payments during the wars
with France was brought about by the reckless and un­
scrupulous course of Mr. Pitt, who dictated the entire
policy of the government. The relations of the bank with
the government had grown closer from year to year since
1718, when subscriptions to public loans were first received
chere, as affording greater convenience than the Treasury.



The bank soon after began to make advances of money in
anticipation of the land and malt taxes, and upon Exchequer
bills and other securities.1 They did this in the face of the
provision of the charter of 1694, that if they should advance
any money to the Crown whatever, except by the special
permission of Parliament, they should forfeit treble the value
of all such advances. The usual limit of these temporary
advances was ,£20,000 or .£30,000 and it became a subject
of complaint if the amount was increased to ,£50,000. The
limit was stretched in the American war to ,£150,000 and
Mr. Bosanquet in 1793 became uneasy as to the legality of
such advances without authority of Parliament. The direc­
tors, therefore, applied for an act of indemnity for past
advances and permission to make them in the future to a
limited amount, not to exceed £*100,000. Mr. Pitt readily
agreed to bring in a bill for this purpose, but he quietly
dropped the limitation and passed the measure in this form
through Parliament. He was now armed with absolute
power to draw upon the bank, unless the directors should
refuse to honor his bills, and he was neither conservative nor
scrupulous in the use of the power.
Mr. Pitt availed himself of the new law to scatter gold
broadcast over Europe to promote the combination against
France, with the result of draining the country of specie and
creating unfavorable foreign exchanges. He drew heavily
upon the bank and drove them into such close quarters that
they passed a resolution on January 15, 1795, that the Chan­
cellor of the Exchequer must make his financial arrange­
ments for the year without expecting further assistance from
them than advances on Treasury bills not exceeding £500,000 at any one time. Mr. Pitt promised to reduce the exist­
ing advances to that amount by payments out of the first
loan which was in process of subscription, but he paid little
attention to such promises. The bank was compelled by the
demands of the government to expand its issues in the
face of unfavorable exchanges until in February, 1795, they
1Gilbart, I., 36.


reached ,£14,000,000. The drain of gold set in strongly in
September, the price of gold in bank-notes rose to ,£4 2s. per
ounce (about five shillings above parity, which was ,£3 17s.
1 0 and the directors of the bank were compelled to
sharply restrict their discounts. They gave notice on De­
cember 31, 1795, that if the applications for discounts on any
day exceeded the sum to be advanced, a pro rata proportion
of each applicant’s bills should be returned, “ without regard
to the respectability of the party sending in the bills or the
solidity of the bills themselves.” 1 Matters went from bad
to worse until February 11, 1796, when the court of directors
adopted the resolution :
That it is the opinion of the Court, founded upon its experience of
the effects of the late Imperial loan, that if any further loan or ad­
vance of money to the Emperor, or other foreign state, should in the
present state of affairs, take place, it will in all probability prove fatal
to the Bank of England.
The Court of Directors do therefore most earnestly deprecate the
adoption of any such measure, and they solemnly protest against any
responsibility for the calamitous consequences that may follow there­

Mr. Pitt replied that after the repeated promises he had
made he saw no occasion for the resolutions and should re­
gard them as having been adopted in a moment of needless
alarm. This did not prevent him from continuing secret re­
mittances to the Continent, but suspension of specie pay­
ments was staved off until the next year by the restriction
of accommodation to merchants and the favorable crops of
1796. The advances upon Treasury bills amounted on June
14, 1796, to ,£1,232,649 and Mr. Pitt demanded ,£800,000
more in July and a like sum in August. The bank re­
fused the second demand but granted a request by Mr. Pitt
in November for ,£2,750,000, 011 condition that the advances
on Treasury bills should be paid out of this loan. “ Mr.
Pitt,” in the terse language of Professor MacLeod, “ took
the money but never paid off the bills.” 2
1 Gilbart, I., 45.
2 Theory and Practice of Banking, I., 524.


history op modern b a n k s op issue .

The landing of a French frigate in one of the Welsh har­
bors and orders from the government to the farmers to drive
their stock into the interior, caused a run upon the Bank of
England which finally brought the long dreaded catastrophe
of suspension of payment in coin. The bank had been mak­
ing frantic efforts for several weeks to contract their issues and
had reduced them from ^10,550,830 on January 21, 1797, to
,£8,640,250 on February 25th, but their cash was reduced on
the latter date to ;£i,272,000. The cabinet met the next day,
which was Sunday, and issued an Order in Council, “ That
the directors of the Bank of England should forbear issuing
any cash in payment until the sense of Parliament can be
taken.” 1 A meeting of merchants was held on Monday,
with the Lord Mayor in the chair, which adopted a resolu­
tion similar to that adopted on the successes of the Pretender
in Scotland in 1745, that “ we will not refuse to receive bank­
notes in payment of any sum of money to be paid us, and
we will use our utmost endeavors to make all our payments
in the same manner.” A select committee was appointed
by Parliament to inquire into the bank’s affairs, and found
them in a prosperous condition except for the scarcity of coin
and bullion. Their assets were ,£17,597,280, representing a
surplus of ,£3,826,890, exclusive of the government debt of
,£11,686,800, which paid three per cent. Suspension of pay­
ments was enacted until June 24th and the bank was au­
thorized to issue notes under ^5. The bank-notes were
made legal tender and were to be received at par in the
payment of taxes. The bank was authorized to receive
special deposits in coin in exchange for notes and to repay
three-fourths of the amount in coin if demanded. The re­
striction was prolonged on June 22d to one month after the
meeting of the next session of Parliament and was again
prolonged on November 30th, at the next session, until six
months after the conclusion of a definitive treaty of peace.
The policy of the bank in restricting commercial discounts,
though forced upon it in a measure by the demands of the
1 Levi, 74.


government, was the cause of serious complaint in the mer­
cantile community and led to much discussion of other
methods of meeting the demand for credit. The bank re­
fused to establish branches in the country and their charter
prohibited any other strong company from doing so. The
very policy of restricting their issues in the autumn of 1796,
which the directors regarded as a measure of extreme pre­
caution, intensified the demand for gold by creating a scarcity
of currency which led to the withdrawal of gold by deposi­
tors. The irritation among the merchants was such that a
meeting was held in London Tavern on April 2, 1796, which
appointed a committee to devise a plan to restore the circulat­
ing medium, if practicable without infringing the monopoly
of the bank. Mr. Walter Boyd, an eminent merchant, drew
up a report on behalf of the committee, authorizing a board
of twenty-five members to be named by Parliament to issue
circulating promissory notes upon deposits of coin, bankbills, and commercial paper.1 The committee were persuaded
by the Chancellor of the Exchequer to delay action and noth­
ing ever came of their plan, but it was the opinion of Mr.
Boyd that the public stocks suffered as well as commercial
paper by the scarcity of currency and the necessity of forced
sales of securities to obtain it. Sir William Pulteney, during
the debate on the bill authorizing the suspension of cash
payments, asked leave to bring in a bill for another bank if
the Bank of England did not resume on June 24, 1797, as
was then proposed. The proposition was defeated at the
time but gained such strength within the next two years
that public meetings were held and pamphlets written in its
support. The bank directors became alarmed, and as gov­
ernment was still pressing for money, they offered £3,000,000 without interest for six years as the price of a renewal
of the charter. Mr. Pitt accepted the terms and passed a
bill in 1800 extending the monopoly of the bank for twentyone years after 1812, or until 1833.
1 MacLeod, Theory and Practice o f Banking , I., 523.


The Continued Suspension of Specie Payments—The Bullion Report
and the Act of 1819—The Contest against the Monopoly of the
Bank of England and the Rise of the Joint Stock Banks—The
Bank Act of 1844—Theory of its Operation and its Failure to
Carry Out the Theory—The Recent Accumulation of Gold in
the Bank.


HE great events of the second century of the history of
the Bank of England have been the resumption of
cash payments, the restriction of circulation by the
Bank Act of 1844, and the recent accumulation of gold in
the custody of the bank. The Act of 1844 has been the
turning point of almost infinite discussion of the theory and
practice of banking in England, but, whatever its merits or
defects, it has not destroyed the character of the Bank of
England as the guardian of the cash reserve of the country,
nor prevented London from becoming the centre of the
exchanges of the world. Freedom from danger of invasion,
the development of banking and credit beyond any point
attained elsewhere, a market free to the world’s commerce,
and a single fixed standard of value have raised England to
supremacy among commercial countries and linked the his­
tory of her financial progress in some degree with that of all
other nations.
The British nation was far from her present position at
the close of the Napoleonic wars. Political and military
triumphs had come to her, but they had been at the expense
of the crippling of her merchant marine, the increase of her


debt to $4,000,000,000, and the suspension of payments in
specie. The Bank of England by prudent management
kept its notes for several years at par with coin and the
depreciation was at first so gradual as hardly to be noticed.
One of the elements of confusion in the discussion of the
effect of the restriction of specie payments was the fact that
bank-notes became the sole medium of ordinary transactions.
The issue of £ i notes by the bank drove the gold from cir­
culation even before the depreciation of the paper and made
metal only a subsidiary money. If an effort had been made
to keep the circulation saturated with coin by continuing
the prohibition upon notes below £5, the depreciation of
the paper would have been quickly felt by the disappearance
of gold and accurately measured by the premium upon gold.
The fact that the paper was maintained at a substantial
parity with gold for nearly ten years while gold disappeared
from circulation, misled those who did not look to the simple
and indisputable facts regarding the foreign exchanges which
were stated in the celebrated Bullion Report of 1810. Silver
had been rapidly disappearing from circulation for some
years, because the English mint ratio gave it a less value
in relation to gold than the market price. The country
bankers were authorized by the restriction laws to redeem
their notes in Bank of England notes in exactly the same
manner as they had formerly done in specie, so that the ex­
pansion and contraction of the country note issues was in a
measure placed in the hands of the central bank as well as
the control of its own circulation.
Bullion rapidly accumulated in the bank after the suspension
of specie payments and the bank announced their willingness
on January 3, 1799, to redeem sums under £5 and to pay in
full after February 1st, notes for £1 and £2, dated prior to
July 1, 1798.1 The bank then held ^7,000,000 in coin and
bullion and had increased its note issues to ^16,000,000. The
government were not willing to take the risk of resumption
and continued the restriction even after the peace of Amiens,
1 Gilbart I., 49.

when the bank again declared that it was well supplied with
cash and was ready to resume. A bill was brought in on
April 9, 1802, only thirteen days after the signature of the
definitive treaty, to continue the restriction until March 1,
1803, and the restriction was continued again on February 28,
1803, until six weeks after the beginning of the next session
of Parliament. War broke out before this date arrived and
the restriction was continued until six months after the
ratification of a definitive treaty of peace. No such treaty
was ratified until after the abdication of Napoleon in the
spring of 1814, when the problem of restriction was again
taken up.
The price of gold began to rise in September, 1799, and
in June, 1800, had reached 5^. per ounce, which was about
seven shillings above the mint price.1 Exchange with Ham­
burg fell and the unfavorable state of the exchanges was
made an excuse for postponing the resumption of specie
payments after the peace of Amiens. The fact that the un­
favorable exchange was due to the depreciation of the cur­
rency was denied or evaded by the Parliamentary leaders
and Mr. Addington, the Chancellor of the Exchequer, urged
that the restriction be continued because, ‘‘ for several months
past, there has been a trade carried on for purchase of guineas
with a view to exportation.”
1 The mint price of gold was £5 17s. 10%d.> which was four and a
half pence above the market price, in order to cover the cost of coin­
age and the loss of interest while the bullion was detained in the
mint. The value of gold coins was fixed as they exist to-day in 1717,
when it became necessary, upon the recommendation of Sir Isaac
Newton, to reduce the coining value of the gold in the guinea to arrest
the exportation of silver. The reduction made the ratio of gold to
silver about fifteen and a quarter to one, but as the ratio in France
and Holland was about fourteen and a half, it continued to be profit­
able to export silver from England to those countries and to import
gold into England. Silver disappeared from circulation, gold became
the sole metallic medium of exchange, because it was the cheaper
metal at the legal ratio, and the law of 1816, which gave England the
gold standard, simply recognized in law what had been the fact prior
to the suspension of cash payments.



An object lesson in the effects of a depreciated currency
was afforded the English people by the condition of affairs
in Ireland, which had a currency of her own. The Irish
shilling contained thirteen pence, and as the pound, both
English and Irish, contained two hundred and forty pence,
English money was more valuable than Irish in the propor­
tion of ;£ioo to £108 6s. 8d. The par of exchange between
England and Ireland was therefore called eight and one third.
The Bank of Ireland was directed to suspend specie pay­
ments at the same time as the Bank of England, and exchange
was maintained at a point: favorable to Ireland until the
autumn after the passage of the restriction act in England.
Exchange then began to fall, which made it unfavorable to
Ireland, until in January, 1804, it had reached a depression
of £18 in the hundred. The bank had been increasing its
issues until they were more than four times the amount at
the time of the restriction. A committee of Parliament was
appointed in 1804 to consider the subject and they found
that the exchanges were nominally unfavorable because of
the depreciation of the Irish paper. The directors of the
Bank of Ireland who appeared before the committee would
not admit that this was the case and maintained that the
large issues of paper money were to supply the place of
gold which had been taken out of the country to pay remit­
tances. One of them advanced the same extraordinary
doctrine advanced a few years later in England, that 4*the
mere buying of gold at an advanced price beyond that of the
mint, is the effect, and not the cause of the exchange, and,
therefore, no proof of the depreciation of the paper itself.’’
The committee refused to be misled by this sort of argu­
ment and found that the real exchange, when allowance was
made for the depreciation in the paper, was favorable to
Ireland. A convincing proof that it was so, if there were no
others, was found in the fact that the exchanges between
England and Belfast were favorable to Belfast, because pay­
ments at Belfast were made in specie, at the very moment
that they were unfavorable at Dublin, where paper was the
standard. Still further demonstration of the simple mathe­



matical proposition, that the fall in the exchange was
measured by the depreciation in the paper money, and not by
any cause common to Irish industry or banking, was afforded
by the fact that there was a local difference of exchange be­
tween Dublin and Belfast, which put specie at a premium of
ten or twelve per cent, in Dublin, while it passed at par in
Belfast as the only medium of exchange.1 The committee
recommended that the relations between the currencies of
the two countries be simplified by making the notes of the
Bank of Ireland payable in Bank of England paper and that
the Bank of Ireland establish a fund in London for that pur­
pose. Little attention seems to have been paid to this report
and the recommendation that the currencies be assimilated,
which was made by Mr. Parnell in Parliament; in 1809, was
rejected without a division.
The depreciation of the Bank of England notes did not
advance rapidly until the period of commercial speculation
which caused the panic of 1810. The price of gold in bank
paper, which had risen to ^4 5s. per ounce in 1800, fell back
to about £*4, representing a depreciation of two and a half
shillings or about three and two-tenths per cent., and re­
mained at substantially this figure until 1809. The price of
gold rapidly advanced during the following year until the
mint price of gold was £ \ us. or a depreciation of 17.4 per
cent. Exchange with Hamburg had been falling with the
depreciation of the currency and on February 1, 1810, Mr.
Horner moved for several accounts relating to the currency
and exchanges. The committee was then appointed whose
work has become so famous in the literature of finance as
the Bullion Report. The committee, in an endeavor to ascer­
tain the true cause of the unfavorable exchanges, examined
a large number of witnesses, including directors of the Bank
of England, private bankers, business men, and students of
finance. The conclusions of the committee, however, were
directly adverse to the opinions of the bankers and in accor­
dance with those of the most enlightened students of the
abstract problems of finance and political economy.
1MacLeod, Theory and Practice of Banking, II., 14.


The report which the committee presented to the House
of Commons took its place at once among the classics of
finance and has been one of the guides of sound banking
from that time to this. It is a remarkable fact that Mr.
Horner was a young man of thirty-two who had never given
more than a general attention to financial subjects. He
simply listened attentively to the testimony of the best ex­
perts who appeared before the committee and with singular
clearness of vision grasped the correct principles of regulating
a banking currency and discarded the shallow sophistries
and “ practical rules ” which were presented to him by the
great bankers of London.1 The Bullion Report is remarkable
not only for the clearness and precision with which it lays
down the fundamental rules for regulating the volume of a
paper currency, but for the discriminating judgment with
which it discusses limitations of the then existing theories
of prices and currency which only came to be generally
accepted by political economists a generation later and have
not been accepted by all of them to-day.9
The undisputed facts upon which the bullion committee
based their report are summed up by Professor MacLeod as
1M. Juglar remarks that, “ There is always something which blinds
those the best placed to see, and it is not the persons engaged in
affairs who are the best judges of the mechanism they direct or which,
rather, sweeps them along.”—Des Crises Commercialese 341. For
similar views see Price, Currency and Banking, 3-4; Bagehot, Lom­
bard Street, Works, V., 112-15.
2Mr. Horner himself expressed a modest opinion of the literary
merits of the report, but declared that it possessed one great merit,
“ That it declares in very plain and pointed terms both the true doc­
trine, and the existence of a great evil growing out of the neglect of
that doctrine.” Portions of the report were written by Mr. Huskisson and Mr. Thornton, but the inspiring spirit was largely Mr.
Horner’s. The views set forth were not new and had been so clearly
stated by Mr. Ricardo in his pamphlet on “ The High Price of
Bullion,” that some of Mr. Ricardo’s friends accused Mr. Horner
of borrowing the ideas without proper credit.
3 Theory and Practice of Banking, II., 29.



1. That the mint price of gold bullion, or the legal stand­
ard of the coin was, £$ 17s. 10%d. per ounce.
2. That the market price of gold bullion was then 10$.
per ounce.
3. That the foreign exchanges had fallen to an enormous
extent: that with Hamburg, nine per cent., that with Paris
14 per cent.
4. That the increase of bank-notes had been very great
during the last few years, and was rapidly augmenting.
5. That specie had disappeared from circulation.
The report made by the committee was divided into four
parts, the first dealing with the causes of the high price of
gold; the second, with the state of the foreign exchanges
and the reason why they were adverse to England ; the third,
with the conduct of the Bank of England in the regulation
of its note issues ; and the fourth, the increase in circulation
of the Bank of England and of the country banks and the
increase of their discounts.
The demonstration was easy to intelligent and unprejudiced
observers that the high price of gold was the measure of the
depreciation of the bank paper. The contention of some of
those who declared that bank paper had not depreciated, but
that gold had risen in value because of its scarcity, grew out
of a muddy confusion of ideas regarding the relations of
prices to the two standards of gold and paper. The com­
mittee showed that the question of prices had no relation to
the difference between the mint price and the market price
of gold. The paragraph in which they made this clear is
as follows:
An ounce of standard gold bullion will not fetch more in our
market than £$ 17s. 10}£d.y unless ^ 3 17s. 10}4d.t in our actual cur­
rency is equivalent to less than an ounce of gold. An increase or
diminution in the demand for gold, or what comes to the same thing,
a diminution or increase in the general supply of gold, will, no doubt,
have a material effect upon the money prices of all other articles.
An increased demand for gold, and a consequent scarcity of that
article, will make it more valuable in proportion to all other articles ;
the same quantity of gold will purchase a greater quantity of any



other article than it did before ; in other words, the real price of gold,
or the quantity of commodities given in exchange for it, will rise, and
the money prices of all commodities will fall; the money price of
gold itself will remain unaltered, but the prices of all other commodi­
ties will fall. That this is not the present state of things is abun­
dantly manifest; the prices of all commodities have risen and gold
appears to have risen in its price only in common with them.

Another proof that it was not the scarcity of gold, but the
depreciation of paper, which increased the market price of
gold in paper was the fact “ that both at Hamburg and
Amsterdam, where the measure of value is not gold as in
this country, but silver, an unusual demand for gold would
affect its money price, that is, its price in silver; and that
as it does not appear that there has been any considerable rise
in the price of gold, as valued in silver, at those places in
the last year, the inference is, that there was not any consid­
erable increase in the demand for gold.” The committee
also called attention to the fact that on previous occasions
“ the excess of the market price of gold above its mint price
was found to be owing to the bad state of the currency ;
and in both instances, the reformation of the currency effectu­
ally lowered the market price of gold to the level of the mint
price.” By parity of reasoning, the reformation of the ex­
isting paper currency would lower the price of gold to the
level of the mint price, without regard to the quantity of
commodities which either form of currency might purchase.
The high rate of exchange against England, as expressed
in paper currency, was explained by some of the witnesses
as being due to a large balance of payment due from Eng­
land to other countries, either on account of imports of
merchandise or expenditures abroad on account of military
supplies and subsidies. The committee, however, pointed
out that it had “ been long settled and understood as a prin­
ciple, that the difference of exchange resulting from the
state of trade and payments between two countries is limited
by the expense of conveying and insuring the precious
metals from one country to the other ; at least, that it
cannot for any considerable length of time exceed that limit.



The real difference of exchange, resulting from the state of
trade and payments, never can fall lower than the amount
of such expense of carriage, including the insurance.” If
proof were needed of this simple proposition, it was fur­
nished by the answers given to the searching questions of
the committee by Mr. Greffulhe, regarding the actual rate
of exchange in coin. “ From these answers of Mr. Greffulhe,
it appears,” said the committee, “ that when the computed
exchange with Hamburg was 29, that is, from 16 to 17 per
cent, below par, the real difference of exchange, resulting
from the state of trade and balance of payments, was no
more than five and a half per cent, against this country.”
The committee concluded, therefore, that after making the
necessary allowances for the balance of trade and payments,
there still remained a fall of 11 per cent, in the exchange with
Hamburg “ to be explained in some other manner.”
Mr. Harman, one of the directors of the bank, declared
before the committee, 4‘ I must very materially alter my
opinions before I can suppose that the exchanges will be
influenced by any modification of our paper currency.” The
committee furnished him in their report the evidence of
the depreciation of the Scotch currency, when the optional
clause of payment was inserted after the Seven Years’ War ;
the depreciation of Irish currency six years before ; and the
depreciation of the notes of the Bank of England itself three
years after its foundation. The committee then declared :

Under the former system, when the bank was bound to answer its
notes in specie upon demand, the state of the foreign exchanges and
the price of gold did most materially influence its conduct in the issue
of those notes, though it was not the practice of the directors syste­
matically to watch either the one or the other. So long as gold was
demandable for their paper, they were speedily apprised of a depres­
sion of the exchange, and a rise in the price of gold, by a run upon
them for that article. If at any time they incautiously exceeded the
proper limit of their advances and issues, the paper was quickly
brought back to them, by those who were tempted to profit by the
market price of gold or by the rate of exchange. In this manner the
evil soon cured itself.

The committee, in taking up the question of excessive


issues, made the discriminating admission, “ that the mere
numerical return of the amount of bank-notes out in circula­
tion cannot be considered as at all deciding the question
whether such paper is or is not excessive. It is necessary
to have recourse to other tests.’’ The economy of money
was referred to which had taken place in late years, by “ the
increased use of bankers’ drafts in the common payments of
London; the contrivance of bringing all such drafts daily to
a common receptacle, where they are balanced against each
other ; the intermediate agency of bill-brokers ; and several
other changes in the practice of London bankers.” Not­
withstanding this, the committee found an approximate
increase between 1808 and 1809 of ^3,095,340 in country
bank-notes, and about ,£1,500,000 in Bank of England notes.
The suspension of cash payments imposed no other expense
upon the issuers of this paper than the printing of the notes
and some £ “100,000 in stamp taxes. The committee, there­
fore, asserted their conclusions, “ That there is at present
an excess in the paper circulation of this country, of which the
most unequivocal symptom is the very high price of bullion,
and next to that, the low state of the Continental exchanges;
that this excess is to be ascribed to the want of a sufficient
check and control in the issues of paper from the Bank of
England ; and originally to the suspension of cash payments,
which removed the natural and true control.”
The Bullion Report was presented by Mr. Horner to the
House on June 9, 1810, but was not taken up for considera­
tion until May 6, 1811. The debate was opened by Mr.
Horner, who spoke for three hours and closed by moving a
series of sixteen resolutions. These resolutions declared that
when Parliament passed the restriction act, it had no inten­
tion that the value of the bank-notes should be altered, but
that they had for a considerable time been below their legal
value, and that the extraordinary depression of the foreign
exchanges was in great part due to the depreciation of the
currency of England relative to that of other countries. The
final resolutions declared that the only method of preserving
the paper currency at its proper value was to make it paya­

ble on demand in the legal coin of the realm, and that cash
payments ought to be resumed at the end of two years. The
report was ably supported by Mr. Henry Thornton, but
was assailed by Mr. Rose, Mr. Vansittart, and others. Mr.
Vansittart maintained that “ a standard in the sense used by
these gentlemen, namely, a fixed and invariable weight of
the precious metals as a measure of value, never existed in
this country. *’ His idea was that the pound sterling was a
sort of intangible thing, and that the paper pound was not
to be considered as depreciated so long as it formed the cur­
rent medium of exchange, and was accepted in the discharge
of obligations. The effort was made by the defenders of
paper money to deny any difference between gold prices and
paper prices, but it was disclosed in the course of the debate
that the government themselves were making a distinction
by paying guineas to the soldiers in Guernsey at the value
of 23 shillings, although their legal value was only 21
The country was not ready to return to a specie basis, and
Mr. Horner’s first resolution was defeated by a vote of 75
in the affirmative to 151 in the negative, and his final reso­
lution by a vote of 45 to 180. Mr. Vansittart followed up
his victory by a series of resolutions, to the effect ‘‘ That the
promissory notes of the Bank of England have hitherto
been, and are at this time held to be, equivalent to the legal
coin of the realm,” and that the price of bullion and the
state of the foreign exchanges were in no way due to exces­
sive issues of bank paper. Notwithstanding the protests of
the better informed members of the House, an amendment
by Mr. Canning was rejected, 42 to 82, and Mr. Vansittart’s
astounding resolutions were carried.
The opponents of the Bullion Report laid stress upon the
fact that gold was not sold openly at a premium. The rea­
son was the belief that it was a penal offence to part with a
bank-note for less than its face value in bullion, and at the
very moment of the debate on Mr. Horner’s report three
men were lying in prison for selling guineas for more than
twenty-one shillings under an old statute of Edward VI.




The issue soon after came before the Court of Common Pleas
and they unanimously quashed a conviction under the law
and declared that it was 110 crime to sell guineas at a pre­
mium. Lord King in March, 1811, issued a circular to sev­
eral of his tenants, reminding them that their contract was
to pay a certain quantity of the legal coin of the country, and
that, as the paper currency was considerably depreciated, he
should in future require his rents to be paid in the legal coin
of the realm, in Portugese coin of equal weight, or by a suffi­
cient amount of bank-notes to purchase the necessary weight
of standard gold. This attempt to establish a gold price
distinct from the paper price of commodities caused a tem­
pest of rage among the advocates of a paper currency and
led to the charge againt Lord King, so much bandied about
in France, of incivism. A bill was promptly introduced into
Parliament by Lord Stanhope, making it a misdemeanor to
make any difference in payments between guineas and bank­
notes. The measure passed the House of Lords by a vote
of 43 to 16, and the House of Commons by a vote of 95 to 20.
The disasters to the country banks during 1815 and 1816
greatly reduced the volume of paper afloat and made way
for additional issues by the Bank of England. The reduc­
tion in country bank paper in circulation is estimated by
Professor MacLeod 1 at three times the amount of the issue
of the Bank of England, and the effect was immediately felt
in the rise in value of Bank of England notes. The market
price of gold in paper fell from £5 6s., in May, 1815, to ^3
18s. 6d., or within three per cent, of par, in October, 1816.
Foreign exchange rose in a corresponding degree, and these
rates prevailed until the mid-summer of 1817. The bank
had been preparing during the peace in 1815 to resume
specie payments and were able after the final overthrow of
Napoleon to announce, in November, 1816, that they would
pay all notes dated previous to January 1, 1812, and that in
the following April they would pay all notes dated before
January 1, 1816. Resumption was thus almost accomplished
1 Theo*"f and Practice o f Banking, II., 62.

and the people were found to be so accustomed to a paper
currency that little demand was made for gold and many
persons who had hoarded gold presented it for exchange in
Cash payments were not yet established by law, however,
and the restriction had been continued, after Napoleon’s
return from Elba, until July, 1818. The return of peace
brought a great many foreign borrowers to England.
Prussia, Austria, and other states were endeavoring to ob­
tain gold to reform their currencies. The result was a
heavy drain upon the gold reserve, which had reached
£ ‘11,914,000 in October, 1817, and the reappearance of a
premium upon coin and bullion.1 Advances to the govern­
ment were increased from ^20,000,000 to ^28,000,000 and
the bank made no effort to restrict their issues, in the face
of the foreign drain and a new increase in the circulation of
the country banks. It was perfectly evident that specie
payments could not long be maintained with the paper price
of gold at £4 3s., or about seven per cent, premium, and
committees were appointed on February 3, 1819, by both
houses of Parliament to inquire into the state of the bank.
They reported in favor of a further suspension of specie
payments and a bill for the purpose became law on April
1 The question was much discussed by the orthodox believers of
the classical school of political economy, why prices of commodities
did not fall with the export of gold and invite foreign purchasers of
English merchandise. As Prof. Sumner puts it (.History of American
Currency, 264), “ If all nations used specie, or even paper and specie,
in only due proportion it would be as impossible for one nation to be
drained of specie as for New York harbor to be drained of water by
the tide.” But all nations do not use specie only, but credit, and
modern experience has demonstrated that prices do not move up and
down with gold exports and imports, but under the operation of
much wider causes in the credit market. The Bank of England did
not employ at this time the method of protecting its cash by raising
the rate of discount, and the orthodox theory of price movements was
of no practical avail against the operation of special causes which
drew off gold. See an outline of the discussion in Money, by Francis
A. Walker, 356-58.


5th. The bill forbade the bank to make payments in gold
either for fractional sums or for any of their notes during the
session of Parliament. The committees then addressed
themselves to a full hearing regarding the bank manage­
ment and the best means of resuming specie payments upon
a secure basis.
The testimony taken by the committees indicated a
marked advance in sound opinion amoiig bankers and busi­
ness men since the adoption of the comic resolutions of Mr.
Vansittart. Nearly all the witnesses admitted the influence
of the irredeemable circulation upon the foreign exchanges
and the necessity of curtailing the circulation when the ex­
changes became unfavorable and the automatic regulation
of redemption in coin on demand was lacking. The majority
of the bank directors were not convinced of the wisdom of
these views until several years later, but Sir Robert Peel
changed his opinion completely and found a powerful sup­
porter in Lord Grenville, who was a member of the Cabinet
which originally proposed the restriction act. Lord Gren­
ville went so far as to declare that he considered the restric­
tion one of the greatest calamities under which the country
labored and to deplore the part which he had himself taken
when it was proposed. While the bank was enabled by the
act to lend money with one hand, he declared, it was with
the other shaking the foundation of contracts, affecting
prices, and involving the country in distress and individuals
in ruin ten times greater than any benefits they could derive
from liberal issues.
Both houses concurred in the passage of a bill for the
gradual resumption of specie payments by the reduction of
the mint price of gold. It was provided that after February
1, 1820, the bank should be required to deliver gold of stand­
ard fineness in quantities of not less than sixty ounces at £4
1s. per ounce ; that after October 1, 1820, the rate should be
reduced to £$ 19s. 6d., and after May 1, 1821, to the mint
price of £$ 17s. 1o}4 d. per ounce. The provision for pay­
ment in bullion was adopted so as to prevent a run upon the
bank8 for coin by small note-holders, while it established

substantial coin redemption when the bullion came to be
delivered at the mint price.1 This liability to pay in bullion
was to continue until May i, 1823, after which full redemp­
tion in coin on demand was to be required. The statutes
restricting the trade in gold coin and bullion were repealed
and Mr. Pitt’s practice of free borrowing from the bank was
cut off by an act forbidding advances of any description
without the express authority of Parliament. It is probable
that the bank would have been able to resume cash payments
without authority of legislation, within the time which the
act required, but its passage by Parliament did much to
educate and crystallize public opinion and to protect the
bank during the attacks upon the resumption act which were
made within the next few years.
The accumulation of gold in the Bank of England was so
rapid that it became possible to pass an act in 1821 permit­
ting full resumption on May 1, 1821. The government
repaid £*10,000,000 of its obligations to the bank and specie
payments wT resumed in coin at the date fixed by law.
The bad harvests and commercial collapse led to several
attacks upon the resumption act in Parliament in 1822 and
1823, but they were rejected by large majorities. It was
pointed out in the course of the debate that the low price
of wheat, which was a great cause of discontent among the
agricultural class, could not well be due to the alleged con­
traction of the currency, for a greater decline had taken
place in France, which had been steadily upon a metallic
basis, and a like decline in other Continental countries where
depreciated paper was still the medium of circulation. The
price of wheat at Vienna, in spite of the large volume of the
Austrian paper currency, had dropped from 1145. in March
1817, to 19s. 6d.y in September, 1819. It was shown also
that the amount of currency in England had increased rather
than diminished, for the paper issues had not been materially
reduced and a large mass of coin had been infused into the
circulation. The only concession obtained by the opponents
1 Levi, 137.


of resumption was the statute of 1822 (Chapter 70), author­
izing country bankers to continue the issue of notes for £1
until the expiration of the charter of the Bank of England
in 1833. The permission to issue £1 notes, which had been
given to the Bank of England in 1797 and continued during
the entire period of restriction, was withdrawn by the
resumption acts.
The effect of the monopoly of the Bank of England,
which deprived any corporation or large firm of the power to
issue notes, but left the power to firms of six persons or less,
was the subject of severe criticism every time that the small
country banks were swept away in a period of industrial
depression. The success of the Scotch banking system was
attracting attention and English financiers were desirous of
adopting it in England. It was supposed, however, down
to 1823, that no joint stock bank could be lawfully established
in England because of the exclusive privileges conferred
upon the Bank of England by the Act of 1742. It was
found, upon careful inspection of the act, and having in
view the rule of law that a penal statute must be construed
strictly, that the restrictions were limited in their application
to banks of issue. The failure to make any distinction up
to this time between the power to establish joint stock banks
for the purpose of issuing notes and the power to establish
them for other purposes was due to the early impression that
banking could not be carried on without the issue of notes.
The London private bankers had for thirty years suspended
the use of circulating promissory notes, but the tradition
lingered that joint stock banks could not be established with­
out infringing the legal monopoly of the Bank of England.
Mr. Joplin in a pamphlet issued in 1823 announced his dis­
covery that the charter of the bank “ does not prevent pub­
lic banks for the deposit of capital from being established.” 1
There was natural hesitation, even after this discovery, to
embark in joint stock banks of deposit without specific
authority of law, but the discovery probably had something

MacLeod, Theory and Practice o f Banking , II., 381.



to do with wringing concessions from the Bank of England
and improving the existing system. The government pro­
posed to the bank in 1823 that it consent to the creation of
joint stock banks of issue at a distance of sixty-five miles
from London, upon condition of the extension of the bank
charter for ten years. This proposition was rejected, but
the subject was revived after the dreadful panic of 1825.
The time for the renewal of the charter was drawing nearer
and the bank consented to the Act of 1826, establishing
joint stock banks of issue beyond the radius of sixty-five
miles from London and requiring the bank to establish
branches. These joint stock banks were authorized to issue
notes, but they were not to issue them within the prescribed
distance nor to draw upon their London agents any bill of
exchange payable on demand or for any less sum than ^50.
A sworn list of the shareholders and places for carrying on
business was required of the new banking companies, but
few restrictions were imposed as to their management, capital,
or cash reserve.
Few joint stock banks were formed for the first few years
after the Act of 1826, as the leading country bankers already
had private banks and had no wish to set up powerful rivals.
The Bank of England managers clung to the monopoly of
banking in London, even after they had conceded freedom
beyond the sixty-five mile radius, and begged Lord Althorp,
when the charter was renewed in 1833, to insert a clause
clearly preventing the formation of joint stock banks in the
City. Lord Althorp, having obtained the opinion of the
law officers of the Crown, in favor of the right to set up de­
posit banks, refused to impose new restrictions and tartly
reminded the directors of the bank that the bargain was that
their privileges should remain as they were,—not that they
should be extended.1 A clause was inserted in the Act of
i 833, specifically declaring that any body politic or corporate
or partnership might carry on the business of banking in
London or within sixty-five miles thereof, provided they did

Macl^eod, Theory and Practice o f Banking , II., 384.


not issue notes payable on demand. It was not until after
this act that it was seriously attempted to set up a joint
stock bank in London. The history of these banks is not a
part of the history of banks of issue, but it is an interesting
fact that the first was the London and Westminster Bank,
which was originally formed as a private partnership and
whose manager was Mr. James W. Gilbart, the author of
one of the most complete and intelligent works on English
banking. Joint stock banks of issue were formed in con­
siderable numbers in the prosperous years preceding the
panic of 1836, and more than forty were established in the
spring of the latter year. The number issuing notes when
the restrictive Act of 1844 took effect was 72, of which only
14 still retain the privilege.
The Bank of England opened its first branches at Glou­
cester, Manchester, and Swansea. The branches were able to
compete on favorable terms with the country banks and to
discount bills at four per cent., where the old banks charged
five per cent, and sometimes an additional commission.
The principal advantage which the country bankers re­
tained was the payment of interest on deposits, but they
felt keenly the competition of the branch banks and held
a meeting as early as December 7, 1826, to consider it.
They adopted resolutions that the establishment of branch
banks “ have the evident tendency to subvert the general
banking system that has long existed throughout the coun­
try, and which has grown up with, and been adapted to, the
wants and conveniences of the public.” A deputation was
sent to the Chancellor of the Exchequer, who promised to
give serious consideration to their views. Further cause of
complaint was found in the stamp duties, which were levied
upon the country bank-notes according to value, while a
fixed sum was accepted from the Bank of England for their
entire issues. The result, according to the country bankers,
was to subject them to a tax of ^650 on ,£10,000 where the
bank paid only £ “ 5. This protest resulted in an act ex­
tending the privileges of the Bank of England to the coun­
try banks, but the general protests against the branches were

I l8


answered by the assurance that “ the interest of the country
bankers should not be neglected in any negotiation between
the government and the Bank of England for the renewal of
the bank charter. ’’ 1
The extension of country banking, without any legal
regulation, was popularly regarded as one of the causes of
the panic of 1825 as well as of some of the earlier panics.
The issue of small notes by the country banks was treated
by eminent statesmen as an especially dangerous feature of
country banking and as having a tendency to expel coin
from the circulation. Many of these notes were retired by
the insolvency of the issuers in the panic of 1825 and the
ministry seized the opportunity to propose their prohibition
for the future. They took steps, without waiting for Parlia­
ment to act, to prohibit the issue of the required stamps for
£1 and £2 notes and the Chancellor of the Exchequer made
an early motion in Parliament that no notes be issued in the
future under £5. The proposition became law and after a
sharp contest was extended in 1828 to Scotch notes circula­
ting in England.2
The approach of the date fixed for the expiration of the
bank charter,—at the end of one year’s notice after August
1, 1833,—fedto appointment of a committee of the House
of Commons May 22, 1832, to consider the privileges to be
granted in the extended charter. The witnesses examined
discussed the propriety of establishing joint stock banks in
London (which most of them opposed), the publications of
the accounts of the bank, the regulation of the circulation,
and the rate of discount. The subject of making the bank­
notes legal tender except at the bank was also considered
and the change was urged upon the ground that the notes
could then be used by the country banks in the redemption
of their own notes in times of panic and the demand for
gold diminished. Lord Althorp moved the resolutions for
1 Gilbart, I., 70-73.

2 The history of Scotch and Irish banking will show that the effort
made at this time, to deprive those countries of the use of small
notes, was defeated.


1 19

the renewal of the charter on May 31, 1833, and it was de­
cided by a vote of 316 to 83 to proceed with their considera­
tion. The proposition to make the notes legal tender except
at the bank prevailed by a vote of 214 to 156.
The new charter continued the exclusive privilege of note
issue within sixty-five miles of London, but authorized
country banks to have agencies in London for the purpose
of paying such of their notes as might be presented. The
bank was authorized to reduce its capital by one-fourth of
the amount of the debt of the public to the bank and in
consideration of its privileges surrendered ,£120,000 of the
amount allowed annually by the government for the man­
agement of the debt.1 The charter of the bank was ex­
tended to one years’ notice, to be given within six months
after the expiration of ten years from August 1, 1834, anc^
until repayment of all debts due by Parliament to the bank.
The renewal of the charter in 1844 extended the life of the
bank until twelve months’ notice after August 1, 1855, and
the repayment of the public debt. No such notice was
given and the bank continued to operate under this author­
ity until 1870. A revision was made at that time of the
statutes relating to the public debt, and it was enacted that
the Bank of England shall continue a corporation until all
the public funds are duly redeemed by Parliament.2
The period following the crisis of 1839 developed a pecul­
iar doctrine of finance in England, which obtained a strong
footing among public men with only a rudimentary know­
ledge of political economy and has spread to some extent
on the Continent of Europe and in the United States. This
1 The government repaid one-fourth of the permanent debt, amount­
ing to £ 3,671,000, and reducing the principal to ^11,015,100; but
the bank never availed itself of the permission to deduct the amount
crom its capital, which remains at £14,553,0 x>, where it was fixed in
1816. The interest on the debt to the bank was reduced in 1892 from
three to two and three-fourths per cent., and changes were made in the
allowances for managing the debt which made the total saving to the
government ^45,700.—London Bankers' Magazine, July, 1892, LIV.,



2 Clause 72, Act 33 and 34 Victoria, c. 71.



doctrine embodies the ideas that bank-notes are a form of
currency entirely distinct from other commercial paper and
forms of credit; that an expansion of bank-note issues, even
when redeemable in coin on demand, is a potent cause of
commercial crises ; and that the way to prevent crises is to
place fixed limits upon bank-note issues. Few advocates of
this theory have undertaken to place definite limits upon the
volume of bills of exchange or of other forms of commercial
paper issued by solvent borrowers, but they have maintained
that bank-notes were money for all practical purposes of
daily use ; that an undue expansion in the volume of money
has stimulated speculation and expelled gold under the opera­
tion of Gresham’s law; and that the curtailment of note
issues would maintain sobriety in the mercantile world and
restore the equilibrium of the foreign exchanges.
The advocates of this view, of whom the most conspicu­
ous were Sir Robert Peel, Lord Overstone, and Colonel Tor­
rens, named their new discovery “ The currency principle, ’’
and immediately set out to rescue the commercial world of
Great Britain from future disturbance by enforcing their
policy in a modified form upon the Bank of England. Sir
Robert Peel declared, in advocating the resumption act of
1819, that it was impossible to prescribe any specific limita­
tion of issue for the bank and that the quantity of circula­
tion which was demanded in a time of confidence varied
materially from the amount required in a period of despon­
dency. He became a complete convert to the currency
principle in 1844 and introduced the bill which became the
basis of the present charter of the Bank of England. The
theory of the currency principle was so generally accepted
as a means of putting an end to panics that amendment was
refused by the House of Commons by a vote of 185 to 30,
and the bill passed the House of Lords without a division,
and received the royal assent on July 19, 1844. The bill
absolutely cut off the creation of banks of issue, except by
the union of existing banks, and made the future elasticity of
English currency dependent upon deposits of coin or bullion
with the Bank of England.


The new charter provided for the separation of the issue
department from the banking department of the Bank of
England and placed the issue department under the charge
of a committee of the directors appointed by the entire body.
The Governor was directed to transfer to the issue depart­
ment on August 31, 1844, securities to the value of ^14,000,000, of which the debt due by the government to the
bank was to be a part. The bank was also to deliver to the
issue department such of the gold coin and bullion as was
not required for the banking department and was to receive
back a quantity of notes which should make the circulation
of the bank exactly equal to the coin and bullion 011 deposit,
plus the sum of ^14,000,000 represented by securities.1
Thenceforth the issue department was to pay coin and
bullion for notes and issue notes for coin and bullion, and
no department of the bank was authorized or permitted to
issue notes in excess of the limits thus established. The
price of gold at the bank was fixed for the future at £3 17s.
9d. per ounce. Weekly accounts of the circulation were to
be transmitted to the government and published in the Lon­
don Gazette. The bank was required to pay ^180,000 annu­
ally for its privileges instead of the rate of ,£120,000 fixed in
1833. This payment was modified in 1861 and now amounts
to about ,£200,000.
The purpose of fixing the amount of notes covered by se­
curities at ^14,000,000 was to economize that amount of
gold without impairing the convertibility of the note. The
amount was arrived at, not with any special regard to the
capital of the bank or the government debt already held, but
with regard to the smallest amount of Bank of England
1 Whether the notes constitute a prior lien on the securities and
bullion in the issue department is a point which is not clearly set
forth and has never been judicially decided. The act directs that
“ there shall be transferred, appropriated, and set apart by the said
governor and company to the issue department securities to the value
of ^*i4,ooo,ooo,>; but “ it shall be lawful for them to diminish the
amount of such securities,,, which seems to preclude the idea that
the}7 are not part of the general assets of the bank.—Price, 65.



notes which could be counted upon to remain always in cir­
culation. It was found that the net circulation in Decem­
ber, 1839, was ^14,732,000, and it was argued that at least
£2,000,000 more must be kept in the banking reserve of the
bank. It was considered safe, therefore, to fix the uncov­
ered circulation at ^14,000,000 and it was left to the play of
the foreign exchanges to control the fluctuations above that
amount.1 Gold imported under the attraction of low prices
and high interest rates would be brought to the bank and
exchanged for notes, under the theory of the framers of the
act, and gold withdrawn from the country by the attraction
of low prices and high interest rates elsewhere would be
taken from the bank by the presentation of notes, which
would thus be withdrawn from circulation.
The principle of issuing notes covered by other securities
than coin, within the safe maximum limit of the amount
which can be kept permanently in circulation, is a simple
and intelligible banking principle, and indeed the principle
upon which modern banking is founded. The declared pur­
pose of the act—“ to cause our mixed circulation of coin
and bank-notes to expand and contract, as it would have
expanded and contracted under similar circumstances had it
consisted exclusively of coin,”—also seemed simple and in­
telligible to those who ignored the existence of credit and
the domestic causes which made a larger circulation desira­
ble at some periods than at others. The Act of 1844 pro­
posed substantially to destroy the bank-note as an instrument
of credit and make it a mere certificate of coin, leaving to
other forms of commercial paper the functions which the
bank-note had in part performed. It is obvious, however,
that the framers of the act, in fixing a maximum limit of
authorized circulation, meant to deal only with the condi­
tions then existing and that, if their theory had proved op­
erative, they could not have objected to a much higher limit
to meet the expanded volume of modern trade.
Existing private and joint stock banks of issue were per­
mitted, with the usual respect of English law for vested
1 Mr. Torrens, quoted by Hankey, 5-8.


1 23

rights, to continue their outstanding circulation. It was the
purpose and expectation that these banks would gradually
be led to retire their circulation and remit the power to the
central bank of issue. Provision for this contingency was
made by the authority given the bank to increase the
amount of securities in the issue department to an amount
not exceeding two-thirds of the country bank-notes with­
drawn and to issue circulation against the new securities.1
The new issues did not fall to the bank automatically, but
required an order from the Crown in Council. The amount
of circulation allowed the country banks was determined by
the average circulation during the twelve weeks preceding
April 27, 1844, and the amount was found to be ,£5,153,417
for the 207 private banks and ,£3,478,230 for the 72 joint
stock banks. It was not until December 13, 1855, that any
increase was made in the secured circulation of the Bank of
England. Forty-seven banks with aggregate issues of
,£712,623 had ceased to issue their notes since the Act of
1844 and an order was made authorizing the increase of the
Bank of England issue by ,£475,000. The next increase was
.£175,000 in 1861, and the next ,£350,000 in 1866, increasing
the issues upon securities to ,£15,000,000. An increase of
.£750,000 was made April 1, 1881; ,£450,000 September 15,
^87 ; ,£250,000 February 8, 1889; .£350,000 January 29,
1894; ^ 975)°°° March 3, 1900; ,£400,000 August 11, 1902 ;
£■275,000 August 10, 1903. The secured circulation, there­
fore, now stands at ,£18,450,000 ($90,000,000). Lapsed
issues up to 1914 were £'8,126,445,—,£4,818,802 for 197
private banks and ,£3,307,643 for 67 joint-stock banks.
No provision was made for strengthening the security of
the issues of private banks, except the absolute limit put
1 The limitation to two-thirds of the cancelled issues was based
upon the theory that these issues had been protected by one-third
their amount in bullion, which would be released for circulation,
thus keeping the amount of circulation intact, The utter disregard
of banking principles embodied in the law is indicated by this as­
sumption, which completely ignores the necessity for a reservt
against general liabilities.—Gilbart, II., 100.



upon the amount, for it was not intended to foster their
development. A banker who ceased to issue his own notes
was not permitted to resume the issue, and if two or
more banks became united and the number of partners of
the united bank exceeded six their power of note issue was
to cease. The country bankers were required to permit
their books to be inspected by a government officer, but this
was apparently to prevent an excess of issue rather than to
afford any other sort of security to the public. The country
banks have been slow to leave the field, as the figures of
their circulation demonstrate. Fifty-six private banks were
still issuing ^2,220,048 and 35 joint stock banks were still
issuing ,£1,974,202 in notes at the beginning of 1896; but
by 1914 the number had fallen to eight private banks and six
joint stock banks, with issues respectively of ^334,615 and
,£170,587. These notes are not legal tender and the banks
issuing them are not required to publish accounts.
The operation of the Bank Act of 1844 was put to an early
test by the crisis of 1847 and the result was a complete fail­
ure upon two essential points. The operation of the act
neither prevented the speculation which is the cause of pan­
ics, nor reduced the issue of notes to correspond with the
export of gold. Inquiries were made by both the House of
Commons and the House of Lords, at the meeting of Parlia­
ment after the panic and the friends of the Act of 1844 made
an earnest effort to rescue it from the discredit which the
panic had cast upon it. The committee of the House of
Commons reported in favor of continuing the act in effect,
but the House of Lords’ committee spoke in severe terms of
its operation. The failure of the act in the important re­
spect of preventing commercial convulsions was frankly
admitted in the debate in the Commons by Sir Robert Peel.
It had neither “ put a check on improvident speculation/’
in the language of the Lords’ committee, nor afforded ‘‘ se­
curity against violent fluctuations in the value of money.”
The law was framed to arrest commercial expansion by limit­
ing the means for carrying on commercial transactions. It
failed absolutely in this object, because such operations can


1 25

be carried on, and usually are carried on, by other means
than bank-notes. It succeeded in checking the expansion
only when other forms of credit had been swept away by
distrust and expansion of note issues to fill their place was
absolutely needed to prevent overwhelming commercial dis­
aster. It did not prevent expansion, in simple terms, when
expansion might do harm ; it prevented it absolutely when
it might have done good.
It was the theory of the supporters of the act, that the
currency would fluctuate in exact accordance with the fluctu­
ations of a metallic currency by the self-acting provision for
the issue of notes only in exchange for gold and the issue of
gold in exchange for notes. Both sides in the discussion
of the bill, when it was pending in Parliament, seem to have
made the incredible blunder of overlooking the fact that
gold could be obtained by the presentation of checks. This
was exactly what happened in 1847 and the effect upon the
outstanding note issues and the bullion in the bank at
different dates during the April pressure is indicated in the
following table:
N O T E S H E L D B Y T H E N O T E S IN T H E B A N K ­
IN G R E S E R V E .

Aug. 2 9, 1846
Dec. 19, 1846
Jan. 9, 1847
Feb. 20, 1847
Mar. 20, 1847
Apr. 10, 1847

19. 549.000



^ “16,366,000

The bank, therefore, saw its bullion decreasing on the one
hand and its banking reserve decreasing on the other hand,
while gold and notes poured out of the banking department
in the discharge of its obligations. The banking reserve
was chiefly in notes which had been obtained by the sur­
render to the issue department of such gold as was received
on deposit, but the payment of these notes to customers
either swelled the note circulation or reduced the gold in the
bank, by just the amount of the payment. The effect, as
Mr. John Stuart Mill pointed out in his testimony before



the Committee of the House of Commons, was a double
action, which required each department of the bank to take
measures for self-protection and made the bank’s action on
the money market ‘‘ as violent on a drain of three millions,
as would have been required on the old system for one of
six.” 1 The banking department might be completely
wrecked by the exhaustion of its note reserve, without the
power it formerly possessed to draw upon the whole re­
sources of the bank for help.
It was fortunate iii many respects that the Act of 1844
failed to operate to contract the domestic circulation as was
expected. Such an event would only have added to the in­
tensity of the panic and made the suspension of the act and
the issue of additional notes more imperative. Such con­
traction and such absence of expansion as actually occurred
invited a run upon the bank for gold and notes which would
not have occurred under former conditions. Bank of Eng­
land notes were a legal tender except at the bank and were
largely employed in the reserves of the country banks. The
absolute limit on the supply had the double effect of frighten­
ing the public into withdrawing their deposits from the
banks for hoarding before the supply was exhausted and of
driving the banks to withdraw their deposits from the Bank
of England for hoarding against this demand by the public.
If they could not get notes under such circumstances, they
would take gold, and the reduction of the note circulation in
the meantime would only have increased the pressure. The
demand for notes, so long as their convertibility was unques­
tioned, was, of course, immensely increased by the destruc­
tion of credit. Hoarding operated to reduce the visible
quantity of notes at the very moment that the disappearance
of commercial paper as a medium of circulation increased
the necessity for them. The terrible pressure thus applied
by the Act of 1844 to the commercial community compelled
the sale of goods and securities in foreign markets at any
sacrifice which would bring the ready currency withheld by
1 Political Economy, B. III., Ch. xxiv., Sec. 4.


1 27

the operation of the Bank Act. The operation of the law,
therefore, meant an absolute loss, not merely in the nominal
sense of money denominations, but in the real sense of sur­
rendering more English commodities for a given quantity
of foreign commodities than would otherwise have been
required. 1
The chief contention which was left to the friends of the
Act of 1844, after the rude disillusionment of the panic of
1847, was that the act had maintained beyond doubt “ the
convertibility of the note.” They argued that under former
conditions and in previous panics, the bank had been drained
of gold as well as of its banking reserve, the two not being
then separated, and that the ultimate redemption of the notes
in gold had been threatened. From a practical point of view,
there was perhaps some force in this claim in behalf of the
act.a The claim is subject to the two conditions, however,
that a better knowledge of the rules of banking had come
into operation since the earlier panics and that theoretically
the “ convertibility of the note” was not perfectly assured.
It is doubtful, indeed, if convertibility could have been
maintained if there had never been, either in 1847, i 857>or
1866, any suspension of the Bank Act. Loss of convertibility
would not have come primarily from distrust of the notes or
of the credit of the bank, but from the pressure for money
by depositors upon the private banks and joint stock banks
which kept their reserve with the Bank of England. They
would have come upon the bank with a rush for the pay­
ment of their deposits and the point might very soon have
been reached where the bank had only public securities as
1Gilbart,I., 337-38.
8Mr. Mill insists that the convertibility of the note “ would have
continued to be maintained, at whatever cost, under the old system,”
and remarks that the suspension of the banking department, “ in­
volving, as it would, the probable stoppage of every private banking
establishment in London, and perhaps also the non-payment of the
dividends to the national creditor, would be a far greater immediate
calamity than a brief interruption of the convertibility of the note.’*
—Political Economy, B. III., Ch. xxiv., Sec. 3, note.



the guarantee of its circulation. The effort, in other words,
to keep the bank standing a solitary monument; of unimpaired
credit when every other part of the credit system of the
country had fallen a mass of ruins around it could not
have succeeded. This was the logical meaning of the
propositions of those who insisted that the Act of 1844 main­
tained “ the convertibility of the note,” so far as they had
any definite meaning, and it was a proposition which was
utterly chimerical.
If the limitations of the Act of 1844 have been of any value
to the English people, it has probably been in driving them
to the adoption of substitutes for circulating notes and to the
extension of deposit banking. England was sufficiently far
advanced in 1844 in the use of instruments of credit to make
the restrictions of the Bank Act of much less importance than
such restrictions would have proved in a new and undevel­
oped country. One of the devices adopted in London for
promoting the movement of capital was the Cheque Bank.
Money was received by this bank on deposit, and books of
checks were issued for even denominations, which might be
filled in for less than the denomination but not for more.
The face value of the checks issued did not exceed the
depositor’s credit, so that the receiver of such a check had
the assurance of the bank that the depositor’s account was
not overdrawn. Such checks were made payable by the
Cheque Bank only through some other banker and not at
the counter of the bank, thereby escaping the prohibition of
the law against promissory notes payable to bearer on de­
mand. The checks passed between individuals for cash and
the Cheque Bank established relations with some 1500
domestic and foreign banks which agreed to receive and
cash its checks. Several railways and other companies re­
ceived these checks as cash and they proved convenient for
transmission through the mails.1 The Cheque Bank, there­
fore, put in operation a sort of emergency currency, outside
the law, if not in violation of law, which has been resorted
1 MacLeod, Theory and Practice of Banking , II, 374- 75.


to in other countries only under the pressure of commercial
A much more important and scientific step than cast-iron
rules of circulation was adopted by the Bank of England for
the protection of its gold reserve after the crisis of 1857.
This step consisted in raising the rate of interest rapidly by
degrees of one per cent, at a time, instead of fractions of one
per cent., in order to arrest the export of gold. The increas­
ing ease and cheapness of communication had destroyed the
value of differences of a fraction of one per cent., when this
fraction was divided into fractions of a year, in attracting
gold from foreign countries or arresting its departure. The
theory of statesmen and students of political economy had
generally recognized up to this time only two causes of the
export of gold—payments for merchandise and the pressure
of a depreciated currency. The bullion brokers, without
spending time over theories, had long since learned by obser­
vation that it became profitable to export gold when interest
rates abroad were higher than at home. They fabricated
bills of exchange, had them discounted by bankers, took the
proceeds in gold and shipped the gold to the point where it
would earn the highest interest. The bills fabricated for
this purpose had the character of accommodation bills, in
that they represented no merchandise transaction and were
drawn for the single purpose of transferring money from the
place where it was cheap to the place where it was dear, in
order to earn the higher rate of interest.
The fact and possibility of such shipments of gold do not
seem to have been known, or at least fully understood, up
to this time, by the staid old merchants who formed a ma­
jority of the board of directors of the Bank of England.
The necessity of meeting the drain by rapid advances in the
rate of discount was first set forth in the literature of political
economy by Prof. H. D. MacLeod,2 was quickly adopted as
the true theory by Mr. Goschen, and put in force by the bank
1For a similar device in Austria, see the closing portion of Chapter
ix., first edition of this work.
2 Theory of Credit , II., 813- 18.



which, on this occasion, according to Mr. Bagehot, “ and as
far as I know, on this occasion alone, ’’ made 4‘ an excellent
alteration of their policy which was not exacted by contem­
porary opinion, and which was in advance of it.” 1 The
results were even more striking than were anticipated by
the advocates of the new theory, and are thus summed up
for the next few years by Mr. Bagehot:

The beneficial results of the improved policy of the bank were pal­
pable and speedy : we were enabled by it to sustain the great drain
of silver from Europe to India to pay for Indian cotton in the years
between 1862 and 1865. In the autumn of 1864 there was especial
danger; but by a rapid and able use of their new policy, the Bank of
England maintained an adequate reserve, and preserved the country
from calamities which, if we had looked only to precedent, would
have seemed inevitable. All the causes which produced the panic of
1857 were in action in 1864; the drain of silver in 1864 and the preceding
year was beyond comparison greater than in 1857 and the years before
i t ; and yet in 1864 there was no panic. The Bank of England was
almost immediately rewarded for its adoption of right principles by
finding that those principles, at a severe crisis, preserved public credit.2

The great expansion of English banking after the middle
of the century led to serious doubts as to the capacity
of the Bank of England to maintain commercial credit in
every conceivable emergency. Mr. Bagehot pointed out in
his celebrated work, Lombard Street, more than twenty
years ago, that the entire fabric of English credit rested
upon the gold reserve of the Bank of England. The reserve
had then increased somewhat above its level in earlier times,
but was still considered by many as affording an insufficient
protection for the great volume of the banking business of
the country. The private and joint stock banks made no
effort to maintain a coin reserve of their own, for such a
policy would have locked up their capital and driven them
to the wall in the fierce competition for fractional profits.
They carried only such cash as was needed from day to day
for ordinary transactions, and relied upon their deposits with
1 Lombard Street, Works, V., 118.
2For a temporary failure of the new rule to act, and the reason for it,
see account of the crisis of 1866. in Ch. xxiii.


the Bank of England for cash to meet emergencies. The
system thus created was graphically called ‘‘ the one reserve
system,” and under it the credit of the entire business com­
munity depends upon the solvency of the Bank of England.1
Under this system the deposits of other banks at the Bank
of England tend to increase in times of anxiety. The joint
stock and private banks, in the country as well as in the
city, instead of drawing gold and notes from the centre to
put in their own vaults, as is done by the banks of the
United States in times of stress, obtain rediscounts at the
Bank of England and carry the proceeds to their deposit
accounts there, in order to be able to draw checks freely
on the bank, which can be exchanged for notes, if desired.
Thus, in 1857, bankers’ balances increased from ,£3,400,000
on November 4th to .£5,400,000 on November 25th. In
1866, in one week, between May 9th and May 16th, bankers’
balances rose from .£5,000,000 to .£7,900,000, and in 1875
there was an increase from ,£7,274,000 on May 19th to
;£ 11,857,000 on June 2d.8 In 1890, when separate returns
were no longer published, the influence of the bankers’
balances was shown by the increase of general deposits
from ,£30,286,000 on November 12th to .£36,365,000 on
November 19th.
The characteristic features of English banking in recent
years have been the extension of banking privileges and
the consolidation and growth in power of the joint stock
banks. The latter did not enjoy the privilege of limited
liability in early days and refused to avail themselves of it
when it was granted in 1858; but the collapse of the City of
Glasgow Bank in Scotland, with the accompanying ruin
of many shareholders, as told hereafter, led most of the
joint stock banks to accept the Act of 1879, authorizing the
1The Irish and Scotch banks of issue hold gold funds, which
amounted on May 30, 1908, to £ 9,997,073, but this gold is more or
less tied up by the laws governing their circulation, and calls are
almost invariably made for gold upon the Bank of England in times
of stringency.
2 Pal grave, 24-25.

I 32


creation of a reserve liability in the form of uncalled capital
as the limit of obligation of shareholders in case of failure.1
This definition of the obligations of the shareholder led
wealthy men, who had formerly stood aloof, to invest in
bank shares, and within the next thirty years joint stock
banking resources were more than doubled. The number
of banking offices open to the public In England and
Wales increased from 1779 in 1872 to 6973 I9 I3 >while
in the United Kingdom as a whole the increase was from
2924 in 1872 to 4460 in 1886, 5612 in 1894, 6512 in 1900, and
9116 in 1913. Even with the great increase in number of
offices in England and Wales, the equipment reached only
one office to 5173 of the population in 1913. This was below
the figure for Scotland in 1872, which was one office to 4137
people, and which rose in 1913 to one office for 3790 people.2
While this great improvement in the accommodation of
the public was taking place, the number of banks was
diminishing. Forty-two banks in the United Kingdom were
absorbed by others from 1877 to 1886, 90 from 1887 to 1895,
and more than 100 from 1896 to 1907.3 One of the causes
of these amalgamations, especially where country banks
were absorbed by London banks, was the low rates for
money which prevailed in the city from 1892 to 1896. The
country rate, being more steady, afforded a larger profit to
the city bank, while the country bank benefited by the
addition to prestige and capital resulting from absorption,
which permitted a larger extension of business. Some of
the smaller London banks, on the other hand, yielded to the
pressure for concentration by union with large provincial
banks, which thus obtained the benefits of London offices
and admission to the clearing house.4 Finally, began in
1 Sykes, 98.
2 London Bankers9Magazine, February, 1914, XCVII., 170.
8 The number of banks stated as in operation differs somewhat
according to the classes dealt with. Straker states the number of
joint stock banks in 1849, in England and Wales, at 99; in 1892,102;
and in 1902, 68.—The Money Market, 80.
4 Sykes, 102-103.


recent years the union of large joint stock banks and private
bankers in London. Out of these various measures of con­
solidation have come some of the largest banking houses in
the world. The London, City, and Midland, an example of
the entrance of a provincial bank into London, had at the
close of 1913 assets of ^108,584,213 and overtopped every
other institution except the Bank of England. The absorp­
tion of four important banks during the five years 1909-13
was accompanied by an increase of capital and surplus to
^8,048,650. A close second was Lloyds Bank, with capital
and surplus of ^7,208,672 and total assets of ^106,618,948;
while the third largest institution was the London County and
Westminster, with capital and surplus in 1913 of £ j }500,000
and total assets of ^104,248,238.1
With the readjustment of the banking situation caused by
the elimination of small institutions, new amalgamations
have been fewer in recent years, reaching only four in 1908;
six in 1909; five in 1910; three in 1911; one in 1912; and
three in 1913.
The total resources of the banks of the United Kingdom
and Ireland at the close of the year 1913 were in excess of
^1,350,000,000. The banks of England and Wales alone
showed total assets of ^“1,116,487,779, of which ^286,279,374
was in cash on hand, on call, or at short notice; ^593,791,336
was in bills discounted, advances, and loans; and investments
in securities were ^“164,197,691. On the side of liabilities,
the deposits, current accounts, and note circulation represented
^£957,788,930 and capital and reserve funds ,£105,608,950.
The total assets of the Scotch banks were ,£158,664,623,
which included cash on hand and at short notice to the
amount of ,£38,749,685; bills discounted, advances, and loans,
^75,963»o53; and investments, .£34,024,335. On the side of
liabilities, the deposits, current accounts, and note circulation
1In April, 1914, Lloyds absorbed the Wilts and Dorset Banking
Company with resources of about £14,000,000, and in June, I9i4> the
London City and Midland arranged to take over the Metropolitan
Bank of England and Wales, with assets of about £13,000,000.

were ^135,060,895 and capital and reserve funds ^17,496,450.
The banks of Ireland showed total assets of ,£90,904,781, of
which cash on hand and at short notice was ^16,713,526;
bills discounted, advances, and loans, ^49,407,521; and in­
vestments, ^23,934,664. On the side of liabilities, the de­
posits, current accounts, and circulation were ^78,953,230 and
capital and reserve funds ^11,095,230. Total liabilities on
account of deposits, current accounts, and circulation for all
British banks, including small amounts for the Isle of Man,
were ^1,172,725,299; discounts, advances, and loans were
^719,284,295; and investments, ^224,486,077.
From this extreme concentration of banking resources has
arisen much controversy whether the cash kept by the Bank
of England is sufficient in amount to support: such a mass of
credit, and whether, if it is not sufficient, larger reserves in
coin should not be kept by the joint stock and private banks.
The experience of three crises since the Bank Act of 1844
has given serious warning of the shock which would come to
every British interest if the Bank of England should prove
inadequate to support the fabric of British credit and to sup­
ply all foreign demands for gold. Mr. Bagehot fixed “ the
apprehension minimum/’ below which the bank reserve
could not go without exciting alarm, at ^10,000,000, and
he maintained that measures to protect the reserve should
begin to be taken when it dropped below ^15,000,000. The
reserve was gradually strengthened by the accumulation of
gold and by the financial blunders of other countries until it
stood in 1891 at ^“ 2,295,403; but this expansion no more
than kept pace with the expansion of credit and did not
diminish apprehension for the future. Mr. Goschen, the dis­
tinguished financier who has several times acted as Chan­
cellor of the Exchequer, proposed a plan in 1891 for issuing
£1 notes upon a reserve consisting of four-fifths gold and
one-fifth securities. The purpose of the plan was to sub­
stitute the notes for gold in the hands of the public, and to
draw the gold into the bullion reserve of the bank. Mr.
Goschen proposed, if the bullion in the bank was raised by


this means to ^30,000,000, to “ give certain additional powers
of issue in times of emergency/ ’ by authorizing the bank to
strengthen the reserve in the banking department by the
issue of additional notes against securities, on paying to the
government a high rate of interest, to be fixed by law. Mr.
Goschen’s proposals were much discussed, but did not result
in definite action. Other proposals at various dates proved
equally abortive.1
Agitation of the subject was renewed in 1906 and acquired
new vigor from the pressure caused on the London money
market by the American crisis of the next year. Attention
then began to be called to the deposits in the post-office
savings banks, which from ^80,579,641 in 1893 increased to
>£i 55>996,446 in 1906. It was pointed out that these deposit
accounts constituted a point of attack exposed to extreme
danger in case alarm should be spread among the poor or
ignorant by a financial crisis. Against these deposits, which
were invested in securities, the government kept no reserve
at all, and was compelled even under ordinary conditions
to borrow from the Bank of England on deficiency bills
when withdrawals exceeded deposits.3 A plan suggested for
strengthening reserves by Mr. Holden of the London, City,
and Midland Bank was that the government should pay off
its old debt to the bank, upon which the institution was
founded, in actual gold, which should be added to the re­
serve, but that the government should continue to pay the
bank the amount of the interest previously paid on the debt.
It was argued that this payment could not be construed as a
subsidy to the bank, but only as proper provision by the
government for the protection of the postal savings bank
deposits. While cooperation among the joint stock banks
to create a special reserve was often urged, such a policy
bristled with difficulties arising from the severity of com­
1 Some of these are reviewed by Sykes, in the new edition of
Gilbart, The History, Principles, and Practice of Bankings II., 4 30 440.

* London Bankers' Magazine, April, 1908, LXXXV., 527.



petition. So seriously was the situation regarded, however,
that in the spring of 1908 the subject was taken under con­
sideration by a committee of bankers and by a special
committee of the London Chamber of Commerce.1
One of the significant features of the growing banking
power of other countries was the impairment of the power
of the Bank of England to influence the flow of gold by
changing the discount rate. While London has continued
to be the centre upon which bills of exchange have been
negotiated from all over the world, Great Britain has ceased
to enjoy her old monopoly of foreign trade, and much of the
banking business is now done by agencies of foreign banks.a
In emergencies the London market, as in 1889 and 1906,
turns to the Bank of France for gold. Superimposed upon
this menace from abroad to the power of the Bank of Eng­
land is the immensely increased banking power and the
increased demands of the British market. As the situation
is described by a careful student3:
From a banking position, there is no doubt economy in making
the Bank of England keep the reserve of the bankers, but it is
equally certain that, from a general point of view, the doing this
tends to place the stress of every pressure which occurs always on
one point—a point on which many and varied needs all concentrate
—demands for domestic and foreign needs, the requirements for har­
vest wages and annual holiday-makers in England, of farmers in
Scotland, of dealers in Ireland, the requirements of great nations
forming and increasing their gold circulations, the demands for gold
for export as well as for the internal circulation of the country.

In order to retain control of a market in which so many
1 London Bankers' Magazine, April, 1908, LXXXV., 512.
2 It was declared in 1904 by Mr. W. R. Lawson, “ that all the
London banks, discount houses, and private bankers together should
hold only forty millions sterling or thereabouts of our foreign bills,
while they credit foreign banks with a holding of from fifty to one
hundred millions sterling, is an anomaly to be investigated.”—
British Economics in 1904, 226.
3 Palgrave, Bank Rate and the Money Market, 41.


disturbing factors play a part, the Bank of England has
several times changed its discount policy and adopted other
measures to influence the supply of floating capital. One
of the most frequent of these devices is what is called “ bor­
rowing on consols.” This consists in the sale by the bank
in the open market of a portion of its holdings of consols for
cash and the purchase at the same time of an equal amount
of consols for the monthly account. The effect of this
operation is to absorb the amount of cash for which the
consols are sold and thus force up “ the open market rate”
for money, while the bank gets back the consols at the time
of the monthly settlement.1
Prior to 1844 comparative uniformity prevailed in discount
rates at the Bank of England. For more than a century,
down to 1839, “ the bank rate” never exceeded five per
cent, nor fell below four per cent. During the pressure of
1839 it was raised for some months to six per cent., but in
January, 1840, was reduced to five per cent, and remained at
that rate or at four per cent, until the passage of the Act of
1844.2 At that time, the open market rate being not above
two per cent., the bank was “ out of the market.” It was in
August, 1844, that the bank rate was reduced to two and
a half per cent., and from that date the changes in rate have
been more numerous than at any other bank in the world.
The total number of changes from 1844 the close of 1900
was 400, of which by far the greater number wT made
after the change of policy in 1857 already referred to. Dur­
ing the thirty-eight years from 1857 to the period of cheap
money in 1894 occurred 330 changes, or an average of more
than eight per year. The year 1873 witnessed twenty-four
1 Cf. Nicholas, in Moody's Magazine, January, 1907, III., 158.
Easton says regarding this practice: 44It is difficult to understand
how such capital can be utilized at a profit, but when the bank gets
control of the market it is able to obtain more discount business,
which no doubt would more than compensate it for the amount paid
as interest on loans.”—Banks and Bankings 150.
* Palgrave, 49.



changes and fifteen other years ten or more changes each.
The frequency of the changes in 1873 was due to the large
operations in bills arising out of the payment of the French
war indemnity to Germany.1 The result of these repeated
variations was to afford a low rate for tnonejr during most
of the period covered. A rate not exceeding two and a half
per cent, was charged during 6434 days, from 1844 to 1900,
or more than one-quarter of the time; a rate not exceeding
three per cent, was charged during 11,341 days, or more
than half the time (including the lower rate); and a rate not
exceeding four per cent, was charged during 15,778 days, or
more than three-quarters of the time.3
Changes in the discount rate at London were numerous
during the early years of the twentieth century, the average
falling only once prior to 1908 as low as three per cent. The
average rate in 1901 was 3.72; in 1902, 3.33; in 1903, 3.75;
in 1904, 3.30; in 1905, 3.00; in 1906, 4.27; in 1907, 4.93;
in 1908, 3.00; in 1909, 3.10; in 1910, 3.72; in 1911, 3.47;
in 1912, 3.77; in 1913, 4.77 per cent.3 The maximum rate
of 1905 was four per cent., and this or three and a half
per cent, prevailed until October, 1906; but then began
the pressure on international money markets which forced
an advance to six percent, within the month and its continu­
ance into January, 1907. Seven changes in the rate marked
that troubled year; but the average was only a fraction be­
low the average for 1913, when pressure due to political
uncertainties was intensified by the persistent efforts of
Germany, France, and Russia to add to their stocks of gold.
The higher rates, however, after 1878 were enforced only
upon the outside public. Private bankers and brokers ad­
justed their rates so promptly to changes in market con­
ditions, and made such discriminations between first-class
bills and ordinary trade bills, that the Bank of England felt
1 Easton, Banks and Banking, 132.
8 Palgrave, 102.
3 Bulletin de Statistique, February, 1914, LXXIII., 233.


called upon to protect itself by similar measures.1 The step
taken in February, 1878, was to announce that the bank
would, when occasion required, discount for customers who
transacted business exclusively with the bank, at a rate
lower than the advertised official rate.8 At its provincial
branches discounts are granted at the ordinary local rate.
Another departure was the arrangement entered into in 1890
with the Hampshire County Council, by which the funds of
the Council on deposit with the bank were to be loaned
through its agency and the profits, less a commission, given
to the Council.3
The Bank of England is governed by a court of twentyfour directors, and a governor and a deputy governor who
serve for a term of one year. The senior director who has
not already served is usually made governor and the next in
seniority deputy governor. Eight of the directors retire every
year, but these are usually the younger ones, so that the
older always remain. It is customary to choose young men
for vacancies in the board, so that they will be still in the
possession of physical vigor when their turn comes to be
governor.4 Bankers in the strictly English sense, lenders
of money for short terms on commercial paper, are not
allowed to serve on the board of directors, but this rule
does not exclude the leaders of finance who are engaged
in other branches of the banking business. It is usually
about twenty years from the time of a man's entry upon the
board of directors until he is reached in his turn as governor,
1 Sykes declares that there are at least five rates in London; but
one of these is the deposit rate, representing the allowance to de­
positors by the joint stock and private banks. This is usually fixed
one and a half per cent, below the Bank of England rate .—Banking
and Currency, 162-163.
2 Palgrave, 55.
8 It was stated at this time that the question of paying interest on
deposits, which had not before been the practice, “ might be raised
for consideration.”—Turner, Chronicles of the Bank of England,
2544 Bagehot, Works, V., 136.



and it is rarely that a director is made governor out of his
turn or serves more than two years. The board meets with
the governor and the deputy every Thursday in what has
become historic as ‘*the bank parlor,” to pass upon the
report for the week.
The Bank of England has been comparatively free from
government interference since the time of Pitt. It receives
the public deposits and performs many financial operations
for the government, but it differs from many Continental
banks in the sense that “ it is purely the banker of the state,
and not its cashier, and as such maintains with it the same
relations as with the individuals and companies which con­
stitute its clientage.” 1 One of the largest operations per­
formed in this capacity was the conversion of the consolidated
and other classes of three per cents, in 1888. These securi­
ties were reduced to two and three-quarters per cent., with
the provision that after April 5, 1903, the rate of return
should fall to two and a half per cent. Out of a total sum of
^590,824,407 dealt with by the Conversion Act, the Bank
of England, with some aid from the Bank of Ireland, had by
November 5, 1888, converted ^549,094,010.2
There is no division of the profits of the bank with the
state, as among the leading Continental banks, and only
moderate taxes are paid. The necessity of acting as guardian
of the gold reserve of the country has kept the profits
of the Bank of England, however, in recent years be­
low those of the more successful joint stock banks. The
highest dividends paid since 1866 were eleven per cent,
in 1891 and ten and a half per cent, in 1879, 1882, and
1890. Ten per cent, was paid from 1897 to 1903, inclu­
sive, but the rate in more recent years has been nine per
1 Noel, I., 232.
9 Gilbart, I., 93. The remainder was disposed of under various
provisions of law.
3 The figures for each year from 1695 down are given by Gilbart,


The measure of the changes in the bullion in the bank in
recent years, as well as the state of the other leading items
of the bank’s accounts, for the average of the last quarter in
each year, is given in the following table :




1907 1

I 9T3

^26,829,000 ^31,350,000 ^ 34, 839,000 ^26,406,000
26,237,000 28,633,000 37,096,000 20,876,000
26,351,000 27,410,000 36,147,000 20,751,000
25,683,000 29,205,000 35,669,000 22,355,000
25,222,999 29,346,720 36,336,691 20,360,721
24,621,423 29,344,372 34,643,349 20,826,856
24,691,913 27,038,698 33,895,673 19,929,836
24,209,867 26,930,149 32,508,224 20,238,539
24,405,030 29,281,524 35,977,745 19,455,412
24,460,836 29,837,081 36,301,144 19,712,368
24,732,153 35,414,155 39,168,647 21,820,279
25,510,059 34,830,397 38,607,719 23,159,668
26,039,50O 34,367,453 36,809,048 24,991,060
25,77^,436 34,204,021 35, 543,067 25,865,721
25,528,878 41,614,576 32,937,638 35,262,470
26,090,666 56,354,680 40,996,456
26,672,217 59*574,404 42,393,798 42 ,473,334
27,422,525 45,601,685 42,242,939 31,834,320
39,283,485 31,489,297
27,311,327 42,459,967
28,479,023 48,247,856 46,145,806 31,704,656
29,638,602 47,017,854 44.851,587 31,969,693
29,630,620 50,492,232 44,714,890 35,568,509
29,315,670 50, 779>638 47,055.875 32 , 798,470
28,631,341 48,067,855 44,553,523
28,051,886 48,879,852 42,594,067 31,539,094
29,002,873 53,545,820 50,033,036 31,918,667
28,676,871 50, 730,798 48,501,268 30,388,371
29,514,250 49, 131,248 47,366,980 29,753,540
29,751,000 61,527,000 59,817,000 29,411,000
56,482,000 31,836,000
28,611,000 55,963,000 52,534,000 30,549,000
29,193,000 6 l , I 2 3 ,C O O 57,186,000 31,732,000
53,816,000 29, 294,000
29,608,000 71,343,000 65,337,ooo 33,875,009

1 Figures from

6 0

5 1


9 9 3 ,0 0 0

4 9 5 ,0 0 0

represent the average of the last week of the

C H A PT E R V I.

Its General Scope and Results—The Bank of Scotland and the Royal
Bank—The Failures of the Ayr Bank, the Western Bank and the
City of Glasgow Bank—Advantages of Scotch Banking and its
Effect upon the Habits of the People and the Prosperity of the
-Branch Banks in London and Limited Liability.


HE Scotch system of banks of issue comes nearer to
the ideal of successful free banking than that of any
other country. Absolute freedom in note issues
reigned for over one hundred years in Scotland, and during
eighty years of that period general distrust of the banking
system never occurred, small notes became the favorite
medium of exchange among the people, and the deposits in
the banks absorbed almost the entire savings of rich and
poor and brought within the circle of active producing
capital the entire accumulations of the country. Such de­
fects as were disclosed in the early years of Scotch banking
were corrected with experience, and the few departures
which have taken place from sound principles have been
such as to suggest no change in the established practice of
the majority of Scotch banks, but, at the most, some official
regulation which should hold all to the rules voluntarily
adopted by the oldest banks and the soundest bankers. The
mania for restricting note issues which swept over the
British Parliament in 1844 shut the circulation of the Scotch
banks within fixed legal limits, and limited the banks of
issue to those already in existence, but left untouched their
power to issue small notes and their means of accommodat­
ing the people of Scotland by receiving deposits.



Banking in Scotland was inaugurated by the system of
monopoly, but differed from all earlier banking systems en­
joying monopoly of note issues in the fact that the first
joint stock bank was formed by private persons for the ex­
press purpose of promoting trade and not for supporting the
credit of the government. The charter of the Bank of Scot­
land, whfch was organized under authority of an act of the
Scotch Parliament of July 17, 1695, was framed to some ex­
tent on the model of the charter of the Bank of England and
made it illegal for any other company to set up the business
of banking for twenty-one years. The joint stock was to be
1,200,000 Scotch pounds, the equivalent of 100,000 English
pounds sterling, and was to be subscribed in amounts of not
less than ^1000 Scotch nor more than £20,000 Scotch
(equivalent to £83 6s. 8d. and ^1666 13s. 4d. English).1 The
bank was allowed to lend on real or personal security at not
more than six per cent., but was prohibited from employing
its stock or profits in any other trade or commerce, except
that of lending and borrowing money upon interest and the
negotiation of bills of exchange. The company was pro­
hibited from purchasing land or from advancing money to
the government, upon the anticipation of any sums to be
granted by Parliament, except those upon which a loan
should be authorized by a specific act.
The Bank of Scotland soon encountered the opposition of
the African Company, otherwise known as the Darien Com­
pany, which was organized by William Paterson, the founder
of the Bank of England. The Bank of Scotland had so
little confidence in its abilit}^ to protect its monopoly, that it
made no serious effort to contest the legal rights of its rival,
but endeavored to strengthen its position by calling in twotenths of its capital, of which one-tenth had been originally
paid in. The African company issued notes with great im­
prudence, lent to its own shareholders, and was obliged to
1 The coinage of Scotland was assimilated with that of England by
the act of Union in 1707, and the Bank of Scotland assisted in the
operation by receiving the old money and giving new money or their
own notes in return.

abandon the field in May, 1698. The Bank of Scotland
repaid to their shareholders the two-tenths of the capital
called in and continued for several years without a rival. No
deposits were received at first from the public, but notes were
issued against the capital of the denominations of £5, .£10,
£ 20, £50, and ,£100. Notes for£i were first issued between
1699 and 1704. A run was begun in December of the latter
year, which compelled the bank to suspend specie payments.
A meeting of the proprietors was held and a device adopted
which is still of interest because it is similar to the existing
laws of Canada and Germany in the case of failed banks.
This device consisted in making the notes bear interest until
they were paid and resulted in keeping the notes at par.
Payment was made with interest in less than five months,
by means of a new call upon the proprietors for one-tenth
of the nominal capital. Another run upon the bank was
made in September, 1715, when the rebellion on behalf of
the Stuarts broke out, and the withdrawal of coin by the
presentation of the notes was encouraged by the bank direc­
tors in order to prevent the seizure of the coin reserve by the
insurgents. The bank suspended payment after most of the
cash had been withdrawn and gave notice again that the
notes would bear interest until paid. The monopoly of
banking for twenty-one years expired in 1716 and no steps
were taken to renew it.
The second successful bank in Scotland was formed, as in
the case of the Bank of Venice and Bank of England, by
the proprietors of the public debt, which they assumed on
the union with England. An act which was passed in 1719
empowered the King to incorporate the proprietors of the
debt into a body corporate, which was organized in 1724.
The new corporation endeavored to secure admission to the
Bank of Scotland, upon the terms of increasing the capital
of the united bank by the sum of ,£250,000,—the principal
of the debt,—and the division of the annual interest of ,£10,000 in the proportion of two-sevenths to the shareholders of
the bank and five-sevenths to the holders of the debt. The
bank was making dividends which were declared by rivals to



run as high as fifty per cent., and they replied that they had
no legal authority to increase their capital, that their stock
was large enough for the banking business of the country,
and that they would not in any case unite with the holders
of the debt at par while their stock was worth at least ten
per cent, and the debt only paid four per cent. The holders
of the debt, or the Equivalent Fund, as it was called, then
petitioned the King for banking powers, which were granted
on May 31, 1727. These powers were not granted without
powerful opposition from the old bank, whose defenders
declared that their capital, which they had called in to the
amount of three-tenths, making an aggregate of £ “ 0,000,
was sufficient to circulate all the credit that could be re­
quired in Scotland. The last call made for the payment of
capital was partly paid in the notes of the bank. This raised
a great outcry from unthinking persons, who maintained
that the payments should be made in specie, but they were
answered by the scientific statement that ‘‘ bank-notes are
justly reckoned the same as specie when paid in on a call of
stock, because, when paid in, it lessens the demand 011 the
bank.” 1
The new bank was known as the Royal Bank of Scotland
and began business on December 8, 1727, with a capital
stock of £*151,000. They received support from the govern­
ment b}r the deposit of £ 20,000 of public monies and their
business rapidly extended. The Royal Bank is entitled to
the credit of the invention of cash credits, the unique feature
of Scotch banking which has done so much to promote the
prosperity of Scotland and to place business success and
wealth within the reach of the humblest of her people.
There was a deal of friction between the two banks during
these early years and the Bank of Scotland introduced a
clause into their notes making them payable at the discre­
tion of the directors at the end of six months, with the
interest from the time of presentation until the time of pay­
ment, instead of payable in coin on demand. This practical
suspension of redemption on demand resulted in excessive
1 MacLeod, Theory and Practice of Banking, II., 203.



issues of notes, not only by the two leading banks, but by
private banking and manufacturing companies, and the fall
of the notes below par. The attempt to maintain coin re­
demption was carried out by a process, which is described in
detail by Adam Smith,1 of collecting coin through London
agents and sending it down in wagons to Scotland. Bills
of exchange were constantly drawn upon London to cover
coin obligations and their payment was often provided for
only by drawing fresh bills. The fact that the bank paper
was below par led to the constant presentation of notes for
redemption and justified Smith’s declaration that “ bringing
gold into the country was like pouring water into a sieve, or
like the toil of Danaides.” The two principal banks soon
saw the folly of this method of doing business and agreed to
combine their influence to obtain an act of Parliament, which
was passed in 1765, prohibiting the issue of notes with the
optional clause, making all such notes payable to bearer on
demand, and prohibiting notes under twenty shillings ($5).
The Bank of Scotland and the Royal Bank were the only
chartered banks until the incorporation of the British Linen
Company at Edinburgh in 1746. This company was organ­
ized for the purpose of promoting the linen industry by
lending money to the manufacturers and as the Company
was thus led into the banking business it soon found it ex­
pedient to continue as a banking company only, under the
original name.8 The next important institution founded was
the Ayr Bank, which distinguished itself by a radical depart­
ure from the methods of the older Scotch banks. The
wonderful expansion of Scotch agriculture and industry
after the failure of the Jacobite rebellion, under the stimulus
of conservative free banking and the system of cash credits,
was not rapid enough for certain restless spirits who wished
to borrow far beyond their capital or credit. The Ayr Bank
was formed with the avowed purpose of adopting a more
liberal policy, and the course of the older banks in gradually
1 Wealth of Nations, Book II., Ch. ii., 1, 302.
2 Cunningham, II., 350.


I4 7

curtailing the discounts of a group of speculators who were
dealing in accommodation paper drove all this class of busi­
ness to the new bank. The result was the over-issue of
notes, which came back so rapidly upon the bank for re­
demption in coin that it was necessary to draw constantly
upon London and to incur heavy expenses for commissions
and interest. As Adam Smith describes the operations of
the bank :
When it was obliged to stop, it had in the circulation about £200,000
in bank-notes. In order to support the circulation of those notes,
which were continually returning upon it as fast as they were issued
it had been constantly in the practice of drawing bills of exchange
upon London, of which the number and value were continually in­
creasing, and, when it stopped, amounted to upwards of £600,000.
This bank, therefore, had in little more than the course of two years
advanced to different people upwards of £800,000 at five per cent.
Upon the £200,000, which it circulated in bank-notes, this five per
cent, might perhaps be considered as clear gain, without any other
deduction besides the expense of management. But upon upwards
of ^600,000 for which it was continually drawing bills of exchange
upon London, it was paying, in the way of interest and commission,
upwards of eight per cent., and was, consequently, losing more than
three per cent, upon more than three-fourths of all its dealings.

The Ayr Bank was founded by a company which com­
prised the Duke of Hamilton and many other wealthy landed
proprietors and it was supposed that their estates, which
were pledged by the unlimited liability of the stockholders,
would suffice to maintain the notes of the bank at par and
supply it with coin. The failure of the experiment proved
two of the essential principles of a banking currency—that
110 greater volume of notes can be maintained in circulation
than the convenience of business requires, and that landed
security is not the equivalent of coin in maintaining the re­
demption of notes on demand or the credit of a bank. The
period of the operation of the Ayr Bank was one of exten­
sive speculation and large Scotch exports, but the apparent
prosperity was brought to a sudden halt by the crisis of 1772,
which began in London on June 10th, and caused a run upon



the Edinburgh branch of the Ayr Bank just one week later.
The bank continued its payments until June 25th, when it
was compelled to suspend and its great mass of obligations
was discredited.
The Bank of Scotland was authorized in 1774 to double
its capital stock, and began in this year the policy of establising branches which has become so striking a feature of
Scotch banking. Efforts had been made in 1696 and again
in 1731 to establish branches in Glasgow, Aberdeen, Dundee,
and one or two other places, but in both instances proved
unprofitable and were abandoned after a year or two. The
capital of the Bank of Scotland was increased in 1784 to
^300,000, in 1792 to £600,000, in 1794 to ,£1,000,000, and
in 1804 to £ i ,500,000, of which £ i y000,000, was paid in.
The present paid up capital is £ i,250,000 and the nominal
capital £ “
1,875,000. The capital of the Royal Bank has been
raised to £ “ ,000,000, all of which has been paid in. The
capital of the British Linen Company is £1,000,000, all paid
in. The Commercial Bank was founded in 1810 as the bank­
ing institution of the Liberal party, with a paid-up capital
of £1,000,000, which was strengthened later by a reserve
fund of £400,000. The nominal capital is now £5,000,000.
These four banks—the Bank of Scotland, the Royal Bank,
the British Linen Company, and the Commercial Bank—
are the oldest institutions now in existence. The other
banks of issue which were in operation when the Act of
1845 forbade the extension of the system were for the most
part founded as late as 1825, the date of the foundation of
the existing National Bank of Scotland and the Abderdeen
Town and County Bank. There were a few older institu­
tions which have since ceased to exist, among them being
the Perth Banking Company, founded in 1766 and united
with the Union Bank in 1857, an^ the Dundee Banking
Company, founded in 1763 and united with the Royal Bank
of Scotland in 1864.
The strength of the Scotch banking system was illustrated
by the events which followed the suspension of specie pay­
ments in England. The news reached Edinburgh on March



i, 1797, and a meeting of the bank officers decided that it
would be necessary for the Scotch banks to follow the example
of the Bank of England. There were symptoms of a run
for a few days, and the disappearance of specie led to the cut­
ting of £1 notes into quarters to afford a currency for small
transactions.1 The Lord Provost called a meeting of the
principal inhabitants, who resolved to support the credit of
the banks and to receive their notes as specie. Banks which
had been in the habit of issuing notes were allowed to issue
notes for five shillings for a limited period and confidence
quickly returned. No action was ever brought against the
banks for their failure to pay specie, the notes were received
as confidently as ever, and in a short time business activity
was resumed and continued throughout the long Napoleonic
wars. The banks, in the language of the report to the
Lords in 1826, “ supported themselves from 1797 to 1812
without any protection from the restriction by which the
Bank of England, and that of Ireland, were relieved from
cash payments. ’’
The policy of the English Bank Act of 1844, to suppress
the evils of speculation by restricting bank-note circulation,
was extended to Scotland in 1845,2 hut several of the provi­
sions regarding the Scotch banks differ from those affecting
the English banks. The banks of issue existing in Scot­
land at the time of the passing of the act were allowed to
retain an authorized circulation equal to the average during
the year ending on the 1st of May, 1845. They were also
authorized to issue additional notes when fully covered by
deposits of coin at the head office or principal place of issue.
Not more than one-fifth of this coin deposit was to be in
silver. The Scotch banks, therefore, stood upon an equality
in issuing notes upon deposits of coin beyond the authorized
limit, while the English banks except the Bank of England
were absolutely limited. No new bank of issue could be
founded, however, in Scotland. The authorized circulation
of the Scotch banks, as ascertained under the new law,
1MacLeod, Theory of Credit, II., 601.
28 and 9 Victoria, c. 38.

was £3,087,209. The limit of authorized circulation was
reduced by the suspension of the Western Bank in 1857,
which had an authorized limit of ,£337,938, and the similar
suspension of the City of Glasgow Bank in 1878, which had
an authorized limit of ^72,921. These reductions fixed the
authorized circulation at £2,676,350, where it now stands.
The union of two Scotch banks is permitted by the Act of
1845, and the retention of the aggregate circulation of both.
Several unions of this kind have taken place without chan­
ging the limit of the authorized circulation for the Kingdom.
The average circulation of the Scotch banks for the four
weeks ending July 25, 1908, including that covered by coin,
is shown in the following table :
Circulation of the Scotch Banks.
BA N K .


Bank of Scotland................ ^ 343,418
Royal Bank of Scotland... 216,451
British Linen Company ... 438.024
Com! Bank of Scotland... 374,880
Nat. Bank of Scotland---- 297.024
Union Bank of Scotland...
N. of Scotland Banking Co. 454,346
Clydesdale Banking Co.... 274,321
Total..................... 2, 676,350

W E E K S.





5, 745,410



The average circulation of these banks for February, 1914,
was £7,190,931, of which ,£5,009,068 was in notes for less
than ^5.
The history of Scotch banking was comparatively unevent­
ful after the restrictive legislation of 1845, except for the two
great failures of the Western Bank in 1857 and the City of
Glasgow Bank in 1878. As these failures have sometimes
been treated by the opponents of Scotch banking as an
impeachment of its safety and success, they are worthy of
some attention in detail. Both occurred in years when


other banking institutions and business houses in England
and other parts of the world were collapsing, but both were
the result of methods of banking so reckless and unsound
that they had repeatedly received, before the failures, the
condemnation of other Scotch bankers. The Western Bank
was founded in 1832 and in the twenty-four years of its
operation lost its entire capital of £1,500,000, and nearly
as much more from its other assets. The Western Bank
from the outset kept in London a reserve which was much
inferior to that of other Scotch banks and was so small that
its drafts were dishonored in 1834 by its London agents.
The other Scotch banks thereupon refused its notes and
remonstrated with it for its mismanagement. The directors
notified the other banks on October 30, 1834, that they had
resolved to invest in marketable securities a sum sufficient
to secure themselves in the future, to lessen their discounts,
and to keep sufficient funds to meet their obligations. The
chartered banks, upon this pledge, advanced ,£100,000 to the
Western Bank to enable them to purchase the proposed
securities. But the management of the Western Bank soon
forgot their promises and returned to their former method
of business. These methods were so objectionable that
when they applied to the Board of Trade in 1838 for a grant
of letters patent, the other banks presented a joint memorial
against the grant. This memorial declared that Scotland,
during the periodical convulsions among the banks of Eng­
land, which had led to the failure of several hundreds, had
for the most part maintained a state of general tranquillity.
The memorial continued:

The cause of this is notoriously owing, first, to the large capital
employed in the Scotch banks, and, second, to the system of admin­
istration adopted. Capital alone, as has been recently experienced
in England, by extending the scale of operations, may only increase
the mischief. In the like manner a numerous proprietary, consti­
tuting a protection to the public against eventual loss, may, by adding
to the credit, add to the power of such an institution for evil. The
safeguard of the Scotch system has been the uniform practice adopted
of retaining a large portion of the capital and deposits invested in
government securities, capable of being converted into money, at all



times and under all circumstances. This requires a sacrifice, because
the rate of interest is small, and, in times of difficulty, the sale in­
volves a loss, but it has given the Scotch banks absolute security, and
enabled them to pass unhurt through periods of great discredit. . . .
The Western Bank was established in the year 1832, and the prin­
ciple on which it has avowedly acted has been to employ as much as
possible of its capital and assets in discounts and loans, retaining
only the cash necessary to meet its current engagements. . . .
It will be quite apparent that a bank that can employ its whole
funds in this manner is enabled either to divide a larger share of
profits than its competitors, or to do business 011 more favorable term s;
and we repeat, that if the only consequence of this was to increase or
diminish the dividends of the rival establishments, it would be of
comparatively small importance, but in its results it endangers the
existence of every bank in the country and the fortunes of a large
portion of the community. We feel that, if letters patent shall be
granted to this bank, after what has passed, it will be a public sanc­
tion and countenance of a new and mischievous principle, opposed
to the banking system of Scotland.

The charter was not granted and as the result of keeping
such small reserves in London the Western Bank was again
in trouble in 1847. The bank was then compelled to bor­
row £300,000 of the Bank of England in November and
December, wrhich it repaid in March, 1848. A somewhat
more cautious policy was pursued until 1852, when the dis­
counts of the bank were £13,525,332 and the re-discounts
were ^407,143. The bank even at this time had £356,000
in overdue bills and held a number of life insurance policies
as security for dead loans, on which it was paying the
premiums. A reckless policy of re-discounting was begun
in 1852 which expanded the re-discounts in 1856 to ,£5,407,363 with ordinary discounts of £*20,410,884. The most
alarming feature of the bank’s affairs, however, was loans to
four firms which reached an aggregate of ,£1,603,725. The
character of the bills discounted for these firms is shown by
the fact that of ,£402,716 in bills of Macdonald £*398,349
were dishonored at maturity, and the results for the other
three firms were only a little better. The books of the bank
were examined, soon after the general meeting in June,
lg57> by request of the directors and it was found that bad



debts to the amount of ,£573,000 were carried as good assets
and that the advances to shareholders amounted to ,£988,487.
It was found that the four firms to which such immense ad­
vances had been made had been dealing in accommodation
paper and that the Macdonalds drew upon 124 acceptors, of
whom only 37 had been inquired about and 21 were reported
as extremely bad. The banks stopped the accounts of these
firms, which immediately failed, and a panic resulted 011
the Stock Exchange on October iotli. Depositors began to
withdraw their accounts, the bank was unable to settle its
balances through the clearing house and on Monday, No­
vember 9th, closed its doors.
The collapse of the City of Glasgow Bank in 1878 was
similar in its character to that of the Western Bank twenty one years earlier and was due to similar causes. The City
of Glasgow Bank was compelled to stop temporarily in 1857
and continued to be suspected of reckless management from
that time until its failure. The institution had fallen into
such discredit early in 1878 that the bill brokers generally
asked and received an extra quarter or half of one per cent,
over the market rate charged other banks in discounting its
acceptances.1 Distrust finally came to a head in September,
1878, when the London banks found increasing difficulty in
getting rid of acceptances sent them by their correspondents
in India and ordered their agents in the East to buy no more
such paper. The directors of the City of Glasgow Bank
appealed to the other Scotch banks for help towards the close
of the month and an expert accountant was set to work
upon their books. A slight examination showed that nearly
;£6,ooo,ooo had been lent to four firms and that the books
had been deliberately falsified for not less than three years.
The other banks declined to give any assistance and the
City of Glasgow Bank stopped payments on Wednesday,
October 2d. The news was received very quietly in Scot­
land and the other Scotch banks announced that the notes of
the failed bank would continue to be accepted as usual.
They also made an arrangement by which relief was given
1 Gilbart, II., 365-



to depositors who were hampered by the locking up of their
money pending the settlement of the bank’s affairs.
The heaviest burden of loss fell upon the shareholders,
whose liability was unlimited under the law then in force.
The liquidators were compelled to institute a number of suits
to fasten the liability fully upon the shareholders and to
defeat attempts to transfer stock. Having adjusted the list,
they made a call for £500 for every ;£ioo of stock held, and
subsequently made another call for £2250 per share of ,£100.
The result of the first call, of which the nominal amount
was £*4,200,000, resulted in receipts of £*2,409,066 at the
end of the second year of the liquidation, October 22, 1880.
The nominal amount of the second call was £7,814,000, upon
shareholders who were still solvent, and the amount realized
was ,£3,405,452. The result of these two calls, with a sum
of ,£5,851,657 realized from the assets, enabled the payment
of seventeen shillings in the pound within less than two
years and payment in full was made within little more than
a year, with the help of an advance from the other Scotch
banks, to creditors willing to forego interest on their claims.
While the creditors thus lost almost nothing, the great
majority of the shareholders were absolutely ruined. The
majority expressed their purpose at the first meeting on
October 22, 1878, to keep faith with their creditors, and they
kept the pledge so well that when the two calls had been
made the holders of only ,£88,722 out of the capital of
,£1,000,000 remained solvent. Criminal proceedings for the
falsification of the books were begun against the directors
and they were given short terms of imprisonment.
T he. narrative of the transformation of the unlimited
banks of Great Britain into limited companies relates to
English banking so far as it affects some of the great English
joint stock banks, but it belongs more properly to the history
of Scotch banking in its origin and in its relations with im­
portant banks of issue. The agitation of the subject was
the direct result of the terrible losses suffered by the stock­
holders of the City of Glasgow Bank because of their unlim­
ited liability for the obligations of the bank. The law of


England, which prevailed in Scotland after the union, pre­
sumed and enforced unlimited liability upon corporations
except in the cases where special charters had been granted.
There was much opposition to extending the principle of
limited liability to private partnerships, but a statute of
!855 (Chapter 133) finally authorized the formation of joint
stock companies under such conditions. Joint stock banks
were excluded from the operation of this law and the exclu­
sion was continued in the joint stock banking act of 1857.
The failures of that year led to an enactment of 1858,1 which
admitted banks to the privileges of limited liability so far as
concerned their general obligations. Banks issuing promis­
sory notes, however, were liable for the amount of the notes,
without limitation, in addition to the sum for which they
might be liable to general creditors. This act was merely
permissive and required banking companies which took
advantage of it to give thirty days’ notice to each customer
and after registering under the act to post conspicuously at
their offices, on February 1st and August 1st of each year, a
statement of their liabilities and assets.
The Act of 1858 would have averted the hardships of the
stockholders in the City of Glasgow Bank if they had taken
advantage of its provisions before the failure. The three
older Scotch banks, however, held special charters which
limited their liability and the others, aside from the natural
indisposition to revise their constitutions, feared that the
effect would be injurious to their credit. Thus matters
remained until the collapse of the City of Glasgow Bank.
Investments in bank shares were recognized by the law
courts in Scotland as a legitimate investment of trust funds,
but the trustees were personally liable for the calls made by
the banks as well as to their clients, and many were ruined
by the failure. A steady selling of shares began all over
England and Scotland, by the prudent as well as those who
were carried away by the flurry of the moment.2 The shares
of the three senior Scotch banks declined about ^55 on an
1 Statute 1858, c. 91.
2 Gilbart, II., 39^.

average, while the shares of the unlimited banks fell about
£ 9 °The subject of permitting banking with limited liability
under different conditions from those imposed by the Act cf
1858 was brought up in Parliament and the government 011
April 21,1879, introduced a bill for the purpose. The act be­
came law 1after a good deal of controversy and authorized the
increase of capital stock by an amount equal to existing shares
or some multiple of their value, and liable to be called up
only in case the company was wound up. This constituted a
reserve liability, which placed a definite fund within the
reach of a failed bank without requiring assessments upon
the shareholders to the full amount of the liabilities. The
principal of unlimited liability was retained in regard to
note issues by corporations whose original charters were
unlimited. Most of the leading English banks and the
unlimited Scotch banks soon registered under the new law.
It was feared that the adoption of limited liability would
result in a reduction of deposits, but this fear was discovered
to be unfounded and deposits materially increased in the
limited banks within the next few years. The banks gener­
ally adopted the policy of increasing their reserve funds by
setting aside a part of the profits, but the reserve funds
themselves are a source of profit in the revenue derived from
the securities in which they are invested. It was found,
moreover, by some of the English joint stock banks that a
better class of shareholders, of undoubted responsibility, were
attracted by the limited principle where men of straw with­
out other visible assets had begun to acquire title to the
stock when the liability was unlimited.2
The three senior Scotch banks possessed the privilege of
limited liabilitj^ in respect to both note issues and general
liabilities. They desired in 1881 to increase their capital and
to issue additional stock under the conditions of the limited
companies.8 The bills which they proposed were at first
1 42 and 43 Victoria, c., 76.
2 Loudon Bankers' Magazine, June, 1892, LIU., 897.
3 The chartered banks had occasion to point out, in the course of


favorably received in Parliament, but after passing a second
reading in the House of Lords were opposed by the govern­
ment. Conferences and correspondence ensued which
brought out some rather startling statements as to the policy
of the government towards the Scotch note issues. Several
of the objections made to the proposed bills were completely
demolished by the representatives of the banks, and the
government several times shifted their position. The gov­
ernment at first objected to legislation by private bill and
suggested that the grant of new privileges in recent years to
corporations had been accompanied by a review of those
already possessed. They declared they were determined to
oppose the grant of new powers if the three banks continued
to ask for them accompanied by limited liability for notes.
The banks promptly offered to cover their note issue by
government securities to the amount of the circulation
authorized by the Act of 1845 and by coin to the amount of
the excess. The government then suddenly forgot their
solicitude for the security of the circulation and intimated
that they would give the banks a lease of the right of note
issue for a fixed term, subject to a moderate royalty.
This was an important indication of public policy, for it
grew out of the theory that the right of note issue was
peculiarly an attribute of the state. It was based upon a
measure dealing with English banks of issue which had
been brought before Parliament by Lord Palmerston in 1865,
but never became law. The government emphasized their
leaning towards state note issues by an alternative proposi­
tion which they submitted,—that the banks join them in
considering the terms upon which a state issue of notes,
conducted through the agency of all the banks, and main­
taining the £1 circulation, might be introduced into Scot­
land in place of the existing circulation. The banks replied
the discussion which followed, that there were legal difficulties which
were almost insuperable against extending unlimited liability for ex­
isting note issues to their shareholders, but they expressed their will­
ingness to adopt other safeguards for the ultimate redemption of the
notes.— Gilbart, II., 414.



at length, declining these propositions. They did not care
to take a lease of rights which they declared were already
theirs and had been exercised under express grants from the
Crown or from Parliament for from 135 years, in the case of
the youngest, to 186 years in the case of the oldest of the
three banks. A state issue of notes, they declared, would
not be acceptable to the people of Scotland, who would
suffer more than the banks from the closing of many of the
branches and the diminution of banking facilities which
would be the necessary consequence.
The right of the Scotch banks to maintain their branches
in England became a subject of active controversy in 1875,
when Mr. Goschen introduced a bill in the House of Com­
mons prohibiting such branches. The National Bank of
Scotland had established a London branch in 1865 and the
Bank of Scotland in 1872, and Mr. Goschen himself had
carried through a bill permitting the Royal Bank to do so in
1873. It was the opening by the Clydesdale Bank of branches
in Northern England which aroused the hostility of the Eng­
lish banks.1 Mr. Goschen’s bill resulted in a commission,
which made no recommendations, and the matter was dropped.
A new attempt was made to drag the limitation upon Scotch
banking into the limited liability act of 1879. It was em­
bodied in the eighth section of the original government bill
and prohibited limited companies from establishing branches
outside that part of the Kingdom in which they had their
head offices. The Scotch banks were immediately up in
arms against this provision and the government were finally
persuaded to abandon it. They attempted a flank move­
ment, by cutting down the operations of the bill to the joint
stock banks of England, entirely excluding Scotland and
Ireland. This was to defeat one of the most important pur­
poses of the bill and the friends of the Scotch banks declared
that they would not permit it to pass in such a form. The
government were finally compelled to give way and permit
its passage in a form applicable to the entire United King1

Macl^eod, Theory and Practice o f Banking , II, 397.



dom and without any limitations upon the power of the
Scotch banks to establish their branches in London.
The essential features of the Scotch system of banking
have been freedom of note issues, the use of small notes, and
cash credits. The great achievements of the system with
these elements may be summed up thus:
1. It has provided Scotland with an elastic currency,
adapted to the condition of her industries and adequate in
volume to their changing needs.
2. It has enabled the people to carry on numerous com­
mercial and agricultural transactions for which they could
not have found the necessary quantity of coin and has econo­
mized the locking up of capital in the precious metals.
3. It has made the use of notes of small denominations
familiar and popular and has taught the people the distinc­
tion between bank-notes as the representatives of credit and
the precious metals as the measures of value.
4. It has brought into active use the available savings and
capital of the country.
5. It has afforded an opportunity for entering upon busi­
ness to thousands of poor but honest men and enabled them
to lay the foundation of a comfortable home and in many
cases of a fortune.
6. It has convinced the people so conclusively of the value
and safety of the banking currency system that no serious
panic has ever lasted beyond a few days or has ever affected
any of the banks except those which were justly the subject
of distrust.
I. The first proposition, that the Scotch banking system
has provided the country with an elastic and adequate cur­
rency, is strictly applicable only to the period between 1765,
when payment of notes on demand was made obligatory by
law, and 1845, when the volume of authorized circulation
was arbitrarily limited. The limitation imposed in 1845
could not be seriously objected to at that time, because it left
the authorized circulation at the amount then existing. The
moderate demands of changing seasons for an increased vol­
ume of circulation could easily be met by issues of notes



against coin, since it would be highly improbable and impru­
dent that any bank should be without a small supply of coin
which might be made available for such a purpose. This
view of the matter is based, however, upon the theory that
the population and trade of Scotland were to remain station­
ary or to decline, as actually happened to the population of
Ireland. An advancing population and volume of trade
must gradually feel the fetters cramping the flesh of com­
merce and this has been to some extent the experience of
Scotland. “ The only effect of this law,” upon the banks,
according to M. Courcelle-Seneuil, “ has been to limit their
productive power, in condemning them to keep in reserve a
considerable sum without necessity.” 1 Protests against the
operation of the Act of 1845 have been frequently made by
the Scotch chambers of commerce and experience has seemed
to justify the early criticism of Mr. Gilbart. “ that restric­
tions upon banks are taxes upon the public.” 2 But Scot­
land had already passed the point in 1845 where free banking
was of supreme importance to her industrial development.
Limitations upon her circulation might hamper the opera­
tions and reduce the profits of the banks, but they could not
unlearn the lessons in saving and in the use of banking
facilities which had been taught by a century of free banking.
The Scotch circulation has continued to fluctuate in some
degree according to the seasons, the lowest point being
reached in March and the highest in November. The ad­
vance, however, is not steady from March to November, but
rises to a high point in May and then falls slightly until the
advance sets in which culminates in the autumn. May and
November are the months when the interest on mortgages is
usually settled, annuities are paid, the country people take
the interest on their deposits, and servants receive their
wages. It was the custom during the first half of the pres­
ent century to settle all such transactions by bank-notes.
This made it easier for the banks to keep their accounts than
under the system of drawing odd amounts in checks ; for a
1 Traitk des Operations de Banque, 298.
2 History, Principlesy and Practice of Banking, II., 182.


l6 l

depositor having payments to make would draw out the en­
tire sum in notes, would receive his payments during the day
in the same form, and would deposit the net proceeds again
in one sum in notes at the close of the day. The use of
checks has now become more general, but does not prevent
the rise and fall of the circulation in the autumn and spring
as formerly.1
The elasticity and security of the Scotch circulation are
assured by the daily exchange of notes through the Edin­
burgh clearing house. The settlements for notes were un­
dertaken at an early date by the Bank of Scotland and
the Royal Bank, on each alternate month and are made by
exchange drafts on London. A bank which cannot meet
the test of these settlements is driven to suspension, as
happened to the Western Bank in 1857. The daily ex­
changes by notes are the great regulator of the paper cur­
rency and by their means, according to the admission of
one of the most radical opponents of free banking, “ the
average circulation of Scotch bank-notes is reduced to a term
of a few days. ’’8 Notes which are not demanded by the con­
venience of trade quickly come back to the banks as deposits
on current account and are returned through the exchanges
to the issuing bank to be retired and cancelled.
II. The proposition that the banking currency of Scotland
has enabled her people to carry on numerous transactions
for which they could not well have found the necessary
quantity of coin, was abundantly demonstrated by the testi­
mony before the committees of Parliament which made re­
ports upon the subject in 1826. The Act of 1845 was n°t
successful, according to Mr. Gilbart, “ in imparting to the
people of Scotland a taste for gold.” The circulation of
notes, with the profit which the banks derived from circula­
tion, was necessary to maintain the existing banking system
and afford accommodation to the Scotch people. The banks
have never issued the gold except upon demand or for spe­
cial purposes. When it has become necessary to increase
1 Gilbart, II., 178.


La Banque d'Angleterre, etc., 515.



the circulation beyond the limit imposed by the gold in
hand, they have quietly brought the gold from London to
Edinburgh and kept it locked up in the vaults of the bank
until the necessity for it was at an end. The amount of
gold kept in the Scotch banks prior to the legislation of
1845 was but a small percentage of their obligations, but
was large enough to maintain their solvency and supply the
yellow metal when demanded for export or other special
uses. The specie holdings for the four weeks ending Janu­
ary 3, 1846, just after the act took effect, were only ^1,180,.
406, or less than half a pound sterling per capita, against a
circulation of £3,336,409. The specie had increased for the
four weeks ending March 5, 1864, to ,£2,337,459 against a
circulation of £*3,996,743; and for the four weeks ending
October 5, 1895, to £ “ ,521,437 against a circulation of
^7,054,197, at which amount it has substantially remained.
III. The use of small notes has also been of enormous
advantage to the people of Scotland, and has produced none
of the dangerous results to the stability of the currency
which have sometimes been predicted in other countries
when small notes have been proposed. The benefits of
issuing notes for £1 were fully set forth in the testimony
before the committees of the two houses of Parliament in
1826. Mr. Robert Paul, the Secretary to the Commercial
Bank, summed up some of the evils of abolishing small notes
by declaring that it would require the reduction of the num­
ber of branches, because of the increased expense in the
transmission of gold; the withdrawal of cash accounts, be­
cause they would no longer accomplish the end for which
they were granted,—the maintenance of the small note cir­
culation and the profits derived from it by the banks; and
the reduction of the rate of interest paid on deposits, because
it would be necessary to keep a very large stock of gold and
to keep it wholly unproductive.
A letter written by an agent of the Renfrewshire Bank at
Greenock to the manager, Mr. Roger Aytoun, set forth in
an even more striking manner the absolute paralysis which
would fall upon many transactions by the adoption of a gold



currency and the abolition of notes under £5. Cattle dealers
in the country markets, he pointed out, often purchased two
or three hundred beasts, reaching an aggregate value of
several hundred pounds, but they purchased them by the
single animal, at a price ranging from £2 to £4, from the
farmers who brought them to market. It would be neces­
sary, if £1 notes were abolished, for them to come to market
loaded with gold and silver, and the difficulty of obtaining it
from the banks would be increased by the fact that the
banks derived no profit from its circulation. Grain was
bought up, it was pointed out, in much the same manner
and the herring fisheries, which often amounted at Iyochfine
alone to the value of ,£40,000 in a single season, were
brought in by a thousand boats, whose catch for a night was
generally under £5. “ If small notes are superseded, and
gold substituted,’’ continued the letter, “ it is not easy to
see how the supply of gold is to be kept up to carry on the
business and transactions of this country. Should a quan­
tity of it be received into the circulation, it would not re­
main long, but find its way into the banks, who will not
again give it out in bills as they do their notes, and it will
immediately become a scarce article in the country. A per­
son, then, having to pay in small sums, will on every such
occasion be obliged to send his large notes to the bank that
issued them, perhaps a hundred miles off, to receive gold
and silver in their place, to answer his purpose.” The evi­
dence was so overwhelming of the value of the small note
system that even Sir Robert Peel and the extreme advocates
of the currency principle were convinced of the serious in­
jury which its abolition would do in Scotland and both the
committees of the Lords and the Commons recommended
the postponement of the measure.
IV. The fourth advantage of the Scotch currency system,
that it has brought into active use the available savings and
capital of the country, is due to the system of allowing inter­
est on deposits. This is hardly practicable except under
freedom of note issues, because no other system would afford
the banks sufficient profit to pay a rate of interest attractive



to capital. The early regulations permitted deposits for any
amount above ^10, subject to withdrawal at the will of the
depositor and bearing interest from the day of deposit until
the day of withdrawal. This system was supplemented by
the provident banks, which received deposits of small sums
until they amounted to ^10. It was the ambition of the
Scotch domestic, fisherman, and agricultural laborer to ac­
cumulate enough for a bank deposit during a half year or a
year and add it to the principal and interest which he had
already earned. When this sum accumulated sufficiently to
enable the depositor to buy or build a house, or to set up
as a master in the trade in which he had been a servant, it
would be drawn in bank-notes, which would continue to afford
profit to the bank until returned by some other depositor.
The system thus stimulated greatly the frugality and savings
of the poor, and did much to accumulate in Scotland a capi­
tal capable of developing her agriculture and manufactures.1
It has not been merely as savings banks, however, that
the Scotch banks have contributed to bring into the circle
of active industry the entire capital of the country. The
wide diffusion of branches under the Scotch banking system
places a bank account within the reach of every small trader.
The result, in connection with the interest allowed on de­
posits, has been to create a much greater number of deposit
accounts from small tradesmen than in any other country.
The facility of banking and the advantage of earning inter­
est have tempted the Scotch tradesman to keep his spare cash
in hand at the lowest minimum and to deposit his entire sur­
plus in the bank. The payment of interest thus acts as a
direct check upon excessive issues by bringing the notes
back to the bank for deposit. The advocates of the Scotch
1 The proof of the large savings of the Scotch people and their gen­
eral use of banking facilities may be found in the bank returns for the
United Kingdom for 1907 published on pp. 133-34, in Chapter V.
These returns show that, in spite of the enormous wealth and bank­
ing business concentrated in the City of London, the deposit liabilities
of the Scotch banks, divided by the population of Scotland, show a
per-capita average of about ^26, while those of England subjected to
a like process show an average of about ^24.


banking system blame the English banks for their failure to
invite the available capital of the country into their coffers
by the payment of interest.1 If a Scotch banker issues a
quantity of notes, he feels assured that nearly all of them
will be paid into some bank in the course of the day. There
was a competition among issuers, before the Act of 1845,
but it was under the restraint of the theoretical rule of free
banking, that the notes come back to the bank whenever
they are issued in excess. Many of the English banks,
however, have discouraged deposits and active accounts by
charging a commission when the accounts were operated
Deposit accounts and the payment of interest have thus
operated at once to bring within the circle of productive in­
dustry every possible fraction of available capital, but they
have operated also to apply constantly to the banks the
touchstone of a sound and scientific currency,—the redemp­
tion and cancellation of their notes. These results could not
be accomplished without the wide diffusion of branches.
In spite of amalgamations, which dispensed with many old
branches, the total number of offices increased from 812 in
1872 to 1256 in 1913, or an office to 3790 inhabitants. The
methods by which they have accomplished such results,
moreover, are not, in the language of M. Courcelle-Seneuil,
“ the exercise of a blind routine, the setting in motion of a
sort of mechanism ; they have been the employment of an
enlightened judgment in their loans, the exercise of a high
intelligence applied to business.” The Scotch system of
branches results in an even distribution of capital by with­
drawing it from points where it is not needed and concentrat­
ing it where it is needed. The branches in the agricultural
districts usually accumulate more capital than is needed
within their own circuits and transfer it to the manufactur­
ing districts, which are able to employ nearly all the capital
they can obtain. This system kept capital within the coun­
try and the payment of interest on deposits contributed to
deter the Scotch people from the reckless investments which
1 Gilbart, II., 201.



have absorbed so many millions of English, French, and
American money.
It was predicted, when the regulation of note issues was
applied to the Scotch banks in 1845, that the result would be
the reduction of the interest paid on deposits, and this pre­
diction has been verified by events. A part of this reduction
has undoubtedly been due to the accumulation of capital
and the fall in its price in the money markets of the world,
but a part is due to the increased cost of banking under the
Act of 1845. A radical departure was taken from the old
methods of Scotch banking, when the banks by a circular of
October 1,1892, gave notice that after that date the allowance
of interest on creditor balances of current accounts would be
discontinued.1 No distinction was made in regard to the
rate of interest, at the time of the Act of 1845 and for some
years after, between deposit accounts and credit balances of
current accounts. The rate allowed was the same on the two
classes of accounts and seldom fell so low as two per cent.
The rate in force on deposits for several years was one and a
half per cent, and this was reduced in January, 1895, to one
per cent. These low rates have destroyed much of the
motive for depositing idle capital in the banks, and have
driven the Scotch people to send their money to Australia
and seek other and less secure investments than those which
they formerly obtained at home by simply depositing their
surplus in their current accounts with the banks.
V. The fifth great advantage of the Scotch banking sys­
tem, that it has afforded an opportunity for entering upon
business to thousands of poor but honest young men, is due
chiefly to the system of cash credits. The Royal Bank
found, soon after its organization, that it had more capital
than it could employ in ordinary commercial operations on
bills of exchange within the narrow circle of Scotch com­
merce. The result was the adoption of the system of cash
credits for the promotion of agriculture and industry. The
system consists in giving an open credit, or drawing account,
to a customer who is vouched for by two or more trustworthy
1 London

Bankers' Magazine, April, 1893, LV., 577<



persons. A cash credit of £100 authorizes the person in
whose favor it is granted to draw upon the bank for that
amount, but he is not usually expected to draw the entire
sum at once and is charged with interest only on the amount
actually drawn and not repaid at any given time. The sys­
tem differs, therefore, from the discounting of a bill of ex­
change in the fact that the money can be drawn piece-meal
instead of in bulk and interest is charged only upon the por­
tion of the loan actually outstanding. If payments are made
from time to time into the bank, they are credited and the
interest charged is reduced. The persons who vouch for the
holder of the cash credit are called cautioners or sureties.
A cash credit, therefore, is in the nature of permission to
overdraw an account up to a fixed limit. Cash credits are
rarely given for sums below £100 and generally range from
£200 to £500. The banks prefer these small sums, but
sometimes grant such credits for £1000 or even larger sums.
Payments upon these credits are made in the notes of the
bank, which are thus kept in active circulation. Such a
credit is not allowed to lapse into a dead loan of the aggre­
gate amount, but it is expected that payments will inter­
mingle with drafts upon it. It is intended as a working
capital for men of good character engaged in trade or agri­
culture. It has the advantage over the ordinary method of
loans by discount, not only that it is more economical to the
borrower, but that it keeps within the control of the bank
all sums not in active business use. The holder of a cash
credit is not only benefited by paying into his account all the
cash which he may receive from day to day, but he reduces
the bank's outstanding loans by that amount and enables it
to increase them in other directions.
The advantage of this system to Scotch industry has been
incalculable, measured not only in shillings and pounds to
the borrower, but in the stimulus which it has given to the
thrift, frugality, honesty, and morality of the people. The
two cautioners keep an eye upon the young man for whom
they have vouched, have a right to know the state of his ac­
counts, and if they find that bis business is badly conducted,



they can withdraw their security and authorize the bank to
call in the loan. The losses on cash credits have been tri­
fling throughout the entire history of Scotch banking. Cash
credits have been granted to manufacturers and large employ­
ers and to the trustees of great public works, as well as to
young men setting up in business and to farmers desiring
money in anticipation of the sale of their crops. Many dis­
tinguished Scotch manufacturers have testified that the sys­
tem of cash credits was the foundation of their success in
life. Mr. Monteith, a member of Parliament who testified
before the Committee of the House of Commons in 1826, de­
clared that he was then a manufacturer employing 4000
hands and that, except for the merest trifle of capital which
was lent to him, and which he soon paid off, he began the
world with nothing but a cash credit. The testimony before
the same committee showed that upon one cash credit of
^500 there were operations to the amount of ,£70,000 in a
single year, and one witness stated that during twenty-one
years in a country bank of moderate size operations took
place to the amount of ^90,000,000 and that there had been
but one loss of ^200 on a single account and that the whole
loss' of the bank during the entire period did not exceed

^ 1200/

VI. The confidence which has been produced among
the Scotch people in the system of a banking currency as
maintained by their banks was illustrated in a remarkable
manner at the time of the failures of the Western Bank in
1857 and the City of Glasgow Bank in 1878. The run upon
the Western Bank began on Tuesday, October 13, 1857, an&
continued for three days, but during that entire period the
bank paid away only about ^36,000, in coin, and for the
entire month from October 10th to November 7th only
^44,000. Deposits were drawn out to the amount of
^1,280,000, but in nearly every case the depositors were
willing to accept the notes of the bank and when it
suspended operations the notes in circulation were still
^720,000. The heaviest pressure upon the bank came after
1 MacLeod, Theory and Pratice o f Banking , I., 347.



the announcement that it would receive support from the
other Edinburgh banks on condition of winding up. This
pressure came, not from any demand for gold, but from
large tradesmen who transferred their accounts to other
banks in order to establish banking relations for the future.1
The bank was unable to settle the heavy exchanges which
were thus created against it in the settlement with the
associated banks.
It was not until Sunday, November 8th, that the other
banks resolved to refuse the notes of the Western Bank in
consequence of its inability to settle its exchanges, and the de­
mand for gold became more marked on Monday and Tuesday.
The Western Bank closed on Monday and a genuine panic
was directed for a day and a half against the City of Glasgow
Bank, because it had been guilty of the same negligence as
the Western Bank regarding the keeping of its reserve in
Iyondon. The bank was obliged to close on Wednesday,
but the demand for gold was almost entirely confined to
depositors and very few note-holders came forward to
demand payment of their notes. Large remittances of gold
arrived from London on Wednesday and Thursday, the run
on the banks ended on Wednesday afternoon, and the people
seemed to retain the same confidence as ever in the other
banks and received the notes even of the Western Bank when
the other banks agreed to again receive them. When the
City of Glasgow Bank failed in 1878, it was only necessary
for the other banks to announce that they would continue
to receive its notes, as usual, to put an end to all uneasiness
on the score of the notes. If the banks on these occasions
had not been allowed to issue notes, the entire demand for
1 The same tendency to substitute the note obligations of the bank
for a deposit account was shown in British North America after the
failure of the Commercial Bank of Manitoba on July 3, 1893. The
reason in this case for preferring notes was the fact that they were
made by the Canadian banking act of 1890 a perfectly secured first
lien upon the assets. The banks receiving these notes were willing
to hold them for a time, at the request of the liquidator, because they
bore six per cent interest until paid.— Breckenridge,




the withdrawal of deposits must have been met in coin and
would have put a heavy pressure upon the coin reserves.
But the small notes were readily received, the deposit ac­
counts of the solvent banks were not assailed and the Scotch
banking system retained as completely as ever the confidence
of the people.
The history of Scotch banking has been comparatively
uneventful in recent years. The reduction of the interest
paid on deposits and the investment of a large share of
Scotch banking assets in London tended to prevent the
rapid growth of resources and to assimilate the operations
of the Scotch banks to those of other British joint-stock
banks. The crisis of 1907, however, enabled the banks to
increase their rate of interest on deposits temporarily to four
per cent., which drew back some depositors.1 The depre­
ciation of consols, which caused losses to nearly all British
banks, was responsible in part for the first banking amal­
gamation in Scotland since 1868. This was the absorption
in 1907 by the Bank of Scotland of the Caledonian Bank.
The latter, the smallest of the surviving Scotch banks of
issue, with deposits of about >61,350,000, had been since
1878 working in harmony with the larger institution, but
had not been conspicuously successful. The merger made
the total assets of the Bank of Scotland at the close of 1907
^21,955,629, and put it at the head of all Scotch banks in
magnitude of resources. The Bank of Scotland added the
authorized note issue of the Caledonian Bank, which was
,£53,434, to own previous issue 0^343,418.* Another
merger, in March, 1908, absorbed the Town and County
Bank into the North of Scotland Bank, and reduced the
number of banks in Scotland to eight. The authorized issue
of the Town and County Bank was >670,133, and its assets
on January 1, 1908, were ,£3,905,256.8
Bankers' Magazine

1 London
, February, 1908, LXXXV., 230.
August, 1907, LXXXIV., 170-72.
April, 1908, LXXXV., 634.


C H A P T E R V II.
The Effect of Political and Economic Misfortunes—The Early Bankers
and the Foundation of the Bank of Ireland—The Provincial Bank
and Other Banks of Issue— The Collapse of the Agricultural and
Tipperary Banks— The Act of 1845 and Present Conditions.


RELAND has had almost as varied an experience in
banking as in the political fortunes of her people and
her banking history has been affected more or less
unfavorably by the agitated condition of the country. The
policy of England towards Ireland was distinctly selfish
during the seventeenth and eighteenth centuries. Irish
agriculture was crushed by the importation of bounty-paid
wheat from England and Irish manufactures were stifled by
countervailing duties intended to prevent their competition
with English goods.1 The linen trade was almost the only
one which was allowed some degree of prosperity, upon
the theory that it was better for England to draw her
linen supply from a dependency than to pay foreign coun­
tries for it. This policy was changed from 1782 to 1800,
while Ireland had an independent parliament, for the policy
of large bounties and protective duties, and for a brief period
Irish industry started forward by leaps and bounds under
this artificial stimulus. But the country soon felt the heavy
cost of the bounty system and prosperity began to decline
before the union with Great Britain. The economic history
of Ireland then became a part of that of England, and a
reasonable degree of progress was made up to the time of
Cunningham, II., 298,523.




the potato famine in 1846. That event caused a loss of pop­
ulation by starvation and immigration which has never been
recovered. Absentee landlordism also has been a permanent
source of loss to the country by the large amount of produce
and money annually sent abroad in payment for rents. The
fact that bank deposits have increased and that Ireland has
retained within her limits a large fund of gold and silver,
in spite of these obstacles to her progress, is high evidence
of the productive and thrifty character of the Irish people
and the sound judgment of their bankers.
The earliest banking in Ireland seems to have been done
by brokers or intermediaries, who brought borrowers and
lenders together for a consideration. The business of issuing
promissory notes against deposits of coin gradually grew up
among the goldsmiths and tradesmen, who carried it on in
addition to their regular callings. These notes were given
a legal status as negotiable instruments by an Act of 1709,
which made them assignable and transferable by endorsement.
There were no banking laws to prevent fraud and failure,
and the losses by the failure of banks or exchangers was
estimated as early as 1682 at having been ,£50,000 within a
few years.1 The Act of 1709 gave the power to protest in­
land as well as foreign bills and promissory notes for nonacceptance or non-payment. The Irish House of Commons
acted as a court of bankruptcy and a special act of Parlia­
ment was necessary for the liquidation of the affairs of an
insolvent institution. The first act of the kind on record is
in 1721, which was passed for the relief of the creditors of
Mead and Curtis, a Dublin firm which had suspended on
June 14, 1727. A bill for the relief of Burton and Falkiner
of Dublin was passed in 1733 but the final legislation re­
garding the affairs of this firm was not passed until 1757.
The firm had acted as bankers for the government and their
failure seems to have been due to their large holdings of
landed property, which could not be turned into cash when
A series of failures took place in 1755 and 1756, which led
billon, 17.



to the appointment of a select committee of the House of
Commons to make an inquiry. They reported that credit
had suffered by the setting up of persons as bankers with­
out sufficient capital, and recommended that bankers be
required to register the real and personal estate which they
proposed to hold as security for the payment of their liabili­
ties, that the names of the issuing bankers be stated on bank­
notes, that bankers should not be permitted to trade as
merchants, and that it should be made a felony without
benefit of clergy for cashiers or clerks to embezzle money
in excess of £*50. The committee also recommended the
cancellation of notes at the time of payment. These recom­
mendations, except that regarding the registration of security,
were embodied into law in 1755 (29 George II., c. 16). This
act did not entirely revive credit and four important banking
failures took place in 1758 and in 1760. The first was that of
Clements, Malone, and Gore, a firm established on July 3,
1758, which closed its doors on November 1st, of the same
year. This firm issued deposit notes payable to bearer on
seven days’ notice with interest at the rate of ten pence per
week for every ^100 (two and one-sixth per cent, per annum).
The deposits obtained were larger than were expected and
were invested largely in land, but the depositors soon began
to demand repayment of their notes and as cash could not
be obtained the firm was obliged to suspend.1
Three of the six large banking firms in Dublin suspended
in 1760 and the others refused to discount bills and practi­
cally suspended business. Among the firms which remained
solvent was that of Messrs. La Touche and Co., which began
business in 1725 and survived as a banking house until its
fusion with the Munster Bank in 1878. The financial con­
dition of the country and the state of credit were in such a
situation that a meeting of the merchants of Dublin was
held in April, 1760, which made an appeal to Parliament for
relief. A committee of inquiry was named by the House
which reported on April 23, 1760, that the quantity of paper
in circulation was insufficient to carry on trade and manufac­
1 Dillon, 23.



tures, and recommended support for the three surviving
banks to the amount of .£50,000 each. This recommenda­
tion was adopted and the notes of these bankers were
received as cash in the subscription for a loan which was
then being raised. The failure of Sir George Colebrook,
Bart., and Company, London bankers who had opened a
branch in Dublin, in 1764, was the cause of another panic
in 1770 which led the Lord Lieutenant and some of the
gentry to issue a notice pledging themselves to receive the
notes of the existing Dublin bankers without question.
The effort to found a strong joint stock bank began the
year after the foundation of the Bank of England. A number
of the principal merchants of Dublin held a meeting in 1695
and presented a memorial to the Irish House of Commons
on September 17th, recommending the establishment 44of a
public bank or a fund of credit, for the encouragement of
trade, and supply of the present want of money.’’ The
petition was referred to the committee on trade, but was
never reported upon. The matter was revived in 1720 by
Lord Abercorn, Lord Boyne, and others, who petitioned the
King for authority to found a public bank with a capital of
£500,000. The Lords Justices reported in favor of the
scheme and the King authorized the Lord Lieutenant to
grant a commission and charter. The consent of the House
of Commons was required for a proper bill and the early
stages were favorably passed. Charges of jobbery began
to be made against the promoters of the bank, a rival scheme
was started with a capital of £ “
1,000,000, whose promoters
were charged with paying £*50,000 to members of the House
as bribes, and the outcome was the passage of a resolution
on December 9, 1721, “ That the erecting or establishing a
public bank in this Kingdom will be of the most dangerous
and fatal consequence to his Majesty's service and the trade
and liberties of this nation." Religious, political, and finan­
cial reasons influenced the action of the House, but a stronger
reason was probably found in the infringement of the privilege
of originating legislation, which they jealously guarded.
The plan of a public bank remained in abeyance until



1782, when Ireland obtained a new constitution, was freed
from humiliating tariff restrictions and believed herself upon
the threshold of a new era of prosperity. Mr. Eden, the
Secretary to the Lord Lieutenant, presented the heads of a
bill for a bank on February 27, 1782. Some opposition
developed among the existing bankers and their friends in the
House and when Mr. Eden called the bill up on March 5th,
the opponents of the bank endeavored to secure an adjourn­
ment, but the motion was lost and the report of the com­
mittee was agreed to. The capital of the bank was fixed at
600,000 Irish pounds,1 of which no person wras to subscribe
more than ^10,000, and which was to be lent to the govern­
ment at four per cent. The charter was to run until January
1, 1794, and until twelve months’ notice of withdrawal and
the re-payment of all sums due the bank by the government.
The bank began business June 23, 1783, and as early as
October 31st, of the same year Mr. David La Touche, Jr.,
was able to inform the House of Commons that great advan­
tages had resulted, particularly to the traders in linen. The
first offices of the bank were in some old houses in Mary’s
Abbey, but after the union of Great Britain and Ireland in
1802, the directors of the bank purchased the Parliament
house for ,£40,000. They remodelled it to meet their require­
ments and established the bank there in 1808. The meet­
ings of the directors and shareholders are held in the old
chamber of the Lords and the general office occupies the
old House of Commons.
The new institution was known, in similar language to
that establishing the Bank of England, as ‘‘ The Governor
and Company of the Bank of Ireland,’’ and was not allowed
1 The coinage of Ireland, although bearing the same names, differed
from that of Great Britain. The English shilling was passed in Ire­
land for thirteen pence, although twelve Irish pence were equal to a
shilling and twenty shillings to a pound. This made English coins
worth about eight per cent, more than Irish coins of the same names
and led to much confusion until the currencies were assimilated by
the Act of 6 George IV., c. 79, making the currency of Great Britain
that of the United Kingdom and providing for the interpretation of
contracts in its terms.



to charge more than five per cent, interest on loans and dis­
counts. If the bank incurred debts to a greater amount
than its capital, the subscribers were answerable in their
private capacity to the creditors in proportion to their sub­
scriptions. The stock was to be transferable and to be
deemed personal estate, and as such to go to the executors
of the holders rather than their heirs. Fifteen directors were
to be chosen annually, not more than two-thirds of the direc­
tors of the preceding year were to be re-elected, and the
corporation was to have a governor and a deputy governor.
The charter of the bank was renewed in 1791 and the capital
increased to ,£1,000,000. Another increase of ,£500,000 was
made in 1791, and still another increase of £*1,000,000 was
made in 1808 by 48 George III., c. 103. The charter was
extended at this time until the expiration of twelve months’
notice after January, 1837. The last increase of capital
was made in 1820, when the total was fixed at ,£3,000,000
in Irish currency (equivalent to £‘2,769,231 in English cur­
rency). This last increase was taken from the surplus fund
of the bank and lent to the government, making the aggre­
gate loans to this date £ ‘2,630,769 in English currency. The
total annuity paid the bank by the government was fixed at
£*115,384, which was reduced in 1845 to £92,076, or at the
rate of three and a half per cent, on the English equivalent
of the amount of the loan, and was further slightly reduced
in 1892.
The suspension of cash payments in England in 1797 was
extended to Ireland, without any apparent necessity, “ for
the sake of uniformity.” Exchange was then in favor of
Ireland, there was no special demand upon the Bank of
Ireland and no drain of gold was feared. The effect of sus­
pension, however, was to enormously stimulate the issue of
notes, which increased from ,£621,917 in 1797 to £*2,482,162
in 1800, ,£3,068,100 in 1809, ,£4,212,600 in 1813, and finally
reached ,£5,182,600 in 1821 and ^6,309,300 in 1825. Ex­
change turned against Ireland as early as 1804 and led to
the special inquiry by the British Parliament which resulted
in the formulation of the principles afterwards repeated with



greater elaboration in the Bullion Report. The evidence
showed that silver had disappeared from circulation, even
for subsidiary purposes, and been replaced by silver notes.
Mr. Colville, a director of the Bank of Ireland, testified that
there were in Ireland seven bankers issuing notes ; 28 issuers
of gold and silver notes, 62 issuers of silver notes ; and 128
issuers of I. O. U’s. 1 The Bank of Ireland made large
profits upon its forced circulation, and paid dividends never
less than six and a half per cent, and rising in 1803 and
1805, including a bonus, to twelve and a half per cent. Ex­
change on London became favorable after a time, not because
the value of Irish currency was raised, but because that of
England had fallen to its level.
The substantial monopoly of joint stock banking by means
of note issues was conferred upon the Bank of Ireland by
the act of incorporation, which declared that it should “ not
be lawful for any body politic or corporate, erected or to be
erected, other than the corporation thereby intended to be
created and erected into a national bank, or for any other
persons whatsoever united or to be united in covenant or
partnership exceeding the number of six persons, to borrow,
owe, or take up any sum or sums of money on their bills or
notes payable at demand, or at any less time than six months
from the borrowing thereof.” This provision left it in the
power of individuals and firms of small numbers to issue
notes, and this privilege was availed of to a great extent
after the suspension of cash payments. Nothwithstanding
the worthless character of many of these institutions, the
demand for currency was so imperative that large quantities
of notes were easily floated and great distress occurred, after
1820, when the number of institutions outside the Bank of
Ireland had been reduced to six. The Bank of Ireland was
permitted by an Act of 1821 (chapter 27) to resume cash
payments on June 1st of that year.
The absence of a proper circulating medium, in spite of
the monopoly enjoyed by the Bank of Ireland, led to a pro­

Theory of Credit, II., 609.



vision in the act which increased the capital of the bank,1
that the bank should surrender its monopoly outside the
circuit of fifty Irish miles from Dublin. Companies of more
than six partners were henceforth authorized to do a bank­
ing business and to issue circulating notes outside the pro­
posed limit. A party of English capitalists determined to
take advantage of this provision and at a meeting in London
on June 11, 1824, resolved to found a bank with a capital
of ^2,000,000 in shares of £100 each, of which one-fourth
was to be paid up. Subscriptions were received far beyond
the amount needed before the end of the year and the capital
of the Provincial Bank of Ireland, which was thus estab­
lished, has never been increased except in 1836, when £40,000 was transferred to the capital from the 1‘ rest5’ or reserve
fund. The monopoly enjoyed by the Bank of Ireland in
Dublin made it necessary to keep the head office of the new
bank in London, but an agency was established in Dublin
and Messrs. La Touche and Company acted as agents until
1838, when the bank opened its own office.
The Provincial Bank rapidly extended its branches
throughout Ireland, establishing them at Cork, Limerick,
Clonmel, and Londonderry in 1825 ; at Sligo, Wexford, Bel­
fast, Waterford, and Galway in 1826, and at other towns in
successive years. The Bank of Ireland, which had been
content with its head office until it found competitors in the
field, began a policy of opening branches and established
them at Cork, Waterford, Clonmel, Londonderry, Newry,
Belfast, and Westport almost as soon as the prospectus of the
Provincial Bank had appeared. They began an action of
law against the Provincial Bank in December, 1828, because
of the payment of the latter’s notes in Dublin. The jury
found in favor of the Bank of Ireland upon the law and the
evidence, but awarded damages at sixpence, with costs of a
like amount, as evidence of the feeling in the business com­
munity of Dublin against the narrow policy of the bank.
The restiveness of the merchants was farther indicated in a
petition to the Lords of the Treasury for the establishment
*2 George IV ., c. 72.



of joint stock banks in Dublin, which led to a compromise.
An Act was passed in 1830, making lawful the payment of
notes in Dublin by the issuing bank for the purpose of with­
drawing them from circulation. The Provincial Bank ob­
tained the privilege in 1827 of receiving the revenues of the
excise, stamps, and postal service outside the Dublin district
reserved to the Bank of Ireland. Collectors of revenue were
authorized in the same year to receive the notes of the bank
in the same manner as those of the Bank of Ireland.
The Acts of 1820 and 1825 made it possible to establish
joint stock banks in different parts of Ireland and several of
these were soon incorporated. The first was the Northern
Banking Company, founded by the partners of a private bank
of the same name in Belfast. An attempt was made to convert
this bank into a joint stock bank in 1820, but it was found
necessary to await a change of the law requiring the residence
of all the partners in Ireland. The bank began business in its
new character in January, 1825, with a capital of ,£500,000.
The capital was increased in 1867 to £ “
1,000,000 and has
since been increased to ,£2,000,000, of which £400,000 has
been paid in. The Northern Banking Company purchased
the business of Messrs. Ball and Co., of Dublin in 1888 at a
cost of £ “
22,500 and opened an office at the capital. The
Belfast Banking Company was another institution which
was founded upon a private company. It began business as
a joint stock bank of issue on August 1, 1827, with a capital
°f ,£500,000, of which ,£125,000 was paid in. The capital
was increased in 1866 to ^1,000,000 and in 1883 to £2,000,000 with ,£400,000 paid in.
The National Bank of Ireland was founded in 1835 as the
result of the Nationalist feeling in the country. It began
business at the Carrick-on-Suir with a subscribed capital of
£ 1,000,000 and consisted at first of separate bodies of share­
holders, English and Irish. When a branch was opened,
the local share-holders subscribed a portion of the capital
and the English proprietors contributed a like amount.
The profits were divided evenly between the two interests,
but the system proved inconvenient and the stocks were



consolidated in 1837 except in two branches, where the
consolidation was delayed until 1856. Daniel O’Connell
was the first governor of the bank and his name caused
the institution to be dubbed “ The Liberator’s Bank”
and made way for its notes all over Ireland. The only
other bank of issue which is still doing business is the
Ulster Bank, founded in 1836, at Belfast. The capital was
originally ,£1,000,000, which has since been increased to
,£2,400,000, with ,£400,000 paid up. The profits paid in
dividends to the shareholders were twenty per cent, annu­
ally from 1866 to 1885 and have been only a little less in
subsequent years. The Royal Bank of Ireland was estab­
lished at Dublin in 1836, but was restrained by the monopoly
of the Bank of Ireland from issuing notes, and was found in
this condition in 1845 by the legislation confirming the
power of issue to the banks which then possessed it. The
Royal Bank, although a powerful and profitable institution,
was, therefore, never enrolled among Irish banks of issue.
The foundation of the National Bank was intended to
offset in a measure the collapse of the Agricultural and
Commercial Bank of Ireland, which was established in 1834
by the appeals of a Dublin baker, Mr. Thomas Mooney, to
the patriotism of the Irish people. Mr. Mooney bore the
same name as a Dublin capitalist of wealth and standing and
he secured as one of the directors a stationer named James
Chambers, which was also the name of a distinguished
Dublin financier who was a director of the Bank of Ireland.
The impression generally prevailed that these two eminent
gentlemen were interested in the new bank and Mr. T. M.
Gresham, who was brought into the bank just before its
collapse, testified before a committee of the House of Com­
mons that “ there is no manner of doubt that we were all
deceived in two names in that bank.” The capital of the
Agricultural Bank was gathered up from all sorts of humble
people by appeals to their Irish patriotism and parts of it
were obtained by liberal discounts to those who presented
commercial bills. A meeting of the shareholders after the
collapse of the bank was attended by two steamboat-loads



from Belfast, most of whom had their expenses paid by the
directors, and another contingent came from the south of
Ireland in canal boats. The branch managers of the bank
were selected according to their holdings of stock and acted
in reckless disregard of orders from the head office, even to
the extent of raising their own salaries and dating the
increase back to the time of their appointment.1 The nom­
inal capital of the Agricultural Bank was £1,000,000, but it
was admitted that at the time of beginning business it did
not actually exceed ,£3,000. The first branch was opened
at Nenagh, Tipperary County, in November, 1834, and the
bank was compelled to close its doors on November 14, 1836.
A special act of Parliament was required to wind up the
affairs of the bank and an attempt to put it on its feet under
a new organization failed in 1841.
The Tipperary joint stock bank, which succeeded Scully’s
private bank in 1838, did not issue its own notes, but had an
arrangement with the Bank of Ireland by which its paper
was discounted. The power was reserved to the Tipperary
bank by the Act of 1845 to take the same amount of issue
as it would have been entitled to in case of the termination
of the agreement with the Bank of Ireland, so that it was
recognized as connected with the system of banks of issue.
The directors of the institution when it became a joint stock
bank were John Sadlier, his brother James, and Mr. James
Scully. The capital of the bank was £100,000, a portion
of which was held in England, and favorable reports were
regularly made and large dividends declared for some seven­
teen years. Prosperity seemed to reign in the affairs of the
bank until February, 1856, when the doors were closed, less
than a month after the issue of a favorable report and the
declaration of a dividend. It was found that John Sadlier
had systematically robbed the bank and falsified the accounts.
Sadlier was one of the brilliant swindlers who so often take
the world by storm and persuade shrewd men of business to
embark with them in great enterprises. He had piloted
through Parliament several important railway bills, obtained
1 Dillon, 71- 77.



the reputation of immense wealth, been elected member of
Parliament for Carlow, and was offered and accepted the
position of a Junior Lord of the Treasury. He became
chairman of the London and County Bank in 1848, chair­
man of the Royal Swedish Railway and a director in num­
erous stock companies. Towards the close of his career he
indiscriminately used all the funds of either corporation he
could lay his hands on, issued duplicate shares in the rail­
way company and forged documents which he deposited as
security for advances from other bankers. His forgeries
began to be suspected, the Tipperary Bank collapsed, and on
February 17, 1856, Sadlier’s body was found by a laborer
crossing Hampstead Heath, lying on the ground with a
bottle labelled “ poison ” beside it.1
The Banking Act of 1845, following the similar legisla­
tion for England and Scotland, repealed the acts of Parlia­
ment which prohibited the formation of stock companies for
banking with more than six partners. This threw down the
bars to all comers, so far as the organization of banks of
discount and deposit was concerned, but circulation was put
in a straight jacket, as in the case of the English banks.
The authorized issue of circulating notes after December 6,
1845, was not to be permitted to exceed, upon an average
of four weeks, the average amount of the circulation for the
year ending on the first day of May, 1845.2 ^ any two
banks united, they were allowed to maintain the aggregate
authorized circulation of both the old banks, and if any bank
surrendered its issue or agreed to issue Bank of Ireland notes,
the Bank of Ireland was allowed to increase its issues to the
full amount of the notes withdrawn. The law differed in
this respect from the English act, which limited the increase
in Bank of England issues in such cases to two-thirds of the
issues withdrawn.
The Irish law differed in an important respect from the
English banking act in regard to the additional circulation
b illo n , 8:-86.

28 and 9 Victoria, c. 37, sec. 19.



which the banks were authorized to issue against deposits
of coin and bullion. This privilege was accorded to all the
Irish banks of issue,—instead of but one, as in the case of
England,—and they were thus put upon an equal footing
with no apparent purpose of concentrating issues finally in a
single institution. The Irish banks are required, however,
to keep the coin held against additional circulation wholly
at their head offices, while all their notes are required to be
redeemed on demand at the place or places where issued.
These requirements compel them to keep a supply of coin at
every branch, in order to redeem notes issued from that
branch, and it is the practice for a bank to redeem any of its
notes at any of its branches where they may be presented.
The fact that the privilege of additional issues has been
availed of to only a limited extent, while the coin holdings
of the banks have been large, would seem to indicate that
the fixed limit of authorized issues has not operated greatly
to restrain the business development of Ireland. One reason
for this is doubtless found in the fact that the population and
the volume of business were so greatly decreased in the
famine years, while the authorized circulation remained
untouched. The limit has proved in practice so generous
that Ireland has enjoyed a currency fluctuating with the
seasons and with the varying demand for money, in much
the same manner as an untrammelled banking currency.
The circulation was nearly £"1,000,000 above the limit in
1846, standing at ,£7,266,000, but declined as low as £4,310000 in 1849. The average returned in 1854 to ,£6,296,000
and increased pretty steadily until i860, when it .stood at
^£6,840,000. A decline then set in, which reached its lowest
ebb in 1863 at £5,405,000. Another period of increase
carried the average circulation for 1872 as high as ,£7,674,000,
after which it fell to £6,065,000 in 1879, rose to £7,297,000
in 1882 and fell to ,£5,885,000 in 1887,—the lowest average
for twenty years. The authorized circulation of each
bank, with the circulation and specie holdings for the four
weeks ending July 25, 1908, is shown in the following



Circulation of Irish Banks.



£5.738,428 £2,509,750 £ 973.771
3I3:»079 I,l8l ,748
6,354,494 6,291,107 3.452,105
The average circulation of these banks for February, 1914,
was £8,064,349, of which £2,694,458 was in notes for less
than £5.
The elastic character of the Irish currency, in spite of the
restrictions of law, gives an interest to the fluctuations dur­
ing the year which result from the varying demand for
money. Beginning with January, the amount of the circula­
tion usually declines,—slowly at first, but more rapidly in
May, June, and July, until it reaches its lowest point at the
end of August. Then begins the process described by Mr.
Gilbart, as a consequence of the law that “ the monthly cir­
culation must depend upon the quantity of produce brought
to market within the month ” :

Bank of Ireland................
Provincial Bank of Ireland
Belfast Bank.....................
Northern Bank................
Ulster Bank.....................
The Nations Batik.. - T- * - -

Now, it lias been the custom in Ireland to commence bringing the
produce to market immediately after the harvest. Hence arises the
increase of the notes in September, and their further increase in the fol­
lowing month. But in the beginning of the year the landlords collect
their rents, and receive from their tenants the notes for which this
produce has been sold ; this brings the notes back to the bank, either
to be placed to his credit (if he have an account there), or, otherwise,
in exchange for a letter of credit on Dublin, or a bill on London.
The circuit of a note, then, is this :— It is obtained from the bank by
a corn-merchant, who pays it to a farmer for his corn, which he ships
to England. The farmer afterwards pays the note for rent to his
landlord, who brings it back to the bank.1

One of the peculiar features of the Irish circulation, like
the Scottish, is the large proportion of small notes. The
1 The History, Principles , and Practice o f Banking , II., 250.


I8 5

Select Committee of the House of Commons in 1826 recom­
mended fixing a limit of time in the future beyond which
the circulation of notes below £5 should cease, but the testi­
mony given before the committee was against such a restric­
tion and it was not adopted. The arguments made against
the restriction were that it would check the growth of
manufactures, make difficult the sale of small lots of agri­
cultural produce, and curtail the accommodation which the
banks are able to give their customers and especially their
cash credits. The transfer of gold, it was pointed out, would
be inconvenient and costly, and once sent out of the country
it would rarely come back. The Act of 1845 prohibited notes
of fractions of £1 and required the banks in their reports to
state separately the notes in circulation under £5. These
returns have shown a large proportion of small notes in cir­
culation and a marked increase from September to January
over the spring and summer months. This circulation of
small notes has contributed, with the widely diffused system
of branches, and the existence of several strong joint stock
banks without the power of issue, to afford reasonably ade­
quate facilities for the development of banking in Ireland.
The number of banking offices in Ireland increased from 333
in 1872 to 571 in 1895 and 863 in 1913.


The Bank o f Prussia and the Share o f the State in its Profits— Other
Banks o f Issue in Prussia and the Smaller States of Germany—
The Reform o f Currency and Banking under the Empire— The
Sales of Silver and the Withdrawal of Paper Money— Legal-Tender
Character of the Bank-Notes and the Reforms of 1909.


HE existing banking system of the German Empire is
a part of the fabric of imperialism which was so in­
dustriously built up by Prince Bismarck from the be­
ginning of his premiership in 1862 until his retirement from
office. The Imperial Bank of Germany is in a measure an
expansion and development of the Bank of Prussia, which
was founded in the time of Frederick the Great, but it has
already absorbed the circulation belonging to the banks of
most of the other German states and is authorized to absorb
the entire paper circulation of the Empire as it is surrendered
by the local banks, in much the same manner as the Bank
of England is authorized by the Act of 1844 to absorb the
circulation of the country banks of England and Wales.
The circulation of the Imperial German Bank, while mod­
elled in many respects on that of the Bank of England, is
capable of a somewhat greater degree of elasticity, by virtue
of a legal provision for an emergency circulation above the
usual limit, and the notes are now legal tender.
The Bank of Prussia was created by virtue of an edict of
June 17, 1765, under the name of the Royal Bank of Loans
and Current Accounts at Berlin (Konigliche Giro- und Lehnbank zu Berlin) with a capital of 1,000,000 thalers ($750,000)





and was at first exclusively an institution of state. It con­
tinued to be a state institution until 1846, when the new de­
mands for capital for railways and for the extension of
commercial relations led to an extension of the scope of the
bank and an appeal to private capital to carry it on. Two
ordinances of April 14 and July 18, 1846, authorized the
increase of the capital by a sum of 10,000,000 thalers ($7,500,000) and admitted the shareholders to a part in the adminis­
tration by means of a central commission composed of fifteen
members, who were authorized to appoint a commitee of three
to exercise a regular supervision over the acts of the direc­
tors.1 The capital owned by the State had been increased by
the setting aside of profits until it had reached in 1846 1,197,553 thalers ($900,000), and the portion furnished by the pub­
lic was increased in May, 1856, to 15,000,000 thalers and
again by the law of September 24, 1866, to 20,000,000 thalers,
($15,000,000), divided into shares of a par value of one
thousand thalers each. The capital credited to the state had
been increasing in the meantime until it attained in Decem­
ber, 1867, a total of 1,897,800 thalers ($1,425,000).
The government took care to keep its hands firmly on the
direction of the bank, in spite of the new privileges given
the shareholders, and limited the right to participate in the
general assembly of shareholders to the two hundred hold­
ing the largest amount of stock domiciled in Prussia. Su­
preme control was reserved directly and exclusively to a
privy council (Bank Kuratorium), composed of the Presi­
dent of the Council of Ministers, the Ministers of Finance,
of Justice, and of Commerce, and a fifth member named by
the King. The direct management also was confided to a
director and a committee of direction appointed upon the
King’s nomination. This official control was compensated
in a measure by exemptions from imposts and from certain
taxes which were imposed upon other similar establishments.
The bank was compelled, however, to pay interest on the
deposit of the public funds and to pay three and a half per
1 Noel, I., 246.



cent, upon the capital contributed by the State and half the
net profits remaining after the payment of a dividend of a
like amount to the shareholders. The receipts of the gov­
ernment from these sources, including interest on its own
stock, attained a very considerable figure during the eight
years prior to its transformation into the new Imperial Bank,
amounting to 3,166,436 thalers in 1873 ; 1,711,920 thalers in
1874; and 2,284,875 thalers in 1875.
The accounts of the Bank of Prussia afford a good illus­
tration of the principle that banks of issue usually precede
mere banks of discount and deposit as a means of familiar­
izing the public with banking methods. There were scarcely
any deposits in the early history of the bank, except those
made by the government and upon which interest was paid
by the bank. These government deposits came from the
trust funds of the courts, including those of guardianship,
and the administration of churches, schools, hospitals, and
other charitable foundations and public institutions. Their
magnitude constantly grew and their use by the bank gave
it loanable funds which it could not otherwise have obtained
except by an issue of notes upon commercial paper dispro­
portionate to its original capital. This money entrusted to
the bank enabled it to do a discount business which steadily
grew with the expansion of commerce in Prussia and among
her neighbors. The aggregate of the discount business of
the year rose from 1,581,956,399 marks ($395,000,000) in
1867 to 2,630,469,468 marks in 1871, 3,958,299,756 marks in
1872, and 5,350,216,312 marks in 1873. The business depres­
sion which began in the latter year forced the discounts down
to 4,136,089,162 marks in 1874 and to 4,099,613,175 marks
($1,025,ocx),000) *n i 875.
One of the peculiarities of the Bank of Prussia, which ex­
tended to many other German banks, was the practice of
making loans upon merchandise as well as upon bullion
and the pledge of securities. Business of this kind was al­
ways kept within conservative limits and the statutes of the
Bank of Prussia admitted the precious metals at a valuation
of only 95 per cent, of their real value and merchandise at


from 50 to 60 per cent. The valuation of negotiable securi­
ties was determined by the officers of the bank. All these
operations were limited in amount and were required to run
for terms no longer than bills of exchange, for which the
maximum was three months. The number of loans of this
sort steadily declined during the latter years of the history
of the bank, while the amount increased, reaching a maxi­
mum in 1872 of 824,840,690 marks ($206,000,000), including
The issue of circulating notes was the chief means by
which the Bank of Prussia was able to utilize its assets and
there was no limit of law after 1856 upon the volume of the
issues. The law of 1846 forbade the issue of bills for a
greater sum than 21,000,000 thalers ($15,750,000), but the
repeal of this provision in 1856 left the bank untrammelled,
except as the opinion of the banking community imposed a
relation of one to three between the metallic reserve and the
circulation. The bills were not a legal tender and were re­
deemable in coin on demand, but they were accepted in pub­
lic depositories by virtue of a royal ordinance of June 9,
1847. The denominations were limited to ten, twenty-five,
fifty, one hundred, and five hundred thalers, equivalent to a
minimum of $7.50 and a maximum of $375. A further
limitation was imposed that bills of the smallest denomina­
tion should not exceed a total of 10,000,000 thalers ($7,500,000), and in fact their number never surpassed 957,000 in
the ten years preceding consolidation with the Bank of the
Empire and had descended in 1875 to 520,000 ($3,900,000).
The maximum note circulation in i860 was 93,029,000 tha­
lers ($70,000,000); in 1865, 136,148,000 thalers, and 1870
202.488.000 thalers. The increase was more rapid in the
next few years and carried the maximum in 1871 to 242,242,000 thalers; in 1872, to 311,531,000 thalers; in 1873 to 342,290.000 thalers; and in 1874 to 297,412,000 thalers.
The reserve of the Bank of Prussia consisted of gold and
silver coin and bullion, public securities, bills of Prussian
private banks, and securities payable at sight or otherwise
and until 1869 of accepted drafts (Giro-A nweisungen). The

19 °


total of this reserve reached in 1875 about 1,900,000,000
marks ($475,000,000). The proportion of coin and bullion
seldom exceeded one-third of this aggregate. The maximum
in i860 was 77,457,000 thalers ($58,000,000) and had only
reached 99,427,000 thalers in 1870. The rapid increase of
the number of branches of the bank scattered over Prussia
and the growth of commercial operations led to an increase
in the reserve during the last four years of the operations of
the bank commensurate with the increase in its circulation
and discounts, so that the maximum in 1874 was 239,860,000 thalers ($180,000,000) and the minimum was 203,511,000
thalers ($152,000,000). The Bank of Prussia, in spite of
the share which the government enjoyed in its profits, had
no monopoly of the right of note issue in the Kingdom. By
its side and in competition with its numerous branches ex­
isted eight local banks, including one at Berlin, whose united
capital was 8,899,000 thalers ($6,675,000) and which had the
right to issue bills to the amount of 7,000,000 thalers, but in
no case of a smaller denomination than ten thalers ($7.50).*
The branches of the Bank of Prussia increased from 143 in
1867 to 158 in 1870 and 167 in 1875.2
The other German states were not without flourishing
banks of issue, which conformed in the general features of
their organization to the Bank of Prussia. There were
thirty-three German banks in existence, including those of
Prussia, when the Imperial Bank was established in 1875.
Two of these were commercial banks and one was a terri­
torial bank, the capital in each of these cases being furnished
by the municipality or the State and the liabilities constituting
a general claim against the government and the community.
The others were organized as stock companies. Three of
the German banks—the Bank of Bremen, founded in 1856 ;
the Bank of Thuringia, founded in 1856 ; and the Bank of
Anhalt-Dessau, founded in 1847—held charters without
limit of time, which were regarded as perpetual. The char1 Courcelle-Seneuil, 365.
2 Noel, I., 250.


19 I

fcers of the other banks ran for various periods from one year
to eighty-one years. The charters of the Bank of Gera,
which expired in 1953, and of the Banks of Central Germany
and Lower Saxony, which expired in 1956, had been granted
originally for one hundred years.
The oldest of the banks with limited charters was that of
Pomerania, established at Stettin in 1821, with a capital of
6,000,000 marks. The others were : The Bavarian Bank of
Mortgage and Exchange at Munich, founded in 1834 \ the
Bank of Leipzig, in 1839 ; the Communal Bank of Breslau,
in 1848; the Communal Bank of Chemnitz, in 1848 ; the
Bank of United Deposits of Berlin, in 1850; the Bank of
Rostock, in 1850; the Bank of Weimar, in 1853 ; the Bank
of Gera, in 1854 ; the Bank of Frankfort, in 1854; the Bank
of Southern Germany, at Darmstadt, in 1855 ; the Bank of
Cologne, in 1856 ; the Bank of Magdeburg, in 1856 ; the Pri­
vate Bank of Lubeck, in 1856 ; the Territorial Bank of Hesse,
at Homburg, in 1856 ; the Bank of Hanover, at Hanover,
in 1856 ; the Private Bank of Gotha, in 1856 ; the Bank of
Central Germany, at Meiningen, in 1856 ; the Bank of Lower
Saxony, at Buckebourg, in 1856; the Bank of Dantzig, in
1857 5 the Bank of Pozen, in 1857 ; the Bank of Brunswick,
in 1857; the Commercial Bank of Lubeck, in 1865 ; the
Bank of Saxon}% at Dresden, in 1865 ; the Territorial Bank
of Gorlitz, in 1866 ; the Bank of United Deposits, at Leipzig,
in 1867 ; the Territorial Bank of Oldenburg, in 1868 ; the
Bank of Baden, at Mannheim, in 1870 ; and the Bank of
Wurtemburg at Stuttgard, in 1871. The Prussian banks in
this list are those at Stettin, Breslau, Cologne, Gorlitz,
Magdeburg, Dantzig, and Pozen, and the Bank of United
Deposits at Berlin.
Many of these banks were born of the financial necessities
of the governments by which they were chartered and were
under obligations to aid the public Treasury. The Bank of
Homburg was required to loan to the government up to a
maximum of 100,000 florins ($42,000) at three per cent.; the
Bank of Gotha was required to advance to the Treasury
a maximum sum of 200,000 thalers ($150,000) at four per



cent. ; the Bank of Bremen was required to loan a maximum
of 200,000 thalers, and the Bank of Buckebourg was under
obligations to make advances to the amount of 400,000
thalers without interest, on the condition that the government
deposit public securities paying an interest of four per cent.1
The State exercised a more or less complete control over all
these local banks, in some cases appointing the officials and
in others limiting its action to inspection and suggestion.
The Banks of Bremen and Frankfort were among those en­
joying comparative freedom, being subject only to public
control when it was judged desirable.
The operations of these banks before 1875 consisted, like
the operations of the Bank of Prussia, in the discount of
commercial paper, the negotiations of foreign and domestic
bills of exchange, advances upon public stocks and the pre­
cious metals and in some cases upon mortgages, and the
pledge of securities and property. The building of railways,
the increased productive power of the community, and the
consequent increase in capital, brought a rapid extension of
business to the German banks during the ten years before
they become subordinate to the German Imperial Bank.
The aggregate commercial discounts of all except the Bank
of Prussia increased from 126,629 in number and 693,420,537 marks ($167,000,000) in amount in 1867 to 535,302 in
number and 2,797,759,142 marks ($675,000,000) in amount
in 1874. The management of the local state banks was for
the most part prudent and conservative and they were doing
a safe and profitable business when they were arrested in
their growth by the policy of consolidation. Most of them
had branches in the neighboring towns and cities, reaching
a total of nearly fifty establishments besides the parent banks.
They were required by the laws of most of the states to set
aside a portion of their profits as a reserve fund and this fund
increased from 12,270,712 marks ($3,000,000) in 1867 to 34,332,457 marks ($8,200,000) in 1875.
The aggregate circulation of the banks outside the Bank
1 Noel, I., 263.



of Prussia was 181,635,305 marks ($45,000,000) in 1867, 242,502,653 marks in 1869, 432,799,730 marks in 1872 and 487,020,519 marks in 1874. The circulation of the Bank of
Prussia on the latter date was 838,422,000 marks, making
a total bank-note circulation for all the states of Germany
of 1,325,442,519 marks ($320,000,000). The banks showing
the largest circulation in 1874 were those at Dresden, 99,727,440 marks ; at Mannheim, 51,901,428 marks ; at Darmstadt,
46,327,015 marks ; at Frankfort, 45,208,833 marks ; at Leip­
zig, 28,464,069 marks; at Stuttgard, 25,477,028 marks; and
at Meiningen, 24,000,000 marks.
The narrow limits of many of the German states and their
commerce with each other led to the mutual circulation of
their bills in spite of the absence of any legal tender quality
even within the limits of the state where they were issued.1
The banks of some of the smaller states took advantage of
the wide circulation of their bills, and the lack of require­
ments for prompt redemption, by swelling their issues and
by various artifices for getting the notes into circulation at
distant points. Though legally redeemable in coin on de­
mand, the small denominations of the notes and the diffi­
culty of getting them to the counters of the issuing banks
threatened to create a practically irredeemable and redundant
currency, which would expel coin and bring the country to
a paper basis. “ They might without difficulty have reme­
died this abuse,” says M. Courcelle-Seneuil, “ by means of
a system of mutual exchange and liquidation among the
banks themselves, such as is practised in Scotland, and the
principal banks had in their hands every power to enforce
this exchange upon the banks of the small states.” a But
other means of reaching the difficulty were adopted, and the
initiative was taken by Prussia, which passed an act on May
14, 1855, forbidding the circulation within her limits of for­
1 The legal tender quality was not given by law to the notes of any
of the German banks and was expressly disclaimed by the laws in­
corporating the banks of Pomerania, of Frankfort, of Homburg, of
Meiningen, and of the United Deposits at Berlin.—Noel, I., 284.
2 Traiti des Opirations de Banque, 366.


h i s t o r y o f m o d e r n b a n k s o f is s u e .

eign bills payable to bearer, without interest, of a value
below ten thalers. Saxony took similar action on July 8,
1855, and the small states of Thuringia concluded a conven­
tion January 21, 1856, by which they forbade the circulation
of foreign bills to bearer without interest and below ten
thalers in denomination, with the exception of the bank
drafts of Prussia and Saxony. The Grand Duchy of Baden
forbade the circulation of any foreign bills on December 24,
1855, except those issued in Prussia, Bavaria, and Nassau
and at Frankfort. Prussia extended the scope of her pro­
hibition on May 25, 1857, to foreign bills except those
below ten thalers issued by the governments of Saxony,
Thuringia, and Anhalt. A Saxon ordinance of May 18,
1857, imposed a fine of fifty thalers upon the holders of for­
eign bills below the denomination of ten thalers except
upon banks of issue which carried on a special service of
The history of the circulation of these state bills outside
of the limits of the issuing state suggests an interesting
comparison with the circulation of the notes of the depart­
mental banks of France and of the State banks of the United
States. The banks were not in any of these cases closely
linked together by clearing arrangements and the means of
communication and the promptness of commercial transac­
tions were not such as to result in the prompt return of the
notes to the issuing banks for redemption. It does not
appear that this resulted in a great inflation of the note
issues, even in the United States,2 but it naturally aroused
fears that the banks might not be able to redeem their notes
promptly on presentation and that they might fall below par
1 Noel, I., 288.
2 M. Wolowski, who is one of the warmest champions of monopoly
of note issues, speaking of the situation in 1863, says: “ Twenty
banks issuing 45,000,000 thalers ($33,000,000) for thirty-two states
whose population exceeded thirteen millions, is not too much as to
quantity; it is too much because of the embarrassment which is
caused by this diversity of monetary signs.”—La Question des
Banquesy 404.



in coin. The situation in France differed from that in Ger­
many and the United States in the respect that the notes of
the departmental banks were made legal tender after the
revolution of 1848 within the department where they were
issued, but were forced into an inferior position by the notes
of the Bank of France, which were legal tender throughout
the republic. The circulation of the bank-notes of Germany
and the United States without the legal tender quality might
have been maintained at par with coin (from which they do
not seem to have departed in Germany) under a system of
closer union among the banks and prompter means of com­
The government of Prussia took action as early as 1846
towards the centralization of the banking system, by the
ordinance of October 5th, which provided that the provin­
cial banks of the Kingdom should cease their operations
when the Bank of Prussia should lose its special privileges.
Another act, which indicated the purpose of the government
to keep matters in its own hands, was the law of May 7,
1856, renewing the privileges of the Bank of Prussia, but
reserving to the executive power the right at the end of 1871
and every ten years thereafter to dissolve the bank and re­
turn the capital to the shareholders. This provision neces­
sarily exposed the other banks, under the ordinance of 1846,
to dissolution as banks of issue at the end of the same period.
The law remained in this condition until the reorganization
of the North German Confederation under the headship of
Prussia in 1867. A provision was then incorporated in the
constitution of North Germany confiding to the Federal As­
sembly exclusively the regulation of banks of issue. The
power remained in abeyance for a few years, when the law
of March 27, 1870, reserved to the Confederation the right
of granting the power of issue or of increasing the monetary
circulation. The law stipulated that the renewal of the
privilege of issue should not henceforth be granted except
upon the condition that it might be revoked at any time
upon preliminary notice of one year. It was also provided
that where a bank possessed the right of issue for a definite



term, subject to preliminary notice of withdrawal, this notice
should be regarded as having been given.
The monetary system of Germany called for radical re­
form, without regard to the banking policy adopted, in order
to facilitate exchanges among the German states and with
foreign countries. The coins were of such different denomi­
nations and degrees of abrasion that heavy exchange charges
were levied on the borders of every little state and possible
profits on merchandise were almost neutralized by this loss.
Several conventions to simplify the monetary system were
held before the unification of the Empire, one of the latest at
Vienna on January 24, 1857. The basis of an agreement
was then prepared abrogating the old systems and adopting
one based upon the new pound of five hundred grams which
was in use in several continental countries. Germany was
divided by this convention into three zones. Silver was
treated as the single standard of value and was to be coined
into two forms,—the thaler, equivalent to a florin and threequarters, and the florin, worth four-sevenths of a thaler.
It was proposed to coin thirty thalers out of a pound of five
hundred grams of fine silver for use in the Northern States
and fifty-two and a half florins out of a pound for use in the
South. Other silver pieces of one and two thalers were to
be coined with special devices, under the name of the union
thaler ( Vereinthaler), for trade between North and South
Germany, and were to be received by public depositories as
lawful money.
Silver constituted the principal metallic stock of Germany
and of the cash resources of the local banks up to the time
of the monetary reform. Gold figured somewhat in the cir­
culation, but it was not a legal tender.1 The gold pieces,
coined under the convention of 1857 according to mint re­
1 Mr. Shaw declares that the convention in 1857 had a part of its
motive in the wish by the German States “ to protect that part of
their currency system which was threatened by bimetallic law,” and
that France drew gold from Germany as well as from California and
Australia as the result of the change in the ratio .—History of Cur­
rency, 205-11.


gulations, were to be received at a valuation in standard sil­
ver money known as ‘‘ the bank rate, ’’ which was fixed in
advance for six months and was never to be higher than the
mean quotations in the market. The character of the circu­
lating medium was further complicated by a circulation of
government paper money, which was issued by every Ger­
man state except the principality of Iyippe and the three free
cities of Hamburg, Bremen, and Iyubeck. The adoption of
the gold standard was first formally recommended by a com­
mercial convention of one hundred and nineteen German
cities which sat at Berlin between October 20, and October
23, 1868.1 A resolution was presented by Dr. Adolph Soetbeer, who was the official reporter on the subject of the
standard at an earlier session held in September, 1865, de­
claring that c<a monetary unity, and at the same time such a
general monetary reform as befits the age, can be brought
about by the adoption simultaneously by all the German
States of the single standard with full application of the
decimal system, in pursuance of the principles recommended
by the International Monetary Conference of Paris in its re­
port of July 6, 1867. ” This resolution was adopted, includ­
ing the recommendation of a unit of value equivalent to the
gold five-franc piece, and the public authorities were recom­
mended to put it in force not later than January 1, 1872, when
the new sjT of weights and measures already adopted by
the North German Confederation took effect.2
The payment of the great war indemnity by France gave
Germany the opportunity to carry out the recommendations
of her leading economists, that she adopt the gold standard.
The direct payments in French gold were only 273,003,058
francs ($52,600,000), but the power given the German gov­
ernment to draw the proceeds of bills of exchange upon
London and Paris gave them access in a large measure to the
1Appendix to American Report on International Monetary Confer­
ence of 1878, Sen. Ex. Doc. 58, 45th Congress, Third Ses., 727.
2M. Allard, the honorary director of the Belgian mint, declares that
silver was “ academically demonetized ” by the vote of the Paris Con­
ference.—La Crise Agricole et Monetaire, 41.



gold of the world. The German government kept an ac­
count with the Iyondon Joint-Stock Bank which was believed
to run as high as ,£4,000,000. ($20,000,ooo)1and by watching
the market were able to rapidly carry gold into Germany.
The law establishing a uniform coinage (Act of December
4, 1871) did not adopt the five-franc piece as the unit, as
recommended by the convention of 1868, but adopted a unit
called the mark, equivalent to one-third of a Prussian thaler,
and established the ratio of fifteen and a half to one between
gold and silver. The provision of the treaty of Vienna,
providing for the coinage of the union thaler of silver, was
repealed. Gold legal tender coins were provided for, but the
Imperial gold standard was not fully established until the
coinage act of July 9, 1873, when it superseded all local
standai1 and made the monetary unit the mark of gold.3
The Imperial silver coinage was to be carried on on govern­
ment account, and limited to ten marks per capita, and was to
be a legal tender for only twenty marks between individuals,
but payable in any sum to the government. The new sil­
ver coins were made mere token coins, by reducing the weight
of the fine silver eleven and one-ninth per cent, below the
full weight at the ratio of fifteen and a half to one and coin­
ing a pound of fine silver into one hundred marks and a
pound of fine gold into 1395 marks.
One of the interesting incidental results of the new coinage
laws was the termination of the career of the old Bank of
Hamburg, which had for more than two and a half centuries
been carried on on the principles of the Bank of Venice and
the Bank of Amsterdam. The accounts of the bank were
kept in marks banco, representing a bank credit of the uni­
form value of half a thaler (37^ cents), and its notes were
redeemable in silver. The Bank of Hamburg, founded in
1619, was the last survivor of the medieval banks, created
1 Bagehot, Lombard Street, Works, V., 199-202.
2 The exact equivalent of the mark in American gold coin is twentythree and eight-tenths cents, but for convenience of computation in
dealing with large figures it is treated in this work as substantially
equal to a quarter of a dollar.



for the purposes of foreign commerce. Accounts could be
opened only by a Hamburg citizen or corporation and were
transferred only upon his appearance in person or by attor­
ney with a transfer order. The principle upon which the
bank was conducted was the granting of a credit on the
books for the silver or gold deposited. No loans were made
and no notes or other liabilities were created beyond the
amount of coin and bullion on deposit. So faithfully was
this rule adhered to that when the French on November 5,
1813, took possession of the bank they found 7,506,956
marks in silver held against liabilities of 7,489,343 marks.
They removed a large part of the treasure before the free­
dom of Hamburg was re-established on June 1, 1814, but the
bank resumed business with unimpaired credit and the
thefts of Napoleon’s forces were made good in 1816 by a
transfer of French securities. Modem banking methods
were gradually introduced into the Bank of Hamburg and a
capital was accumulated of about 1,000,000 marks ($250,000)
in addition to the buildings. The bank survived the storm
of the crisis of 1857, only to fall under the decrees establish­
ing the new German monetary system, which ordered the
bank to liquidate its accounts in fine silver by February 15,
1873. The latest reference to its existence is found in the
proceedings of the Hamburg Senate on October 13, 1875,
declaring their purpose to sell to the Bank of Germany for
900,000 marks the buildings of “ the venerable institution
which had performed such great services to German trade.”1
The accumulation of a stock of gold was begun by the Im­
perial Bank and the government, and the purchases of gold
by the bank, from January 1, 1876, to the end of 1893,
amounted in American money to $434,890,067. The coin­
age of Imperial gold coins from 1872 to the close of 1893
reached 2,737,790,915 marks and the aggregate coinage of
silver 484,048,609 marks. The sales of silver by the govern­
ment up to March 31, 1893, represented a coining value of
672,862,729 marks, but the amount actually received was
1 Palgrave, Dictionary o f Political Economy , I., 105.



574,055,532 marks, showing a loss of 98,807,197 marks.1
The bulk of the sales were made before May 16, 1878, before
the great decline in the price of silver, and the highest price
per kilogram was obtained in the period of the largest sales,
between September 30, 1876, and September 30; 1877.* The
profit on the gold, silver, and subsidiary coinage, taking
these coins at their face value, was 96,380,330 marks, and
the cost of recoinage added to the loss on silver was 127,894,218 marks, showing a net loss of 31,513,888 marks.
The banking system of the Empire was unified in a meas­
ure by the provisions of the law of July 9, 1873, that bank
bills should be withdrawn from circulation before January 1,
1876, if their value was not declared in Imperial marks, and
that the smallest notes should be for 100 marks ($23.80).
The work of unification was completed, so far as it was
possible to complete it, by the Imperial law of March 14,
1875, which was supplemented by the Prussian law of
March 27th and a convention between Prussia and the Em­
pire on May 17th and 18th following. The Royal Bank of
Prussia was directed to cease its operations on December 31,
1875, and to transfer its rights and privileges to a new bank,
known as the Bank of the Empire (.Reichsbank). The gov­
ernment of Prussia was allowed to withdraw its capital of
1,906,800 thalers in the old institution and the half of the
reserve fund belonging to it. The Prussian government was
further compensated for the surrender of its rights in the
bank by an indemnity of 15,000,000 marks ($3,750,000),
paid from the Treasury of the Empire, and a pledge that
1 The equivalent for these sums in American money, as given in
the American translation of the Report of the Berlin Silver Commis­
sion of 1894, a re : Gold coinage, $651,594,221; silver coinage, $115,203,549 ; face value of silver coins sold, $160,141,329 ; price received,
$136,625,216 ; loss on sales, $23,516,113 ; net loss after deducting
profits, $7,500,308.—Sen. Mis. Doc. 274, pt. I., Fifty-third Congress,
Second Session, 33-36.
2 The sales during this period were not far short of half of the
whole, being 1680.4 kilograms and representing a face value of 302,500,000 marks. The average price of silver in 1876 was $1,156 per
ounce and in 1877, $1,201 per ounce.



the new bank should continue the annual payment of 621,910 thalers ($465,000) from 1876 to 1925 which had been
agreed upon by the Bank of Prussia in 1856.1 The Imperial
government agreed to be responsible for this annuity in case
the privileges of the bank were not continued. The share­
holders of the Bank of Prussia were given the option of
receiving back their capital in cash, in accordance with the
pledge of the Prussian law of October 5, 1846, or receiving
shares of equal face value with their existing holdings in the
new Imperial Bank. The new bank on these conditions
succeeded to all the rights and obligations of the Bank of
Prussia. The Chancellor of the Empire was authorized to
acquire the bank shares which should be exchanged for the
shares of the Bank of Prussia and to issue interest-bearing
Treasury bonds maturing not later than May 1, 1876, to the
amount of the shares not issued, in order to complete the
capital of the new institution. The capital was fixed by law
at 120,000,000 marks and was divided into 40,000 shares of
3000 marks ($750) each, of which 19,919 shares replaced the
shares of the Bank of Prussia which the holders had chosen
to convert; 20,000 shares were placed by public subscrip­
tion, and 81 by means of sales on the Bourse.
The organization of the Imperial Bank made it entirely a
private institution as to ownership, but essentially a public
one in its management. “ In fact,” says M. Octave Noel,
“ the establishment is closely bound to the state and is only
able to move, think or act when the state manifests in some
manner its presence and affirms its control.” The official
control over the bank is confided to a council of curators,
composed of the Chancellor of the Empire, who is President,
and four other members, one named by the Emperor and the
other three by the Federal Council. The direction of the
policy of the bank is so completely under the orders of the
Chancellor that in case of his absence or impeachment the
presidency of the Council is vested temporarily in an official
named by the Emperor. The Chancellor or his substitute
1 Noel, I., 248.



directs the entire administration and issues the instructions
to the council of direction, to the branches and to the em­
ployees of the bank. The committee of curators meet every
three months and examine reports regarding the bank’s
condition and the operations which are being carried on.
The administrative authority is vested in a directorate com­
posed of a president and a number of members named for
life by the Imperial government upon the nomination of the
Federal Council. The official force of the bank, although
paid from the funds of the institution, are subject to the
same obligations and enjoy the same privileges as the public
employees of the Empire. Honors and pensions are ac­
corded them, benefits are voted to the families of deceased
employees, the number of posts and the salaries are included
in the Imperial budget, and the accounts are subject to the
control of the accounting officers of the Empire. The em­
ployees of the bank, moreover, are forbidden by law to hold
stock in the institution.
The influence of the private owners is exerted through a
central commission of fifteen members and fifteen alternates,
elected by the general assembly of the shareholders from
their own numbers. These commissioners are required to
possess in their own right not less than three shares, to have
their domicile within the Empire, and nine members and nine
alternates are required to be residents of Berlin. A third
of the board is elected every year and the members are
eligible for re-election. Many of the business details of the
management of the bank are remitted to this central com­
mission, so long as their course does not meet the disap­
proval of the Imperial authorities. They are required to
examine at least each month the weekly reports, to inspect
the deposit accounts, and to determine what proportion of
the bank funds shall be used in advances and in the purchase
of paper, what the rate of discount shall be, and what ar­
rangements shall be made with other German banks. A
still smaller body of three members of the central commis­
sion is charged with the daily supervision of the bank’s af­



fairs and they are authorized to sit at all meetings of the
directorate with consulting powers.
The note circulation of the Imperial Bank is based largely
upon the English banking act of 1844, but with an impor­
tant modification which adds greatly to the ability of the
bank to provide accommodation in times of stringency.
There is a fixed limit of authorized circulation, against which
cash or its equivalent must be held in the proportion of onetliird, and issues beyond this limit must be covered in cash
for the full amount. The cash reserve of one-third in the
one case and one hundred per cent, in the other may consist
of money having currency in Germany, Imperial Treasury
bonds, gold bullion, or foreign gold coin. The notes, there­
fore, are issued against the general assets of the bank, which
remain wholly within its own control and are not set aside
by specific designation or prior lien for the security of the
note holders. The law, says Prof. Dunbar, “ has simply
provided by suitable measures that the affairs of the bank,
including its issue of notes and the money and securities
held by it, shall meet certain tests of soundness, believing
that both the ultimate solvency of the bank and the prompt
payment of its circulation are thus made secure.”1 The
limit of authorized circulation was fixed by the law of March
14, 1875, at 250,000,000 marks ($60,000,000) but the same
law provided that when any existing bank of circulation
should surrender its right, either by liquidation or by refusal
to accept the conditions imposed by the new law, the amount
of the circulation might be assumed by the Imperial Bank.
Seventeen banks surrendered their right to issue notes soon
after the adoption of the new system and their action added
26,085,000 marks to the authorized circulation of the Im­
perial Bank. This was afterwards increased to 42,117,000
marks.2 The two-thirds of the authorized circulation not
covered by the cash reserve are required to be covered by
1 Theory and History of Banking, 195.
2 Raffalovich, Marche Financier en 1893-4, 67.



bills of exchange maturing in not more than three months
and bearing not less than two solvent names.
The novel feature of the German system of circulation is
the authority given to the Imperial Bank to exceed the statu­
tory limit of note issue without metallic security, upon the
payment of a tax at the rate of five per cent, per year upon
the excess of circulation. Weekly reports are required by
the government and upon the excess of circulation shown
above the limit a tax of per cent, is at once assessed, rep­
resenting approximately the tax for a single week at the rate
of five per cent, a year. This provision permits increased
issues when there is stringency enough in the money market
to carry current discount rates above five per cent, but drives
the new notes promptly out of circulation when the discount
rate falls. The operation of the rule, which has been several
times availed of by the Imperial Bank and by other German
banks, has proved salutary in averting such stringency as
has been felt in England under the Act of 1844, while it has
kept the circulation within the limits set by the needs of
The local banks of Germany were brought by the law of
1875 under the same rules as the Imperial Bank and drastic
regulations were enforced to compel them to comply with the
new law or abandon the issue of circulating notes. The
purpose of the new legislation, to bring the control of the
bank-note circulation as soon as practicable into the hands
of the Imperial Bank, was indicated by the declaration that
the power to issue bank-notes or to increase circulation be­
yond the limit already authorized by the various states should
be granted only by a law of the Empire. Prussia was almost
supreme in the Federal Council and there was little likelihood
that she would consent to any law increasing the circulation
of the local banks. The long duration of the privilege ac­
corded to some of them was cut off by a provision that their
privileges should be subject to revocation on January 1, 1891,
1 The example of Germany was followed in this provision by AustriaHungary and Japan in the revision of their bank charters.



and every tenth year thereafter, upon one year’s notice and
without indemnity, if they accepted the power of note issue
involved in the new law. Those banks which were not dis­
posed to accept the new conditions were dealt with in a man­
ner similar to the departmental banks of France after the
revolution of 1848. They were not deprived of the privilege
of issuing notes, but they were forbidden by Article 42 of the
law to carry on banking operations, outside the limits of the
state which had given them the privilege, by means of
branches or agents or to hold shares in other banks. An­
other provision (Article 43) declared that “ The notes of
banks having the privilege of note issue at the time of the
promulgation of this law, shall not be employed in payments
outside the state which may have granted them the privilege.
The exchange of these notes, however, for other bank-notes,
paper money, or specie is not subject to this prohibition.”
Banks which saw fit to submit to the new conditions were
treated somewhat more favorably, pending the extension of
the branches of the Imperial Bank throughout the Empire.
They were governed by Article 44 of the law and were sub­
ject to the same conditions, as to the classes of securities
dealt in, the character of the commercial paper held, the
proportion of cash reserve to circulation and the payment of
benefits to the state, as the Imperial Bank. They were re­
quired to hold security for their circulation to the amount of
one-third in money having currency in Germany, in Imperial
Treasury bonds, in gold bullion or foreign gold coin. The
remaining two-thirds of the circulation was required to be
protected by bills of exchange running for not more than
three months and bearing three endorsements or not less than
two names of well-known solvency. They were required to
exchange their notes for German money having currency at
Berlin, or Frankfort, and redemption must not be delayed
beyond the morrow of the presentation of the note.1 Banks
accepting these conditions obligated themselves to receive at
their face value, in branches established in cities of more
1 Noel, I., 320-23.

than eighty thousand inhabitants and at the parent bank
the notes of German banks whose circulation was authorized
throughout the Empire and which wT redeemable in coin
on demand. Bills on one bank thus received by another
could be used only in the settlement of balances with the
bank of issue, employed in payments within the territory of
the issuing bank or presented for redemption. Banks de­
siring to conform to the requirements of Article 44 were re­
quired to present to the Chancellor of the Empire the evidence
that their statutes conformed to the law and that the locality
chosen for the exchange of bills (Berlin or Frankfort) posessed a branch ready for actual operation.
Much feeling was aroused among the German banks upon
the passage of this law and fifteen of the thirty-two outside
the Bank of Prussia promptly abandoned their right to cir­
culation, and became mere private banks of discount and
deposit, rather than conform to all the requirements of the
new law. The Bank of Brunswick took the bolder course,
which it was believed no bank would be able to maintain,
of refusing to comply with Article 44 and continuing its cir­
culation under the limitations of Articles 42 and 43. The
Bank of Brunswick, therefore, continued to issue bills which
circulated within the limits of the duchy and braved the ef­
forts of the Bank of Prussia to force it into submission. The
Prussian Bank refused to receive the paper of the Bank of
Brunswick and upon the failure of this device had orders
issued to the postal savings banks not to receive the notes
of the bank on deposit. The latter measure threatened to
arouse so much of the old separatist feeling in Germany that
it was abandoned by direction of the Chancellor. Frederick
William of Brunswick died during the latter part of 1884,
and Prince Albert of Prussia, the nephew of the German
Emperor, was elected Duke of Brunswick by the Diet on
October 21, 1885. The close relations thus established be­
tween Brunswick and the Imperial government soon led to
the compliance of the Bank of Brunswick with the provi­
sions of Article 44.
The purpose to clear the field for the circulation of the Im­



perial Bank was indicated by a law of April 30, 1874, which
required the retirement of the paper money issued by the
various states not later than July 1, 1875. The Imperial
government, in order to promote this policy, was authorized
to issue Treasury bonds to the amount of 120,000,000 marks
($30,000,000) and to apportion them among the states ac­
cording to population. The paper money in circulation was
61,374,599 thalers ($45,000,000), and it was not distributed in
any such even ratio as the new bonds. The law, in contem­
plation of this situation, authorized the Imperial Treasury to
advance to states which needed an additional allowance
to retire their paper money a sum in Treasury bonds equal
to two-thirds of the excess of notes above the original ap­
portionment of bonds. These bonds were to be receivable
by the Imperial Treasury and were to be convertible on
demand into metallic money. The advances of bonds in
addition to the apportionment of 120,000,000 marks, were
54,919,941 marks, of which Saxony received 19,013,441
marks; Bavaria, 14,534,975 marks; Baden, 4,577,449
marks; Wurtemberg, 3,309,651 marks; Hesse, 3,250,514 marks; and the other states less than 2,000,000 marks
each. Prussia received no additional advance, but her share
of the original allotment was 72,145,494 marks. Oldenburg,
Lippe, Lubeck, Bremen, Hamburg, and Alsace-Lorraine
received no extra advance.
The sixteen banks which decided in 1875 to accept the
federal regulation of their circulation and to continue to
issue notes were, besides the Imperial Bank and the Bank
of Brunswick, the Municipal Bank of Breslau, and the
banks of Magdeburg, Dantzig, the Grand Duchy of Posen,
Hanover, Frankfort, Bavaria, Saxony, United Deposits at
Leipzig, Chemnitz, Wurtemberg, Baden, Southern Ger­
many, and Bremen. Provision was made in the new law
for a new bank in Bavaria, with which two existing banks
were consolidated, and which was given special permission
to issue circulating notes to the amount of 70,000,000 marks.
The authorized uncovered circulation of these sixteen banks
was 111,125,000 marks, of which the Bank of Bavaria was



originally entitled to 32,000,000 marks, the Bank of Saxony
at Dresden to 16,771,000 marks, the banks of Frankfort,
Baden, Wurtemberg, and of Southern Germany to 10,000,000 marks each, and the others to smaller amounts. The
absorption of the issues of these banks by the Imperial Bank
has proceeded rapidly in recent years. Only eight banks of
circulation remained in existence in German}^ at the close of
1891, outside the Imperial Bank. They included the larger
of the banks named above, and their aggregate capital was
130,000,000 marks ($32,000,000). The circulation of the
local banks fell from 200,300,000 marks ($50,000,000) in
1883 to 192,400,000 marks in 1890, but their metallic reserve
increased from 111,200,000 marks to 112,600,000 marks.1
Four more banks surrendered the right of note issue within
the next sixteen years, and at the beginning of 1908 only the
following institutions remained as competitors in this field
with the Imperial Bank: Bank of Bavaria, with an author­
ized issue of 32,000,000 marks; Bank of Saxony, 16,771,000
marks; Bank of Baden, 10,000,000 marks; Bank of Wurtem­
berg, 10,000,000 marks.
The principal items in the accounts of the Imperial Bank
since its creation are shown in the following table2:

I 876
I 878








(In millions of marks.)



















1Bulletin de Statistique> Nov., 1891, XXX., 542.
2These figures down to 1900 are taken from Die Reichsbank, 18/6jpooy 268, seq.




1908 1



1, 478.7



(In millions of marks.)



74. r

D E P O S IT S ,
AC C O U N T S, E T C .




The first issues of the Imperial Bank subject to the five
per cent, tax occurred in December, 1881, and were repeated
in September and October, 1882; in December, 1886; and
three times in the latter part of 1889, when the excess above
the limit ran as high as 109,477,500 marks ($26,000,000).
The limit was exceeded in 1890 by 26,250,000 marks ($6,500,000), but at the end of 1891 the reserve had been so increased
that the note issues were 101,407,000 marks below the limit.
This margin was reduced to 16,764,000 marks ($4,000,000)
at the end of 1892, but there was only one week of excess
issues in 1893, none in 1894, and three weeks in 1895.
New conditions began to develop with the expansion of
German trade in 1896. The number of weeks in which
taxes were paid in that year was six; in 1897, nine; in 1898,
sixteen; in 1899, twenty; and in 1900, twenty. The amount
paid in taxes on this excess circulation, which had never
been higher than 338,627 marks ($81,000) before 1896, at­
tained 464,801 marks in that year; 767,916 marks in 1897;
1,927,401 marks in 1898; 2,847,294 marks in 1899; and
2,517,853 marks in 1900, making total payments in five
years of 8,525,265 marks ($2,025,000). The reason for this
was not found in any special pressure in the market for
1June 30.



capital, except perhaps in 1900, but in the fact that the
growth of business in Germany required a larger volume
of circulating medium.
In the revision of the charter of the bank by the law of
June 7, 1899, the new conditions were recognized. The
government proposed an increase in the authorized un­
covered circulation to 400,000,000 marks, and this limit was
raised by the Reichstag to 450,000,000 marks ($107,000,000).
Soon after these limits became effective, on January 1, 1901,
the Frankfort Bank (in March, 1901) and the Bank of South
Germany (in June, 1902) surrendered their fixed issues of
10,000,000 each to the Imperial Bank, and in 1906 a third
institution, raising its total authorized or “ uncovered” issue
to 472,829,000 marks ($112,500,000).
The object of this elevation of the limit of authorized
circulation was to avoid imposing an unwarranted burden
of taxation upon the circulation when it was only at the
amount required by normal conditions. The effect was re­
flected in the statement of excess issues as soon as the new
limit took effect, which was at the beginning of 1901. The
limit of untaxed circulation was exceeded during only five
weeks in that year; three weeks in 1902; seven weeks in
1903; eight weeks in 1904; nine weeks in 1905; and seven­
teen weeks in 1906. The amount of tax paid was only
352,684 marks ($83,800) in 1901, and prior to the pressure
of 1907 reached a maximum under the new order of things
of 3,692,350 marks ($880,000) in 1906.
The highest amount attained by the excess circulation
prior to the operation of the new limit was 371,233,061
marks in the week ending September 30, 1899. It was this
September week of the autumn crop movement and the close
of the financial quarter which almost invariably showed the
largest issues. Even the outbreak of the war between Russia
and Japan in 1904, which caused a temporary panic on the
bourses of Berlin and Paris, did not compel the issue of any
taxed circulation until the quarter-end on March 31st, when
the amount was 166,126,902 marks, while the limit reached
on September 30th, after the peace, was 305,038,527 marks,



and the maximum of 1905 on the same date was 450,282,987
marks ($107,000,000).1
The crisis of 1907, however, subjected the Imperial Bank
to a severe test, for the pressure felt in Germany was not
merely a reflex of that in the United States, but was due
also to speculation and excessive demands for capital at
home. Not only was the discount rate of the bank kept
at seven and a half per cent, from November 8, 1907, to
January 15, 1908, but remained at six per cent, until March
7th, and at five per cent, far into the summer, after the Bank
of England rate had fallen to two and a half per cent. Even
these high rates barely kept the gold reserve intact, and
caused doubts to spread of the wisdom of the law imposing
the tax of five per cent, on the uncovered circulation above
the legal limit. The annual report for 1907 showed that the
average metallic reserve of the year had shrunk to 843,340,000
marks ($200,300,000) as compared with 890,965,000 marks
in 1906 and 972,959,000 marks in 1905. Even this degree of
security had been maintained only at heavy cost. The aver­
age discount rate of 1907 had been 6.033 per cent.; circulation
subject to the special tax had been outstanding twenty-five
weeks, or for practically half the year; the week of Decem­
ber 31st witnessed an excess circulation of 625,974,363 marks
($149,000,000); and the tax paid for the year amounted to
5,600,698 marks ($1,350,000).2
If the burden had fallen chiefly upon the bank, it would
have been viewed with equanimity by many elements in the
community, but the tax imposed upon commerce was so
heavy that severe criticisms of the bank and the government
were heard in the Reichstag, which went so far as to demand
a modification of the gold standard and the payment of silver
for notes in order “ to put a silver wall around the gold
1 Raffalovich, L e Marchk Financier en 1905-1906, 428.
2 Bulletin de Statistique, April, 1908, LX III., 476. It was hinted
by the Russian Minister of Finance that the German bank was
compelled to appeal to Russia for a loan o f gold.— London Statist,
January n , 1908, LX I., 76.

treasure.” 1 While the new governor of the bank, Herr
Havenstein,2 declared it to be his unalterable purpose to
maintain the gold standard, the government felt compelled
to take several measures to allay the growing uneasiness.
One of these was the appointment of a commission, chosen
from among economists and representatives of the commercial
classes, to examine into questions relating to the extension
of the bank charter, the increase of the limit of untaxed
issues, the extension of the check and clearing system, and
the methods of drawing gold into the bank from abroad
and from the domestic circulation. * Other measures were
the enactment of a code governing the use of checks and
the increase of the per capita stock of subsidiary silver.
Already the bank, under the sanction of a law of February
20,1906, had begun the issue of notes for fifty marks ($11.90)
and twenty marks ($4.76), in order to draw into the vaults
of the bank an equivalent amount of gold.4 Of these new
notes 139,286,100 marks of the larger denomination and
151,157,180 marks of the smaller were already in circulation
at the close of 1907.5
The rate of discount charged by the Bank of Germany,
including its earlier career as the Bank of Prussia, averaged
barely over four and a quarter per cent, from 1845 to 1900.
The highest average for a decade was 4.60 per cent., from
1865 to 1874, — the period of the wars with Austria and
France,—and the lowest was 3.65 per cent., from 1885 to
1894. These averages, however, do not represent the ex­
treme fluctuations. The rate of nine per cent, prevailed
1 Economiste Europeen,

Jan. 17, 1908, X X X I I L , 69.
2 The new governor in January, 1908, succeeded Dr. Koch who,
after passing through various grades in the old Bank of Prussia and
the Imperial Bank, had been governor of the latter since 1890.—
., December 14, 1907, L X .
, January 18, 1908, L X V I., 122. The first sitting
of the commission was on May 1, 1908. —
May 5, 1908, 1492.
, February, 1906, U X . , 178.
April, 1908, L X III., 178.

London Statist
3 London Economist
4 Bulletin de Statistique
5 Ibid.,

Moniteur des InterUs



for sixty-three days in 1866, and eight per cent, for five days
in 1866, and thirty-two days in 1870.1 Apart from these
instances, there was no higher rate than seven per cent,
after 1866, until the crisis of 1907. The German rate during
the fifty-six years ending with 1900 was higher on the average
by about two-thirds of one per cent, than the rate of the
Bank of England; but this is partly accounted for by the
fact that the rate at Berlin was never below three per cent.,
while for about one-third of the time the rate at London
was two or two and a half per cent.2
Discount rates were high at the Imperial Bank during the
entire three years beginning with 1905. The constant de­
mand for capital throughout the world, and the severe pres­
sure exerted on European markets by high rates in New
York in the autumn of 1905 and again in 1906, compelled all
the European banks to take unusual precautions to guard
their reserves. The average rates at the Imperial Bank were
4.10 per cent, in 1901; 3.12 per cent, in 1902 ; 3.84 percent,
in 1903 ; 4.22 per cent, in 1904 ; 3.82 per cent, in 1905 ; and
5.15 per cent, in 1906. The rate was changed eight times
in 1905 and the year closed with a six per cent, rate, which
never fell below four and a half per cent, in 1906.
On December 18, 1906, the rate was raised to seven per
cent, for the first time since the Boer War and did not fall
below five and a half per cent, at any time during the next
year. This was the rate prevailing when the crisis in the
United States led to a rate of six and a half per cent, on
October 29th, and finally to a special meeting of the Central
Committee which fixed the rate at seven and a half per
cent, on November 8, 1907.
The discount business of the bank is largely that of redis­
count for the large joint stock banks, which have come to
play an important part not only in commercial banking, but
in flotations of securities and corporation financing.3 By
1 Cf, Palgrave, Bank Rate and the Money Market, 157.
2 Ibid., 204.
3 The three largest of these institutions are the Deutsche Bank,
with aggregate resources at the close of 1907 of 1,871,720,000 marks



reason of the fact that much paper is offered for rediscount
only some time after it is drawn, the average maturities held
at the Imperial Bank are well within the legal limit of three
months. The average maturity of all domestic bills, which
in 1876 was twenty-seven days and in 1898 twenty-five days,
was in 1906 only twenty days. The average amount of these
bills was 1480 marks ($352) in 1876, and 1689 marks ($402)
in 1906. Of bills outstanding at the close of the year, the
proportion maturing in fifteen days or less in 1906 was 42
per cent.; those having thirty-one to sixty days to run, 27
per cent.; and those having from sixty-one to ninety days
only 15 per cent.1
The proportion of the metallic reserve kept in gold was
not regularly stated until the revision of the charter by the
law of 1909. The amount at the close of 1894 was 7 H r
448,000 marks ($170,000,000). The competition for the yel­
low metal and the great expansion of trade in Germany
prevented any permanent gain in gold during the next
decade and reduced the average amount held during 1906
to 674,734,000 marks and during 1907 to 633,830,000 marks.
Among the devices adopted to facilitate the importation of
gold was that of exempting advances upon imports of the
metal from interest charges for a stipulated period, which
was extended in March, 1908, to a maximum of six weeks.2
The redemption of notes in coin on demand is required at
the Imperial Bank in Berlin, but may be refused at the
branches when the funds on hand do not justify it.8 The
($456,000,000); the Diskonto Gesellschaft, 850,000,000 marks ($202,000,000) ; and the Dresdner Bank, 1,012,060,000 marks ($240,000,000).
Cf. the author’s Principles o f Money and Banking, II., 283,
1 London Bankers* Magazine, December, 1907, L X X X IV , 700.
2 Moniteur des InUrits Mattriels, March 29, 1908, 979.
3 The report, long prevalent, that the Imperial Bank discriminated
against those seeking to withdraw gold, was denied by Dr. Koch, gov­
ernor of the bank, in the autumn of 1907, who said that the bank
“ pays out gold in unlimited amounts at its central office in Berlin in
redemption of its notes ; but that it does not do this at branches like
those of Hamburg and Bremen, since, in that case, it would have to

bank is obliged to receive the bills of other banks of issue
which have conformed to the law of March 24, 1875, and
where they are established in cities of more than 80,000
inhabitants. Bank bills were not a legal tender until 1909,
and the original charter prescribed that “ there exists no
obligation to accept bank bills for payments which are legally
due in specie, and no such obligation can be established
by the legislation of any state with regard to the banks of
the state.’’
The government took advantage of the extension of the
charter of the Imperial Bank in 1889 to secure a larger share
in the dividends than it had before demanded. The statute
of December 18, 1889, reduced from four and a half to three
and a half per cent, the dividend allotted to the shareholders
before any other allotment. Twenty per cent, of the remain­
ing profits was to be carried to a reserve fund, so long as this
fund was less than a quarter of the capital, and the remainder
was to be shared equally between the shareholders and the
Imperial Treasury until the portion of the shareholders
reached six per cent. Of the profits in excess of six per
cent, the shareholders obtained only a quarter and the Im­
perial Treasury the other three-quarters. The minimum
dividend of three and a half per cent, was to be made up to
the shareholders from the reserve funds when it was not
provided by the annual profits of the bank. The reserve
fund reached the legal limit of one-fourth of the capital in
1891. The old law divided the dividends above four and a
half per cent, equally between the shareholders and the gov­
ernment up to eight per cent. The actual profits under the
old law from 1876 to 1888 were 131,900,000 marks, amount­
ing to 8.46 per cent, annually on the capital. The share­
holders received 94,900,000 marks, amounting to 6.08 per
cent, of the capital and the state received 24,700,000 marks.
Further changes were made in favor of the government by
the revisions of 1899 and 1909. Under both laws, the share­
holders were still allotted three and one-half per cent, in

bear the expense of shipment to those cities.” — Letter in London
Economist, November 9, 1907, L X V ., 1925.

2 16


dividends before the distribution to the state, and after an
allotment to the reserve fund three-quarters of the remaining
profits went into the public treasury and only the remaining
one-quarter to the shareholders. The difference between the
law of 1899 and that of 1909 was that under the former, 20
per cent, of surplus profits after the first dividend to share­
holders was carried to the reserve fund, until this fund should
attain 60,000,000 marks, while under the law of 1909, only
10 per cent, of the excess profits was to be carried to the
reserve fund. The number of shareholders increased from
7,877 at the close of 1894 to 18,799 at the close of 1913. The
number of offices of the bank on December 31, 1894, was 267,
and on December 31, 1913, 487.
One of the important services rendered to German com­
merce by the Imperial Bank, which takes the place in some
degree of the clearing and cheque system, is the transfer of
deposits on current account (Giro Verkehr). By this system
a person in any town where there is a branch of the bank,
wishing to make a payment to some one in another town,
may pay the amount into the local branch of the Imperial
Bank and it will be credited on the following day to the cur­
rent account of the person in whose favor it is deposited.
These transfers are made without charge and it is not neces­
sary that the person making the payment shall have an
account at the bank. The system was devised partly to
facilitate transactions in different parts of the Empire and
1 The lion’s share going to the government under these provisions,
in case of high discount rates and large profits, is illustrated by the
accounts for 1907. Net profits stood at 52,313,651 marks, against
40,262,908 marks in 1906, The three and a half per cent, dividend to
shareholders called for 6,300,000 marks, and the division of the re­
mainder according to law gave 34,510,238 marks to the state and only
11,503,413 marks to shareholders. Even under these conditions their
dividend was at the rate of 9.89 per cent, as compared with 8.22 per
cent, in 1906. I f the tax on excess circulation is taken into account,
the government received 40,110,936 marks ($9,450,000) against 29,164,530 marks in 1906.— Bulletin de Statistique, April, 1908, L X III.,





partly to economize the use of specie. In the latter respect
it has been eminently successful, the proportion paid in specie
having declined from 39.5 per cent, in 1876 to 16.8 per cent,
in 1900.
In two other respects the Imperial Bank has conformed in
recent years to modem methods of giving flexibility to its
resources and strengthening its control over the money mar­
ket. One of these is the accumulation of foreign bills, par­
ticularly those drawn on England, in its portfolio. President
Koch, discussing this policy early in December, 1906, de­
clared that it was the practice of the bank to buy these bills
at times when they were low and to sell them later, when, in
consequence of the higher rate of exchange, there might
otherwise be danger of gold exports.1 The other measure is
that known in England as “ borrowing from the market/'
This process consists in offering Treasury bills for re-discount in the open market, thereby absorbing surplus cash
and preventing a too rapid fall in the open market rate.2
The law of June 1, 1909, did not alter the amount of the
capital of the bank, which had been increased in 1889 to
180,000,000 marks ($43,000,000). Several important changes
were made, however, in respect to the note issue. The total
amount of uncovered notes which the Imperial Bank was
authorized to issue free of tax was increased to 550,000,000
marks ($130,750,000), and the total note circulation for all
banks of issue was fixed at 618,000,000 marks. A new pro­
vision was made for the Imperial Bank, however, by which
the amount of uncovered notes free of tax was permitted
to rise to 750,000,000 marks for the weekly periods at the
end of March, June, September, and December of each
year. This provision was made to meet the special demand
for currency occasioned by the custom which prevails in
1 London Economist, December 8, 1906, L X III., 2006.
2This was done in February, 1908, when 40,000,000 marks in
Treasury bills were thus offered and President Havenstein declared
that the fall in the open market-rate did not represent the real state
of the market.— Berlin letter in New York Evening Post, February 29,



Germany of the quarterly settlement of commercial accounts.
Another important change was the making of the notes of
the Imperial Bank legal tender. It was stated in the report
presented with the bill to the Reichstag that, as bank-notes
were regularly employed, and for large amounts almost ex­
clusively, it was advisable to fix their legal status in order to
avoid difficulties when they were tendered as legal payment.1
At the same time, the notes were made redeemable exclu­
sively in German gold coin, instead of merely in German
currency, which included government notes and silver. A
further obligation was imposed upon the Imperial Bank to
accept at par the notes of the state banks of issue, at its main
office in Berlin, and at branch offices in the larger cities.
The characteristic feature of the policy of the Imperial
Bank during recent years has been the building up of a gold
reserve which should be adequate to the strain of the
political anxieties which prevailed in Europe during and
after the struggle in the Balkans. By bidding high for the
precious metal whenever it appeared in free markets and by
maintaining the discount rate at six per cent, for nearly ten
months (from January ist to October 27th), affording an
average rate for 1913 of 5.885 per cent., the bank increased
its metallic reserves from 1,081,711,000 marks ($257,000,000)
on January 7, 1913, to 1,540,135,000 marks ($366,000,000)
on November 22, 1913. The average gold holdings, which
were 880,083,000 marks ($209,400,000) for 1912, rose to
1,067,596,000 marks ($254,000,000) for 1913, and the process
of gold accumulation was continued well into the following
year. This increase in the gold stock was accomplished in
part by the substitution of small notes for gold drawn
from the circulation. The outstanding issues of notes of
50 marks ($11.90) and of 20 marks ($4.76) were increased
from 367,008,770 marks on December 31,1911, to 681,822,040
marks on December 31, 1913, or by a total of 314,813,730
marks ($74,800,000).
' “ Renewal of Reichsbank Charter,” National Monetary Commis­
Senate Document 507, 61st Congress, Second Session, p. 98.

sio n ,

T H E A U ST R O -H U N G A R IA N B A N K .
The Evils of a Century o f Paper Money— The First Issues of Notes
and the Efforts to Restore Coin Redemption— The Creation of
the Imperial Bank and the Successive Changes in its Charter—
Establishment and Growth of the Hungarian Branch— The Mone­
tary Reform o f 1892 and the New Rate of Exchange— Use of
Modern Devices for Maintaining Stability of Exchange.


HE Austrian Empire has been for a century under the
dominion of paper money, but her monetary history
has differed from that of France with the assignats
and the United States with the Continental money of the
Revolution. The Austrian paper money has been a serious
detriment to the commercial development of the country and
the solidity of business enterprises, but the volume has
never reached the point of absolute worthlessness and re­
pudiation. The effect of the system has been, in the lan­
guage of Professor Sumner,1 “ not like an acute disease ; it
is like an invalid state with occasional fever.” The first
ivssues of paper money seem to have had the same beneficial
effects as the issues of Law’s bank in France and the issues
of £1 bank-notes in Scotland, in stimulating business en­
terprises and affording a convenient circulating medium
where none existed, but the limit was soon over-passed and
the Austrian paper money began its downward course. This
course has been several times arrested by earnest efforts on
the part of the government, only to be resumed when the
necessities of war compelled new issues of paper. The fi1 History o f A merican Currency, p. 323.



nancial history of the Austrian Empire has been a succes­
sion of acts for refunding, for new issues of interest-bearing
and non-interest bearing securities, and new regulations for
the Austrian National Bank until the recital becomes almost
tedious. The government and the bank have been able in
recent years to accumulate a large stock of gold, the paper
money has risen much above the value of standard silver
coins, and unless the country is dragged into some new war
she will soon accomplish the resumption of specie payments
upon a gold basis.
The first important banking institution in Austria seems
to have been created at Vienna by a decree of June 16, 1703,
with a capital of 7,000,000 florins ($3,500,000). It was
created for the purpose of rescuing the government from the
evils of a debased currency which even then existed, but
was authorized to receive the deposits of individuals, like
the similar establishments of Venice, Hamburg, and Amster­
dam. It was essentially a governmental institution and was
formed, like the Bank of Venice, for the funding of the pub­
lic debt, which was to be accomplished by an annual levy
upon the receipts of the Treasury for the security and retire­
ment of the mandates or assegni which the new establish­
ment was authorized to issue.1 The experiment was not
successful. The government was unable in the involved
state of the finances to make the annual payments to which
it was pledged and the mandates issued by the bank were
received very reluctantly into the monetary circulation. The
government finally turned the institution over to the City of
Vienna and it took the name of the Bank of the City of
Vienna. The transformation did not save it. The bank
suspended operations in drafts on private account in order to
devote its entire resources to refunding, but the expected
means for this work failed and the bank went into liquida­
tion at the expense of its depositors and shareholders. No
further attempt was made to establish a national bank for
over a century.
1 Noel, I., 344.

The Austrian Empire found itself in 1761 in one of the
most critical stages of its history. The headship of Ger­
many, which descended to the Hapsburgs from Charle­
magne, was escaping from Austrian control under the potent
influence of Frederick the Great of Prussia, and Austrian
finances were involved in an inextricable confusion in which
the one patent fact of a deficit was all that was not obscure.
The Count of Sinzendorff, one of the leading ministers of the
Empire, noticed that the condition under which loans were
contracted afforded no opportunity to small capitalists to in­
vest. He presented, therefore, a project by wliich bills of
from 20 to 100 florins were issued, with coupons attached
indicating the value from day to day, with interest added at
six per cent. Public depositories were authorized to receive
these bills in payment of taxes and to disburse them to the
creditors of the State at their value at the date of payment,
including accrued interest. M. Noel says regarding the
effects of this issue :

The public were not slow to receive these bills with favor and the
circulation attained immediately such proportions that the govern­
ment felt able to dispense with the provision for interest, which
created a heavy charge upon the Treasury. It decided to substitute,
by a system of exchanges from day to day, paper money without in­
terest for the original interest-bearing bills, which represented a par­
ticular kind of Treasury bonds; and in redeeming the last, in order
to avoid confusion, it issued notes of five, ten, twenty-five, fifty, and
one hundred florins. Public opinion showed itself as favorable to the
employment of the new money as to the circulation of the first, and
the numerous facilities which it gave to daily transactions gave it a
preference even over metallic money.1

The government could not content themselves with the
moderate use of the power in their hands. A second issue
of notes was decreed in 1769 and a third in 1771. Commerce
was expanding, aided to some extent by the convenience of
the new note issues, and the government seized the oppor­
tunity for injecting fresh masses of paper into the circulation.
These excessive issues provoked a panic in 1797, which
1 Banques d 'Emission en Europe, I., 340.



obliged the government to give forced legal tender character
to the paper and even to refuse its conversion into securities
of the consolidated debt. Specie rose to a premium of thir­
teen per cent, in December, 1799, and began to disappear
from circulation, and in 1800 the Treasury attempted to fill
its place by the creation of notes of one and two florins (fifty
cents and one dollar). Austria lost several Italian provinces
as the result of the brilliant campaigns of Napoleon, and the
inhabitants of those provinces who held Treasury bills over­
ran the public depositories with the demand for payment in
specie. The separation between coin and paper constantly
grew wider, until in 1806 paper circulated for only half its
value in silver, which was then the metallic standard. The
Treasury made repeated promises, which could not be kept,
that a part of the annual tax levy should be consecrated to
the reduction of the paper circulation. The need for funds
was so urgent that decrees were issued ordering the trans­
mission to the Treasury of silver vessels, jewelry, the deco­
rations of the churches and the consecrated fonts throughout
the empire, which were paid for in paper money at three
times their specie value.
The peace which followed the French victory at Wagram
in 1809 and the marriage of the Archduchess Maria Iyouisa
with Napoleon afforded an opportunity, which the govern­
ment embraced, to attempt the restoration of order in the
public finances. Delegates from all the provinces were
assembled, but they found almost insuperable difficulties in
the inefficiency and corruption of public officials and the ab­
solute lack of confidence by the business community and the
people in the oft-broken pledges of the government. The
issues of government paper money had steadily increased
from 74,200,000 florins ($37,000,000) in 1797 to 1,064,000,000
florins ($530,000,000) in 1811. The value of the paper had
declined almost in proportion to the increase in the issues.
The price of silver expressed in paper was 118 in December,
1800. It steadily rose to 203 in 1807, leaped to 500 in De­
cember, 1810, with the enormously increased issues of the
three intervening years, and touched 1200 for a time in 1811.



The method adopted in France, when the territorial man­
dates were substituted for the assignats, was followed by
Austria, which declared the reduction of existing issues to
one-fifth of their original value and substituted redemption
notes (Einlosungsscheine), which were called Viennese
money. The decree of February 20, 1811, which put this
reduction in force, was issued with the avowed purpose of
arresting the fluctuations in the paper money, which were
declared to be “ so extremely pernicious, because they
shatter private fortunes, fetter industry, derange all social
relations, and give birth to distrust and jealousy.” 1 The
decree was despatched under seal to the officials in different
parts of the Empire, to be opened at five o’clock in the morn­
ing on March 15, 1811, and the announcement was awaited
by eager crowds who looked to the action of the Emperor to
relieve the public distress. The majority, who held quan­
tities of the paper, went away cursing the government for
the decree. A few, who were believed to have had previous
notice of its contents, had put their affairs in a shape which
left them rich, as some of the purchasers of stock in the
Mississippi Company of John Law had transformed it into
real estate or exported the proceeds in coin while the stock
was still selling at high figures. The government promised
to limit the new issues of redemption paper to just enough
to redeem the outstanding notes in the proposed ratio of one
to five, which would be about 212,000,000 florins. The new
notes were depreciated, however, from the first day of their
issue and fell to fifty per cent, during the year, but rose to
eighty-seven per cent, when the public began to believe that
the quantity would not be increased. The suspension of
new issues was only for a brief period and the necessities of
the last Napoleonic wars forced the issues up to 638,900,000
florins ($319,000,000) in 1816.
The distrust and business paratysis caused by these re­
peated paper issues and the necessity of raising money to
carry on the government led to the creation of the National
1 Leroy-Beaulieu, II., 644.



Bank of Austria. The Emperor, in issuing the imperial
patent for the establishment of the bank, invoked the public
confidence bj' declaring that he had from the first desired
to re-establish order in the standard of value, but that the
violent shocks which had rent Europe asunder had involved
Austria in a series of difficult wars, in which the preservation
and the independence of the monarchy became dearer than
mere questions of finance. He pledged himself to the people,
that no new paper money should be put in circulation and that
the withdrawal of that already out should be confided to a
national privileged establishment.1
A party of capitalists was formed after some delay and the
statutes of the National Bank of Austria received the Impe­
rial approval on July 15, 1817. The bank was accorded for
twenty-five years the exclusive privilege of note issues, was
exempted from the stamp taxes, and was authorized to accept
deposits and discount commercial paper. The entire capital
was to be 110,000,000 florins ($55,000,000) in shares of 1100
florins each, payable 100 florins in silver and 1000 florins in
paper. The bank was able to dispose of only 50,621 shares,
from which the proceeds were $2,600,000 in silver coin and
$29,000,000 in paper. The government took up and de­
stroyed the paper and issued an equal amount of securities
bearing interest at the rate of two and a half per cent. As
the notes were depreciated to one-third of their nominal
value, this amounted to seven and a half per cent, upon the
real capital realized, which was about $12,300,000 ($2,600,000 in coin and $9,700,000 in the coin value of the paper).
The services of the bank in restoring confidence and busi­
ness activity were further compensated by permission to
issue a quantity of notes which the government pledged
itself to accept as cash without the privilege, which was
accorded to individuals, of demanding redemption in coin.
The government showed its good faith by devoting to the
retirement of the paper money a part of the war contribution
paid by France, and 131,829,887 florins were soon withdrawn

Noel, I., 345-46.



from circulation, reducing the amount outstanding to 54^,886,038 florins ($273,000,000). The bank continued the
process of converting the government money into bank-notes
until on December 31, 1847, the amount outstanding was
reduced to 9,712,838 florins ($4,850,000).
The uprising in Hungary in 1848, the Crimean War, and
the Italian struggle which resulted in Austrian defeat at
Magenta and Solferino, imposed new charges upon the Aus­
trian government and did much to upset the work of the
bank during the thirty years of peace from 1816 to 1846.
The bank had proceeded so rapidly with the conversion of
the government paper money as to endanger its own security
and alarming runs were threatened in 1831, and again in
1840, which were only averted by the help of the government
and in the latter case by a loan of coin from the private
banks of Vienna. The charter of the bank expired in 1842,
but the Emperor signed a patent renewing its privileges,
with some modifications, until December 31, 1866. The
bank had enjoyed until this time the exclusive privilege of
discount as well as the monopoly of note issues, but the
former privilege was now thrown open to others and the
power to make loans upon real estate mortgages was with­
drawn. The bank had contributed somewhat to the expan­
sion of commerce by its discounts, but its immense advances
to the government prevented its applying so much capital as
\vas needed for the development of new private enterprises.
Financial societies and private banks of discount had sprung
up in the important centres and their success and legality
depended upon sharing with the National Bank the power to
make discounts and advances.
The bank at the end of the year 1847 possessed a metallic
reserve of 70,240,000 florins ($35,000,000) and maintained a
circulation of 213,000,000 florins. The outbreak of the revo­
lution in Hungary brought the bill-holders in crowds to the
bank for the redemption of the notes and the coin reserve
shrunk in a few da}^s to 35,023,030 florins. The directors
were seized with panic and secured from the government the
decree of June 20, 1848, authorizing the bank to suspend



specie payments and giving forced legal tender character to
its notes. The government hesitated to take this desperate
step and accompanied it with decrees intended to prevent
the export of gold and silver, even to the amount of more
than 100 florins ($50) in the pockets of tourists. The gov­
ernment at the same time resumed the issue of its own paper
promises in the form of interest-bearing mandates, redeem­
able in four, eight, and twelve months. The fifth of these
issues, in 1849, was given forced legal tender character and
the notes were no longer to be redeemed in coin. Gold and
silver began to disappear from circulation, pieces of six and
ten kreutzers (one to two cents) were coined only to disap­
pear, and bank bills of one florin and Treasury bills of six
and ten kreutzers were issued to take the place of the small­
est coins. The credit of the bank began to sink with that
of the government and the depreciation of the bills in the
middle of 1849 to about half their nominal value alarmed
the administration and led to a solemn declaration that no
more loans should be demanded from the bank and that the
existing debt should be adjusted and consolidated.
The history of the thirteen years from 1848 to 1861 is the
history of the disregard of this pledge and of repeated loans
negotiated through the bank in spite of continual efforts to
refund the debt and reduce its proportions. The aggregate
of funded and floating debts due the bank by the govern­
ment was 178,500,000 florins on January i, 1849, and 205,-#
300,000 florins on January 1, 1850. Considerable reductions
were made during the next four years and the figures were
carried down to 121,700,000 florins on January 1, 1854. The
provisions for the Crimean War forced the figures up again
with a bound to 294,200,000 florins ($147,000,000) on Janu­
ary 1, 1855. The reduction of the debt began again the
next year and continued until it was reduced on January 1,
1859, to 145,700,000 florins, but the war with the Italian
States and France carried the amount up again to 285,800,000 florins.1 M. Paul I^eroy-Beaulieu, after reviewing the
1 Leroy-Beaulieu, II., 646.



long series of negotiations between the government and the
bank, sums up the lesson of these years as follows :
It is apparent how political events hurled the state farther and far­
ther down the path o f forced legal tender at the moment when the
resumption of specie payments seemed at hand. It is apparent also
o f what little use were pledges, whether o f realty or securities, to
hasten the liberation o f the state and to permit the bank to terminate
the suspension o f specie payments. It is because all such pledges are
incapable o f negotiation at short notice without great loss. It is ap­
parent also what singularly advantageous conditions the bank ob­
tained from the state for its advances. It enjoyed an interest of two
or three per cent, on sums in paper which cost it nothing.1 This
situation was too favorable for the bank for it to show itself rigorous
towards the state. Every exhibition of complaisance which it made
was the source of abundant revenue. This rate of two or three per
cent, was extravagant. In France one per cent, was adopted and in
Italy six-tenths o f one per cent. The transformation, for such a long
period o f time, o f a great establishment of credit into the official
lender o f the state had the disastrous consequence that this establish­
ment could with difficulty fulfil its natural mission of lending to com­
merce. One cannot serve two masters, and a bank which always has
its hand in its coffers to make advances to the state is compelled to
show itself more stringent towards manufacturers and merchants.

The attempt to resume specie payments seemed upon the
eve of success in 1859. A monetary convention was con­
cluded January 24, 1857, with the view to securing a uniform
currency throughout Germany, by which the contracting
parties, of which Austria was one, were to issue no more
legal tender paper after January 1, 1859, which was not re­
deemable in coin on demand. An Imperial ordinance of
April 30, 1858, prepared the way for resumption by provid­
ing that after November 1st of the same year one-third of
1 M. Noel seems to ignore this element of the bank loans and says :
“ The bank, during the entire period which elapsed from its origin to
1861, had risen to the level of its heavy task. It had contributed en­
ergetically to sustain the government in the difficult situations which
it had traversed and its support, often disinterested, had merited gen­
eral confidence. Far from abusing the opportunity of the multiplied
crises which had obliged the Imperial Treasury to appeal to it, it had
endeavored to lighten the burden of the sacrifices imposed by events
upon the country.” — Banques d>Emission en Europe, I., 364.



the new bills should be covered by coin or bullion and that
the other two-thirds should be represented in the assets of
the bank by securities or commercial paper. An arrange­
ment was also concluded between the government and the
bank for the retirement of 100,000,000 florins in small notes
by the pledge of the domains of the State. War with Italy
upset these carefully laid plans and on April 29, 1859, the
bank was again released from the obligation of coin redemp^
tion, and the government appealed to it for a loan of 200,'
000,000 florins. This was met, to two-thirds of its fac^
value, by the issue of bank-notes entirely in denominations
of five florins ($2.50). The public had no use for so many
small bills and they rapidly returned to the bank. The loan
with which it was sought to pay this advance by the bank
proved a failure and the government was compelled to deliver
a variety of securities in addition to the unplaced obligations
of the loan, with a condition that they should not be marketed
before November 1, 1861.1
The management of the bank decided on May 9, 1853, to
issue the 49,379 shares which had remained undisposed of
since 1820 and they gave the preference to the holders of the
original shares, at the rate of 800 florins payable in bank
bills, which were then below par. The bank was again au­
thorized by a decree of October 21, 1855, to loan money on
mortgages and issue mortgage bonds. This branch of busi­
ness rapidly developed and on December 31, 1858, already
employed about 37,000,000 florins ($18,500,000). The capi­
tal of the bank was again doubled and immediately after­
wards increased by 50,000 new shares issued at the rate of
about 725 florins, which made the total capital on December
31, 1855, about 110,250,000 florins ($55,000,000). A law of
November 13, 1868, reduced the capital again to 90,000,000
florins ($45,000,000).
The approach of the termination of the privileges of the
bank led to an earnest discussion, which resulted in the law
of December 27, 1862, remodelling the charter of the insti1Leroy-Beaulieu, II., 650.



tion and its relations with the government. The govern­
ment proposed the renewal of the charter until 1890; the
finance committee of the elective chamber proposed 1880.
The subject was referred to a mixed committee of both cham­
bers, which finally fixed the limit at December 31, 1876.
The privileges of the bank were broadened from time to
time until 1877, when the law of December 20th, terminating
the commercial treaties, provided also that the ministry
should conclude an arrangement with the bank extending its
privileges until March 29, 1878. A subsequent act made
the limit May 31, 1878, and one month later the National
Bank of Austria was fused with the Austro-Hungarian
The National Bank, during its later years, in spite of the
manner in which it was fettered by its relations to the gov­
ernment and the suspension of specie payments, conducted
its relations with the business community in such a way as
to contribute in a considerable measure to the expansion of
industry. The business paper carried increased from about
32,000,000 florins ($16,000,000) in 1848 to 75,000,000 florins
in 1854 and 90,000,000 florins ($45,000,000) in 1855. The
advances on public securities increased from about 15,000,000 florins in 1848 to 50,000,000 florins in 1854 and 82,000,000 florins in 1855. The discounts increased nearly forty per
cent, from 1865 to 1877 and would probably have reached a
larger figure but for the liquidations following the crisis of
1873. The following table shows, in florins, the aggregate
amount of the commercial paper discounted every alternate
year from 1865 to 1877 :









471, 136,665
646 327,512




168, 973,050




The provisions for regulating the note issues which were
adopted in 1863 bear the traces of the English legislation of
1844. They provided for an ‘‘ uncovered ’’ circulation of
200,000,000 florins ($100,000,000) and that all notes issued
beyond that sum should be covered by gold or silver coin or
bullion. The uncovered circulation was required to be pro­
tected by commercial paper, by securities deposited for
advances, by the coupons of mortgages matured and payable
or by mortgage bonds of the bank. This last form of secu­
rities was not allowed to exceed 20,000,000 florins and they
were accepted for only two-thirds of their nominal value.
Gold coin or bullion was at that time allowed to take the
place of silver to the extent of only a quarter of the metallic
reserve. A decree of October 30, 1868, authorized the bank
to count as security for the uncovered circulation bills of
exchange drawn upon foreign places, and a law of March
18, 1872, gave the bank discretion as to the proportion of
gold and silver to be kept in its reserves.
The attempt to tie the note circulation rigidly to deposits
of specie broke down as completely in Austria as it has
broken down in England every time that a crisis has oc­
curred. The first suspension of the limit was authorized by
the government for a brief period in 1866. The bank was
compelled again in 1869 to suspend advances upon private
deposits of bullion and did not resume this branch of its
business for two years, in spite of the protests of manufac­
turers and brokers. The bank pursued a very conservative
course while the fever of speculation was upon the country,
but was unable to come to the rescue of mercantile credit
when the crisis of 1873 broke out, because of the limitations
upon its circulation. The condition of credit became so
critical that the government was obliged to intervene in
almost precisely the same manner as in England. A letter
was addressed to the bank by the Minister of Finance on May
13, 1873, revoking the provisions of Article 14 of the statutes
of the bank, relative to the metallic security for bank-notes,
and an ordinance to the same effect was approved by the
Diet. The ordinance gave the bank authority to issue notes



by discounting bills of exchange and making advances on
public securities without any other limitation than its own
good judgment. Under this authority the bank granted
extraordinary credits to the amount of 64,451,000 florins in
Austria, and 30,119,000 florins in Hungary. The circula­
tion exceeded the legal limit several times in May and July
and was almost continuously above the limit during October,
November, and December, 1873. The effect of the action
of the bank was almost instantaneous in restoring credit.
“ The first moment of panic passed,” says M. Clement Juglar, “ it was seen that commerce and industry continued to
make good head and that the vital forces of the country
were not exhausted, the crisis having been specially severe
in everything affecting the bank. ’’ 1
Payment in coin on demand was nominally the condition
upon which the bank held its privileges, but the situation
of the government and its relations with the bank were such
that it was thought necessary to maintain forced legal tender
for an indefinite period. A convention was signed between
the bank and the government on January 3, 1863, providing
for the resumption of specie payments by the bank during
1867, but the war with Prussia postponed the event and the
country continued to stagger through the mire of irredeem­
able paper. An act of May 5, 1866, authorized the gov­
ernment to issue 150,000,000 florins in government bills,
including notes of one and five florins which had already
been issued by the bank and which were now declared to be
bills of state. The disasters of Sadowa and the other events
of the war drove the government to the old device of John
Law and the French revolutionists, to guarantee a part of
its paper issues by the salt mines of Gmund, Hallein, and
Aussee, at the same time that the pledge was given that the
maximum of the two forms of the floating debt—the paper
money and the salt notes (Salinenscheine)—should not ex­
ceed 400,000,000 florins. This pledge was not kept to the
letter, but the actual circulation was never greatly above the
1Des Crises Commercialese 496.

23 2


legal maximum. The mean circulation of the old paper
money in 1876 was 343,029,232 florins and of the salt notes
68,970,395 florins.
An effort was made in 1867 to bring Austria within the
circle of the L,atin Union and to harmonize her monetary
system with that of France, Italy, Belgium, and Switzer­
land. The government consented to the coinage of pieces
of eight and four florins in gold, equivalent to pieces of
twenty and ten francs ($4 and $2). The Franco-German war
arrested the negotiations before they had been ratified, but
the Imperial government immediately began the coinage of
the proposed pieces, and they were accepted in France in
public depositories by virtue of a decree of June 14, 1874.
Their coinage averaged about 3,000,000 florins ($1,500,000)
per year, until it was suspended by the laws which reorgan­
ized the monetary system in 1892.
The domestic troubles which broke out in Austria before
the defeat of Sadowa led to the reorganization of the Empire
according to the system of dualism which now prevails. The
Hungarian Diet was convoked at Pesth on November 19,
1866, and a basis of union with Austria upon the conditions
of local independence was prepared by a committee of sixtyseven headed by Francis Deak. The Hungarian budget
was to be entirely independent of that of Austria in all in­
ternal affairs except those affecting the army. The officials
of the bank regarded their interest as fully protected in both
Austria and Hungary by the law of 1862, but the bank soon
found its rights in Hungary called in question and sought a
new arrangement which would place them beyond attack.
The Hungarian Diet passed a vote early in 1870, promising
recognition to the bank until the expiration of its privileges
in 1876, if the bank would consent to a payment to Hungary
in the same proportion as that made to Austria, and if it
would establish at Buda-Pesth an independent directorate
for Hungary. The bank was willing to make a payment of
4,500,000 florins, but this was not acceptable to the Hun­
garian cabinet and the privileges of the bank approached
expiration without an agreement. The Imperial government


then brought forward a plan for terminating the existence
of the National Bank of Austria and substituting in its
place a new institution to be known as the Austro-Hungarian
Bank. The proposition became law and the new institution
was established for a term beginning July i, 1878, and end­
ing December 31, 1887. The charter was afterwards re­
newed for a period of ten years ending on December 31, 1897.
The new bank succeeded to all the transactions of the old
and a directorate was established at Buda-Pesth and a sum
of 50,000,000 florins ($25,000,000) set aside for discounts
and advances in Hungary. The bank-notes of the institu­
tion are required to be printed in both the German and
Hungarian tongues and to bear the arms of the monarchy.
The governor of the bank is named by the Emperor, upon
the joint nomination of the finance ministers of Austria and
Hungary, and the two deputy governors are chosen from the
two parts of the Empire. The changes made in the pro­
visions for the note circulation had in view the new charac­
ter of the bank as a representative of the two monarchies and
the purpose of the government to resume specie payments.
The certificates and matured coupons of the Austrian and
Hungarian debt were included among the legal securities
for the covered circulation and it was provided that the two
principal establishments at Vienna and Buda-Pesth might
issue bills on deposits of silver coin and bullion at the rate
of forty-five florins to the pound of fine silver. This pro­
vision became inoperative when the government in 1879
suspended the coinage of silver on private account.
The amount of 200,000,000 florins has been steadily ad­
hered to as the limit of the uncovered circulation, but the
rule is now followed of keeping coin and foreign gold bills
to the amount of forty per cent, of the entire volume of
bank-notes in the hands of the public. The difficulties
caused by a rigid limit of circulation in 1873 were guarded
against, upon the extension of the bank charter in 1887, by
the adoption of the German system of the five per cent, tax
on the circulation. The method of determination is sub­
stantially the same as in the case of the German Imperial



Bank. Weekly reports are required, and upon the amount
by which the aggregate circulation exceeds the sum of the
metallic reserve and the uncovered circulation of 200,000,000
florins, a tax is levied of of one per cent, for the weekly
excess. The notes of the Austro-Hungarian Bank are a
legal tender throughout the Empire for their full nominal
value in all payments to be made in Austrian money, in the
absence of a specific contract or a judicial decision requiring
payment in specie.1
Political conflicts between Austria and Hungary embar­
rassed the bank and delayed the complete restoration of
specie payments which was undertaken in 1892. It was
only by temporary conventions that the life of the bank
was extended from 1897 to I^99, and even the extension of
the charter in the latter year to 1910 was limited by the
proviso that if the union between the two countries should
terminate at the close of 1906, the privilege of the bank
should terminate also.2 A more distinctly political character
was given to the organization of the bank by the enlargement
of the power of the governor, the provision that the general
council should be composed of equal numbers of Austrian
and Hungarian subjects, and the requirement that the sessions
of the council should take place alternately at Vienna and
at Buda-Pesth. Even this arrangement, coupled with many
new restrictions upon the bank, was threatened for a time
by the refusal of the Commission on the Debt to pay over to
the bank the amounts contemplated by the agreement for
the retirement of the government paper money, but the
danger was averted by a change of ministry.8 The payment
was made by the Witteck ministry and the arrangement
went into force.
The essential steps towards the resumption of specie pay­
ments in Austria-Hungary were taken by the monetary laws
of 1892. The ministers of finance of the two parts of the
JNoel, I., 458.
Economiste EuropSen, June 23, 1899, X V ., 794.
3Raffalovich, Le Marche Financier en 1899-1900, 550.




Empire on February 26, 1892, invited a number of eminent
financiers and political economists to meet and consider the
following questions:
i» What standard ought to be adopted when the currency
is reformed ?
2. In case of the adoption of the gold standard, should a
limited circulation of silver money be admitted and to what
amount ?
3. Is the circulation of government notes advisable, bear­
ing no interest, redeemable in legal money and not made a
forced legal tender, and under what conditions ?
4. According to what principles should the conversion into
gold of the existing florin be regulated ?
5. What monetary unit is it advisable to choose ?
The inquiry in Austria was entrusted to a commission of
thirty-six persons, under the presidency of Herr Steinbach,
the Minister of Finance, and the sittings continued from
March 8th to March 17th. The inquiry in Hungary was
made by a commission of twenty-one under the presidency
of Herr Wekerle. The first question was answered by a
large majority in favor of the gold standard. The second
question led to a greater division of opinion, but the majority
seemed disposed to favor as large a use of silver as was com­
patible with the absolute maintenance of the gold standard.
The majority also favored the continuance of a circulation
of 50,000,000 to 100,000,000 florins in government notes not
fully covered by coin. A few believers in a strictly metallic
currency opposed any such use of paper money, and argued
that its continuance would shake confidence in the monetary
system. The fifth question was answered in favor of the
maintenance of the florin or its division into two parts, if
a smaller unit were desired. The answer to the fourth
involved the old controversy regarding the effects of the
restoration of a metallic standard after business had been
conducted and contracts made for many years on a depre­
ciated paper basis. The definite answer to this and the other
questions was finally given by the government, without fol­
lowing in all respects the recommendations of the commission.



The proposals of the ministry were submitted to the Par­
liament of both countries on May 14, 1892, and were made
law throughout the Empire on August nth. The crown
{kronen) was made the monetary unit upon the basis of
cutting a kilogram of fine gold into 3280 crowns, and a
kilogram nine-tenths fine into 2952 crowns. The value of
the new coin in United States money is 20.3 cents or about
one-twentieth more than the French franc. The crown was
divided into 100 heller, and gold pieces of ten and twenty
crowns were ordered to be coined. Austrian ducats were
still authorized to be coined as money of commerce, but the
coinage of pieces of four and eight florins under the terms
of the treaty with France was discontinued. Silver pieces
were provided for of one crown ($0,203) and of fifty heller
($0.1015) an(i nickel and bronze pieces of smaller denomina­
tions. The silver pieces were to contain only 835 parts
silver in 1000 parts, making them substantially token coins,
and their legal tender quality was limited to fifty crowns
( $

1 0 ) . 1

The government decided to convert the paper money at
the rate of one florin for two crowns. This was the rate
which was under discussion by the commission, and while
it adhered pretty closely to the current rate of exchange it
involved a reduction of the nominal value of the paper in
gold about sixteen per cent.8 It had been urged by several
members of the commission that it was desirable to convert
foreign obligations upon the basis of parity in gold, in order
to maintain the public credit, even if it were more just to
convert the money of domestic circulation at the rates which
had ruled for a dozen years.3 The problem of conversion
was complicated by the fact that the Austrian metallic
standard, so far as there had been any, had been silver rather
1 Ordinance of August 8, 1892, Bulletin de Statistique, Sept., 1892,
X X X II., 318-22.
2Two crowns being worth 40.6 cents, their even exchange for one
florin, nominally worth 48.2 cents, left a reduction of 7.6 cents in the
value o f the florin, which is about 16 per cent.
3Rafifalovich, L e Marchi Fina?icier en 1892, 96.


than gold and many obligations were specifically payable in
silver. The suspension of silver coinage on private account
in 1879 gave a fictitious value to Austrian silver coins, just
as it was attempted by the British government to give such
a value to Indian rupees in 1893, and the florin ceased to
fluctuate with the silver bullion market while remaining
below both gold and paper. The government did not in
1879, however, abandon the silver standard and from 1879
to 1891 coined not less than 125,500,000 silver florins at the
mints of Vienna and Kremnitz. The rate of conversion
adopted for the paper currency, therefore, was not exactly
the scaling of a gold obligation, for gold only became the
standard on the date that the rate of conversion was fixed.
The rate represented about the average exchange from 1879
to 1891.1
The bank was required to establish gold payments upon
the basis of the new rate of exchange. The result was a
considerable benefit to the bank, for it had in its vaults on
August 7, 1892, 59,757,000 florins in gold and 20,428,000
florins in foreign bills payable in gold, which at the new
rate acquired a higher nominal value. The bank carried
13.500.000 florins in foreign bills to its special reserve fund,
and was still able on August 15th to report a cash reserve of
70.666.000 florins, including 619,876 florins received during
the preceding week, and foreign bills in hand payable in
gold, to the amount of 10,404,000 florins.2 The addition was
made to the special reserve fund in order to avoid increas­
ing the limit of covered note issues, which was not thought
advisable without consultation with the government. The
entire operation was simply a matter of bookkeeping and
added nothing to the real resources of the bank or to the
value of its gold. The gold had formerly been counted at
its face value, while its real value, expressed in terms of
depreciated paper, was much greater. The change simply
recognized this fact and in bringing the gold and papet
1 Haupt, 58-64.
2L e Marche Financier cn 1892, 102.



together gave a nominal value to the former corresponding
to the reduced standard. The purchasing power of a given
weight of gold remained the same under either method of
bookkeeping, but the gold was intended to become under the
new system a money of actual circulation instead of a bullion
reserve expressed in a standard above the real one.
The importation of gold followed quickly on the estab­
lishment of the standard and was promoted by the policy
of the bank, which raised the discount rate and made
advances to facilitate arbitrage transactions when exchange
seemed to be unfavorable. The receipts of gold by the
bank from April n th to October 10, 1892, were 38,759,000
florins ($19,000,000), of which a large part was in pieces of
American origin. Receipts from India became heavy in
November and raised the total receipts from August nth,
the date of the promulgation of the new laws, to December
31, 1892, to 39,447,000 florins. The state also availed itself
of foreign bills in its possession to accumulate gold and at
the close of 1892 had about 40,000,000 florins in the hands
of the Austrian ministry and 50,000,000 florins in the hands
of the Hungarian ministry. A new project was adopted
in 1894 for retiring the government paper money and sub­
stituting bank-notes and subsidiary silver. An arrangement
was made with the Austro-Hungarian Bank to sell 40,000,000 florins in silver for coinage into pieces of one crown and
to issue 160,000,000 florins in bank-notes as the government
notes were received and cancelled. The Treasury agreed to
pay over to the bank 200,000,000 florins in gold ($100,000,000), which was to be used only as the coin guarantee of the
new notes, florin for florin. The first notes retired were
those of one and five florins and considerable opposition
developed among the people at surrendering the convenient
paper notes for the more cumbersome silver. An economist
of note, Max Wirth, urged that the retirement of paper
should begin with notes of 50 florins ($25) instead of the
small notes, but the government adhered to its original plan.1
1 RafFalovich, Marchi Financier en 1893-4, 113.


The crisis of 1893 in the United States and the rather
unfavorable condition of the money market in Germany
had a reflex influence upon Austria which arrested her steps
towards a gold basis and prevented any considerable increase
in her gold fund during that year. The reappearance of a
premium on gold, running from three to seven per cent., in
paper money and bank notes, caused a deal of disappoint­
ment and much inquiry as to the reason. The critics of the
government ascribed it to the attempt to convert the old five
per cent, obligations into four per cents., which resulted in
bringing back into Austria a large quantity of securities
held abroad. It was calculated that the importations of
securities during 1893 exceeded the exports by 114,690,000
florins ($57,000,000).1 The Minister of Finance pointed out
that this inward current was almost wholly in securities
payable in silver and that it was necessary to cut the bond
which nominally bound the two metals together in the
Austrian currency system. A reason was found for the
change in some quarters in the state of the money market
at Berlin, which was swamped with South American and
other securities of little value, which had absorbed the
ready money of German capitalists. The Austrian securi­
ties were among the few of real value which were held in
Germany, and money could be recovered at the smallest loss
by returning them to Austria, whose people were buying
their own securities at good prices. This tendency, though
doubtless heightened in the case of Austria by the conver­
sions and by the fear of payment in silver, only confirmed a
principle which has become marked in recent years—that
the securities issued by a solvent power tend, after their
original placement, to return into the hands of its own
people. This was observed in the United States in 1878,
when it was estimated that five-sixth of the public debt had
returned into the hands of Americans ; in France, after the
great loans to pay the German war indemnity; and even
in Italy, who originally paid two-thirds of her interest

Neue Freie Presse, January 1, 1894.



charges abroad, but now pays hardly a fifth outside the
The new monetary system, by which the gold crown
($0,203) became the unit of value, went into operation in
1900. The sum of 112,000,000 florins ($22,736,000) in gov­
ernment bills was gradually replaced, with the help of the
bank, by 5-crown pieces in silver and new bank notes. The
bank received from the Treasury 224,000,000 crowns in new
gold pieces of 20 crowns, which exactly equalled the out­
standing government notes, and afforded a complete cover
for 64,000,000 crowns in 5-crown pieces and 160,000,000
crowns in io-crown notes. Of this deposit the government
of Austria paid 156,800,000 crowns and that of Hungary
67.200.000 crowns.2 The circulation of old notes ceased to
be permitted after September 1, 1901, and the notes ceased
to be legal tender after Februaty 28, 1903. Already by the
first of October, 1902, the amount outstanding had fallen to
6.500.000 crowns ($1,319,500), and the gold in circulation
early in 1903 consisted of 35,980,510 crowns in io-crown
pieces and 103,923,160 in pieces of 20 crowns ($4.06). By
the close of 1903 the gold resources of the bank were 1,250,000,000 crowns and afforded a cover of 86 per cent, for an
outstanding circulation of 1,550,000,000 crowns. Only po­
litical differences between the different parts of the Dual
Monarchy stood in the way of a mandatory law compelling
the redemption of bank-notes in gold on demand.8

Vide infra, 28.
2 Raffalovich, L e Marchk Financier en 1902-1903, 817. The eco­
nomic effect of these operations is thus described by Willis : “ It was
sought to transform the legal-tender notes into bank notes and then
to provide for their management upon banking principles. In this
way the volume of the circulation would not be disturbed. The
means o f obtaining the bank notes for the redemption o f the legal
tenders were, however, in this case thoroughly sound.” — “ The Aus­
trian Monetary Reform,,, in Sound Currency, August, 1899, V I., 127.
3 One of the grounds o f indifference in Austria was the feeling that
resumption of specie payments would enable Hungary to emancipate



Control of the foreign exchanges was the capstone of the
structure of gold redemption, and this could not be attained
while the government kept its gold resources with private
bankers and relied upon them to meet its obligations abroad.
This was the condition prevailing down to the summer of
1901, when Count von Bilinski, the governor of the bank,
after much previous negotiation, arranged a meeting on
August 8th, at his home at Ischl, with the finance ministers
of the two governments. It was then agreed that the public
deposits should be transferred from the Rothschilds and
other private bankers to the Austro-Hungarian Bank, and
that the latter should not only attend to government pay­
ments abroad, but should furnish exchange freely for private
parties and should begin the tentative issue of gold coins
in the interior.1 It was a complex and delicate task and
involved several changes in the organization of the bank.
Among other measures gold customs drafts were issued by
the bank in exchange for foreign and domestic gold coin,
thereby economizing the movement of gold and transferring
disputes as to the value of foreign coins from the customs
offices to the bank.2
These measures were eminently successful in maintaining
parity of exchange with gold countries and in enhancing
the volume of business and the financial importance of the
bank. Within about five years gold was paid out to the
amount of 1,250,000,000 crowns, of which four-fifths came
back to the bank and one-fifth remained in the domestic
circulation. Operations in foreign exchange in 1900, prior
to the Ischl agreement, were ^52,000,000 in English money,
270,100,000 francs in French, and 1,047,700,000 marks in
German money. Transactions in French and German money
had more than doubled in 1906, and in the stress of 1907 the
herself entirely in financial matters from Austria.— Raffalovich, L e
Marchi Financier en 1901-02, 614.
1 Economiste Europeen, April 24, 1908, X X X III., 516.
2 Ibid., May 1, 1908, X X X III., 549.



total of exchange operations reached 2,966,300,000 crowns
($602,000,000) and the bank was able to congratulate its
shareholders that it was able to maintain a discount rate
of six per cent,, while higher rates prevailed in the countries
around it.1
The action of the government in buying silver for sub­
sidiary coinage from the bank proved a great aid to the
latter in solving the problem what to do with its large stocks
of silver accumulated when that metal was near the old
parity with gold. The cash reserves of the National Bank
of Austria and of the Austro-Hungarian Bank consisted
almost exclusively of silver while that metal was at a pre­
mium over gold, but gold began to flow into the bank in
1871, and soon came to constitute about half the reserve.
The gold then remained nearly stationary in amount for ten
years, while the silver rapidly increased. This difficulty has
not been serious in recent years, and the gold stock has come
to exceed the silver by about four times. The gold held at
the close of 1906 was 1,112,263,245 crowns, and decreased
to the close of 1907 only to 1,099,393,421 crowns ($223,150,000). The silver stock decreased during the same interval
from 282,055,904 crowns to 281,485,199 crowns ($57,130,000).
In spite of the change in the monetary unit, computation in
florins long lingered in Austria. It was encouraged by the
continued use of the silver pieces of one florin, of which the
bank possessed a large stock. It was decided early in 1908
to discontinue the issue of silver florins and to coin at once a
large part of those in the reserves of the bank into pieces
of one crown.2
The proportions of gold and silver held and other sta­
tistics of the bank, before the change in the monetary unit,
appear in the following table;
1 Generalversammlung der Oesterreichisch- Ungarischen Bank am
3 Februar, 1908, xviii.
2 U. S. Consular Reports, August 12, 1908, 14.



S P E C IE R E S E R V E .
D E C . 3 1S T .

A C C O U N T S.

M E A N D IS ­
C O U N T S.


M E A N C IR C U ­
L A T IO N .

------I I 3.4
I I 7.5

(In m illio n s o f flo rin s.)













io r.8



















The capital of the bank was changed, when the new
monetary system took effect in 1900, to 210,000,000 crowns
($42,630,000). The increase from 180,000,000 crowns was
accomplished by transferring 30,000,000 crowns from surplus,
which was thus reduced to 6,514,000 crowns, but was gradu­
ally built up again to 15,305,349 crowns at the close of 1907.
The principal accounts of the bank under the new monetary
unit are shown in the following table :
Accounts of the Austro-Hungarian Bank, 1900-1913.
D*C. 31.





(In the>usands of crowns - = $0,203.)





1,713,0 18


i, °



1, 751,301

5 7>575

34 5 .176
5 11.6 3 7

1, 341,107







The circulation of the bank varies widely at different
seasons. The degree of pressure for currency is indicated
by the record of occasions on which notes have been issued
in excess of the authorized limit and subject to the five per
cent. tax. These occasions were more or less exceptional down
to the close of 1905. During eighteen years ending with
that year,—a period of 864 weeks,—excess issues appeared
in fifty-five weeks, some of them for very small amounts.
Of these issues twenty-three occurred in the month of Oc­
tober, which is the harvest month.1 The first occasion was
in the autumn of 1890, when the limit was exceeded 656,440 florins in the week of October 7th, and the excess rose
to 23,257,080 florins during the week of October 31st. The
excess of circulation declined to 17,093,710 florins in the
following week and disappeared in the week of November
14th. The pressure was felt more severely in later years
and especially in 1907, when there were twenty-two weeks
of excess circulation, and after August 23d, issues were con­
tinuously above the authorized limit. The highest excess
was in the week ending October 31st, when the amount was
242,067,000 crowns ($49,125,000). Then began a gradual
improvement, which carried the excess down on December
15th to 25,074,000 crowns, to be advanced again temporarily
by the end-of-the-year demand for currency, which carried
the excess circulation on December 31, 1907, to 187,145,1 Letter of the Governor of the bank to the New York Chamber of
Commerce, July 22, 1906. In this letter Count von Bilinski declared
that “ the system of note taxation exerted no decided influence upon
the discount policy of the bank, inasmuch as the Council of Adminis­
tration, after careful consideration of all circumstances, had occasion
to raise its discount rate repeatedly during times when the limitation
of its note issue had not been reached; and also on several occasions
when its limitations were reached, it maintained a discount rate lower
than the legal five per cent. rate. Thus the cost of the tax was not
borne by its clients, but by the bank itself.’*— The Currency : Report

by the Special Committee of the Chamber of Commerce of the State of
New York, 43.



ooo crowns. The range of variation in the circulation before
the change in the monetary unit is indicated by the following
figures for representative years:
Fluctuations in Circulation.
(Ia thousands o f florins.)



M A X IM U M .















Substantially the same range of variation has prevailed
since the adoption of the crown as the unit of value and the
practical restoration of stable exchange. In the year 1907
the circulation at the beginning of the year was 1,982,037,000
crowns ($402,300,000) from which it fell gradually to a mini­
mum of 1,709,004,000 crowns ($346,900,000) on March 23d.
From that date the demand for additional notes increased
only slowly until September 23d, when the amount was 1,871,917,800 crowns. Then began the rapid upward movement
caused by the combined influence of the autumn crop move­
ment and the disturbances in the money markets of the
world, which carried the circulation on September 30th to
2,001,892,000 crowns and on October 31st to 2,070,293,000
crowns ($420,200,000),—the maximum of the year. From
this point there was a gradual decline to 1,865,210,000 crowns
($378,600,000) on December 15th, until the usual movement at
the end of the year, which left the amount of notes outstand­
ing on December 31st at 2,028,024,000 crowns ($411,600,000).
About one-third of the amount of the notes are for 20
crowns ($4.06). The number of these on December 31, 1907,
was 32,978,829 out of notes outstanding to the number of
59,968,201, and their value was 659,576,580 crowns ($133,875,000). Notes of other denominations were 357,188 for



1000 crowns, 6,189,182 for 100 crowns, 4,604,357 for 50 crowns,
and a small number in old notes in process of retirement.1
The volume of discounts fluctuates in much the same
manner as the note circulation. The maximum of 1907
was 865,223,000 crowns ($175,630,000) on October 31st, the
minimum was 525,410,000 crowns ($106,650,000) on Feb­
ruary 23d, and the average for the year was 666,309,000
crowns. As in other European banks of issue, the greater
part of the paper held is of even shorter maturities than is
required by the statutes. Thus, of the amount held at the
close of 1907, 468,849,397 crowns, or 62.67 per cent, of the
whole, matured during January, 1908, and 25.47 Per cent,
during February, leaving only 11.86 to run longer than two
The rate of discount of the National Bank varied between
1817 and 1862 from five to eight per cent., and from 1863 t°
the fusion with the Austro-Hungarian Bank in 1878 never
went higher than six and a half per cent. The changes in
the rate of discount during these fifteen years were twelve,
while those of the Bank of England were one hundred and
fifty-two, of the Bank of France forty-six, and of the Bank
of Prussia forty-five. The mean rate of the National Bank
of Austria was not more than eight-tenths of a cent, above
that of the Bank of England nor more than seven-tenths
above that of the Bank of France, in spite of the much more
complete industrial development of the latter countries.*
The rate has varied even less during the more recent history
of the consolidated bank. Fixed at four per cent, on May 9,
1879, it was raised to five per cent. October 20, 1882, reduced
to four and a half on February 3, 1883, and to four per cent,
on February 23, 1883. The rate was raised again to four
and a half on October 7, 1887, and reduced to four per cent,
on January 11, 1888. The rate of four per cent, was pretty
uniformly maintained during the early part of the year for
1 Generalversammlung der Oesierreichisch- Ungarischen Bank am

3 Februar 1908, 6.

2 Noel, I., 382, 434.



some years, but the autumn rate was usually higher, reach­
ing in 1890 five and a half per cent. An increase from four
to five per cent, was made on October 7, 1893, but was fol­
lowed by a reduction to four and a half in the second half of
January, 1894, and to four per cent, on February 9th, where
it remained throughout the year and until the autumn of
1895, when it was put at five per cent.
Reductions were made in the winter, which brought the
rate down on February 14, 1896, to four per cent., where it
was successfully maintained, through the elasticity of the
note system, until the autumn of 1898. The scarcity of
capital, which then afflicted Europe as the result of the
war in South Africa and of other causes, forced the rate of
discount at the Austro-Hungarian Bank to four and a half
per cent, on October 14, 1898, and to five per cent, on No­
vember 25th. High rates prevailed, with slight relaxations,
until the spring of 1901, when it became possible on March
1st to reduce the rate to four per cent, and in 1902, on Feb­
ruary 5th, to three and a half per cent., for the first time in the
history of the bank. This rate remained unchanged for
more than three years, when the pressure again felt upon
the world's stock of capital led to an advance on October 19,
1905, to four and a half per cent. Even then the advance
was attributed at first to the attraction for Austrian gold which
was afforded by high rates in foreign markets, but it pres­
ently appeared that there was real pressure at home as well
as abroad.1 Not until May 31, 1906, was a reduction made
to four per cent., and on September 30th it became necessary
to restore the higher rate, and on June 30, 1907, to make a
further advance to five per cent, and on November 15th, to six
per cent. The average rate for 1907 was 4.896 per cent.
The Austro-Hungarian Bank, like the Bank of France,
has done much to extend accommodation to small merchants.
The whole number of pieces of paper discounted in 1878 was
368,795, which grew in 1882 to 550,829; in 1887 to 704,608;
1 Raffalovich, he Marche Financier en 1905-06, 531.



in 1892 to 884,840; in 1897 to 1>380,405; and in 1907 to
2,944,077. The number of pieces for 150 florins ($60) or less
was 374,238 in 1897. The number for 300 crowns ($60) or
less in 1907 was 749,506.*
The number of branches of the Austro-Hungarian Bank
had risen in 1907 to 46 in Austria and 33 in Hungary, outside
the principal establishments at Vienna and Buda-Pesth. The
bank at Buda-Pesth has been rapidly gaining in recent years
in volume of business over the bank at Vienna, and the de­
velopment of Hungary from a purely agricultural to an
industrial country has created a jealousy which is among the
causes threatening to the perpetuation of the bank in its
dual form. The discounts at Buda-Pesth, which were 16,853,181 florins at the close of 1875 against discounts at
Vienna of 51,109,319 florins, advanced at the close of 1890
to 35,688,570 florins at Buda-Pesth against 53,253,903 florins
at Vienna, and at the close of 1894 to 43,410,814 florins at
Buda-Pesth against 41,649,846 florins at Vienna. Still more
remarkable has been the competition of the branches outside
the two capitals. The relations in percentages of the volume
of discounts outstanding at the different offices on three
representative dates are shown in the following table:
Proportion of Discounts at Different Offices.

Amount Dec. 31,1907

Dec. 31,1894. Dec. 31,1899. Dec. 31,1907.

Austrian branches , 33-50
Hungarian branches, 19-31
Total, 100.00


100 00




An enlarged share in the profits of the bank was claimed
by the state in the extension of the charter in 1899, as in the
1 Cf. articles by the present writer in New York Bankers' Magazine,
November, 1897, I/V., 698, and April, 1899, LVIII., 528.



case of most other European banks in recent years. Taxes
are levied upon the real estate and securities belonging to
the bank and on the dividends paid to shareholders. Under
the law of 1878, which was not radically changed in 1887,
five per cent, of net profits went to the shareholders, ten per
cent, of the remainder was added to the reserve, the divi­
dend to shareholders was then made up to seven per cent.,
and half the remainder went into the treasuries of the two
monarchies, in the proportion of seventy per cent, to Austria
and thirty per cent, to Hungary.1 This distribution was
modified in 1899 so that the primary dividend to share­
holders is only four per cent. After the allotment of ten per
cent, of the remainder to reserve and a small amount for
pensions, half of the remainder goes to the state and half to
shareholders until their total dividend reaches six per cent.,
after which the state takes two-thirds.2 Under this distri­
bution net profits in 1907 were 29,925,536 crowns ($6,075,000), of which the shareholders received 16,119,640 crowns
($3,275,000) or at the rate of 7.67 per cent., while the state
received 11,228,216 crowns, exclusive of taxes. Including
1,886,460 crowns paid upon excess circulation, the . total
share of the state on these two accounts was 13,114,676
crowns ($2,662,000). This is much larger than any previous
allotment to the state, the amounts prior to 1906 having
been less than 5,000,000 crowns annually. The rate of divi­
dend in 1905 was 5.014 and in 1906, 6.457 Per cent.3
The creation of an independent bank of issue for Hungary
was one of the projects which grew logically out of the
movement which gained momentum at the beginning of the
twentieth century for the restoration of Hungarian indepen­
dence. So insistent was the demand for a separate bank
that when the convention for the continuance of the union
between the two countries was prolonged for ten years in the
1 Noel, I., 466.
2 jfcconomiste Europeen, March 6, 1908, XXXIII., 298.
8 Moniteur des Interets Materiels, January 15, 1908, 170.



spring of 1908, the question of the bank was left to a special
commission. The markets were disturbed at first by the
fear that the Hungarians were determined upon immediate
separation, but confidence was restored by the decision of
the commission of twenty-one appointed by the Diet to take
a year for consideration.1 At the end of that time the political
demand for a separate institution was so insistent that it
caused a cabinet crisis.2 The question remained unsettled
until August, 1911, seven months after the formal expiration
of the charter of the bank. A law was then enacted (August
8,1911) prolonging the bank's legal existence until the termi­
nation of the political union between Austria and Hungary
at the close of the year 1917. ]>gal recognition was given
by the new statutes to the portfolio of foreign bills, of which
60,000,000 crowns ($12,180,000) were to be counted as a
part of the metallic reserve, and discretion was vested in the
ministers of finance of the two governments as to the maxi­
mum amount of notes to be issued of 10 crowns and 20 crowns.
A new division of earnings was provided, by which only
one-fourth of the amount available goes to the shareholders
and three-fourths to the state, after the dividend to the share­
holders has reached seven per cent.3
1London Economist, April 4, 1908, IyXVI., 736. The questions ad­
dressed to leading economists are given in Economiste Europeen, April
10, 1908, XXXIII., 473.
2 Economiste Europeen, May 7, 1909, XXXV., 601.
3 RafFalovich, Le Marche Financier en 1911-12, 367.


Its Relation to the Government and its Modern Development—The
Long Regime of Paper Money and the Efforts in 1817,1839, i860,
and 1881 to Bring it to an End—The Revision of the Charter in
1894—Final Success of Count Witte in 1897—The Question of
the Rate of Conversion and the Gold Standard—How the Bank
Went through the War with Japan—The Bank of Finland.

HE history of the Bank of Russia is of interest, because
it is the most successful instance on a large scale of a
bank of issue owned by the state and because it car­
ried through in the closing decade of the nineteenth century
the most serious operations ever undertaken in Europe for
the restoration of stability of exchange upon a gold basis.
Russia was for more than a century, with only brief inter­
ludes, under the regime of government paper money. The
task of restoring sound conditions involved the solution of
many monetary problems never before fully solved, and the
accumulation of one of the three greatest stocks of gold in
the world, the others being those of the Bank of France and
the Treasury of the United States.1 The solution of these
problems fell to the lot of a succession of Ministers of Finance
who rose to the level of their opportunities and obligations,
and by their foresight and skill placed Russia upon the high­
road to economic competition with the older and richer nations.
Paper money was introduced into Russia as early as 1768,
and was welcomed at first because of its greater convenience


1These funds stood, respectively, about September 1,1908: Bank of
Russia, 1541,300,000; Bank of France, $620,800,000; United States
Treasury, $1,021,000,000.


than the copper money of which it was the representative.
The pretext was maintained for a time that the paper was
simply the coined certificate for the copper, and the notes,
which were known as assignats, were at a slight premium.
Bureaus were established at St. Petersburg, Moscow, and in
the provinces for the redemption of the paper, which may be
considered forerunners of the Bank of Russia. A ukase of
January 10, 1774, prescribed that the limit of 20,000,000
roubles ($15,400,000) should never be exceeded in the issue
of paper money. This pledge was disregarded, as most such
limits upon paper issues have been, and after the limit had
been raised to 100,000,000 roubles ($77,200,000) on June 26,
1786, in order to obtain resources for war with Turkey, the
depreciation began. The price of the silver rouble had
risen before the end of the century to 1.47 in paper roubles
and the prices of merchandise had followed the upward
course of the precious metals. The government endeavored
to protect itself, at the same time that it recognized the de­
preciation of the paper, by a ukase of June 23, 1794, raising
the capitation tax paid b}' the peasants, ‘‘ in view of the fact
that the increased price of all products permits them to earn
more by cultivation and other work.” 1
The four most serious efforts to rescue the monetary system
of the country from the mire of irredeemable paper were
made in 1817, 1839, i860, and 1881. The first attempt was
made by means of loans placed both abroad and at home, of
which a part of the proceeds was to be applied to the retire­
ment of the paper circulation. The Emperor Alexander
1., after the peace of Tilsit in 1810, recognized all the out­
standing notes as a public debt, pledged the public faith
to their redemption, and declared that no more paper money
should be issued. The circulation, notwithstanding these
pledges, climbed upward from 577,000,000 roubles in 1810 to
836.000.000 roubles in 1817. It was then that the loans

1Paul Leroy-Beaulieu’s ha Science des Finances, II., 656. The rou­
ble was the exact equi\alent of four francs in French money ($0,772)
and exchange on Paris at par was quoted in the form of 400 francs
for 100 roubles.



were issued which had been promised in a decree of May27, 1810, and the progress of reform was so rapid that the
circulation was reduced in 1822 to 595,776,000 roubles.
Count Cancrin was then at the head of Russian finances,
and he steadily refused to increase the paper circulation dur­
ing thirteen years, in spite of wars in Turkey, Persia, and
Poland. He hesitated, however, at the policy of substi­
tuting an interest-bearing debt for the immense mass of
paper obligations bearing no interest and did not succeed in
raising the value of the paper rouble much above a quartet
of the rouble of silver.1
The government made the second effort to reduce the vol­
ume of paper money by a decree of July 1, 1839, that the
paper roubles should be valued at three and a half to a rou­
ble of silver and that a new form of paper should be substi­
tuted in this proportion. The new paper was to be known
as bills of credit and was to be redeemable in silver and
secured by the public domain. The exchange of the assig­
nats for the new bills was ordered to take place on June 1,
1843, and a pledge was given to the business community for
the credit of the new paper by depositing in the citadel of
St. Petersburg in December, 1844, a metallic reserve of 70,464,245 roubles ($54,000,000), which was to be under the
control of twenty-four members of the stock exchange. This
fund was increased on July 14, 1845, by 12,180,000 roubles,
which established a coin reserve of nearly fifty per cent, of
the 170,000,000 roubles in bills of credit then outstanding.
A limited redemption was maintained and the bills did not
drop far below par until the Crimean War, but new issues of
credit paper were made even before the alliance with Austria
to crush Hungary and 735,000,000 roubles in the new bills
were in circulation at the close of the Crimean War in 1857.
The third attempt to extricate the Empire from the evils
of a debased monetary standard was connected with the
establishment of the Bank of Russia in substantially the
1 The greatest depression in the value of the assignats was in 1815,
when 100 silver roubles exchanged for 418 in paper.—Levy, 200.

form in which it existed from i860 to 1894. The statutes of
the bank were established by a decree of May 26, i860, and
the reserves of several older banking establishments were
turned into its coffers and it assumed their engagements.
The original capital was 15,000,000 roubles ($12,000,000)
and the declared object of the bank was to consolidate the
credit circulation and the floating debt of the Empire. The
entire ownership and management were in the government,
but the capital and reserve funds were declared to be invio­
lably set aside for the uses of the bank, and the private de­
positors were guaranteed against confiscation. A third of the
profits were to go to a reserve fund, part of which was to be
applied from time to time to the increase of the capital stock.1
The capital was soon increased by this means to 25,000,000
roubles and the reserve fund to 3,000,000 roubles, where
they remained until the reorganization of the bank in 1894.
The bank had a metallic reserve on May 1, 1861, of 86,000,000 roubles against a circulation of 714,627,069 roubles, but
the commercial discounts scarcely exceeded 14,000,000 rou­
bles. The depreciation at this time was about ten per cent,
and M. Lamanski, the deputy governor of the bank, pro­
posed a plan for restoring parity and protecting the note
issues. He recommended the transformation of the bank
into a stock company, with the monopoly of note issue for
twenty-eight years, the redemption of notes in coin accord­
ing to a sliding scale gradually approaching par, and author­
ity to sell the public domains, the forests and the state
railways to protect the circulation.2
The plan of M. I^amanski was adopted in a measure, the
proceeds of a loan of 15,000,000 roubles were carried to the
coin reserve of the bank and it was decreed that bills re­
ceived in payment for the loan should be destroyed and that
new bills should be issued only against deposits of coin. A
scale of depreciation was fixed which involved the restora­
tion of parity on January 1, 1864. Redemptions proceeded
1 C16ment Juglar, Article “ Banque ” in Dictionnaire des Finances,
I., 347.
2 Winiarski, 57.


for a while without great losses of coin to the bank, and
averaged 1,250,000 roubles per month up to January 1, 1863.
A run then began for the redemption of the paper, which
resulted in a net loss of coin during January of* 2,287,000
roubles; February, 4,921,000 roubles; March, 7,723,000
roubles; April, 10,213,000 roubles; May, 10,367,000 rou­
bles; June, 2,233,000 roubles ; and in July, 6,751,000 roubles.
Various devices were tried to stop the drain, but they were
unsuccessful and coin redemption was suspended by a ukase
of November 19, 1863. Exchange on Paris, which had
risen on October 29th to 396 francs, within four francs of
par, fell gradually to 350 francs, about which point it fluctu­
ated for some time. The net result of the effort to restore
specie payments was a reduction of the outstanding paper to
634,773,929 roubles on November 30, 1863, and a useless
expense to the Treasury of nearly 100,000,000 roubles ($75,000,000).
The bank was entrusted in 1862 with the mission of buy­
ing lands for the peasants and was aided by the deposit
of the Treasury funds free of interest. These funds were
partly employed in commercial discounts, which were so
freely granted that the legitimate necessities of commerce
were much exceeded and a mass of doubtful paper was left
in the hands of the bank in the crisis of 1873. The expan­
sion of credits, however, was chiefly confined to St. Peters­
burg and Moscow, and the provinces suffered the usual evils
of a country endowed with a single great bank,—the lack
of capital, of currency, and of facilities for credit. The ex­
cess of capital at the centres caused reckless speculation and
blind investments in foreign securities, while the excessive
issues of paper money gradually found an outlet only after
the emancipation of the serfs created a greater demand for
currency for wages. One of the difficulties of the situation
was the constantly recurring deficit in the public finances,
which called for new issues of paper money to fill the void.
This difficulty was overcome for a moment in 1870, when
the deficit declined to 1,205,116 roubles, and during the next
five years, which showed a considerable surplus. The



quotation of the rouble on the exchange market was 330
francs in 1876, or seventeen and a half per cent, below par,
when the menace of war with Turkey and of new issues of
paper money carried it down in 1877 as low as 234 francs, or
a loss of more than 41 per cent.1
The new paper issues which were feared soon became a
reality, in order to maintain the armies in the field. The
circulation had risen on December 31, 1874, to 797,313,500
roubles and the metallic reserve had increased to 231,227,000
roubles. The circulation was reduced during the next two
3^ears until it stood 011 July 1, 1876, at 693,000,000 roubles.
The issue of bills of credit on account of the war was 491,000,000 roubles and the net circulation on December 18, 1878,
was 1,103,280,185 roubles. A supplementary issue of 96,000,000 roubles in 1879, with the famine and arrest of exports,
caused a crisis in 1880 which reduced the revenues of the
government and the railway receipts, in spite of high paper
prices, and caused the rapid fall of the coin value of the
rouble. The change of ministry which resulted from the
crisis brought into power M. Abasa, who at once announced
a plan for reimbursing the debt of the government to the
bank. A ukase of January 1, 1881, ordered that the Treas­
ury pay to the bank without delay a sum sufficient to reduce
to 400,000,000 roubles the debt to the bank on account of
disbursements for the government; that the remainder of
the debt (400,000,000 roubles) be funded by annual payments
of 50,000,000 roubles by the Treasury to the bank; that
bills of credit be destroyed to the extent of their accumula­
tion in the hands of the bank and with due regard to the
needs of the circulation. The first part of this programme
had hardly been carried out when M. Abasa was replaced as
Minister of Finance by M. Bunge. The rigid policy of re­
form which had been inaugurated was somewhat relaxed and
the bills paid into the bank were kept on hand and sub­
sequently re-issued, instead of destroyed.2 The circulation
1Winiarski, 59-60.
2M. Witte, who was later Minister of Finance, has been subjected
to criticism for employing 92,700,000 roubles ($71,000,000). paid into


25 7

was reduced during the ten years from 1878 to 1888 from
1,188,000,000 roubles to 1,046,000,000 roubles, but the value
of the paper rouble did not advance materially towards that
of gold.
The statutes of the Bank of Russia were submitted to a
complete revision in 1894 and an effort was made to make
the bank of greater assistance than before in the promotion
of industry and commerce. The first article of the new
statutes, promulgated on June 24, 1894, declared the purpose
of the bank to be “ to facilitate, by means of credit for short
terms, the movement of commerce and to promote the suc­
cess of national industry and agricultural production/*1 The
new statutes define with considerable precision the accom­
modation extended to agriculture and industry by the bank.
The institution is authorized to open credits and make loans
against bills secured by pledges of hypothecation and by
agricultural or industrial material, by guarantee, and by
other sureties which the Minister of Finance may recognize
as sufficient. Loans secured on material are to be made only
to acquire supplementary material or renew old supplies, but
they are to constitute a lien upon the old material as well as
the new. The material obtained by loans from the bank is
required, in accordance with the protective policy of the
Empire, to be of Russian fabrication, but exceptions may be
authorized in certain cases by the Minister of Finance and,
in the case of agricultural material, with the concurrence of
the Minister of Agriculture. The maximum loan for an
industrial enterprise is 500,000 roubles and for a retail mer-

the bank for cancellation, in the construction of the Trans-Sibe­
rian Railway.—De Cyon, 183-85. M. Raffalovich, however, credits
the government with having known how “ not to abuse the issue of
paper money,” and declares that “ when the needs of commerce have
required a greater quantity of monetary signs an issue has been made
temporarily under the condition of a special guarantee .”—Le Marcht
Financier en 1893-94, I4°1Bulletin de Statistique, August, 1894, XXXVI., 183. The date
here given, and most others in this chapter, are according to the
Julian calendar, whose use still prevails in Russia, and are twelve
days behind the Gregorian dates.

chant 600 roubles. The maximum term for loans for mate­
rial is three years, but periodical payments are required
when the term exceeds six months. The bank is authorized
to accept as security for loans to small farmers, peasants, and
mechanics, upon the pledge of their products, the guarantee
of the provincial assemblies, institutions of credit (including
mutual societies which agree to operate under the rules
framed by the bank), and individuals chosen from among
the inhabitants of the respective communities who inspire
confidence at the bank.
This new policy of the bank has been subjected to severe
criticism upon the ground that the Russian people are
unused to operations of credit and cannot be trusted to meet
in good faith the required payments. The Minister of
Finance himself, in his report recommending the new sys­
tem, referred to the collapses of most of the banks of com­
merce and of mutual credit which have taken place in
Russia during the past twenty years and to the failure of
two branches of the Bank of Russia at Kief and Kharkof,
which were authorized to advance money to small farmers on
the guarantee of two large proprietors and the certificate of
the local tribunal that the property actually existed upon
which the advance was made. More than 2,000,000 roubles
were advanced annually in loans of this sort, but great
abuses occurred and it was found that loans were obtained
upon products which had no existence by means of false
certificates given by the authorities.1 The government has
felt, however, that some losses could be borne in teaching
the people the benefits of commerce and of credit and did
not hesitate, during the famine of 1892 and the customs war
with Germany in 1893, to advance to the suffering peasants
some 90,000,000 roubles which were recovered only partially
and by degrees.
The danger of loans upon products is increased, in the
opinion of the critics of the bank, by the permission that
the products on which loans are made may be retained in the
1De Cyon, 13 - 3 .
5 6


hands of the producers and by the long terms for which the
money is advanced. I^ong-term loans, in the absence of
large deposits, can only be made by fresh issues of paper
money and M. Witte made declarations in his report as to
the effect of such issues strangely like the declarations of
Mirabeau when the French assignats were authorized and of
Secretary Chase when he was urging upon the American
Congress the substitution of legal tender government paper
for bank-notes.1 “ The value of these bills,’’ says M. Witte,
“ issued exclusively for a useful object, will be maintained
by the productiveness of labor, and the issue of such bills
will not influence the quotations of the credit rouble, because
in making these issues in a manner responding to the object
in view the quantity of securities in circulation will be at the
same time increased/9
The government of Russia, however, has undertaken a
comprehensive policy for the development of the resources
and productive power of the country. It has been felt by
those who shape this policy that the government should take
the initiative in measures which in other countries would be
left to private enterprise. This course has been adopted by
Russian statesmen, not in ignorance of the laws of finance
and political economy, but under the conviction that those
laws would not come rapidly into operation to stimulate com­
mercial and credit operations in an agricultural country
without the example of the leadership of the state. This
conviction is the keynote of the present policy of the Bank
of Russia. The government is willing to take steps in mak­
ing loans to producers which would not be taken by a private
financial establishment, because it is willing to risk some­
thing of the national wealth for the sake of increasing it, and
because the strong hand of the government can be appealed
to for the purpose of punishing defaulting debtors. The
issue of paper money, through the instrumentality of a great
bank, is felt to be a necessary means for supplying the people
with that ample supply of monetary signs which proved so
1 Vide Ch. xv., p. 399.


h i s t o r y of m o d e r n b a n k s o f i s s u e .

beneficial to France after the great influx of gold from Cali­
fornia and Australia and which has proved so beneficial to
Scotland under her system of free banking. The government
has not put in jeopardy the solvency of the bank by its
agricultural loans, for the entire amount on December 16,
1895, was 27,466,804 credit roubles, and had been materially
reduced in 1908.
The capital of the Bank of Russia was fixed by the new
vstatutes at 50,000,000 roubles ($38,000,000), and the limit of
the special reserve was increased from 3,000,000 roubles to
5,000,000 roubles. It was proposed at first to raise the new
capital by setting aside annually ten per cent, of the profits,
but this process was soon regarded as too slow and a decree
of February 6, 1895, provided for taking the necessary
amount from the surplus in the Imperial Treasury.1 Losses
by the bank are met from the reserves, and, in case of their
exhaustion, are to be carried to the debit account of the
Treasury. The management of the bank is entrusted to the
Minister of Finance and the annual accounts are submitted
to the Imperial Council.9 The number of branches at the
close of 1907 was 113.
The accounts of the Bank of Russia were stated in a similar
manner to those of the Bank of England, in the separation
of the issue from the banking department. The bills of
credit are government notes for all practical purposes and
the bank itself, even in its banking operations, is little more
than a bureau of the Treasury. A circulation of 769,342,911
roubles was based upon government obligations and corre­
sponded to the “ authorized circulation *’ of the Bank of

Bulletin Russe de Siatisiique, April, 1895, 200.

2M. Witte, the eminent Finance Minister, also created a board
of Treasury officers known as the Council of the Bank and corre­
sponding, according to his view, “ to the similar councils in the
central banks of Western Europe.” These boards take the place of
the Council of Imperial Institutions of Credit, created in 1817, which
contained representatives of the nobility and of the business commu­
nity, and the change is criticized by M. de Cyon on the ground that it
has brought the bank entirely under official supervision with no
external check.—31. Witte et les Finances Russes, 145.


England. Circulation beyond this sum was represented by
the coin reserve of the bank and could be increased only by
deposits of coin. The banking department was utilized for
several years for swelling the paper issues in much the same
manner as when the suspension of the bank act is authorized
in England. These special issues consisted for the most
part of the notes which the bank was ordered to call in and
destroy by the ukase of 1881, but which were kept in reserve
until special authority was given for their re-issue against
new deposits of securities or transfers of gold to the cash
reserves.1 The government, by a ukase of December 9,
1894, abolished the distinction between the authorized per­
manent circulation and the temporary circulation charged
against the banking department by transferring the tempo­
rary issues from the banking department to the issue depart­
ment. The limit of authorized circulation without metallic
cover was increased by this process from 568,513,000 roubles
to 769,342,911 roubles, exclusive of about 285,000,000 roubles
covered by gold. Both sides of the account of the banking
department were diminished by the amount thus transferred,
—200,829,455 roubles,—and by an additional sum of 65,433,691 roubles transferred in gold from the banking to the issue
department as the gold value of that part of the increased
permanent issue not represented by securities.2
The total gold funds of the bank and the Treasury on
January 1, 1895, were 645,731,000 roubles ($500,000,000).
This sum was not all in actual gold held in Russia, the sum
of 58,331,000 roubles representing foreign credits payable in
gold on demand ; but the Treasury alone had a gold fund of
194,410,000 roubles and the bank held 39,540,000 roubles in
gold in its banking department, exclusive of that held
against outstanding notes.3 The funds then set aside to
1 L6vy, 201-203.
2 Bulletin Russe de Statistique, Jan.-Feb., 1895, 34-37.
3It is interesting to note that 28,654,937 roubles ($21,500,000) of these
holdings was in American half-eagles, the largest amount of foreign
coin held of a siugle kind except 38,117,580 roubles ($29,000,000) in
English sovereigns.—Bulletin Russe de Statistique, March, 1895, 170.



cover the circulation were 351,939,000 roubles and the au­
thorized circulation, covered and uncovered, was 1,121,282,000 roubles ($880,000,000). The government by a ukase of
March 3, 1895, increased the metallic coverture for the cir­
culation by transferring from the Treasury to the bank 98,061,276 roubles in exchange funds and substituting 1,125,682
in gold for an equal amount of silver in the bank reserves.
This ftiade the total gold funds held against circulation 375,000,000 roubles, exclusive of 75,000,000 held against a special
issue, and made the metallic coverture more than a third of
the outstanding bills.
The monetary reform in Russia which was practically
achieved by the autumn of 1897 presents one of the most
interesting and important of modern financial operations.
Previous failures and several difficult factors in the problem
imposed upon Count Witte, with whose name the reform will
be permanently linked, a policy of caution and complete
preparation. Three of the important questions involved were
at what rate the value of the paper rouble should be fixed,
whether the metallic standard should be changed from silver
to gold, and where the resources should be obtained to give
stability and permanence to the new system.
Upon the question of the rate of conversion of the paper,
there were those who contended that, in Russia, as in the
United States after the Civil War, the old metallic unit should
be restored in its integrity. Against this contention, how­
ever, were arrayed the views of those who believed in con­
secrating by law the status quo, in order to prevent violent
changes in prices of commodities and adverse effects upon
the export trade of the country. While there had been
periods, as recently as up to the war with Turkey in 1877,
when the credit rouble had been at a quotation as high as
3.40 francs (par being 4.00 francs), the quotation had fallen
during and after the war considerably below 2.66 and for
a time in 1888 even below 2.00 francs.1 These years had
1Leroy-Beaulieu, La Science des Finances, II., 750.



represented, however, a period of wide fluctuations. The
salient fact upon which the advocates of resumption at the
current value of the rouble rested their case was that since 1891
“ the rouble had acquired a stability more and more marked
and a fixity of value which was a benefit both to the country
itself and to those who were called upon to do business with
it.” 1 In the language of a semi-official publication2:
In fine, the credit rouble is equal to a fixed quantity of fine gold,
almost identical with the amount which one has been able, on the
average of the last twenty years and during the last three years, to
procure with this same rouble. The fixed exchange at which the
Bank of Russia buys and sells gold over its counter causes no dis­
turbance to contracts, old or recent, formal or tacit; it does not
modify established customs, the price of rents, the nominal or the
real amount of wages. Mortgage creditors and debtors, holders of
the public funds issued in credit roubles, functionaries and employees,
and all others, give and receive paper roubles at par5and these roubles
are worth to-day that which, on the average, they were worth from
1876 to 1895, from 1879 to 1881, from 1893 to 1896.

Already, as early as 1887, Vichnegradsky, the great finance
minister who paved the way for the later successes of Count
Witte, had declared that the eventual rate of conversion for
the paper rouble would be two-thirds of its nominal value
and had planned to strengthen exchange funds and end
the regime of irredeemable paper.3 By the autumn of 1892
Count Witte was preparing to bring to an end speculation
in the paper rouble in the Berlin market. He gave notice in
January, 1893, to banking institutions doing business in Russia
that aid lent by them to speculative operations in the rouble
would be considered as incompatible with their privileges.
In the autumn of the next year, when the comparative
stability of the paper had been disturbed temporarily by
unfavorable reports regarding the health of the Russian
Emperor, Count Witte went resolutely into the market, pur­
chased the “ short” contracts offered by speculators for the
1 RafFalovich, Les MSthodes pour Revenir h la Bonne Monnaie, 20.
4 Bulletin Russe de Statistique, March-April, 1896, III., 177.
3 Lorini, 118.



decline, and forced them to settle on his own terms,1 With
a great fund of gold at his command, it became possible also
to adopt the means of regulating paper and silver currencies
which has proved so effective in solvent countries in recent
years—the sale of foreign exchange. As early as the autumn
of 1892 the Department of Finance offered to buy exchange
on Berlin at 2.18 marks and to sell at 2.20, shutting fluctua­
tions, while this policy could be maintained, within the
narrow limits of normal gold points.3
The argument for fixing the new gold unit at the current
gold value of the paper rouble was strengthened by the fact that
the metallic standard of the Empire had been, not gold, but
silver. Neither metal was in circulation when Count Witte
projected his reforms, but with his usual foresight he realized
that gold was the proper standard for a modern commercial
state surrounded by gold-standard countries. The adoption
of gold, however, was a radical departure from old Russian
legislation, so that it could not be properly contended that
the government was under a legal obligation to raise the
paper rouble to a parity with gold at its old ratio to silver.
The law of 1842 had decreed that “ the principal monetary
unit, legal and invariable, of all the moneys having cir­
culation in the country shall continue to be the silver
rouble.” 3 It was in September, 1876, that de Reutern, the
Minister of Finance of the day, suspended the free coinage
of silver, and on the 10th of November following that he
required customs dues to be paid in gold; but the definite
adoption of the gold standard awaited the completion of the
monetary reform in 1897.
That the gold standard could be established and main­
1 Vide the author’s Principles of Money and Bankings II., 363-64.
2 Lorini, 82.
3 Lorini, 37. This writer calculates that, at the price of silver in
1897, redemption of a credit rouble in full in silver would have given
to the holder 1.97 francs in gold value instead of the sum of 2.67
francs actually given by the monetary reform .—La Rtforme Monitaire
de la Russie, 111.



tained, in a county with so limited an economic power as
Russia, only by accumulating large gold resources, is in­
dicated by the facts already set forth regarding the gold
funds of the bank and the Treasury. Careful consideration
was also given to the foreign-trade movement, the produc­
tion of gold in Russia, and the balance of payments on
account of financial operations. Substantially, the gold
standard was established by means of borrowed capital, but
so skilfully was the public credit built up that by the con­
version of old loans at lower rates the use of a thousand
millions of dollars was obtained from French and other
foreign lenders practically without increase in interest
The foundations having thus been laid deep and broad,
the gold standard was put into actual operation with mar­
vellous rapidity. In 1895 an ukase of May 8th declared that
written contracts might be made payable in Russian gold
roubles and that such contracts might be settled in gold or in
credit roubles of equivalent gold value at the rate of exchange
prevailing at the date of payment. Public depositaries were
authorized to receive gold at its exchange value in the pay­
ment of excises under regulations framed by the Minister of
Finance. Other steps which followed during the summer
authorized the bank to receive deposits of g o ld coin and bul­
lion, foreign bank-notes, and commercial bills payable in
gold and to issue certificates therefor payable in gold on de­
mand. These certificates were receivable as the equivalent
of gold at the Treasury and the bank, but were not a legal
substitute for gold between individuals except with the con­
sent of the creditor. They were receivable at branches of
the bank for gold obligations due at other branches and ex­
change was furnished free except for the cost of telegraphic
service.8 These important acts were followed on July 26,
1The debt increased from 11,619,434,008 francs on Jan. 1, 1887, to
16,567,830,000 francs on Jan. 1, 1900.—Fonds d*Etat Russes et Autres
Valeurs Mobilises Cree en Russie, 31, 64.
2 Bulletin Russe de Statistique, July-August, 1895, II., 26.

1895, by the promulgation of rules permitting the creation
of special gold accounts at the bank, for the reception of gold
and gold certificates, and the issue of check-books represent­
ing payments exclusively in gold. The public were thus
being gradually prepared, by the flow of a stream of gold
through the Treasury and the banks, for the establishment
of gold payments and the maintenance of a fixed relation
between the credit rouble and the metallic standard.
This relation was definitely established in 1896 at three
roubles of the new standard for two of the old, or at the ratio
of two-thirds of the old gold rouble of four francs ($0,772)
for one rouble of the new standard, which thus had a value
of 2.67 francs ($0,515). A complete project for a new coin­
age system upon this basis was submitted by Count Witte to
the Imperial Council, March 21, 1896, and was the basis of
the ukase of August 8th, which provided that the paper rouble
should be received by the railways, public offices, and the
bank at the new rate until January 1,1898.1 These measures,
positive though they were, were looked upon in certain
quarters as only a provisional fixing of the rate of exchange,
and there was still discussion as to whether the rate should
be given permanence by the issue of new coins and by the
offer to redeem paper roubles in the new coins at the bank.
Count Witte, in his annual estimates for 1897, reminded
the Emperor that in view of what had already been done,
“ legislative sanction will add nothing to the dangers, now
much exaggerated, which are attributed to the resumption
of payments in specie, already accomplished in fact. ’’ On
the contrary, he declared, so far as demands for redemption
depended on confidence in the performance of the reform, the
adoption by law of the fundamental principles of a sound
circulation would tend only to diminish the risks of the re­
form, if any existed, and to strengthen to a higher degree
the credit of Russia.2 These resolute views bore fruit in the
ukase of January 3, 1897, which provided for the issue of
1 Lorini, 100.
2 Bulletin Russe de Statistique, 1896, III., 737.



the old gold coins of the Empire at their former weight and
fineness, but with designations making the old imperial
equal to fifteen roubles of the new standard instead of ten. A
coin of five roubles was provided for by an ukase of November
14, 1897,
^ was not until December 11, 1898, that the
gold piece of ten roubles was authorized, which soon super­
seded the older pieces and became the standard gold coin
of the country.1 The new coinage policy was codified and
confirmed by the law of June 7, 1899, which declared,
“ The monetary system of Russia is based on gold. ’’2
On the part of the bank, provision was made to recognize
by law its obligation to redeem its notes in gold. The
statutes were modified by ukase of August 29, 1897, so that
the English system of separating the issue department from
commercial operations was abandoned and the accounts fused
into a general balance-sheet. The authorized “ uncovered”
issue was reduced to 600,000,000 roubles ($309,000,000) and
of this amount one-half must be covered by gold; issues in
excess could be made only for gold. It was declared, more­
over, that issues should be kept within limits rigorously
determined by the actual needs of the money market.8 Al­
ready the bank held more gold than the volume of notes
outstanding,4 and it involved no risk to follow the suggestion
of Count Witte and announce readiness to pay gold on de­
mand. This was done by the ukase of November 14, 1897,


Bulletin Russe de Statistique, 1901,
164. The text of some
o f these acts is given in English by Willis, Sound Currency, July, 1899,
106-108; in French by L,orini, La Reforme MonHaire de la Russie,


175- 183.


2 Le Marche Financier en
, 794.
3 Bulletin Russe de Statistique, 1897, IV., 467
4 Beaufort sets forth in detail how special deposits o f gold by the
Treasury were carried to the general assets of the bank, gold holdings
in old roubles were advanced in nominal value fifty per cent, in new
roubles, and other readjustments brought up the total gold resources
o f the bank on September 1, 1897, to 1,131,700,000 roubles against
outstanding notes to the amount of 1,068,778,000 roubles.—
, 32-35.

L'Achbvement etVApplication de la Reforme MonHaire de la Russie



which provided for inscriptions on the notes to the effect that
the bank would redeem them in gold coin without limitation
as to amount, that redemption was guaranteed by all the
resources of the state, and that the notes should be received
at par throughout the Empire.
These measures were not taken without misgivings, both
at home and abroad, as to the possession of sufficient economic
power by Russia to retain her laboriously accumulated gold
funds in the face of adverse conditions of trade or foreign war.
But these factors had been anticipated and measured by
Count Witte. In his report on the budget of 1898, he dis­
cussed the conditions necessary to the success of the reform
and did not fail to include among them the maintenance of
equilibrium in the budget and good faith by Russia toward
her foreign creditors. Evidence of the latter had been given
in the most explicit terms by an order of the Emperor, issued
in connection with the law of January 3, 1897, which de­
clared that, in the payment of engagements previously con­
tracted in gold roubles, the coins should continue to rank
only at their old face value, instead of at the new value onehalf higher.1 Proof of the determination to separate the
affairs of the bank finally and absolutely from those of the
public Treasury was afforded, on the morrow of the crisis of
1899, by an ukase which directed that the last 50,000,000
roubles of the State debt to the bank on account of the paper
issues be cancelled from the free cash balance of the Treas­
ury and that the issue of bills of credit should never again
serve as an auxiliary resource in the public finances.*
To both the tests of financial troubles at home and serious
war in the East, the Russian monetary system was subjected
within seven years after it was fairly put in operation in
1897, and both tests it met without disaster. The scarcity of
capital which afflicted Europe in 1899 reacted seriously upon
By a semi-official interpretation this rule was extended to engage­
ments contracted in ‘ ‘ metallic roubles.” — Bulletin Russe de Statist
tique, Nov.-Dec., 1896, III., 740.
2 Raffalovich, L e Marchb Financier en 1899-1 goo, 810.



Russia because so many of her enterprises were fed with
capital from abroad. As usual under such conditions, the
clamor arose for ‘‘ more money *’ and for a freer use of the
facilities of the Bank of Russia. It became necessary for
Count Witte to submit a memorial to the Emperor, showing
that the quantity of currency in the country was greater
than ever before and that if the bank had thought it advisable
to raise its discount rate it was only taking the same pre­
caution as other state banks and had not been exempt from
this necessity even under the regime of paper money.1 The
condition of the bank and the stability of the gold standard
remained absolutely unshaken. Discounts and advances
were increased by nearly fifty per cent, in October, 1899, at
the height of the crisis, as compared with the previous year.
The circulation and gold reserves declined somewhat, but
this was the result of the policy of the government in forcing
gold coin into actual use. From October 1, 1897, to October
1899, gold in circulation had risen from 107,000,000 to
662.300.000 roubles, while bank-notes had fallen from 986,600.000 to 555,000,000 roubles. While within the year 1899
the gold resources of the bank fell by about 115,000,000
roubles, its outstanding note obligations fell by 171,000,000
roubles and its gold resources remained at the close of the
year at 730,000,000 roubles ($375,950,000).
A more serious test of the stability of the monetary system
came with the Russo-Japanese War in 1904. Disaster after
disaster came to Russian arms on land and sea, but they
never threatened the solidity of the structure built up by
Count Witte in time of peace. It was the policy of the Rus­
sian Government from the outset to suffer no infraction of
the gold resources of the bank and to support the expenses
of the war by the issue of interest-bearing securities rather
than by resort to paper money.2 The close of the year 1903
found the bank in much the same position in respect to re­
1 Raffalovich, L e Marche Financier en 1899-1900, 442-448.
8Cf. Cahen, in Questions Monetaires Contemporaines, 557.



serves and circulation as at the close of 1899. The total gold
resources of the Treasury and of the bank were 1,058,500,000
roubles, of which 732,900,000 roubles ($376,500,000) was in
the vaults of the bank and 169,100,000 roubles ($87,000,000)
in foreign bills, making the gold funds of the bank 902,000,000 roubles. As the outstanding circulation was then only
578,700,000 roubles, the notes were covered in the ratio of
156 per cent, by gold, and further paper issues would have
been well within the limit of safety.1 The Treasury, more­
over, instead of being debtor to the bank, as in most European
states, was a creditor to the amount of a free balance of
635,000,000 roubles.
If there was any doubt of the purpose of the Russian Gov­
ernment to adhere.resolutely to a sound financial policy, it
was set at rest by an official communication, appearing in
the Official Messenger of May 13, 1904, which declared that
“ However seductive it might appear at first glance to make
head against all the expenses of the war with the sole re­
sources afforded by the normal elasticity of the circulation,
the Ministry of Finance did not think proper to employ this
method.” A conference of the Committee of Finance defin­
itely considered the proposal to suspend specie payments, as
the Bank of France had done in 1870, in order to husband its
gold, but decided that such a step would be unnecessary and
Commercial credit showed some signs of disturbance at
the prospect of war, and the fact that the monetary system
had not yet been tested led to purchases of foreign bills in
order to transfer capital abroad. Exchange on London rose
in January, 1904, to ninety-five roubles (for ;£io), but offer­
ings of bills soon exceeded the demand and the rate fell in
December to 94.45 roubles.3 The bank co-operated with the
1 Helfferich, Les Finances des Belligerants, 81.
2L e Marche Financier en 1904-05, 926.
3 L e Marche Financier en 1904- 05, 929. The latter rate is close to
the theoretical par, which is 94.5758.


Treasury to prevent exports of gold from Russia. The gov­
ernment decided to place loans abroad rather than at home,
in order to pay for war supplies obtained in foreign countries.
The balance of trade thus created against Russia was met by
drafts upon the funds arising from the war loans in London,
Paris, and Berlin and by the free sale by the bank of drafts
against its foreign balances. From January i to May 16,
1904, the gold balances of the bank abroad fell from 169,100,000 roubles to 39,900,000 roubles ($20,540,000).1
The Bank of Russia raised its discount rate early in 1904
from four and a half to five and a half per cent., but an­
nounced that, without encouraging speculation, it would
extend generous accommodation to solvent borrowers and
would re-discount freely for the private banks. Its own dis­
counts rose from 431,900,000 roubles on November 23,1903,
to 472,700,000 roubles on January 1, 1904; but this increase
was not much more than usually occurred in the beginning
of the year and was offset by a decline to 400,600,000 roubles
on November 23, 1904. The discounts of the private and
joint-stock banks increased from 897,000,000 roubles in
August, 1903, to 1,011,000,000 roubles in January, 1904, but
fell back in August, 1904, to 962,000,000 roubles.
Some additional issues of notes were ultimately made
during the war, but they were chiefly for the two objects of
affording a convenient medium of circulation in Manchuria
and of drawing gold from circulation into the coffers of the
bank. The total increase in circulation during 1904 was
270,000,000 roubles, but this was largely offset by an increase
of 181,000,000 roubles in the gold resources of the bank and
an estimated decrease of 103,700,000 roubles in gold in cir­
culation. Conditions in Manchuria were peculiar, in that
the surrounding countries were not upon a gold basis. Sil­
ver was the money in general use, but passed by weight
rather than by the nominal value of the coins. The Russian
Government found it advisable, therefore, to accumulate a
1Helfferich, 89.

bullion fund, in which rouble notes of small denominations
were redeemed, and to issue a considerable amount of such
notes while large military forces were maintained in Man­
churia.1 In Russia itself the preference for paper over gold
which was the result of the long regime of paper money had
not been outgrown and made it easy for the bank to conform
to this preference without impairing confidence in the stability
of the monetary standard.2
The crisis of 1899 led to several changes in the charter of
the State bank, designed to aid the private banks. The
term of commercial paper which might be accepted by the
State bank for re-discount was extended from three to eight
months and the privilege of re-discount was extended to the
private banks on loans on securities which were not accept­
able directly by the State bank, on the conditions that the
rate of discount should be ten per cent, and that the risk
should be divided between the two institutions.8
A general view of the accounts of the Bank of Russia for
representative j^ears appears in the table below. The small
amount of the gold resources of the bank in earlier years is
explained by the fact that much of the gold in the country
was held by the Treasury, until the plans for resuming gold
payments were put in operation which have been described.
The gold includes in most cases deposits by the bank in
foreign countries. The decline in gold resources after 1898
was due to the entry of gold into circulation in lieu of notes
retired, and a true view of the money in circulation would
include this gold. The deposits as reported include govern­
ment deposits of all types, which make up by far the largest
proportion of the total. Thus, on January 5,1908, Treasury
deposits were 433,740,000 roubles. There are several strong
commercial banks, which do much of the discount business
under ordinary conditions.
1 L e Marchi Financier en 1904-05, 932.
2 Helfferich, 103.
3 L e Marche Financier en 1899-1900, 462.



Balance Sheet of the Bank of Russia.


I 9°4


I I 2 I .2



(In millions of roubles.)
H 80.7
5 I 3-5


374 9

The Bank of Finland.
The Bank of Finland is an outgrowth of the Diet of Borge
in 1809, which regulated the relations of Finland with
Russia. Swedish notes continued to circulate for a long
time in Finland, in spite of determined efforts to supersede
them by Russian silver and paper.1 The bank was not con­
spicuously successful at first, but was able in 1840 to under­
take the redemption of its notes in silver, as was done at the
same time by the Bank of Russia. The unusual requirement
1 Frederiksen, 185. This author adds : “ The continuous decrease
in the value of Swedish notes consequent upon too large an issue
contributed rather to spread them in the interior of Finland. The
merchants, who received more of these debased notes for the same
quantity of merchandise, made large profits by placing the notes with
their customers, who only understood later that they were steadily
decreasing in value. As is always the case when money is decreasing
in value, the lower classes and the remoter districts of the country
were the chief sufferers. ’ *— Finland ; its Public and Private Economy,




that it should also redeem Russian notes made the bank a
victim of the vicissitudes of Russian finance and was the
moving cause of a demand, after the crisis of 1857, f°r a
separate coinage unit in Finland. This was granted by the
Russian Emperor by a decree of April 4, i860. The new
unit, the markka, had the merit of being at once the equivalent
of the French franc and one-fourth the nominal gold value of
the Russian rouble. The depreciation of silver after 1866
caused the same disorder in Finland as elsewhere and led to
the adoption by decree of August 9, 1877, of a gold-standard
law and the suspension of free coinage of silver.
The statutes of the bank were reformed in 1867 upon the
model of those of the Royal Bank of Sweden. The bank is
the property of the state and its profits go into the Treasury.
The Estates choose four delegates and four auditors and ex­
ercise by other means control over the general policy of the
bank. The capital is 25,000,000 marks ($4,825,000) with a
reserve of 31,739,855 marks. The limit of authorized or un­
covered circulation is 40,000,000 marks, to which 10,000,000
marks may be added, by consent of the government, to meet
emergencies. For any excess above these amounts, the
bank must hold either gold, foreign bills, credits with corre­
spondents abroad, or bonds of a class readily marketable on
foreign bourses. Deposits payable on demand must be
covered in the same manner as notes, and the amount of
actual gold must not be less than 20,000,000 marks.1
Preparations for the introduction of the Russian monetary
system into Finland were indicated by a decree of May 27,
1904, making Russian gold full legal tender; but Finnish
money remained for the time being legal tender alongside
the Russian and no immediate requirement in regard to
Russian money was imposed upon the bank.8 The circula­
tion of the bank at the close of 1907 was 95,026,745 marks
($18,340,000) and its assets, which reached a total of
1Frederiksen, 196.

*Bulletin de Statistique, September, 1904, I*VI., 332.

201,153,187 marks, included 25,392,732 marks in gold,
54,655,880 marks in Finnish commercial paper, 29,134,794
marks in advances on securities, and 57,903,196 marks on
deposit abroad.1

1 fcconomiste Europeen, April 3, 1908, X X X III., 445.

Development o f Banks of Issue in Belgium— The Strain Put upon
the National Bank by the F ran co-Prussian War— Difficulties
Caused b y the Double Standard— The Bank o f Amsterdam and
Modern Banking in Holland— Organization of the Banks of
Sweden, Norway, and Denmark.

of banking in Belgium is history of greater
interference and
THEthehistoryfromofstate government thanaentanglementother
finances the
that of most

European countries. Belgium began her present national
life in 1830 with the assumption of but a small debt as a
legacy from her relations with Holland and with the field
comparatively clear for the adoption of a sound system of
currency and banking. The neutrality of Belgium is prac­
tically guaranteed by the great powers of Europe and her
military expenditure scarcely exceeds one dollar per capita.
The National Bank of Belgium has been employed by the
government, therefore, simply as its financial agent in its
ordinary transactions and has not been diverted from its
duties to industry and commerce by the necessity of floating
large loans or covering deficits in the public finances. The
government under these conditions has been able to keep in
its own hands the ultimate power over the bank, without
being often tempted to abuse it, and reserved in the first
charter the right to grant to other corporations the power to
issue notes. The National Bank has a monopoly of note
issue in fact, but is restrained in some measure from abuse
of its power by the knowledge that a competitor may at any
moment be legally authorized to enter the field.




Monopoly of note issue has existed in Belgium only since
1850. The oldest institution issuing bank-notes was the
General Society for the Promotion of National Industry (So­
ciety Ginirale pour favoriser V Industrie Nationale). This so­
ciety was founded in 1822 principally as a bank of circulation
and discounts, but it became little by little a great institution
of finance interested in promoting investments.1 The soci­
ety was a depository of public funds and of large private
savings, loaned money on mortgages, on public securities,
and on merchandise and was interested as promoter and fi­
nancial agent in nearly all the large enterprises of the coun­
try. It had no strong rival until after the separation of
Belgium and Holland and it invited rivalry then by its own
shortsightedness. The society and its management were
largely under Dutch influence and when the new govern­
ment of Belgium sought the assistance of the bank as a
public depositary the managers refused to make any arrange­
ments which would subject them to the public accounting
officers. They regarded the services of the bank as indis­
pensable and forced the government to countenance the
creation of a new banking institution more friendly in its
The Bank of Belgium was founded February 24, 1835, and
the management of the public funds was taken away from
the old institution and given to the new. The methods of
the new bank had the same defects as those of the old, how­
ever, in attempting to make long time loans on commercial
paper, while issuing circulating notes payable on demand.
The result was a crisis in 1838, when confidence was im­
paired by the fear of war over the provinces of Iyimbourg
and Luxembourg. There was a violent contraction of credit
at Brussels, and the Bank of Belgium found itself without
cash to meet its obligations. The older institution, which
was somewhat stronger, and was not regarded as so largely
a creature of the existing government, took advantage of
the opportunity to crush its rival and on December 4, 1838,
1Courcelle-Seneuil, 339.



presented 1,000,000 francs ($200,000) to the Bank of Belgium
for redemption. They followed this up on December 10th,
by the presentation of 1,200,000 francs and on December
15th, by the presentation of 300,000 francs more. The bank
was forced to suspend and to appeal to the government for
assistance. A loan of 4,000,000 francs ($800,000) was voted,
of which 2,600,000 francs were applied to the payment of
bills and commercial obligations of the bank, and 1,400,000
francs to meeting the demands of depositors in the savings
branches which had been established.1
The manner in which the existing institutions mixed up
the business of banks of issue and deposit with that of op­
erations for long terms created a strong feeling in favor of
a bank devoted exclusively to commercial banking. The
Bank of Belgium was again embarrassed in 1842 and was
compelled to surrender the privilege of keeping the public
monies. An arrangement was entered into between the
Treasury and the SocittS Generate, but that institution felt
the effect of the crisis of 1842 and was compelled to abandon
all the branches which it had established except that at Ant­
werp. The government, therefore, in view of the necessity
for an institution of a different character, in granting a re­
newal of the charter of the Sociite Ginirale for twenty-five
years, in 1843, reserved the right to revise and restrict its
powers before the end of the year 1849. The crisis follow­
ing the political excitement of 1848 compelled both existing
banks to suspend specie payments and afforded the govern­
ment the best of excuses for curtailing their privileges. The
banks were aided for the moment by an act of March 20,
1848, giving forced legal tender character to their bills but
confining the issues within fixed limits. The year 1849 had
hardly begun, however, when the President of the Council
of Ministers, M. Frere-Orban, brought forward a plan for
the National Bank of Belgium (Banque Nationale de Bel­
gique). The charter of the bank was granted by the law of
May 5, 1850, fixing the capital at 25,000,000 francs ($5,000,1Noel, I., 549.



000), divided into shares of 1,000 francs each, and giving
the bank its franchise for twenty-five years. The bank was
forbidden to borrow or make loans upon mortgages, or upon
deposits of industrial stock, and was forbidden to take part
directly or indirectly in industrial enterprises. The admin­
istration of the bank was intrusted to a governor appointed
by the King for five years and six directors chosen by the
shareholders, and a government commissioner was charged
with the supervision of discounts and the issuing of bills.
The National Bank found itself face to face with strong
competitors in the two older banking institutions, but grad­
ually gained in strength and credit up to 1870, when it was
subjected to one of the severest tests ever put upon a banking
institution. It was not distrust of the bank, but the politi­
cal events accompanying the Franco-Prussian War which
caused the stress. The demand for banking accommodation
was greatly increased by the necessity of furnishing supplies
for the hostile armies and many business transactions were
transferred to Belgium which would ordinarily have been
carried on in France or Germany. This was an evidence of
confidence in the bank which would not have been without
its benefits if the institution had been prepared for so sudden
an enlargement of its transactions, but this indication of con­
fidence from without was offset by a degree of distrust at
home which led to the presentation of large quantities of
bank bills for redemption in coin. The government added
to the dangers of the situation by a policy which tended to
embarrass the bank and to increase the uneasiness of the
The administration feared that a declaration of war be­
tween France and Germany would lead to the violation of
the neutrality of Belgium, and directed the National Bank
to take measures to transfer the metallic reserve, represent­
ing the balance due the Treasury, to the port of Antwerp.
The bank was informed on July 13th that this transfer must
be effected without delay. An attempt was made to carry
out the movement secretly, but the news became public that
the metallic reserve had been removed from Brussels and



caused great popular alarm. The government, instead of
sustaining the bank, issued two more stupid orders,—one to
the agents of the Finance Department in the provinces, not
to permit their cash to be exchanged for bank bills, and the
other to the chiefs of the military forces, to exchange bank
bills in their military chests for coin.1 Notwithstanding
this apparently deliberate effort to discredit the bank, the
government refused to permit the suspension of specie pay­
ments and held the institution strictly to the performance of
the obligations of its charter. The orders regarding the
public funds and the military chests were so palpably un­
wise that they were quickly revoked, and an order was
given to pay everything in bank bills which could be so
paid, and to exchange large bills at the agencies of the
banks for small ones, in order to facilitate payments in
The discounts of the bank increased from 177,500,000
francs on July 10, 1870, to 203,023,100 francs on July 20th,
and to 223,231,744 francs on July 31st. While assistance
was thus rendered to commercial credit, the presentation of
notes for redemption rose from a daily average of 600,000
francs ($120,000) during 1869 to a daily average of over
1,000,000 francs ($200,000) during the eighty-two days from
July 1st to September 20, 1870. The amount presented on
July 20th was 6,282,000 francs ($1,250,000) and on the next
day 7,025,000 francs ($1,400,000), and the daily average from
July 15th to July 30th was 2,094,000 francs ($415,000).
The bank was able to meet these demands by appeals for
loans of coin from London, Amsterdam, Hamburg, and
Paris, and by realizing the bills drawn on foreign countries
which it had in its possession.2 These bills, which amounted
1 Noel, I., 486.
2 The large holding of foreign bills, chiefly drawn on London, in
the cash reserves o f European banks is, ‘ to a very large extent,
solely for the sake o f the interest which is to be made on them.
Bills on England, owing to the high rate of interest which they often
bear, as compared with continental rates, are a favorite investment
abroad. In Paris, Berlin, Frankfort, Hamburg, and other conti­



at the outbreak of the crisis to 64,144,561 francs, were re­
duced on July 31st to 7,227,333 francs. The proceeds were
employed in the purchase of bullion, principally in silver,
which the mint rapidly coined into crowns. The bank was
thus enabled to meet every demand and to reduce the rate
of discount as soon as the crisis was over. The rate of
July 15th was two and a half per cent., but this was in­
creased to five per cent, between July 15th and August 5th,
and to six per cent, from August 5th to August 27th, and
even to seven per cent, for bills drawn in foreign countries
on Belgium. The 27th of August saw the worst of the
crisis over, and the domestic rate fell to five and a half per
cent. ; on September 20th to four and a half per cent. ; and
on October 8th to three and a half per cent.
Belgium was led to propose the formation of the L,atin
Union in 1865 because of the difficulty of maintaining the
double standard under the oscillations in the price of gold
and silver. The French system of decimal coinage was
adopted by the law of June 5, 1832, but silver was made the
standard and no provision was made for gold coinage. The
creation of a gold circulation in France after the great gold
discoveries led to a popular demand for the admission of
French gold coins into Belgium. This was decreed by the
law of June 4, 1861, and the result was to drive the silver
five-franc pieces out of sight and change the standard of
actual circulation from silver to gold. The National Bank
had a reserve at that time of 48,645,000 francs in silver fivefranc pieces, which was paid out to meet current demands,
but this fund declined by November 8, 1862, to 14,629,000
francs, and the bank suspended their further issue.1 The
smaller pieces continued to disappear, but the movement
was retarded for a time by the suspension of specie pay­
nental cities, the bills on England held by the bankers and joint
stock companies often amount to many millions sterling ; and a very
large sum remains in their hands for several months,— in fact, from
the time when the bills are drawn to the time when they fall due.” —
Goschen, Foreign Exchanges, 138.
1 Shaw, 191.



ments in the United States. The drain set in again in 1865,
the small silver pieces became so scarce that they could not
be supplied by the bank in sufficient sums to meet the
demands of manufacturers, and the government was com­
pelled to resort to the coinage of nickel pieces. The Bel*
gian delegates urged the adoption of the gold standard al
the conference which resulted in the formation of the Latin
Union, but consented to the convention finally adopted by
the other powers.
The fall in the value of silver after 1867 dragged Belgium
into new difficulties, against which the convention of the
Latin Union afforded her no protection. The government
was authorized by the law of December 18, 1873, to suspend
the minting of silver five-franc pieces, which had been going
on at the rate of 300,000 francs a day. The coinage of sil­
ver had already exceeded domestic needs, and great quanti­
ties drifted across the French frontier and found their way
into the Bank of France. This circumstance was made
the occasion of a demand at the conference of 1885 that the
countries of the Union take back their national coins and
pay for them in gold. The Belgian delegate, M. Pirmez,
at first refused to consider any such proposition, declared
that Belgium was being made the victim of the misfortunes
of the Union, and absented himself from the sittings of the
conference. He declared that the treaty of 1865 made no
reference to any such process of liquidation ; that the ac­
ceptance of Belgian coins by French citizens had not been
a part of the treaty, but a result of voluntary action ; and
that the dissolution of the treaty would simply relieve
public depositaries from further acceptance of foreign coins,
without imposing any obligations upon their issuers to re­
deem them.1 The fear that the collapse of the Latin Union
would imperil the gold standard in Belgium finally pre­
vailed, however, over other arguments, and Belgium con­
sented to a basis of liquidation by which each country was
to pay in gold for one-half of its five-franc pieces returned
1 Ansiaux, 14.



to it and was allowed to leave the other half to be returned
by the play of foreign exchange.1
The position of Belgium and of the National Bank will
be peculiarly embarrassing if the dissolution of the Latin
Union destroys the legal status of the silver coins of one
country in the others. Belgian coins would under such
circumstances flow rapidly back into Belgium and would be
likely to glut the reserves of the bank and make difficult
the maintenance of the gold standard. The metallic reserve
of the bank averages about 100,000,000 francs, of which
only a fourth is now in silver, but the volume of Belgian
five-franc pieces outstanding is estimated at 400,000,000
francs, of which about 200,000,000 are in the Bank of
France, besides those in active circulation in France.2 A
glut of silver in Belgium would have the tendency to draw
gold from the National Bank, while there would be the
strongest disposition in the bank to retain gold and force
silver into circulation. It would put a severe test upon the
credit of the bank and its 800,000,000 francs of paper circu­
lation to attempt to enforce the policy of the Bank of France,
to redeem in silver at discretion, and the pressure for gold
for export would be strong because of the redundancy of
the monetary circulation which the glut of silver would
cause. The heroic policy of buying gold and selling silver
for what it will bring in the bullion market is favored by
some Belgian statesmen and may prove the only effective
means of maintaining the gold standard.
The renewal of the charter of the National Bank which
was enacted in 1872 extended the life of the institution to
1 M. Haupt considers France rather than Belgium the victim in
this transaction and regrets that her delegates, after securing the
consent of the delegates of Italy, Switzerland, and Greece to liquida­
tion in full in gold, yielded to their demand that they have the same
privilege as Belgium of liquidating in gold to the extent of only onehalf their silver coins accumulating in French hands .—The Monetary
Question in 1892, 90.
2Haupt, 93.



January i, 1903, and the capital was increased to 50,000,000
francs ($10,000,000). Several changes were made in the
previous laws regarding taxation, the handling of the public
funds, and the share of the government in the profits of the
bank. Greater precision was introduced into the provi­
sions regarding the proportion of specie held, which is now
required to be one-third of the notes in circulation and of
other demand liabilities. This reserve may be trenched
upon in emergencies with the consent of the Minister of
Finance. The notes of the bank were made a legal tender
by the law of June 20, 1873, but only so long as they are
redeemed in coin on demand and are receivable in public
depositaries. Their acceptance by public depositaries is
defined by law, but may be suspended by the Minister of
Finance. A portion of the public funds in the custody of
the bank is allowed to be loaned, but the profits earned go
to the credit of the Treasury.
In the revision of the charter in 1900 the tendencies toward
State socialism which had become strong in Belgium had free
play. The privileges of the bank were indeed extended to
January 1, 1929, but only under provisions which turned
over a large part of its profits to the public Treasury. Under
the extension of the charter in 1872 the bank was required
to pay a patent tax on the gross volume of business, a stamp
tax on its notes, and a tax of one-quarter of one per cent,
semi-annually on the excess of the circulation above 275,000,000 francs. These provisions were continued by the law
of March 26, 1900. The other principal taxes levied by the
law of 1872 were one-quarter of the net profits of the bank
above six per cent, and on discounts the entire excess of re­
ceipts above a rate of five per cent.1 These two limits were
radically changed in 1900. Henceforth one-quarter of the
profits was to go to the State after four per cent, had been
distributed to the shareholders and all profits obtained from
a discount rate above three and a half per cent, were to find
their way into the public Treasury.8 Under these provisions
1 Noel, I., 563.
* Bulletin de Statistique, April, 1900, XLVII., 422.



the payments to the State in 1907 reached 12,721,111
francs ($2,455,000) which was more than twice the cost
of administration (4,887,954 francs) and exceeded by
about fifty per cent, the 8,300,000 francs distributed to
The collections from the excess of discount rates above
three and a half per cent, were 7,002,541 francs ($1,350,000)
in 1907 and were probably larger than was anticipated when
the law of 1900 was enacted. Discount rates had then been
low for many years throughout Europe. For the entire
period from 1851 to the close of 1900 the rate was at three
per cent, or less during 10,623 days out of 18,262, and was
only once (in 1873) as high as seven per cent.2 But the
scarcity of capital throughout the world during the opening
decade of the twentieth century did not leave Belgium un­
touched. The rate of discount at Brussels was lower than
elsewhere, except at Paris, and in 1904 was maintained uni­
formly at three per cent. ; but was raised on October 30,1905,
to four per cent., and in 1906 was subjected to four changes.
Even under this pressure the average rate for 1905 was only
3.18 per cent, and for 1906 3.84 per cent., the amount col­
lected from the tax on the excess discount rate in the former
j^ear being only 471,269 francs. It became necessary, how­
ever, under the troublous conditions of 1907, to advance the
rate on March 18th to five per cent. ; on November 2d to five
and a half per cent. ; and six days later to six per cent.,
carrying the average rate for 1907 to 4.95 per cent. Re­
ductions of the rate were made early in 1908, until at the
close of March it was at three and a half per cent.
As was pointed out by the censors, in their annual report
for 1907, these high rates were necessary for the protection
of the cash resources of the bank and could not be attributed
in any way to selfish interest on the part of the directors,
because of the provision attributing absolutely to the public
Treasury the proceeds of discount above three and a half per
1 Assemblee Generate des Actionnaires du 24 Fevrier, 1908.
9 Palgrave, 185.

cent.1 The advantage of a higher rate than prevailed at Paris
in the autumn of 1907 was to bring exchange nearly to par and
to check the outward movement of gold, which has repeatedly
compelled the bank to strengthen its reserves by special meas­
ures and at heavy cost. It has been largely by its holdings
of foreign bills that it has been able to carry on its operations
and maintain an adequate stock of gold.9
The leading items of the accounts of the bank, for repre­
sentative years since its foundation, are shown, in francs,
in the following table3 :
Principal Accounts of the Bank of Belgium.
D E C . 3 1st.



(In francs

i 860

I17,899,Q 60








95 .614,523





- $0,193.)


346, 590,227
365, 263,291
424, 795,032






81 825,144
81 319,921
72 142,896




8 r ,754,197
78, 854,638
98, 615,552

1Assemblie Ginirale, 1908.
2Palgrave declared in 1903 that “ Through holding these drafts on
other countries the council of the bank has the means of operating in
any direction when the exchanges are unfavorable to Belgium. . . .
Roughly speaking, one-fifth part of the bills it has dealt with during
the last twenty years have been on foreign countries.”—Batik Rate
and the Money Market, 185.
3A nnuaire Statistique de la Belgique, 1906, 378.
4October 1st.



The Bank of The Netherlands.
The existing Bank of the Netherlands is the successor of the
Bank of Amsterdam, one of the most famous of the banks of
the Middle Ages. The Bank of Amsterdam was not a bank of
issue in the modern sense, but proposed originally to deliver
receipts for deposits of coin. The bank was founded by an
ordinance of the City of Amsterdam of January 31, 1609,
and was called the Exchange Bank (Amsterdamsche Wisselbank). Much confusion and many disputes had arisen in
the city because of the variety of coins in circulation and
their departure from the proper standard. Money of full
weight rose to a premium with the exchange brokers and
the fact was considered as the result rather than the cause
of their operations. The city undertook by a statute of July
15, 1608, to prohibit the holding of deposits or the transfer
of money by any one except the owners or their personal
agents. The use of bills of exchange was forbidden and
traders were directed to make no discrimination between
light and heavy coins nor to give or take money at a higher
rate than that fixed by the States-General.
These provisions were only intended to clear the ground
for the establishment of the new bank under government
control. All bills of exchange were required to be paid
through the bank, and the institution was required to sell
any kind of specie demanded of it at as low a premium as
possible. The transferable deposits or credits came to be
known as ‘‘ bank money ” and bore this designation through­
out the history of the bank. The creation of a means of
exchange of fixed and uniform value did much to promote
the great commerce of which Amsterdam was becoming the
centre. The bank accepted deposits only at their bullion
value and granted credit for the amount in lawful money,
subject to a proper charge for handling. Deposits were
necessarily subject to charges, because the bank was sup­
posed to keep in its vaults every guilder received and to do
no loan and discount business. Payments in Amsterdam
came to be made universally in bank money, by the pre-



sentation of a transfer order at the bank by the payer or his
authorized agent, which entitled the payee to the credit on
the next day. The bank became so general a medium of
payments in Amsterdam that the most extravagant estimates
were formed of the gold and silver stored in its vaults.
Some put the amount as high as 900,000,000 gulden ($360,000,000) but the more modest and accurate estimate of
Adam Smith was 33,000,000 gulden ($13,500,000).1
Direct redemption of bank credits in coin gradually fell
into disuse, partly because bank money was so much pref­
erable to coin for nearly all practical purposes and partly be­
cause of the acceptance of foreign coins on special deposits.
The system of advances upon such deposits was formally
put in operation in January, 1683, and the bank issued a re­
ceipt to the depositor for the bullion value of the deposit,
certifying his right to withdraw it upon returning the bank
money with which he had been credited and paying oneeighth of one per cent, interest. The right of withdrawal
was forfeited if the charges were not paid and the deposit
renewed within six months. It was necessary, therefore, in
order to withdraw coin thus deposited, to have both the re­
ceipt and the equivalent amount of bank money. The bank
money outstanding was in excess of the legal coin in the
custody of the bank, but not in excess of the domestic and
foreign coin and bullion. The lapsing of receipts protected
the bank, therefore, from demands for coin redemption which
it could not meet, while another method was adopted to pre­
vent the excess of the bank money in circulation and to pro­
vide bullion for those who desired it for export.
The method adopted by the bank for controlling the vol­
ume of circulation and maintaining its credit was the sale of
bank money for specie or specie for bank money in such
amounts as the public might require. Regular agents of the
bank were charged with these transactions and kept the pre­
mium on bank money within narrow limits and its value
substantially unchanged. It was supposed until the last
1 Wealth o f Nations, II., 61.



half of the eighteenth century that the bank had sacredly
fulfilled its obligations to keep in the vaults the exact amount
of coin and bullion represented by the bank money outstand­
ing. The affairs of the bank were kept secret by the small
committee of the city government which was charged with
its administration, and it was not generally known that as
early as 1657 individuals had been permitted to overdraw
their accounts and that in later years enormous loans of
specie had been made to the Dutch East India Company.
The truth became public property in the winter of 1789 and
1790. The premium on bank money, which was usually
kept above four per cent., then fell below two per cent,
and in August, 1790, disappeared. The bank failed to pro­
tect its credit by purchasing bank money on an adequate
scale and it was represented that large purchases would be
followed by a heavy export of bullion to the injury of com­
merce. The possibility of deception came to an end when
on November, 12, 1790, a notice was issued that silver would
be sold to the holders of bank money at a rate equivalent to
ninety per cent, of their claims. It was substantially an ad­
mission of insolvency and the debt was assumed in 1791 by
the government of the City of Amsterdam. The effort was
made to put the bank again on its feet, but the time for such
banks had passed, the position of Amsterdam as a commercial
centre had changed, the bank was closed by a royal decree
of December 19, 1819, and the small amount of bank money
outstanding was soon after paid off.1
The Bank of the Netherlands (de Nederlandsche Bank) was
authorized by the government in 1814, after it became evi­
dent that the Bank of Amsterdam could not be revived.
The privilege of the bank was twice renewed for twenty-five
years, carrying its charter to March 31, 1889. The next re­
newal was nominally only for fifteen years, until March 31,
1 A summary of the result of the researches of the latest scholar­
ship regarding the Bank of Amsterdam, based in part upon the his­
tory of the bank by W. C. Mees, formerly president of the Bank of
the Netherlands, is presented by Prof. Dunbar in his valuable work
on The Theory and History of Banking, 82-105.



1904, but an extension of ten years was to be tacitly assumed
unless the abrogation of the privilege was decreed by the
state.1 A further extension to 1919 was made by a law of
December 31, 1903, when some changes were made in the
share of the state in the bank’s profits.2 The law of Decem­
ber 22, 1863, left open the possibility of establishing other
banks of issue by special law, but the Bank of the Nether­
lands has been in fact the only bank of issue in Holland
since its establishment. The capital of the bank was origin­
ally 5,000,000 florins ($2,000,000) and has been increased
from time to time to 10,000,000, 15,000,000, and 20,000,000
florins ($8,000,000). The bank is not a public institution,
but the state subscribed in 1863 for one thousand shares at
115, which were sold on June 1, 1864, at 190. The govern­
ment exercises supervision through a special commissioner
paid by the bank, and the president and secretary are named
by the king.
The Treasury shares in the profits of the bank when they
exceed a fixed amount. Under the law of 1888, dividends of
five per cent, were to be paid to the shareholders, even if it
was necessary to recur to the reserve fund to make up the
amount. Ten per cent, of profits was then to go to the re­
serve fund until it reached twenty-five per cent, of capital.
The remaining profits were to be divided equally between
the state and the shareholders until the total dividend allotted
to the latter reached seven per cent., after which they were
to receive only a third. The portion going to the share­
holders was further curtailed by the law of 1903, by the
reduction of their initial dividend to three and one half per
cent. Then, after allotments to reserve and to the manage­
ment, the state was to receive two-thirds of the balance and
the shareholders only one-third. In case of the refusal of
further privileges in 1919, the shareholders are to retain the
reserve existing on March 31, 1889, but half the subsequent
accretions go to the state.3
1 L£vy, 194.

8Raffatovich,in feconomiste Europeen, March 13,1908, XX X III., 328*Economiste Europken, March 13, 1908, XXXIII., 328.



There is no fixed limit upon the note issues of the Bank
of the Netherlands, but the decree of August 16, 1884, fixed
the proportion of the metallic reserve at forty per cent, of the
aggregate of notes and deposits. The law imposes no re­
strictions on the proportion of gold and silver, but since 1872
the bank has ceased to buy silver and has added as much as
possible to its gold. Holland suspended the free coinage of
silver in December, 1877, an^ has maintained her monetary
system at parity with gold by treating the silver coins as
tokens, redeemable in gold.
The monetary system maintained by the Bank of the
Netherlands is of peculiar interest, because of the demonstra­
tion which it affords that, within narrow limits at least, it
is possible to maintain the gold standard with very little
gold and while the money of circulation is chiefly of silver
and paper. The bank pursues a policy directly opposite
from that of the Bank of France, by furnishing gold freely
for export and sparingly for domestic circulation. The pur­
pose of this policy is to maintain the parity of foreign ex­
change, because of the conviction that a refusal to furnish
gold for export would put the metal at a premium and pre­
cipitate the country upon a silver basis. This danger was a
serious one in 1883. The gold reserve, which had been at
56,924,000 florins at the close of 1880, declined in October,
1882, to 11,306,638 florins and in February, 1883, to 5,365,091 florins ($2,150,000). A bill was promptly introduced in
the States-General, authorizing the melting of 25,000,000
florins in old pieces of two and a half florins and their sale
as bullion, in order to obtain gold. The bill did not become
law until March 4, 1884, but the exchanges in the meantime
became favorable and the stock of gold rose on April 21,
1883, to 31,000,000 florins ($12,400,000). The bank now
stands ready to furnish gold for export or to furnish silver at
its bullion value, while the old stock of large silver coins is
being gradually reduced by subsidiary coinage for Holland
and Java.1
1 Bimetallism in Europe, Sen. Ex. Doc. 34,50th Cong., 1st Sess., 33.



The capacity of the bank to furnish gold on demand was
severely tested in 1906 and 1907 as the result of financial
pressure in other countries and the necessity for remittances
to pay for foreign securities, of which the Dutch public are
large buyers.1 The discount rate, which had been at three
per cent, for over a year, was advanced to three and one-half
per cent, on April 28, 1906; to four and one-half per cent, on
May 4th; to five per cent, on October 11, 1906; and to six
per cent, on March 12, 1907. This rate was not long main­
tained and the bank went through the American panic with
a rate of five per cent., fixed on April 23, 1907. The bank­
ing year ending March 31, 1907, closed with the gold stock
reduced from 72,668,470 florins to 61,819,600 florins ($24,727,800) ; but the next year witnessed a reflux of the yellow
metal, as the result of the diminished demand for credit, and
found the reserve at about 97,000,000 florins. It was de­
clared by the management of the bank that “ the Netherlands
maintained the free gold market on which our credit abroad
is based, but we had to guard against excessive withdrawals
from our vaults of the metal that is absolutely necessary to
maintain the stability of value of the medium of exchange.”
How large is the presentation of notes to the bank for specie
and the counter deposit of gold for notes may be judged by
the following figures for representative years :
Exchanges at the Bank of the Netherlands,





(In florins = $0,402.)
6 1,6 17,3 6 5
6 7,505,170

1 Iyondon Bankers' Magazine, December, 1907, LXXXIV., 749. It



The gradual expansion of the business of the Bank of
the Netherlands, upon the average for five-year periods and
in recent years is indicated by the following table1:
Accounts of the Netherlands Bank.



247 , 370,000

135 , 970,000
143 , 590,000




(In florins=401.2 cents.)

I8 6 9 -74
18 7 4 -79
I879 -84
I8 8 9-94
18 9 4 -9 9




3 6 , 350,000

7 , 730,000

The balance sheet of March 31, 1907, showed total lia­
bilities of 300,344,532 florins, of which 20,000,000 florins
was on account of capital, 259,552,488 florins ($103,821,000)
on account of note issues, and 11,138,760 florins on
current accounts.
Banking in Sweden.
The three countries of the Scandinavian Union,—Sweden,
Norway, and Denmark,—have an uniform monetary system
based upon the gold standard with the crown as the unit,
worth twenty-six and eight-tenths cents ($0,268) in United
States money, but each country has a banking system of its
own. The State Bank of Sweden (Sveriges-Riksbank) was
founded November 30, 1656, and to Palmstruch, its founder,
is attributed the first use of bank bills as credit money, not
fully covered by the coin reserve. The bank became a pub­
lic institution in 1668, and its capital is furnished by the
is the opinion of experts in Holland that holdings of American
securities there are over $400,000,000,—not greatly less than all
other Continental bourses.—U. S. Consular Reports, July 12, 1907, 8.
1 faarcijfers voorhet Koninkrijk der Nederlanden, Rijk in Europa,
1905, 222.



nation, but the administration is under the charge of a com­
mission chosen by the Diet and is not responsible to the
executive department of the government. The capital of
the bank, prior to the reform of 1897, was 25,000,000 crowns
($6,700,000) with a reserve of 5,000,000 crowns, and it was
allowed to issue notes to the amount of both, plus its credits
with foreign banks and its metallic reserve.1 The reserve
was not allowed to fall below 10,000,000 crowns. The notes
are a legal tender by the Swedish constitution in Sweden
and are receivable by public depositaries.
The private banks grew up at first without regulation, but
became subject to general law in 1864. A new law of Janu­
ary i, 1887, imposed certain general conditions upon these
banks, most of which are still in force.2 The capital of each
is required to be at least 1,000,000 crowns ($268,000), the
charter runs for ten years, and the shareholders are responsi­
ble only for the amount of their shares.
Sweden in 1897 followed other important European states
in taking measures to concentrate the power of note issue
in a single institution. The nucleus of the new system ex­
isted in the State Bank, whose character was not changed
as to ownership and organization, but which was given by
the law of May 12, 1897, larger powers and more exclusive
privileges. The changes as to note issues did not become
fully effective until January 1, 1904, but the capital of the
State Bank was increased in the meantime to 50,000,000
crowns ($13,400,000) and the way paved for gradually elimi­
nating the circulation of the private and joint stock banks.
As early as 1879 privilege of issuing notes for five crowns
($1.34) was reserved to the State Bank, and in 1887 its limit
of issue was raised to 45,000,000 crowns and the cash hold­
ings were required to be 18,000,000 crowns. The law of
1897, consolidating note issues, raised the maximum limit
of circulation to 100,000,000 crowns and required minimum
cash holdings to be 25,000,000 crowns, all in gold. A sub­
1Muhleman, 149.
2 L6vy, 219.



sequent modification of this law, which took effect January
1, 1902, raised the gold requirement to 40,000,000 crowns,
but permitted the balance to be covered by foreign govern­
ment bonds, foreign and inland bills, and Swedish bonds
quoted on foreign stock exchanges.1
Provisions were made in the law of 1897 f°r compensation
to the private banks for the privilege of note issue withdrawn
from them. It was the motive of the law to perpetuate them
as joint stock banks and to induce them to continue to grant
the same accommodation to commerce as before. To these
ends banks retiring their circulation before the end of 1905
were given a credit with the State Bank against approved
collateral at a rate two per cent, below the published discount
rate (but not below a rate of two per cent.), and rediscounts
at a rate not exceeding two-thirds of the published rate.
The amount of each of these privileges was fixed at one-half
the circulation of the bank on January 1, 1896, and was con­
ditioned on the requirement that the local bank should not
discontinue any branch existing on that date. For those
banks which kept their circulation until the beginning of
1904, the privilege of rediscount was limited to forty per cent,
of their issues.2 The number of banking offices of the banks
of issue existing in 1903 was about 183, of which 24 had
come into existence since 1896, and several belonged to banks
which withdrew promptly from the note-issuing field and
continued as joint stock banks.
The concentration of the power of note issue has tended to
a concentration of metallic reserves, but has left the State
Bank, as before, dependent on its note issues for its resources,
while the private and joint stock banks depend upon their
deposits. This wide divergence in character of operations
by these different types of banks is revealed by the statistics
of the condition of the different classes of banks on January
1, 1907, after the new system had been in full operation for
three years.8
1 Flux, in Yale Review, February, 1903, XI., 364.
2 I b i d 369.
3 Economiste Europken, June 5, 1908, XXXIII., 732.



Condition of Swedish Banks, January 1, 1907

Bank notes and drafts
Specie on hand..........
Due from ban k s___
Discounts ...................


8 , 735 »oa>




a c r o w n s =$0,268.)


431,50 2 028

18 1 ,3 7 1 ,5 8 0
86,9 22 ,419

2 0 3 ,75 7.8 14
68,50 9,757
i 5 3 .7 8 i , x6o


298 , 115,938



The note circulation of the Royal Bank, which was 201,911,044 crowns at the close of 1906, declined to 190,115,534
crowns ($50,810,000) at the close of 1907. The gold reserve
declined only from 71,929,953 to 70,322,453 crowns, while
discounts increased from 149,596,027 to 191,954,154 crowns
and deposits and current accounts from 45,121,588 to 61,139,290 crowns. Net profits, which in 1906 were 7,133,396
crowns, were in 1907, 9,639,023 crowns ($2,575,000)
The Bank of Norway.
The Bank of Norway (Norges Bank) was founded June 14,
1816, with its head office at Drontheim and branches in
leading towns of the province. Its capital was raised by
a tax upon landed property and the land-holders became
shareholders in the bank according to their respective pay­
ments. The original capital of the bank was 2,000,000
specie dollars, and circulation was issued provisionally in the
proportion of five dollars to two dollars of the capital. One
of the purposes of the foundation of the bank was the im­
provement of agriculture, the discount of commercial bills
being at first only a secondary consideration. Loans were
made by means of note issues upon land to an amount not
exceeding two-thirds of the valuation, and the borrower
made a semi-annual payment, including not only interest,
but five per cent, annually of the principal, which was thus
1feconomiste Europeen, April 17, 1908, XXXIII., 507.



liquidated in twenty years, like some modern mortgage loans.
The attempt to float a paper currency upon land values
resulted in failure and the notes of the bank in 1822 could
be exchanged at Hamburg at the rate of only $187.50 for
$100 in silver. The Storthing was compelled to pass a law
reducing the value of the notes by providing that 190 in
paper should be redeemed in the proportion of 100 in silver.1
The value of the notes gradually rose and the bank was put
upon a sounder basis.
The present capital of the Bank of Norway is 15,500,000
crowns ($4,150,000), but by the last renewal of the charter
(by the law of May 19, 1900) may be raised to 25,000,000
crowns. The bank is authorized to issue notes to the
amount of 35,000,000 crowns without metallic reserve, and
to any additional amount when fully covered by gold. Onethird of the computed gold reserve may be on deposit abroad
and 3,000,000 crowns may be deposited in the Bank of
Sweden and the National Bank of Denmark. A leaf is
taken from the experience of Germany in the provision that
additional notes may be issued, upon notice to the govern­
ment, under a tax of six per cent. These changes in favor
of greater freedom of note issue were largely the result of
the monetary pressure of 1899, which compelled the bank to
raise its discount rate first to six per cent, and towards the
end of the year to six and one-half per cent., and to exceed
the authorized note issue for the first time since its founda­
tion.2 The notes are legal tender and are the only credit
paper having general circulation.
The governing board of the bank is named by the Storth­
ing and consists of fifteen representatives. The actual ad­
ministration is entrusted to five directors at the central bank
and three at each branch, who are also named by the
Storthing. The state is a large shareholder, but the man­
agement of the bank is kept independent of the Treasury.8
1Macleod, Theory and Practice of Banking, II., 263-64.
2Bulletin de Statistique, October, 1901, L., 438.
3 Statistique Internationale des Banques d'Emission, Norvege, 6-7.



The policy of limiting the profits of shareholders was adopted
by the law of 1900, in conformity with the policy adopted at
about the same time by France, Belgium, Germany, and
Austria-Hungary. The shareholders first receive dividends
of six per cent. Of the excess, ten per cent, is added to the
reserve funds, and the remainder is divided equally between
the state and the shareholders; but after the portion of the
shareholders has reached ten per cent., three-quarters goes
to the state.1
The note circulation of the bank has expanded with the
expansion of Norwegian trade, but the increase in discounts
and deposits has been shared to some extent with other in­
stitutions. The extent to which the permission to keep the
reserve abroad has been availed of is indicated by the fact
that on December 31, 1905, the total reserve was 37,779,045
crowns and of this amount 13,442,432 crowns was on deposit
with foreign banks. By the close of 1907 the amount on
deposit abroad, including 3,531,035 crowns in the Banks of
Sweden and Denmark, was 21,083,922 crowns. The follow­
ing figures indicate the variations in some of the principal
items of the accounts in recent years2:
Accounts of the Bank of Norway.
DEC. 3 ISt.








(In c r o w n s = $0,268.)





I 9°5


37 . 147-456



23 , 275,493
25 , 979,248
30 , 693,354
48 , 374,428
36 , 173,332
40 , 787,656
41 , 439,433
45 , 438,191


1Bulletin de Statistique, October, 1901, L., 4372Statistisk Aarbog for Kongeriget Norge, 1906, 83, and prior
years; for 1906 and 1907, Economiste Europeen, April 10, 1908,
XXXIII., 476.

7H E



The National Danish Bank.
The National Danish Bank was founded in 1818 and has a
capital of 26,752,400 crowns ($7,000,000). The bank was the
successor of the State Bank (Rigsbanken), which had been
created by the government in 1813 to restore order to the
demoralized financial system of the country. A decree of
July 4, 1818, transferred the privileges of the old bank to
the new for a term of ninety years. The government was
free at the end of this period, in 1908, to extend the privileges
or revoke them. The capital of the National Bank is in
private hands, but it was collected by an enforced levy upon
real estate, and the landowners became shareholders in the
bank for the amount of the tax paid. The bank assumed
the obligations of the State Bank and was unable to pay
dividends until 1845. The dividends since that time have
averaged about seven per cent. A decree of 1873 fixed the
limit of circulation not fully covered by specie at 27,000,000
crowns, but this was increased by a decree of November 5,
1877, to 30,000,000 crowns. The metallic reserve was not
permitted in any case to fall below three-eighths of the face
value of the notes, and at least 12,000,000 crowns was
required to be in gold coin or in bullion which had been
actually delivered to the mint for coinage. The other por­
tions of the metallic reserve may be in gold bars or foreign
gold coin and in foreign silver to an amount not greater than
one-third of the entire fund.1
By a decree of 1886 net balances in favor of the bank
at the Bank of Norway and the Royal Bank of Sweden
might be counted as a part of the legal reserve.2 The
notes are legal tender and the amount varies considerably
with the seasons.
The charter of the bank, with the exclusive privilege of
note issue, was renewed by a law of July 12, 1907. The
proportion of reserve required was increased to fifty per cent.
1Comptroller's Report, /S95, Report of Minister John B. Risley, 77.
2A History of Banking in all the Leading Nations, IV., 382,



of notes outstanding, and it was provided that the bank
should from its profits first pay 750,000 crowns ($200,000)
into the public Treasury and also pay into the Treasury onequarter of the profits remaining after the distribution to the
shareholders of a dividend of six per cent.1 As banking is
comparatively unrestricted in Denmark except in the matter
of note issue, the National Bank has encountered active com­
petition from joint-stock banks and private bankers; but its
circulation and general accounts have gradually increased in
volume. The average issue of bank-notes was about 50,000,000 crowns for the five years ending with 1871; 69,000,000 crowns for the five years ending with 1881; and 78,000,000
crowns ($21,000,000) for the five years ending with 1891.
The balance sheet for July 31, 1907,—the end of the bank’s
fiscal year,—showed circulation of 121,675,000 crowns ($32,830,000); a gold reserve of 95,069,000 crowns ($25,600,000);
and commercial discounts of 35,581,000 crowns ($9,550,000).
The National Bank took an active part in allaying the
tendency to panic which followed an important bank failure
in the winter of 1908. The pressure in Germany reacted
upon all the Scandinavian countries, and especially upon
Copenhagen, by the withdrawal of foreign capital from
Scandinavian enterprises.2 The result was the suspension
on February 6, 1908, of the Freeholders’ Bank (Grundejerbank), followed by a run on several institutions and a serious
fall in the value of bank shares. The Retailers’ Bank
(Detailhandlerbank) in particular suffered a drop of twenty
points in its shares and fears were entertained for its safety.
Accordingly, on Sunday, February 9th, a meeting was called
by the Minister of Finance, at which the National Bank and
the four other leading banks were represented. It was
finally decided that the Treasury and these five leading
banks should jointly undertake a full guarantee not only
for the liabilities of the suspended bank, but also for the
Retailers’ Bank. The guarantee was unlimited, but as a
1fLconomiste Europeen, November 8, 1907, XXXII., 602.
*London Economist, February 15, 1908, LXVI , 314.



preliminary step a fund of 20,000,000 crowns ($5,360,000)
was subscribed.1 An administrative committee, presided
over by Falbe Hansen, the eminent economist, was ap­
pointed to supervise the management of the two banks
which had become involved in difficulties.
1London Bankers' Magazine, March, 1908, IyXXXV., 440,


Development of Banking in Switzerland—The National Bank of the
Swiss Confederation—The Bank of Spain and its Entanglements
with the Treasury—Similar Situation of the Bank of Portugal—
The Banks of Roumania, Bulgaria, and Servia—The Greek Banks
and the Effects of Specie Suspension—The Ottoman Bank.

at Basle
were long noted the
BANKING andSwitzerlandwhich its earliestbanks offorissue
skill and wealth of their bankers, but

were not established in either city until 1845. The first
Swiss bank of issue was established at St. Gall in 1836.
The cantonal bank of Vaud and the Bank of Basle were
established in 1845, the Bank of Commerce at Geneva in
1846, and the Bank of Geneva in 1848. The incorporation
of banks of issue rapidly spread among those cantons which
contained a considerable number of merchants, and in 1863
eighteen banks had been established, with forty-two agencies
or branches. The aggregate circulation of these banks on
December 31, 1862, was 18,468,122 francs ($3,600,000), the
cash reserve was 19,380,922 francs and the current accounts,
representing deposits, 49,166,405 francs ($9,800,000)/ Eleven
of these eighteen banks were established with the help of the
cantonal governments and the remainder were established by
private funds.
The Swiss banks preserved until 1875 a purely local exist­
ence and their operations and circulation rarely extended
beyond the limits of the canton in which they were estab­
1Courcelle-Seneuil, 350.

lished, but the growing needs of commerce invited co-opera­
tion and the extension of banking facilities. Some of the
banks began to extend their branches into other cantons
and others made conventions with each other for the mutual
acceptance of their bills. It was at this stage in the devel­
opment of Swiss banking that the Federal constitution was
revised and authority to legislate regarding banks confided
to the Federal government. Protection against monopoly
was afforded by the provision of the constitution that Federal
legislation *‘ shall not establish a monopoly of the issue of
bank bills nor decree their obligatory acceptance.” The
law of 1875 required the Swiss banks to maintain a cash
reserve equal to forty per cent, of their notes in circula­
tion and forbade any one bank to issue circulation in excess
of 12,000,000 francs ($2,400,000). Each bank was required
to accept the notes of other banks and to redeem them in
coin. The number of banks at the end of 1873 was twentyeight and their circulation was 47,606,000 francs ($9,400,000),
against which there was a cash reserve of 14,892,796 francs.
The Act of 1875 was superseded by that of March 8, 1881,
which limited the circulation to double the paid-up and
unimpaired capital (capital verse et riellement existanf) of the
banks and required banks of issue to have a capital of at
least 500,000 francs. The requirement of a forty per cent,
cash reserve was maintained, to be distinct and independent
of the other reserves of the bank and kept in a separate
account. The remainder of the circulation was required to
be fully covered by the deposit of securities or commercial
bills. Weekly, monthfy, and annual reports are required
according to a form prescribed by the Federal Council and
an annual examination is made under public authority.1
The notes are issued through the Federal inspectorate, are
delivered to the banks as they need them, and are of a uni­
form type. A bank which renounces its circulation is required
to redeem the notes for a certain time, to surrender the
redeemed notes to the Federal authorities and after the

1 Alfred Neymarck, Article, “ Banque,” in Dictionnaire d'Economic

Politique, I., 145.



expiration of the period fixed for redemption to pay into the
Federal Treasury an amount of coin equal to the face value
of the notes still outstanding. The government then as­
sumes the obligation of redemption for thirty years, after
which the balance goes to a public fund.
The Swiss banking system as embodied in the law of 1881
was a system of free banking under government supervision.
The Federal Assembly reserved the right to fix the aggre­
gate of the Swiss circulation and to apportion it among the
banks, but this right was exercised only for the purpose of
compelling the banks to conform to certain uniform require­
ments. Twenty-six of the Swiss banks entered into a clear­
ing arrangement by authority of a law of June 19, 1882, for
the mutual exchange of notes. These banks were known
as “ The Associated Banks” (Banques Concordataires), and
their notes circulated throughout Switzerland and were
received by public depositaries. The central government
at no time guaranteed the bank-note circulation nor made
the notes legal tender in private transactions.1 One of the
peculiarities of the Swiss banks, however, was that a majority
(constituting twenty-two out of thirty-six at the close of
1906) derived their capital from the canton and relied upon
the guarantee of the canton for support in case of need.
They were thus substantially state banks, operating upon
a miniature stage, and out of this fact grew many of the
defects of banking conditions in Switzerland.
The law of 1881 was intended to remedy those defects
which grew out of lack of uniformity of note issues, de­
ficiency of redemption facilities, and unwarranted competi­
tion. As the existing banks had grown up, however, under
varying conditions, they had many points of weakness which
could not easily be removed without a reconstruction of the
entire system. It was forbidden by the law of 1881 to those
banks whose issues were based on commercial paper to deal
in securities or products for future delivery, to hold real
estate, or engage in promotions; but these transactions were

JAvy, 216.



not forbidden to those institutions where such restrictions
would have been most salutary—the banks whose circulation
was covered by securities or rested upon the guarantee of
the canton.1 Hence the character of the assets in respect to
ready convertibility grew steadily worse. From 1883 to 1900
commercial discounts of the Swiss banks increased only
from 176,000,000 to 181,000,000 francs, while holdings of
securities increased from 219,000,000 to 615,000,000 francs.3
Efforts to promote the free interchange of notes had begun
as early as 1876, when a concordat was signed by twentyone banks, by which they received each other’s notes at par
and acted as mutual collecting agents. A central clearing
bureau was established at Zurich, which at first handled a
large volume of business, but soon fell into decadence.8 The
law of 1881 was followed by a new series of agreements,
which again worked well for a few years, only to again fall
into disuse. The difficulty of the situation lay largely in
the competition among the banks for business, which led
the small banks to bid for paper which the large banks had
rejected, and to wide variations in rates of discount, which
prevented any intelligent control over exchange. So serious
did these evils become that a new agreement was entered
into by twenty-eight banks on June 3, 1893, “ with the etl^
of protecting the metallic reserves of the country.” Under
this agreement authority was given to a committee repre­
senting five leading banks to fix a uniform rate of discount,
below which none of the contracting banks should discount
paper having less than ten days to run.4
Even with the best of spirit on the part of the banks of
issue, they could make head with difficulty against the
1 Bouchmil, 48. In 1885 only six banks based their issues on com­
mercial securities. They represented a circulation of 35,000,000 francs
out of a total of about 135,000,000.
2 Ibid., i n . At the close of 1907 the figures were respectively
260,100,000 and 931,281,000 francs.—Controle des Billets de Banque,
1907, Tab. III.
3 Bouchmil, 33.
4 Ibid., 130.


h is t o r y of m o d e r n b a n k s of is s u e .

competition of the private banks, and while some of the latter
were drawn into an agreement in 1894, they soon denounced
it or found means of evading its requirements. Modifications
were made in the agreement at the general assembly of banks
of issue October 9, 1900, but they were found too burdensome
and were abolished the next year.1 In the meantime a special
convention on June 9, 1900, gave to a central committee the
power to reduce the volume of circulation when it judged
that market conditions required it.a Under this author­
ity actual reductions were made for several years, running
as high as ten per cent, of the authorized circulation for 134
days in 1903, and seven and a half per cent, for eighty days
in 1904. The revival of business activity made heavier de­
mands upon the circulation in the next two years, so that
the maximum reduction in 1905 was five per cent, for eightyeight days and in 1906 five per cent, for ninety days. The
manner in which the reduction was accomplished was by
the direct delivery of notes by each bank to the federal
inspectorate.8 Another step, designed to check unwarranted
competition for deposit accounts, was taken by a convention
at I^ausanne, June 10, 1905, at which it was decided that
the rate accorded by bankers on checking accounts payable
at sight should be one and a half per cent, below the official
rate of discount, but in 110 case higher than three per cent,
or lower than one per cent.4
Most of the difficulties of the Swiss banks were accen­
tuated by the persistently adverse course of exchange with
France. Never in any year from 1888 to 1908 was the average
rate for francs in Paris below par in Switzerland and most of
the time it was at such a premium as made it profitable to
import French bank-notes, sell them for Swiss money at
a premium, demand redemption of Swiss notes in silver,
export the silver to France, and again bring back French
1 Bouchmil, 134.
2 Ibid., 124.
3 Controle des Billets de Banque, 1906, 29.
4 Ibid., 1905, 28.


30 7

bank-notes for the renewal of the process.1 At an early date
after the decline in silver bullion Switzerland was practically
denuded of gold, and the profits on exchange were figured
upon the cost of exporting the silver coins of the L,atin
Union. While there were certain seasons of the year at
which exchange was more favorable to Switzerland than at
others, there were six years between 1889 and 1901 in which
the minimum rate was at par or higher, indicating that coin
would not be drawn at any time in these years, in the ordi­
nary course of commercial operations, to take the road over
the Alps into Switzerland. It was out of these conditions
that grew many of the efforts which have been set forth to
restrict circulation, restrain competition, and bring about
co-operation among the banks. So severe was the burden
imposed by the drain of silver upon the banks near the
French frontier, in compelling them to obtain specie at a
premium to maintain their reserve, that one such bank sur­
rendered its power of issue, and the others in June, 1899,
persuaded their associates to share a part of the burden.8
It was inevitable that while these difficulties, growing
out of the lack of unity in the Swiss banking system, were
steadily growing more serious, a movement should gain
headway in favor of centralization.3 Already, before the
law of 1881 (in March, 1879) a plan was presented to the
National Council for a bank controlled by the Confederation.
The opponents of change were able to put its advocates in an
unfavorable parliamentary position, and the revision of the
constitution which was required was rejected by the people
in 1880 by 260,126 votes against 121,099. The political crisis
1 Cf. Bouchmil, 136.
2 Bouchmil, 141.
3 It was declared by the Federal Council in a report made in the
summer of 1904: “ We know by experience that it is not possible,
under the existing system of note issue, to hope for a fundamental
improvement of these unhealthy conditions or the disappearance of
such dangers. What may be hoped with certainty is that the creation
of the [national] bank will lead to a sensible change.” — Economiste
Europeen, July 8, 1904, XXVI., 36.



of 1887, however, when war threatened between France and
Germany, led the Swiss banks to almost suspend the granting
of credit and called renewed attention to their relative finan­
cial helplessness in meeting pressure from France.1 After
various proposals to amend the law of 1881, an amendment
was adopted to Article 39 of the constitution, October 28,
1891, authorizing the Confederation to create a central bank
under its control. Out of this vote grew the project of 1896,
which authorized a central bank with a capital of 25,000,000
francs, to *be provided two-fifths by the cantons and the re­
mainder by the Confederation. It was upon this provision,
for creating a state-owned bank rather than a joint-stock
bank with private ownership, that the campaign principally
turned when the project was submitted to the people by the
referendum. The French cantons opposed to the state social­
ism of the Germans rolled up immense majorities against the
project and it was defeated by a vote of 255,984 against
The deadlock which thus seemed to be created was not
finally ended for more than eight years. Measures for meet­
ing the popular mandate were introduced, however, on the
morrow of the referendum, and the subject was carefully
studied by various Swiss commercial bodies. A project of
law submitted by the Federal Council to the parliamentary
committee on March 24, 1899, was abandoned June 28, 1901,
because of disagreement over the location of the head office
of the bank.3 But efforts to reach agreement were not relaxed
and finally, after many delays, the law of October 6, 1905,
created the Swiss National Bank. Efforts to secure a referen­
dum failed to bring together more than 28,137 signatures out
of 30,000 required,3 and on June 20, 1907, the bank entered
upon its functions.
The principal task of the Swiss National Bank was declared
in its second article to be “ to serve in Switzerland as regu­
lator of the money market, to facilitate operations of payment,
1 Bouchmil, 58.
2 Ibid., 79.
3 Controle des Billets de Banque, 1905, 26.



and to provide for the employment of circulating capital.”
The ultimate capital was fixed at 50,000,000 francs ($9,650,000), of which only half was required to be paid in. The
Confederation no longer appeared as a shareholder in the
final draft of the law ; but the cantons were allowed to sub­
scribe for two-fifths of the capital and the existing banks for
one-fifth in proportion to their circulation at the close of 1902.
The shares not thus taken were left open to public subscrip­
tion. If any shares were not taken at first, they were to
become the property of the Confederation, but under a man­
date that they be promptly disposed of in the market.
The government of the bank was to be exercised through
the general assembly of the shareholders, but a majority of
these, under the division of capital proposed, might represent
the cantons and the old cantonal banks. Moreover, the
council of the bank, which was to exercise general super­
vision over its operations, was to be made up of twenty-five
members chosen by the Federal Council, and only fifteen by
the shareholders. The council elects a committee of seven
members, to which much of its authority is delegated, and
local committees of from three to seven members each. The
general directors, three in number, are appointed by the
Federal Council, upon the nomination of the council of the
bank. In them is vested the authority to fix the rate of
discount, to name officers and to fix salaries, subject to the
approval of the Federal Council.1 There is also a commis­
sion of control named each year by the general assembly for
the purpose of verifying the accounts. The question of the
location of the head office of the bank, which had caused
much controversy, was settled by establishing the directors
1 Articles 55 and 63. M. Roulleau regards these provisions, with
the absence of restrictions on loans to the Confederation and the can­
tons, as going too far in the direction of a purely state bank. He
says that “ it is necessary to trust entirely to the wisdom and discre­
tion of the public powers to resist the temptation to have themselves
accorded exaggerated credits by the bank. This is the danger of
every state bank and this one departs but little from that type.”—
Economiste Europken, November 17, 1905, XXVTII., 620.



of the departments of commercial operations and of control at
Zurich and the director of the department of note issue at
The National Bank has unlimited power of note issue so
far as amount is concerned1; but the provisions for the se­
curity held against it are exacting. There must be a reserve
of forty per cent, in Swiss metallic money or foreign gold.
The remainder of the security must be in domestic or foreign
bills of exchange; but it is especially provided that all the
demand obligations of the bank must be covered by paper
of short maturities and that the paper falling within this
definition is that which falls due or is collectible within ten
days.2 Notes must be redeemed at par at all offices of the
bank and are accepted at par at government offices, but can
be made legal tender between individuals only in case of
necessity in time of war. The minimum denomination of
notes is fifty francs ($9.65). An earnest effort was made
in committee to fix the minimum at twenty francs, but was
defeated upon the ground that it was desirable to encourage
the circulation of coin.
The law of 1881 had provided against the perpetuation of
vested right in the power of note issue by prescribing that
the grant of the power should create no right to indemnity
in case it should be withdrawn. The new draft of Article 39
of the Constitution, however, adopted in 1891, provided that
the profits of the proposed central bank, after the deduction
of an equitable interest on the capital, should go in the pro­
portion of at least two-thirds to the cantons. It was these
provisions which guided the distribution of the earnings of
the National Bank under the new law. Ten per cent, of net
profits, but not exceeding 500,000 francs, is first set aside
for the reserve fund ; a dividend of four per cent, is allotted
to capital; then an allowance is made to the cantons, based
upon the circulation of the old local banks and upon popula1 It was proposed in committee to impose a tax of five per cent, on
issues above a certain limit, as under the German system ; but this
was rejected by a large majority.—Bouchmil, 202.
2 Article 21, Bulletin de Statistique, November, 1905, LVIII., 532.


tion; and the remainder is divided in the proportions of
one-third to the Confederation and two-thirds to the cantons.
The new law provided that the local banks should retire
their circulation within three years after the National Bank
should have begun operations. The method of doing this
was the same as in reducing circulation under the banking
convention of 1900—by the surrender to the inspectorate of
notes to the amount of one-twelfth of outstanding circulation
at the end of every quarter. In case the notes could not be
obtained, a corresponding amount of specie was to be sur­
rendered. The notes were directed to be destroyed; the
specie was transferred to the National Bank for the redemp­
tion of the notes when received.
The average circulation of the local banks increased from
66,973,000 francs, or 24.30 francs ($4.70) per capita for the
ten years ending with 1880, to 120,964,000 francs, or 42.65
francs ($8.23) per capita for the ten years ending with 1890,
and 187,330,000 francs, or 59.15 francs ($11.41) per capita
for the ten years ending with 1900. The average circulation
for the year 1880 was 92,851,000 francs; for 1890, 152,244,000; for 1900, 228,865,900; and for 1906, 240,569,159 francs.
The cash held did not vary greatly in the last few years
before the creation of the National Bank, having been
108,999,979 francs in 1900, and 120,102,863 francs in 1906.
The circulation of the National Bank stood on December
31, 1907, including notes of the local banks in process of
retirement, at 159,220,050 francs ($30,730,000), and its cash
consisted of 75,483,429 francs in gold and 5,860,620 francs in
silver. Although barely established when the crisis of 1907
in America reacted upon European markets, it weathered
the storm with a rate of discount lower than the maximum
of many other European banks. The rate of five per cent.,
which was fixed August 15, 1907, was advanced in October
to five and a half per cent.; but this was the maximum
found necessary, and a reduction was made January 16, 1908,
to five per cent, and January 23d to four and a half per cent.
Within the next six years the National Bank fulfilled the
expectations of its founders in protecting the gold stock of



the country, while maintaining a favorable rate of discount
The circulation showed a high degree of elasticity, declining
in 1913 from a maximum on January 2d, of 335,816,650
francs ($64,800,000) to a minimum 011June 21st of 253,562,100
francs ($48,935,000) and closing the year at 313,821,300 francs.
The average metallic reserve was 193,612,000 francs, which
amounted to 71.09 per cent, of the average note circulation.
The average rate of discount in 1911 was 3.70 per cent.;
in 1912, 4.20per cent.; and in 1913, 4.81 per cent.1
Banking in Spain.
Spain had banks of deposit during her period of prosperity
in the Middle Ages, some of which, like that at Barcelona,3
attained considerable celebrity. These institutions disap­
peared with the decadence of Spanish commerce and it re­
mained for the modern age to witness a new development
of banking. An attempt was made in the eighteenth century
to establish institutions of credit, and the Bank of San Carlos,
which was founded in 1782 at Madrid, was still in operation
when the monopoly of the issue of circulating notes was
given to the Bank of Spain in 1874. The Bank of Spain
was founded in 1829, under the name of the Bank of San
Fernando, but did not enjoy any special privileges outside
of Madrid and the places where it had branches until 1856.8
It was at first a government bank and its name was changed
at the time of the new legislation to the Bank of Spain, but
even after 1856 the right to incorporate other banks of issue
remained in the hands of the government. Such banks had
been established prior to 1856 by the consent of the public
authorities in much the same manner as departmental banks
might have been established in France before 1840.
The legislation of January 8, 1856, was simply a first
step in the direction of monopoly, like the similar legislation
1 Controle des Billets de Banque, 1907, 20.
a This bank, founded in 1401, is said to have been the first bank of
deposit instituted for the accommodation of private merchants.—
Hallarn, II., 530.

*Courcelle-Seneui1, 361.



of France and Germany. This law prescribed that there
should be not more than one bank of issue in any commercial
city. The general provisions regarding the new banks
limited their issues to three times their capital, obliged them
to keep a coin reserve of at least one-third of their circulation,
and fixed the minimum denomination of the notes at one
hundred reals ($5). The liberality of these provisions was
impaired by leaving to the government the nomination of
the governor of the Bank of Spain and of royal commissioners
to manage the independent banks. The Bank of Spain
had created up to 1863 only two branches, at Valencia and
at Alicanta, and there were independent banks at Cadiz,
Barcelona, Seville, Malaga, Corunna, Santander, and Vallodolid. The capital of the independent banks was not
large, but in this respect it was commensurate with the vol­
ume of business in Spain. The Bank of Spain on December
31, 1862, showed a circulation of 208,380,901 reals ($10,400,000), a coin reserve of 107,398,201 reals, deposits of 235,063,731 reals, and a commercial portfolio of 309,231,378 reals
The charter of the Bank of Spain was extended in 1856
for twenty-five years and was renewed in 1874 for thirty
years. The law of March 19, 1874, conferred upon the bank
the exclusive privilege of issuing notes and increased the
capital from 132,000,000 reals ($6,600,000) to 100,000,000
pesetas ($20,000,000).1 All the existing provincial banks,
then numbering eighteen, were ordered to liquidate their
circulation and transfer it to the Bank of Spain. The bank
is not a state institution and the state does not participate in
its profits, but it had the authority, under the law of 1874, to
require advances by the bank to the amount of 125,000,000
pesetas ($25,000,000) upon the deposit of proper guarantees.
The notes of the bank were made legal tender and limited
to five times the capital. The capital was increased soon
after the Act of 1874 to 150,000,000 pesetas ($30,000,000),
1 The present Spanish coinage system follows that of the Latin
Union, the peseta being the equivalent of the franc ($0,193).

which carried the limit of circulation to 750,000,000 pesetas
The necessities of the Treasury led to a new revision of
the charter by the law of July 14, 1891, and the extension
of the privilege of the bank until December 31, 1921. The
new charter authorizes the issue of notes to the amount of
1,500,000,000 pesetas ($300,000,000) against a cash reserve
of one-third, of which at least half is required to be kept in
gold.2 The bank was required to pay for these privileges
by advancing 50,000,000 pesetas to the government annually
for three years without interest or right to reimbursement
until the expiration of the charter. The fate of the bank
has come to be bound up more and more with that of tho
state and it has been only by the bank’s help that the Treas­
ury was able to meet its engagements. The Treasury budget
showed a persistent deficit, and a floating debt was incurred
from 1885 to 1893 333)°00>°00 pesetas ($66,000,000). The
permanent debt on June 30, 1892, was 6,249,639,975 pesetas
($1,200,000,000),8and the charges on account of the debt for
1894 were estimated at 309,219,669 pesetas ($61,000,000 or
about $3.40 per capita). Exchange declined about twenty
per cent, and railway securities and public stocks fell from
fifteen to seventy-five per cent, within five years.
The commercial operations of the bank through its fiftyeight branches became subordinate to the issue of paper
notes to cover advances to the state. A large proportion of
the assets were locked up in loans on government and for­
eign securities, which increased rapidly for several years
because the bank maintained a uniform interest rate of four
per cent., which afforded a profit upon the difference between
this rate and the higher rate earned by the securities.4 This
difference was availed of by shrewd speculators to borrow on
securities, spend the loan on new purchases of securities,
Alfred Neymarck, Article, “ Banque,” in Dictionnaire d'Econo­
mic Politique, I., 140.
2Bulletin de Statistique, July, 1891, XXX., 72.
3Raffalovich, Le Marche Financier en 1893-4, 217.
*Ibid., 1891, 119.



deposit them again as guarantee for a larger loan, and so on
without limit. The interest rate was raised in January, 1892.
to five per cent., but without entirely curing the difficulty.
The recent history of the Bank of Spain is colored by the
results of the war with the United States in 1898 and the
efforts since made to restore order to Spanish finances. When
war broke out, the Spanish government had already practi­
cally exhausted the credit of the country and of the bank.
If a sound financial policy had been pursued up to this time,
the state would have been in a much stronger position to
negotiate loans or to sanction the issue of bank paper under
specie suspension, as was done by the Bank of France in the
war with Germany. Appeal was again made by the Treas­
ury to the Bank of Spain, and the circulation was forced
upward to 1,459,505,000 pesetas on February n , 1899, after
peace had been made with the United States, but while
many war expenses were still unpaid. During the war Paris
exchange rose for a time above one hundred per cent.—a de­
preciation of fifty per cent, on the notes of the bank. The
restoration of peace brought down the gold premium to
twenty per cent., and the Spanish Treasury struggled man­
fully to pay the interest on the foreign debt, even when
augmented by the refusal of the United States to permit the
Cuban debt to continue a charge upon the revenues of that
island or to assume the debt of the Philippines.
Contrary to the policy of other great state banks, the Bank
of Spain did not co-operate heartily with the government in
seeking to restore stability of exchange. It was declared in
the Cortes in 1900, by one of the ministers, that “ The Bank
of Spain has departed from its functions and failed completely
in its mission.” 1 A year later the same minister, Senor
Moret, declared2:
The bank does not issue notes against its assets; its notes re­
spond to no operation of credit; and when a bank of issue does not
thus function, when its assets are not made up of commercial paper,
1Lacombe, Le Change Espagnol, 41.
*Mitjavile, La Crise dn Change en Espagne, 124.



but of public securities and Treasury bills, there is no rule, no means,
and no remedy for bringing its circulation to a normal basis.

The difficulty lay in the fact that the greater the deprecia­
tion of its notes, the greater were the paper profits of the
bank. From 1895 to *899, its net profits rose from 34,230,922 pesetas to 50,400,459 pesetas. These profits were at­
tained in the face of low rates of discount and of interest on
loans, which with the unlimited power of note issue per­
mitted the encouragement of speculation in the same manner
as prior to the war. Thus, from May 25, 1900, to March 22,
1902, the rate of discount and advances stood at three and
one half per cent., while the quotations of the Exterior debt
at Paris in February, 1901, were at a figure which afforded
a net return of 5.54 per cent.1
A resolute effort was made, however, to restore order to
Spanish finances with the service of Sefior Villaverde as
Minister of Finance. He and his successors, by economies
and the imposition of new taxes, succeeded in turning Treas­
ury deficits into a surplus, from 1899 down. The sum of
these surpluses for the eight years ending with 1906 attained
the considerable amount of 492,830,832 pesetas ($90,000,000).
From this surplus reimbursements were made to the bank
on account of advances on Treasury bills which reduced
their amount at the close of 1907 to 210,037,447 pesetas
($40,000,000).* One of the measures taken to this end was
the collection of customs dues in gold. The law of February
23, 1902, by which this requirement was put in force, sought
to avoid an unwarranted increase in tariff charges by fixing
a sliding scale of reduction based upon rates of foreign ex­
change. The benefits of the law in accumulating physical
gold were impaired to some extent by a royal ordinance of
April, 1903, by which the Bank of Spain was allowed to
furnish gold to importers from special gold accounts or by
the sale of gold for silver and paper at the current premium.*
1Mitjavile, 130.
8Arthur Houghton, in fcconomiste Frangais, February 8, 1908,193.
3 Fochier, in Questions MonUaires ConUmporaines, 491.



The fact that the Treasury was no longer a heavy buyer of
exchange for its remittances on account of the debt and other
charges tended, however, to improve the exchange situation,
because the competition for bills was henceforth distributed
over a large number of buyers, who were better able than
the Treasury to conceal their operations and consult their
A special project was carried out in 1903 for reducing the
range of fluctuations in exchange due to speculation. The
railways, which had heavy remittances to make at certain
dates to Paris for interest on their bonds, found that on
such dates the price of bills of exchange in Spanish currency
was sharply advanced. The evil was partially remedied by
opening a credit at two leading French banks of 50,000,000
francs in favor of the Bank of Spain. The purchase price of
bills was fixed from time to time by a syndicate committee
and the different railways agreed not to bid against one
another for bills at a higher price.3 This operation involved
in effect the borrowing of the amount needed to meet de­
ficiencies in the amount of bills of exchange offered, and for
a few months, by careful management on the part of the
Bank of Spain in gathering up local bills in different cities,
exchange was kept fairly steady; but the credit in Paris
was exhausted within a year and the experiment was not
sufficiently successful to lead to its renewal.8
One of the aims of Sen or Villaverde was the revision of
the charter of the bank in order to restore it to its com­
mercial functions. The law of May 13, 1902, dealing with
this subject prescribed that the Treasury should reimburse
to the bank before December 31, 1911, the amount of obliga­
tions in its assets represented by Treasury certificates. The
1Favre, Les Changes Dipriciis, 73.
2fLconomiste Europ&en, January 23, 1903, XXIII., 107.
3 Vide j&conomiste Europten, January 24, 1904, XXV., 156. Its

failure was predicted by Mitjavile on the ground that the available
bills would be largely absorbed by those having obligations to
meet, who could not afford to wait for the syndicate to appear in
the market and reduce rates and would therefore pay any rate
necessary to obtain francs.— La Crise du Change en Espagne, 151.



Treasury was forbidden to borrow of the bank except
by authority of law. The maximum limit of circulation
against which only a reserve of one-third was required was
reduced to 1,200,000,000 pesetas. Of the required reserve
of 400,000,000 pesetas, one-half was required to be in gold.
Against the next 300,000,000 pesetas in notes issued, forty
per cent, was required to be in gold and the remainder up to
a total metallic reserve of sixty per cent, might be in silver.
Against the remaining 500,000,000 pesetas which the bank
was authorized to issue, fifty per cent, was required to be in
gold and the remainder, up to a total of seventy per cent.,
might be in silver.1 Accounts in Paris, I/)ndon, and Berlin
could be counted as gold.
More significant of the determination of Senor Villaverde
was a section of the agreement of July 17, 1902, between the
Treasury and the bank, by which it was declared that the
bank ‘‘would favor by a special rate of interest the use of
commercial, industrial, and agricultural credit by accepting
for discount in equal measure paper arising from these dif­
ferent sources. ’’2 One of the steps directed to this end was to
make speculative loans on the public securities less attractive
to the public and the bank by increasing the rate of discount.
The rate was raised in 1902 to four per cent, and in Septem­
ber, 1903, to four and a half per cent., at which it remained
fixed, even during the crisis in other countries in 1907. It
was admitted, however, in the annual report of 1907, that
the reforms sought by the law of 1902 were not capable of
immediate realization, that it was impossible to improvise
the substitution for assets consisting of securities of assets
exclusively commercial, because this would require the find­
ing of resources which the country still unfortunately lacked.8
1Bulletin de Statistique, July, 1902, U I., 91.
2Mitjavile, 208.
3 Economiste Frangais, April 18, 1908, 565. Doubt is thrown by
Favre upon the earnestness of the bank in seeking to restore sound
conditions. He declared that, “ spurred on by a minority of specu­
lators and exporters who, at least for the time, have an interest in
seeing high exchange, the Bank of Spain thinks only of profiting by



At the session of the Cortes, however, in the summer of
1908 was taken a final step which, when carried out, should
relieve the bank of the subordination of its commercial func­
tions to those of the government and lead to the ultimate
restoration of stable exchange on a gold basis. This was
the enactment of a law, providing for the issue of four per
cent, bonds running for fifty years, to the amount of 160,000,000 pesetas, for the exclusive purpose of taking up the
outstanding Treasury certificates in circulation and in the
vaults of the bank. These certificates were to be received
in payment for the new issue, which was offered at 8524.1
The circulation of the bank at the close of 1907 was 1,557,000,000 pesetas ($300,000,000), which was an increase of
33.000.000 pesetas over the close of 1906, but was a decrease
of about 80,000,000 pesetas as compared with 1901. One of
the difficulties which the bank encountered in maintaining
the reserve required by law was the steady accumulation of
silver in its vaults as the public preference grew for paper,
as in France prior to 1892. The proportions of gold and
silver were nearly the same at the close of 1897. Gold was
not paid out by the bank, so that what was obtained it was
possible to hold. The decline in value of the bank paper
caused by the war with America carried it for a time below
the bullion value of the silver coins, and reduced the silver
in the bank from 267,900,000 pesetas on March 31, 1898, to
112,900,000 pesetas on June 30, 1898. From this point,
however, recovery began in the value of paper and this led
to an increasing current of silver coins into the bank. By
the close of the year 1900 the amount of gold stood at 350,000,000 pesetas, and silver at 400,500,000 pesetas. By the
close of 1907 gold had risen only to 391,000,000 pesetas ($75,460,000), while the silver in the bank vaults amounted to
642.000.000 pesetas ($123,900,000).
The commercial discounts showed an increase at Madrid
the unfortunate monetary situation to realize large profits from the
exchanges and the issue of paper money.”—Les Changes D£pr£cies%
1Moniteur des IntkrHs MaUriels, July 3, 1908, 2183.



from 947,366,000 pesetas in 1906 to 983,784,000 pesetas in
1907, while in the provinces there was an increase from 435,903,000 to 441,895,000 pesetas. The profits of the bank for
the year were 58,260,237 pesetas ($11,250,000), of which
about 21,000,000 pesetas was derived from operations with
the government or was in government obligations. Cost of
administration was 17,369,169 and dividends were dis­
tributed to the amount of 30,750,000 pesetas.1
The Bank of Portugal’
Portugal has a single bank of issue, whose monopoly in
this respect dates only from 1888, but whose origin goes
back to the Bank of Lisbon in 1821. This institution was
authorized by a decree of November 19, 1846, to unite with
the National Surety Company (Companhia Confianca Nati­
onal) to form the Bank of Portugal.5 The last extension of
the charter continued the bank for forty years, from 1888 to
1928, and conferred upon it the monopoly of the issue of legaltender notes in the realm of Portugal and the neighboring
islands. Seven other banks,—five at Oporto, one at Braga,
and one at Guimaraes,—had the power to issue notes for
circulation within their respective districts, which were not
received by public depositaries. An arrangement of July 8,
1891, authorized the Bank of Portugal to unify the circula­
tion and substitute its own notes for those of the other
banks. The bank is managed by a governor appointed by
the Treasury for three years and a board of ten directors
chosen by the shareholders.
The Bank of Portugal has been from the beginning little
more than a gigantic paper-money machine for meeting the
necessities of the state. This was the case with the Bank of
Lisbon, which issued 20,000,000 milreis ($21,600,000) to
take up the government notes. The capital of the bank is
i3>5oo>ooo milreis ($14,500,000). The statutes originally
imposed careful restrictions on the circulation, but these re­
1Aconorniste Europeen, March 20, 1908, XXXIII., 379.

2 RafFalovich, in liconomiste Europeen, March 13, 1908, XXXIII.8





strictions have been suspended in order to permit large loans
to the government, which have tended to drag the circulation
of the bank into the same mire of depreciation as that of the
Bank of Spain in the last century. Article 15 of the orig­
inal law prescribed that the circulation should always be
covered by a metallic reserve and negotiable paper maturing
in not more than three months and that the metallic reserve
should be in gold and should equal one-third the aggregate
of the circulation and other demand liabilities. Article 16
fixed the power of note issue at double the capital of the
bank and Article 37 limited to 2,000,000 milreis the advances
to the state.1 Both the latter limitations have beeii disre­
garded and the circulation is now more than five times the
capital and advances to the government are many times the
amount fixed by the law. The amount of such advances
and loans stood at 53,092,000 milreis in 1905 and increased
to 54,290,000 milreis ($58,633,000) in 1907.
A share of net earnings goes to the state. The share­
holders receive seven per cent., after certain reserves are set
aside, but above seven per cent, there is an equal division
with the government. The profits on loans between five
and six per cent, are divided, but above six per cent, go
entirely to the state.3 The net earnings of 1907 were 1,739,000 milreis ($1,878,000), which permitted a dividend of nine
and a half per cent.
The cash resources of the bank and its readily convertible
obligations have tended to decrease in recent years. The
demand liabilities at the close of 1907 were 70,967,000 milreis
on account of circulation and 1,601,000 milreis on account of
deposits. Against them was held 5,079,000 milreis in gold,
4,822,000 milreis in silver and minor coins, and 18,590,000
milreis in commercial discounts. The remainder of the
assets were made up of government obligations, gold cover­
ing the demand liabilities in the proportion of only seven
per cent.3
1 L£vy, 208.
9Economiste Europien, March 13, 1908, XXXIII., 329.
*Ibid., March 6, 1908, XXXIII., 316.



The National Bank of Roumania.
The National Bank of Roumania was founded in 1880,
with special privileges at first for twenty years, which were
soon extended to December 31, 1912. The capital is 30,000,000 lei ($6,000,000) of which 12,000,000 lei have been
paid in. A third of the capital was furnished by the govern­
ment and the other two-thirds by individuals, but the gov­
ernment in 1900 sold its shares at a large advance. A metallic
reserve of at least one-third of the note issues is required and
no bill can be issued below twenty lei ($4). The entire
circulation must be covered by securities which are readily
negotiable, but thirty per cent, of the metallic reserve may
be represented by foreign bills of exchange.1
The government of Roumania issued paper money soon
after its establishment in 1878, guaranteed by the public
domains, to the amount of 26,200,000 lei, and the National
Bank was charged in 1886 with the withdrawal of this paper
and the substitution of its own notes. The amount of this
special issue was gradually retired and the bank was reim­
bursed by the government. Financial difficulties again arose
in 1901, however, from which the bank aided in extricating
the state, in return for an extension of its charter to 1920. A
further extension to 1930 was purchased by an advance of
15,000,000 lei, which the state is required to reimburse in
part from its share in the profits of the bank. The share­
holders are entitled to a dividend of six per cent, before the
state steps in and takes twenty per cent, of what remains,
but after 1913 the state will take thirty per cent.3
At the time of the creation of the bank in 1880, it was not
known whether the monetary standard would be established
ultimately on a silver or gold basis, but the bank gained
strength so rapidly that it readily accepted in 1892 an ar­
rangement with the government by which the reserve was
1 L£vy, 225. The gold standard was adopted in Roumania by the
law of March 2, 1890. The unit in the three Slavic countries is the
equivalent of the French franc (fo.193).
2 Economiste Europeen, March 13, 1908 XXXIII., 329.



to be kept thereafter in gold coin or in bills on London and
Berlin.1 The circulation on December 31, 1882, was 96,968,310 lei, with a reserve of 23,838,000 lei. This reserve
stood on December 31, 1892, at 53,160,703 lei in gold and
13,954,389 lei in foreign bills. The circulation at the close
of 1906 had risen to 291,685,330 lei and the metallic reserve to
83,575,336 lei.5 The reaction of the crisis of 1907 in America
forced circulation up to 319,742,490 lei. It became necessary
to raise the rate of discount by rapid stages to six, seven,
and finally to eight per cent., but the reserve was kept intact
at more than 100,000,000 lei, and a sum of more than 37,000,000 lei was put at the command of commerce.8
The National Bank of Bulgaria.
The bank-note circulation of Bulgaria is issued by the
National Bank, which was founded on February 8, 1885, by
the government, with a capital of 10,000,000 levs ($2,000,000) in gold. The bank has the exclusive privilege of
issuing notes, and they are received in public depositaries
and in all other offices of the government. It is required
to hold a cash reserve in gold equal to one-third the value
of the notes in circulation and to redeem the notes on demand
at the central office or at any of the branches. The governor
of the bank is named by the Prince upon the nomination of
the minister of finance and four administrators are appointed
in the same way. The government is represented by two
delegates, one a counsellor of the court of accounts and the
other a member of the ministry of finance, who exercise
official supervision over the operations of the bank.
Economic conditions in Bulgaria suffered severely from
1897 to 1900 by reason of a succession of bad crops. The
scanty stock of gold in the country was so far depleted that
the premium on exchange rose to seven and a half and briefly
1 Vide article on “ The Circulation in Roumania,” by Lascar L.
Catargi, quoted in Aconomiste Europien , September 30th and October
7, 1904, XXVI., 420 and 452.
2 Jzconowiste Europten, March 8, 1907, XXXI., 316.
3 Moniteur des Interets Mate riels. May 3, 1908, 1457.



even to eleven and a half per cent., and the government by
a law of November 13, 1899, authorized the redemption of
bank-notes in silver. In its annual report for 1901 the bank
noted the fact that the premium on exchange had mounted
to fourteen per cent, and laid its finger on the fatal defect of
a state-owned bank,—that its credit was linked inseparably
with the augmenting pecuniary needs of the government.1
Some improvement took place after the government loan of
1902, and exceptionally large crops in 1904 forced the pre­
mium on exchange for a moment to the negligible level of
half of one per cent2; but it was not until 1906 that the pre­
mium was entirely suppressed and the exchange of notes for
gold was resumed. The bank, under these conditions, de­
cided to limit the denominations of the silver notes which it
had issued during the period of suspension to five and ten
levs ($1 and $2).3
The result of the change in conditions was a rapid influx
of gold into the bank. There was a gain of 3,600,000 levs
during 1904, carrying total holdings at the end of the year
to 9,272,724 levs; by the close of 1905 there was a further
advance to 20,600,220 levs and for 1906 to 27,699,000 levs
($5,350,°°0)> while silver remained substantially stationary
at 10,688,000 levs ($2,065,000). The circulation of the bank,
which was only 1,900,000 levs ($367,000) at the close of
1890, was 21,700,000 in 1900 ; 32,900,000 m 1903; 37,193,000
in 1905 ; 44,622,000 in 1906 ; and 50,000,000 levs ($9,650,000)
in June, 1908.
The National Bank of Servia.
The bank-note circulation of Servia is issued by the Na­
tional Bank of Servia, which was established by the law of
January 6, 1883, subsequently modified by the law of Sep­
tember 23, 1885.
capital of the bank is 20,000,000 dinars
($4,000,000), of which, however, only half has been paid up.
1 Thery, in Economiste Europeen, October 21, 1904, XXVI., 521.
*Economiste Europten, May 19, 1905, XXVII., 633.
3Ibid., May 31, 1907, XXXI., 697.



The privilege of the bank, which was originally granted for
twenty-five years, includes the monopoly of note issues. The
notes of ten dinars ($2) are redeemable in silver and those
of larger denominations in gold. The bank is authorized,
however, to redeem in silver at its market value in a pro­
portion fixed by the minister of finance upon the special
petition of the bank. Silver may also be substituted for
gold to the amount of not more than twenty-five per cent, of
the cash reserve and the bank is not permitted to increase
its note issues above two and a half times its reserve.
The provision that the notes may be redeemable in part
in silver led to a degree of distrust of the note issues some­
what similar to that which existed in 1893 in the United
States regarding the notes issued under the Sherman law.
This distrust was not allayed when in March, 1898, the gov­
ernment made an arrangement with the bank for a new issue
of 10,000,000 dinars in silver notes to meet the floating debt.
It was provided, however, that the amount of silver notes
put in circulation should not be greater at any time than
32,000,000 dinars and that as the loan to the government
was reimbursed, within the ensuing ten years, the silver
circulation should be reduced until it should not exceed 25,000,000 dinars.1 Improvement in the monetary situation
gradually set in, however, and persisted, in spite of the polit­
ical disturbances of 1903. Only about a year after the violent
change of dynasty the minister of finance reported that the
premium on gold had fallen to one-fifth of one per cent., and
that importation of the yellow metal was under consideration.2
The next year (1905) found the bank able to reduce the dis­
count rate, which had been seven and a half per cent, where
the loan was in gold, to the uniform basis of six per cent, for
both gold and silver loans.8
The affairs of the Bank of Servia have not grown so
rapidly as those of the other Balkan states, but circulation
at the close of 1907 was 37,362,927 dinars ($7,225,000) and
1Economiste Europken, April 22, 1898, XIII., 509.
2 Ibid., September 23, 1904, XXVI., 398.
^ Ibid., May 26, 1906, XXIX., 668.



metallic resources consisted of 14,105,842 dinars ($2,715,000)
in gold and 7,434,967 dinars in silver, exclusive of funds
abroad to the amount of 3,439,753 dinars ($645,000). While
the amount had not materially increased over the close of
1905, the change in the ratio had been in favor of gold, the
gold holdings in 1905 having been 12,421,106 dinars and
silver 8,670,926. Discounts on December 31st were 5,521,560
dinars in 1905 and 6,958,242 dinars in 1907. Current ac­
counts at the close of 1907 were 2,046,226 dinars. The net
profits of the year were 788,746 dinars ($153,000).*
The Banks of Greece.
Greece had until recently three banks of issue,—the Na­
tional Bank, founded in 1842 ; the Ionian Bank, founded in
1839 ; and the Epiro-Thessalian Bank. The capital of the Na­
tional Bank is 20,000,000 drachmas. The Ionian Bank has
its head office in London and its paid-up capital is ,£315,507,
or 7,887,687 drachmas.2 All three banks have been dragged
into the channel of forced legal tender and depreciated money
by the enormous debts of the government and the steadily
growing embarrassments of the public Treasury. A law of
June 20, 1877, gave forced legal tender quality for the first
time in recent years to the notes of the National Bank to a
limit of 47,000,000 drachmas ($9,071,000) and to those of the
Ionian Bank to a limit of 12,000,000 drachmas ($2,316,000).
The money was restored to par in 1884 at a heavy expense
to the Treasury, but the suspension of specie payments was
thought necessary again in October, 1885, and authority to
issue inconvertible notes was extended to the Epiro-Thessalian Bank as well as to the other two banks. The Na­
tional Bank was authorized to issue notes of which one-third
should be covered by coin and bullion, one-third by commer­
1ilconomiste Europeen, July 10, 1908, XXXIV., 6a
2The coinage systems of Greece, Roumania, Bulgaria, and Servia
are each based upon the French decimal system and their monetary
unit in gold, though having different names, is equivalent to the
franc, which is valued by the United States Mint at nineteen and
three-tenths cents($0,193.)



cial paper, and one-third by securities. The government
borrowed from the bank 14,000,000 drachmas in gold and
required it to hold notes subject to its orders to the amount
of 70,000,000 drachmas. The bank was given in return for
these advances the right to circulate 60,000,000 drachmas
on its own account in inconvertible paper. The Ionian
Bank was authorized to maintain a circulation of 7,000,000
drachmas, of which 2,000,000 should be on account of the
government, and the Epiro-Thessalian Bank was given a
maximum circulation of 5,000,000 drachms, of which 800,000 should be on government account. The National Bank
was also authorized to circulate 7,000,000 drachmas in small
notes, and each of the other banks was authorized to issue
3,500,000 drachmas in such notes. The metallic reserve of
the National Bank has been reduced below 2,000,000 drach­
mas ($400,000) and while gold sometimes reaches the coun­
try after the sale of the crops it quickly flies abroad again or
disappears into private hoards. The price of gold in paper
was 122 in 1889 and 1890, 140 in 1892, 180 in 1893, and 200
in 1894.1
The population of Greece is about 2,300,000, and the an­
nual budget for carrying on the government averages about
100,000,000 drachmas ($20,000,000), of which 35,000,000
drachmas is on account of interest on the debt. This in­
terest has not been paid for several years in gold, as required
by the contract, but desultory efforts have been made to per­
suade the holders of the securities to accept new securities in
payment of interest or to permit a complete readjustment of
Greek finances. The British holders of Greek securities
persuaded the London Foreign Office in 1892 to send Major
Law to Athens to study the actual condition of affairs and to
determine whether the government would be able to meet its
obligations. Major Law made a report to the British minis­
ter at Athens under date of March 10, 1893, recommending
various reforms in the financial system. He showed that the
aggregate public debt on January 1, 1893, was about 750,1Raffalovich, Le Marche Financier en 1X93-4, 231.J



000,000 drachmas ($150,000,000 or about $60 per head).
Greece imports more than she exports and the accumulated
deficits in the annual budgets since 1877, due to the premium
on gold and the inefficient methods of collecting the rev­
enues, have been 674,000,000 drachmas.
Major Law’s recommendations were not adopted and no
definite plan was at once perfected for the restoration of
order to Greek finance. The King, in his speech from the
throne on November 8, 1893, afforded striking evidence of
the depreciation of the bank-notes and the evils which had
come in its train. It was announced that all the subsidiary
coins, even to those of bronze, had disappeared and the gov­
ernment recommended the coinage at Paris of nickel pieces
of five, ten, and twenty centimes to supply the people with
small change. A law was approved December 1, 1893/ Pro~
viding for the payment of 50 per cent, of the interest then
overdue on the public debt in bank-bills, for future payments
in the proportion of 30 per cent, in gold, and for covering
directly into the Treasury certain funds which had been
pledged as the guarantee of particular loans. This legisla­
tion was avowedly provisional, and the government was
authorized by the law to enter into negotiations with the
foreign bondholders with a view to a definite readjustment.
Several conferences were held at Athens and Paris, in 1894
and 1895, but they proved abortive.
It was not until after the unfortunate war with Turkey in
1897, over the control of Crete, that a definite adjustment
was reached by Greece with the holders of her obligations.
The great powers then intervened to save the country from
political and financial ruin, and the Greek government,
yielding to the inevitable, declared that it accepted the medi­
ation proposed, surrendering to the powers the protection of
its interests and adhering without reserve to their counsel.8
Out of this situation grew the International Financial Com­
mission, representing England, France, Russia, Germany,
1 The Greeks still adhere to the Julian calendar. The actual date by
the Gregorian calendar, in use in Western Europe, was December 13th.
*Thery, La Gr'ece Aduelie, 21.



Italy, and Austria-Hungary, which took definite charge of
Greek finances. Delegates of these powers met at Athens
on October 27, 1897, under the presidency of M. Streit, who
relinquished temporarily the post of governor of the National
Bank of Greece to accept that of minister of finance. Under
their agreement, accepted by the Greek government, March
7, 1898, arrangements were made for raising the 94,300,000
francs required to be paid as a war indemnity to Turkey,
and for the future division of the public revenue between
the bondholders and the state. The three powers most in­
terested—England, France, and Russia—lent the aid of
their joint guarantee to a loan of 170,000,000 francs ($32,710,000), which it thus became possible to sell at 100^,
although bearing the low rate of two and one-half per cent.1
The new adjustment involved an heroic reduction of in­
terest on old loans, but was rendered necessary by the
manner in which the resources of the country had been dis­
sipated between 1880 and the collapse of 1893. A careful
estimate put the amount which had been realized from 570,000,000 drachmas in loans at only 413,333,500 drachmas,
upon which the annual charge for interest and sinking funds
was 27,789,900 drachmas.2 Of the 75,000,000 drachmas
raised by the new loan in addition to the amount devoted to
the indemnity to Turkey, 30,000,000 was set aside to meet
the deficit in the budget for 1897, 25,000,000 to pay the
floating debt, and 20,000,000 to meet expected deficits from
1898 to 1902.3 Interest on the loan of 1887 was reduced to
forty-three per cent, of the old rate and on other recent
loans to thirty-two per cent., subject to some increase in
case the revenues should permit.4

1This high price was partly due to the surplus of capital then
seeking investment. At Paris the amount offered was 41,500,000
francs. Subscriptions were received from 1387 persons for 987,809,475 francs and actual deposits at the Bank of France on account of
the instalments were 196,579,000 francs.— EZconomiste Europeen,
May 13,1898, XIII., 587.
2Th£ry, La GrZce Aduelle , 9.
3Raffalovich, Le Marchi Financier en 1897- 98, 612.
4Typaldo Bassia, in Dictionnaire du Commerce, II., 370.



Beneficial effects were felt at once upon the economic con­
dition of Greece from the firm control of the International
Commission, but they only began to be marked after it had
been several years in operation. The average rate of ex­
change, which was 1.68 in 1897, was still at 1.63 in 1902,
but fell to 1.56 in 1903 ; 1.38 in 1904; 1.23 in 1905 ; 1.10 in
1906; and 1.087 'm I9°7- These changes occurred largely
as the result of confidence in the new regime rather than
because of an obviously favorable balance of payments. In
1893 foreign capital was rapidly withdrawn from Greece by
the banks, but after 1898 it began to return, with a resulting
development of railway and industrial enterprises and ex­
pansion of the volume of business of the banks. This is
indicated by the increase of drafts to order, which were
chiefly foreign bills, issued by the National Bank, from 116,984.000 drachmas in 1896 to 489,284,000 in 1904, and by the
increase in exchange operations at the Bank of Athens from
71.728.000 drachmas to 324,214,000 drachmas. The increase
in deposits in the two institutions was from 45,854,000 to
130.464.000 drachmas ($25,180,000).1 Equally notable was
the influx of foreign capital for railway and industrial en­
terprises to the amount of 35,000,000 drachmas and the
repatriation of the national securities shown by the increase
of the amount of coupons paid in Greece from 459,843
drachmas in 1899 to 789,300 drachmas in 1905, indicating
holdings in Greece on the latter date of the value of 21,000,000 drachmas.2 From 1896 to 1904 the market value of
securities quoted on the Greek exchanges, not including the
public debt, rose from 156,361,000 drachmas to 272,681,000
Improvements in banking conditions accompanied the
growth in the resources of the country. The Epiro1Th£ry, La Grice Actuelle, 169.
2fcconomiste Europeen, May 11, 1906, XXIX., 584. For similar
cases of the repatriation of national securities under improved
economic conditions, vide the author’s Principles of Money and
Banking, II., 344-46.
3Thdry, La Gr%ce Actuelle, 155.



Thessalian Bank was absorbed in 1899 by the National Bank
and the limit of circulation of the latter was advanced from
60,000,000 to 66,000,000 drachmas. In the same year the
National Bank aided in the foundation of the Bank of Crete,
with a capital of 10,000,000 drachmas and the exclusive
privilege for thirty years of note issue in Crete, to the amount
of its capital and surplus.1 The Bank of Athens, founded
in 1893, with a capital of 2,750,000 drachmas, is not a bank
of issue, but is the leading joint-stock bank and has aided
in the accumulation of a gold fund.
The gold resources of the National Bank held abroad
increased from 37,194,000 drachmas at the close of 1903 to
47.778.000 drachmas ($9,270,000) at the close of 1906. The
circulation issued directly by the bank was well within the
legal limit, at 54,450,866 drachmas, at the close of 1906, but
the issues on account of the government made the total
circulation 129,219,000 drachmas.3 The government issues,
however, were in process of steady reduction, having fallen
from a maximum of 165,775,975 to 137,640,239 drachmas.8
The commercial discounts of the bank, which were 13,782,000 drachmas at the close of 1896, were 21,113,000 drachmas
at the close of 1906. Private deposits increased during the
same period from 40,260,000 to 119,208,000 drachmas. Net
profits in 1906 were 3,974,064 drachmas, from which a
dividend of 185 drachmas per share was distributed on the
The Imperial Ottoman Bank.
The Imperial Ottoman Bank at Constantinople received
the exclusive privilege of note issue in Turkey when it was
founded in 1863. The capital was furnished by British and
French capitalists and was originally ,£2,700,000. This was
increased in 1865 to ^4,050,000 and iii August, 1874, by the
absorption of the Austro-Ottoman Bank, to ^10,000,000, of
1Th6ry, La Grtce Aduelle , 151.
2 Economiste Europeen, June 7,1907, XXXI., 732,
3ibid., August 23, 1907, XXXII., 229,

which half lias been paid up.1 The first charter was for
thirty }rears, but a new convention of February 17, 1875,
prolonged the privileges of the bank for an additional period
of twenty years, until 1913. The bank is required to main­
tain a cash reserve equal to one-third of its circulating notes
and these notes must be paid in coin to the bearer on pres­
entation. They are a legal tender in the districts in which
they are issued and where the branches of the bank are
established. The government is pledged by the charter to
issue no paper money during the continuance of the bank
and to authorize the creation of no other bank or establish­
ment with like privileges.
The Turkish people have not yet become large users of
bank-notes and are easily excited to distrust. This happened
in the summer of 1894, when some forged notes were found
111 circulation and the public presented ,£218,000 for redemp­
tion within a week. The circulation at the head office,
which was ,£249,000 during the first week in June, fell to
£ 66,000 during the first week of July. The circulation of
the bank was as high as ,£990,000 in 1893, but was only
,£838,797 at the close of 1894. The experience of this run
taught the management the importance of maintaining a
strong coin reserve and prepared them for the run which set
in during the political disturbances growing out of the Ar­
menian massacres in the autumn of 1895. The government
offered the bank the privilege of suspending specie payments
for thirty days, but the offer was declined and ^1,300,000 in
gold was obtained early in November from the Bank of
France. The Imperial government were so pleased with the
spirit shown by the bank that the charter was extended for
twelve years until 1925.2
The bank has been extending its branches of late years
and has been finding them more profitable as their convenience
to commerce has come to be understood. Branches exist at
Sn^rna, Bagdad, Aleppo, Alexandria, and many other points,
and those at Smyrna and Bagdad have shown a material
1Revue des Banquesy May, 1895, XIV., 100.
8London Bankers' Magazine, December, 1895, XL., 726.



increase of business. An encouraging feature of this develop­
ment has been the fact that increased advances of capital by
the parent bank have not been required at the branches in
proportion to the increasing volume of business, but the
capital has been obtained in the communities themselves.
The growth of deposits has also been an encouraging feature of
the bank, the amount having increased from about ;£8,000,000
of all classes at the close of 1893 to ;£ 11,741,705 at the close
of 1907. Cash resources, which were ^2,963,419 at the
close of 1899, advanced by normal steps to ^4,134,671 at the
close of 1906. In the crisis of 1907, the bank pursued the
same prudent course as in 1895, so that its cash and money
at call at the end of the year stood at ^5,023,400. In both
Turkey and Egypt, where the operations of the bank are
conducted, trade conditions were much disturbed in 1907,
and some of the foreign banks felt the consequences seriously.1
The failure of the crops caused such suffering in Turkey that
the government reduced import duties on grain and made
free distributions of seeds.2 The Imperial Ottoman Bank,
however, suffered no material losses and was able to dis­
tribute an annual dividend at the rate of nine per cent., which
had been paid for 1906, after successive increases from six
and a half per cent, in 1902 and 1903 to seven per cent, in
1904 and eight per cent, in 1905.
The circulation of the bank increased gradually until the
period of restriction in 1907. It was ^832,320 at the close of
1899 and advanced to 1,177,794 for 1904 and ;£ 1,181,760 for
1906, but fell to ^1,080,763 at the close of 1907. Total assets
at the close of 1899 were ^15 .998,079 ; for 1904, ^19,976,384 ;
for 1906, ^22,397,344; and for 1907, ^£21,023,669.3
London, Bankers* Magazine, August, 1908, IyXXXVI., 138.
2Economiste Frangais, July 18, 1908, 118.
5Cf. Moniteur des InterUs Materiels, July 5, 1907, 2235, and
London Bankers* Magazine, August, 1908, LXXXVI., 257.


Banks of Issue before the Adoption of the Constitution—Hamilton’s
Plan for the First Bank of the United States—The Struggle over
a New Charter—The Second Bank of the United States : Its Early
Errors and its Economic Services—The Bank Dragged into
Politics by Jackson and Clay—Jackson’s Triumph and the Re­
moval of the Deposits—The Independent Treasury System.


HE pathway of American colonial history is thickly
strewn with the failures of government paper money,
which might have afforded an instructive lesson to
the Continental Congress against its issues of Continental
bills. Several cases are found also of issues on private bank
ing credit, but they were not based on sound banking prin­
ciples and do not shine greatly by comparison with the
unrestrained issues resting on the fiat of the State. The
“ Land and Manufactures Bank,” established in Massachu­
setts in 1740, did not pretend to do better than issue notes
redeemable in goods, but they stood for a time so much
higher than “ Massachusetts bills ” that, in spite of the hos­
tility of Governor Belcher, merchants specially advertised
goods to be sold for “ Manufactory bills.” 1 In Connecticut
in 1733 the New London Society for Trade and Commerce
circulated notes which were current until prohibited by the
authorities, and in New Hampshire a company of “ private
gentlemen’’ attempted to meet the demand for a circulating
medium by an issue of bills. Most of these schemes, in­
cluding that of the specie bank, formed to counteract the
1Weeden, 487.




Land and Manufactures Bank, fell under the prohibition of
the Joint Stock Companies’ Act. This act was passed in
England after the bursting of the South Sea Bubble in 1720
and forbade the formation of banking companies without a
special charter, but it was not until 1740 that it was declared
by Parliament to extend to the colonies.
The history of banks of issue in the United States can
hardly be said to have begun, however, until the foundation
of the Bank of Pennsylvania. The bank originated in the
plan of a number of citizens of Philadelphia to supply the
army with rations, and their first bills, issued in 1780, were
nothing more than interest-bearing notes payable at a future
time. The advances in Continental money made by the
shareholders were secured by bills of exchange for ^150,000
drawn on the envoys in Europe, but not intended to be
negotiated.1 Approval was given by Congress May 26,
1781, to the plan of Robert Morris for the Bank of North
America, with a capital of $400,000, to be increased if desired.
Morris arranged with the Bank of Pennsylvania to transfer
the foreign bills it was holding to the new bank and paid in
cash its claims against the Federation. The charter of
the Bank of North America was not actually granted until
December 31, 1781, and business was begun January 7, 1782.
There was so much doubt of the power of Congress to
charter a bank that a charter was obtained April 1, 1782,
from the State of Pennsylvania, under which the bank con­
tinued to operate until absorbed into the national banking
system in 1863. The bank did much to restore order to the
chaos of Federation finances and loaned Morris, as Superin­
tendent of Finance, $1,249,975, of which $996,581 was repaid
in cash and the remainder by surrendering the bank stock
owned by the Federation. The government had originally
paid for its stock in silver brought from France, but this
silver was infinitely more productive by the skilful manage­
ment of the bank than it could ever have been if covered
into the public treasury. Livingston wrote to Dana Decem­
ber 17, 1782 :
1 Sumner, Finances o f the American Revolution , II., 22.



Paper is entirely out of circulation, if we except the bank paper,
which, being payable at sight in specie, is equal to it in value. So
extensive has this circulation been that the managers not long since
published a distribution of the first half-year's dividend at four and a
half per cent, notwithstanding a variety of expenses to which they
had been put in the first organization of the bank.1

The first Bank of the United States was incorporated by
the First Congress in 1791,2 as a part of the scheme of Alex­
ander Hamilton to strengthen the new Federal government.
Those who had opposed the adoption of the Constitution
because of its centralizing tendencies, and some of those who
had supported it, opposed the granting of the bank charter
upon the ground that the Constitution contained no express
grant to Congress of the power to establish a corporation.
Their argument was that the case fell plainly within the
rule subsequently embodied in the tenth amendment to the
Constitution, that “ The powers not delegated to the United
States by the Constitution, nor prohibited by it to the States,
are reserved to the States respectively or to the people.”
President Washington obtained the opinion of the members
of the cabinet before signing the bill. The opinions of
Jefferson and Edmund Randolph were adverse to the con­
stitutionality of the measure ; but Washington followed the
advice of Hamilton, his brilliant young Secretary of the
Treasury, and gave the bill his approval.
The capital of the Bank of the United States was fixed at
$10,000,000, divided into 25,000 shares of $400 each. The
protection of small investors in bank stock was sought by a
graduated scale of voting which did not permit more than
thirty votes to any shareholder. Foreign shareholders were
not allowed to vote by proxy, which practically prevented
their voting at all. The number of directors was fixed at
twenty-five, who must be citizens of the United States and
not more than three-fourths of whom were eligible for reelection. The bank was not forbidden to loan on real
estate security, but could not become an owner of real estate
1 Wharton, Diplomatic Correspondence, VI., 146.
2 Act of February 25, 1791.



(beyond what was needed for banking houses) unless the
property came into its hands in satisfaction of mortgages or
judgments.1 The only limitation upon note issues was that
which limited all debts other than deposits to the amount of
the capital stock. The notes were receivable for dues to the
government so long as they were redeemable in coin on de­
mand. The charter was granted for twenty years, with the
provision that Congress should not charter another bank
within that time. This was far from implying a monopoly
of note issues, for the State banks were in no way disturbed
in their privileges and methods except so far as the new
institution by its example acted as a regulator of the currency.
Its large capital and pre-eminent position operated, and were
intended to operate, to give it such a commanding position
as was occupied by the Bank of England among the country
banks of that country.
The charter provided that one-fifth of the capital should
be subscribed by the government of the United States, but a
loan was to be made to the government equal to the amount
subscribed, to be repaid in ten annual instalments of $200,000 each, with interest at six per cent. No other loans were
to be made to the government exceeding $100,000 without
authority of law. The practical effect of the government
holdings of stock was simply to give the bank the note of
the government for its final payment, but as the bank was
forbidden to deal in its own stock the process of issue of the
government stock was somewhat complicated. It would
have been useless for the government to draw money from
Europe to pay into the treasury of the bank, to be immedi­
ately drawn out again and remitted to Europe for charges
there. The course adopted was for the Treasurer of the
United States to draw bills of exchange on the American
Commissioners in Amsterdam for the amount required to
1 It is significant of Hamilton’s growing familiarity with finance that
he did not revive the project of the bank of issue based upon landed
security which had attracted him a few years before, but laid down
in his report the correct theory of a credit currency based upon quick
assets. — Works, III., 106-107.



pay the bank. The bills were purchased by the bank and
warrants issued in favor of the Treasury upon the bank,
thereby placing the amount in the Treasury. Other war­
rants were then issued upon the Treasury in favor of the
bank for the amount of the subscription to the stock, which
the bank receipted for as paid. The stock having been thus
paid for in accordance with law, the bank loaned $2,000,000 to the government in accordance with the act of incor­
poration by handing over the bills of exchange originally
drawn by the Treasury on Amsterdam.1
The Bank of the United States was authorized to establish
offices of discount and deposit in the several States and
$4,700,000 of the capital was reserved for the central bank
at Philadelphia. The remainder was divided among eight
branches, established eventually at New York, Baltimore,
Boston, Washington, Norfolk, Charleston, Savannah and
New Orleans. Private subscriptions were required to be
paid one-fourth in gold and silver and three-fourths in six
per cent, government stocks or in three per cent, stocks. The
capital was over-subscribed to the amount of four thousand
shares within two hours after the opening of the books.
Oliver Wolcott, who afterwards succeeded Hamilton as Secre­
tary of the Treasury, was offered the presidency, but de­
clined, and Thomas Willing of Philadelphia was selected.
The bank was more successful in its commercial dealings
than in obtaining prompt payment of its advances to the
government. No regular reports were made to the Treasury
Department, but the report communicated to Congress by
Secretary Gallatin for January 24, 1811, showed resources
of $24,183,046, of which the leading items were $14,578,294
in loans and discounts, $2,750,000 in United State six per
cent, stock, and $5,009,567 in specie. The leading items of
liability were $10,000,000 on account of capital, $5,037,125
in circulating notes, $5,900,423 in individual deposits, and
$1,929,999 in United States deposits. The average annual
dividends paid up to March, 1809, were over eight per cent.
1Bolles, II., 129-30.


The bank made several loans to the government in antici­
pation of the revenues early in its career. They were not
promptly paid and the debt of the government to the bank
at the end of 1792 was $2,556,595, which increased at the
end of 1795 to $6,200,000. An attempt was made to sell
government five per cent, stock, but only $120,000 was realized
and it became necessary for the government to part with one
of its most valuable assets,—its shares in the bank. The
third and fourth instalments of the original $2,000,000 loan
to the government were not paid until 1797, when 2160 shares
of the government stock were sold at $500 per share (a pre­
mium of $100) and the proceeds, $1,080,000, were applied
to these two instalments and to other obligations of the gov­
ernment to the bank. Six hundred and twenty more shares
were sold soon afterwards for $304,260 and in 1802 the re­
maining shares were sold at an advance of forty-five per
cent, and the government ceased to be a stock-holder.
Secretary Gallatin reported in 1809 that the government
made a profit of $671,860 on the sale of its shares, besides
receiving dividends at the rate of about eight and threeeighths per cent, annually. The aggregate payments by the
government, including interest, were $2,636,427, while the
proceeds and dividends together were $3,773,580, represent­
ing a profit of nearly fifty-seven per cent, on the original
investment for the eleven years during which the government
was a shareholder.1
Opposition to the Bank of the United States did not die
out with Washington’s administration nor with its large
advances to the government. The conception of the func­
tions of a bank which then prevailed is indicated by Presi­
dent Jefferson’s letter of July 12, 1803, to Gallatin, in which
he declared, ‘41 am decidedly in favor of making all the banks
republican by sharing deposits among them in proportion to
the dispositions they show.” The bank had a steady friend
in Gallatin, however, and he not only continued to avail
himself of its assistance in the fiscal operations of the
1 Sen. Ex. Doc. 38, 52c! Cong., 2d Sess., 34.



government, but induced Jefferson to approve a bill estab­
lishing a branch at New Orleans.
The charter of the bank was to expire in 1811 and the
shareholders petitioned in 1808 for a renewal. The proposal
was strongly supported by Gallatin in a report of March 9,
1809, reviewing the entire history of the bank. He recom­
mended that the capital be increased to $30,000,000, with a
view to lending three-fifths of the amount to the government
in case of war, and that the States be allowed to subscribe
$15,000,000. The advantage derived by the government
from the existing bank he classified under the four heads of
safe keeping of the public monies, transmission of public
monies, collection of revenue, and loans.1 Congress was
not disposed to adopt so comprehensive a scheme as this,
but theoretical opposition to the bank had so far yielded to
practical considerations that the terms of a contract were
arranged for a new charter, which received the approval of
the House on April 21, 1810, by a vote of 75 to 35. It was
the fatal incapacity of the Eleventh Congress to take positive
action which prevented the taking up of the bill again, and
gave the State bankers time to organize an opposition and
instruct their senators against re-cliarter.2
The charter was opposed at the next session not only by
the advocates of strict construction of the Constitution, but
by party factions opposed to Gallatin in the Cabinet and the
Senate. William Duane and Michael I^eib had attempted to
dictate the Federal appointments in Philadelphia and upon
Gallatin’s refusal to submit became his bitter enemies. They
were supported in the bank contest by a Maryland clique
headed by Robert Smith, the Secretary of State, and Sena­
tor Samuel Smith, his brother. The fact that about 1800
of the 2500 shares were held abroad was made the occasion
of bitter attacks upon the bank. A type of this sort of op­
position was the speech of Mr. Desha of Kentucky, in the
House on February 12, 1811, in which he declared that this
accumulation of foreign capital was one of the engines for
1 Stevens, 261.
2Adams, V., 208.



overturning civil liberty and that he had no doubt George
III. was a principal stock-holder and would authorize his
agent in this country to bid millions for a renewal of the
charter.1 Gallatin had anticipated this ground of hostility
in his report to Congress. He called attention to the fact
that the foreign shareholders had no vote and that if the
charter was not renewed the principal of the foreign hold­
ings would have to be remitted abroad in liquidation of the
affairs of the bank.
William H. Crawford of Georgia was the champion of
Gallatin and the bank in the Senate and his able argument
commended him to the administration and made him a strong
candidate in later years for the presidency. Henry Clay held
that Congress had no power to create the bank or to continue
it, and followed the leanings of Mr. Desha in the opinion
that incase of war with England '‘the English premier’’
would exercise control over the institution. The House on
January 24, 1811, postponed indefinitely the bill for renew­
ing the charter by a vote of 65 to 64. The vote in the Sen­
ate on February 20th was 17 to 17, and the Vice-President,
George Clinton, an enemy of Gallatin, gave the casting vote
against the bill. “ The necessity for such an institution,”
says Mr. Henry Adams, ‘‘ was merely one of the moment,
but in the period of national history between 1790 and i860,
the year 1811 was perhaps the only moment when destruc­
tion of the bank threatened national ruin.”2 The govern­
ment was compelled to rely in the war of 1812 on the State
banks, and their suspension of specie payments in 1814 al­
most paralyzed the operations of the Treasury. It became
impossible to make transfers of funds from one part of the
Union to another, because the notes of the banks of one sec­
tion did not pass current in other sections. Gallatin has left
on record the opinion that the suspension of specie payments
in 1814 “ might have been prevented at the time when it
took place, had the former Bank of the United States been
still in existence/9 He believed that the bank would have
1 White, 265.
9 History of the United States, V., 329.


aided the treasury and that “ both acting in concert would
certainly have been able at least to retard the event; and, as
the treaty of peace was ratified within less than six months
after the suspension took place, that catastrophe would have
been altogether avoided.’’
The necessity for means of carrying on the war with
Great Britain led to a great variety of odd proposals in Con­
gress after the suspension of 1814. One of the crudest of
these was a plan of ex-President Jefferson’s, communicated
to President Madison, to issue $20,000,000 in government
promissory notes annually as long as might be necessary and
to appeal to the State legislatures to relinquish the right to
establish banks. Dallas, who succeeded Campbell as Secre­
tary of the Treasury on October 6, 1814, indicated indirectly
his opinion of this scheme by recommending a new bank
and remarking that ‘‘ The extremity of that day cannot be
anticipated when any honest and enlightened statesman will
again venture upon the desperate expedient of a tender
law.” 1 The plan of Dallas, as set forth in his report of
October 17th, was for a bank with a capital of $50,000,000, em­
powered to lend $30,000,000 to the Treasury. There was a
provision in the bill reported, authorizing the suspension of
specie payments at the discretion of the President of the
United States, and it was fallen upon by Daniel Webster in
a speech of great power and eloquence. He urged the crea­
tion of a bank for commercial purposes rather than one in­
volved at the outset with the government. The result of
his attack was the defeat of the bill by a tie vote, which was
then reconsidered and the bill sent to a select committee.
Amendments were adopted which met Mr. Webster’s views,
but in this form the measure did not meet the wants of the
Treasury. It passed the House, 120 to 38, and the Senate,
20 to 14, but was vetoed by the President on January 30,
1815. Another effort was made to pass the Dallas bill, but
it failed in the House on February 17th by a majority of one
1Adams, VIII., 245-49.


The evils of the currency had not been remedied when
Congress met again in December, 1815, and President Madi­
son suggested a national bank as a suitable instrument for
promoting specie payments. Secretary Dallas submitted a
detailed plan for the bank, which was adopted by Congress
with little change. The capital of the new bank was fixed
at $35,000,000, of which one-fifth wasjtobe subscribed by
the government in money or in its own obligations. The
government subscription was by a stock note, which was not
fully paid up in cash until 1831. The public funds were to
be deposited in the bank, “ unless the Secretary of the Treas­
ury shall at any time otherwise order and direct; in which
case the Secretary of the Treasury shall immediately lay be­
fore Congress, if in session, and if not, immediately after
the commencement of the next session, the reasons for such
order or direction.*9 Twenty-five directors were to be chosen,
five to be named by the President, and the notes of the bank
were made receivable in all payments to the United States.
The bank was again given duration for twenty }^ears and no
other bank was to be established within this time by Congress
outside the District of Columbia. This privilege, as in the
case of the first bank, carried with it no restrictions upon the
State banks of issue except such as the new bank was ex­
pected to exercise by its moral and financial influence tow­
ards the restoration of specie payments. A bonus to the
government was required of $500,000 annually for three
years after the end of the second year.
The progress of public opinion in favor of the implied
powers of the Federal government under the Constitution is
indicated by the attitude of Madison and the democratic
party towards the incorporation of the second Bank of the
United States. Madison as a member of the First Congress
had opposed the incorporation of the Bank of the United
States upon constitutional grounds, and in 1799 had alluded
to it as one of the examples of the usurping tendencies of
the Federal government ;l but as President in 1814 and 1815
1Von Holst, L, 388.



he was willing to treat the constitutional issue as res adjudicata. More surprising is the fact that Calhoun, in later
years the hair-splitting logician of strict construction and
the champion of nullification, was found foremost among
the supporters of the charter of the second bank. He re­
ported the bill to the House and suggested that if the bank by
its financial policy was unable to compel the State banks to
return to specie payments, Congress might resort to stronger
measures, which were within their power. Both Calhoun
and Webster favored the refusal by the government of the
notes of suspended banks and the collection of all govern­
ment dues in specie.1 Webster secured an amendment to
the bank bill, requiring the payment of deposits as well as
notes in specie, subject to a forfeit of twelve per cent, on the
amount for which specie payment was refused.
The constitutional question had thus been decided by the
legislative branch of the government before it reached the
Supreme Court in 1819. That court, in the celebrated case of
McCulloch vs. Maryland, in which the decision was rendered
by Chief-Justice Marshall, decided that the power to create
a national bank, to assist in carrying on the fiscal opera­
tions of the government, was within the implied powers
of the Constitution. Equally important was the decision
upon the direct issue raised in that case, whether the States
could constitutionally levy taxes upon the circulating notes
or the property of a national bank. Representative Fiske
of New York, in a strong speech in favor of the renewal of
the first charter in 1811, declared that the States, in order to
give the preference to their own paper, might exclude that
of any other State from circulation within their limits by
taxation.2 He did not suggest that they might pursue the
same policy towards the notes of a national bank, but this
position was taken by the State of Maryland towards the
notes of the second Bank of the United States, and the case
was carried to the Supreme Court. A decision in favor of
the right of the States to have taxed the circulating notes of
1 White, 278.
2 Bolles, II., 150.



the United States or of corporations chartered under its laws,
would have precluded forever the creation of a national cur­
rency, issued either by the government or by national banks.
Indeed, if the Federal government had not the power to
withdraw its creations from discriminating legislation by
the States, Chief-Justice Marshall declared, they might tax
the mail or the mint, the papers of the custom house, or the
forms of judicial process.1
The question of the existence of the bank in the face of
discriminating State taxation was not an academic one in
1818 and the following -years, but one which was severely
practical. The efforts of the bank to drive the State notes
from circulation, and especially its later contraction of dis­
counts when it found itself on the verge of bankruptcy,
caused commercial distress and made the bank exceedingly
unpopular. North Carolina laid a tax of $5000 per year on
the branch at Fayetteville. Kentucky, Tennessee, Ohio, and
Maryland laid taxes on circulation or on the branches as
such. The Maryland act required the purchase of stamped
paper for the printing of the circulating notes or the annual
payment of $15,000 by the branch at Baltimore. The branch
continued to issue notes on unstamped paper and the cashier,
William McCulloch, was sued for debt and gave his name to
one of the most celebrated of American constitutional cases.2
Chief-Justice Marshall, in rendering his decision, admitted
that the States possessed unimpaired the power of taxing the
people and property of the State and that it might tax the
real property of the bank in common with other such prop­
erty within the State, and might tax the interest of citizens
of Maryland in the bank ; but he declared that the Consti­
tution of the United States placed beyond the reach of State
power all the powers conferred on the government of the
Union and all the means given for the purpose of carrying
those powers into execution.3
1 4 Wheaton, 316.
2 McMaster, IV., 497.
s Following this decision, all securities of the United States have
been held free from taxation by the States unless with the consent of



The Bank of the United States was badly managed during
the first years of its existence and in the summer of 1818
was upon the verge of insolvency. The bank began busi­
ness January 7, 1817, and violated its charter from the out­
set. The proportion of specie required to be paid in on the
second and third instalments was not paid and the bank
loaned money to stockholders on the pledge of their stock
and personal notes. Trading in shares before they were paid
for pushed up the quotations and the bank loaned on the in­
creased value when other nominal security was furnished in
the form of mutual indorsements. The Baltimore branch
was practically wrecked by its managers, with a loss of
$1,671,221. The policy adopted for restoring specie pay­
ments was also defective. An arrangement was made with
the leading banks of New York, Philadelphia, and Rich­
mond for the resumption of specie payments by them on
February 20, 1817. The public deposits in these banks,
which the government had been unwilling to accept in de­
preciated bank paper, were to be transferred to the Bank of
the United States, but checks on the State banks which were
parties to the agreement received by the Bank of the United
States were to be credited as cash. Arrangements were also
made for liberal discounts by the new bank, in order to re­
lieve the local banks from the commercial pressure.
These features of the resumption policy were not subject
to criticism and $7,472,419 in public funds and $3,336,491 in
special deposits were transferred from the State banks to the
the United States. The national banks created under the Act of June
3, 1864, for many years availed themselves of this condition to have
as large a proportion of their reserves as possible in United States
notes at the times when their property became subject to assessment
for taxation under State laws. This practice led to an act of Congress
in 1894, authorizing the States to tax such notes at the same rate as
other money. It was long held that the instruments of State sover­
eignty were exempt from Federal taxation upon the same grounds that
the instruments of Federal sovereignty were exempt from State taxa­
tion, but this view was overruled in regard to the circulating notes of
State banks in the case of Veazie Bank vs. Fenno, 8 Wall., 533. See
Kent, I., 429, note.




central bank at Philadelphia. Eighteen branches of the
Bank of the United States were established and the notes
issued were received for government dues without reference
to the place of issue and were redeemable, wherever issued,
by the central bank or any of its branches. The mistake
made by the new bank was in directing the branches to push
their own notes into circulation in place of those of the State
banks, and to issue drafts on the Eastern cities to prevent
the remittance of their own notes. The notes of the local
banks were locked up in the Bank of the United States and
interest charged upon them to the local banks, but both the
notes of the branches and the branch drafts were remitted
eastward by the operations of trade. The notes of the
Western branch banks which were remitted to the East thus
exercised no controlling influence over the volume of
Western business, for they were not presented for redemp­
tion in the West. What made the matter worse was the
necessity imposed in many cases on the branches, in view
of the eastward movement of their own notes, to pay out
again the local notes in the granting of discounts.
The Western branches paid but limited attention to the
instructions of the parent bank to diminish their discounts,
even after the danger of their policy became apparent.
They issued what were known as ‘‘ race-horse bills,” by
which drafts were made by one branch upon another, which
were met when due at the accepting bank by new drafts
upon some other branch. The bank imported $7,311,750
in specie from Europe during its first two years at a cost of
$525,247/ but the drain upon its resources had reduced the
specie in Philadelphia on April 21, 1819, to $126,745, of
which $79,125 was owed to the city banks of Philadelphia.2
The facts regarding the mismanagement of the bank were
brought out by the report of a committee of Congress in
1819 and caused many demands for the repeal of the charter.
Langdon Cheves was elected President, March 6, 1819, and he
adopted heroic measures to restore the bank to solvency.
1Poor, 486.
2Bolles, II., 326.



He borrowed $2,500,000 in specie of the Barings, who were
considerable holders of the bank stock, forbade the issue of
notes in the South and West when exchanges were against
the branches, which was almost invariably the -case, and in
dealings with the government insisted upon the interval
between the transfer of funds and their disbursement which
was actually required for the transfers. The bank was
saved and was conducted with comparative prudence until
the breaking out of the war with President Jackson.
The second Bank of the United States undoubtedly
contributed for more than a decade to facilitate the transfer
of funds from one part of the country to another and to
maintain a uniform circulation equal to coin. The rates of
domestic exchange, which were necessarily high because
of the imperfect means of communication, were materially
reduced by the bank. Its policy greatly benefited com­
merce, but invited bitter complaints from the private dealers
in exchange, who had been enabled to make excessive prof­
its while the currency was below par because of its different
values in different States and the constant fluctuations in
these values. The bank, in the language of the report of
Senator Smith of Maryland in 1832, furnished “ a currency
as safe as silver, more convenient, and more valuable than
silver, which through the whole Western and Southern and
interior parts, of the Union, is eagerly sought in exchange
for silver; which, in those sections, often bears a premium
paid in silver; which is, throughout the Union, equal to
silver, in payment to the government, and payments to
individuals in business. *’ Mr. McDuffie, who submitted the
minority report in the House at the same time, declared that
“ The whole business of dealing in domestic bills of ex­
change, so essential to the internal commerce of the country,
has been almost entirely brought about within the last eight
years. In June, 1819, the bank did not own a single dollar of
domestic bills; and in December, 1824, it owned only to
the amount of $2,378,980; whereas it now owns to the
amount of $23,052,972.” 1
1 House Rep., 460, 226. Cong., 1st Sess., 312.



One of the most serious charges of evasion of law, brought
against the bank in 1832, was in the issue of branch drafts
to circulate as currency. Several appeals were made in vain
to Congress to modify one of the provisions of the charter
requiring the president and principal cashier to sign all the
circulating notes. The volume of circulation necessary to
do business was so great that the physical labor of signature
could not well be performed by those officers. Congress
neglected to act and in 1827 an opinion was obtained from
Horace Binney, in which Daniel Webster and William Wirt
concurred, that there was no legal obstacle to the issue of
checks drawn by officers of the branches upon the parent
bank, printed for even amounts in similar form to bank­
notes. Drafts of this sort for $5 and $10 were authorized by
the board of directors on April 6, 1827, and denominations
of $20 were issued in 1831. They became a common medium
of circulation in the South and West and were accepted in
payments to the United States Treasury.1 The branch
drafts outstanding in April, 1832, were $7,410,090. They
simply served the purpose of currency without conforming
strictly to the intent of the law, in much the same manner
as the checks of the London Cheque Bank or the temporary
issues in the United States during the panic of 1893.
The Bank of the United States fell because so great an
institution in a representative republic could not escape
political entanglements and the suspicion of the abuse of
political power. President Jackson surprised the financial
world by the announcement, in his first annual message in
1829, that “ Both the constitutionality and the expediency
of the law creating the bank are well questioned by a large
portion of our fellow-citizens ; and it must be admitted
by all, that it has failed in the great end of establishing a
uniform and sound currency/’ The bank was at this time
under the presidency of Nicholas Biddle, who succeeded
1Letter of Sec. Rush to Nicholas Biddle, Jan. 21, 1820. House Rep.,
460, 22d Cong., 1st Sess., 55. The authority to receive these drafts
for public dues was revoked by Secretary Woodbury, to take effect
January 1, 1835.



Cheves in 1823, and was one of the most imposing institu­
tions of the country. The President's message, therefore,
was in the nature of a thunderbolt from a clear sky. Jack­
son’s hostility was due to a complaint by Isaac Hill, a New
Hampshire politician who had been made Second Comp­
troller, that Mr. Mason, the manager of the branch at
Portsmouth, New Hampshire, had shown partiality to the
political opponents of General Jackson and that his conduct
had been “ calculated not less to injure the institution than
to disgust and disaffect the principal business men.” “ No
measure short of his removal,” in Hill’s opinion, 4‘would
tend to reconcile the people of New Hampshire to the
The truth appears to have been that Mason had excited
hostility by his energetic contraction of discounts at Ports­
mouth and his efforts to correct previous mismanagement.
I^evi Woodbury, who had defeated Mason for the United
States Senate in 1824, addressed a letter early in July, 1829, to
Mr. Ingham, the Secretary of the Treasury, making com­
plaints against Mason’s management, which Ingham for­
warded to President Biddle for his consideration. Biddle
was a ready writer, he occupied one of the most powerful
positions in the country, he was surrounded by flatterers
and sycophants, and he was quickly entrapped into a quarrel
which resulted in the overthrow of the bank. He not only
denied that the bank had shown political favor at Ports­
mouth or elsewhere, but went out of his way to declare that
the governing board acknowledged no responsibility what­
ever to the Secretary of the Treasury in regard to the politi­
cal opinions of the officers of the bank and that it was
carefully shielded by its charter from executive control. So
fixed had become the relations between the bank and the
Treasury in the handling of public monies, and so much a
matter of mere routine, that Biddle appeared to overlook the
possibility of the withdrawal of the public deposits. He
evidently had no realizing sense of the danger which hung
over his head or of the spirit of hostility which was being
aroused in the mind of Jackson.



The President’s suggestions in his annual message excited
the fear for a moment that he had information which was
not known to the public and bank shares dropped from 125
to 116, only to recover to 130 after a report by a committee
of Congress. The portions of the message relating to the
bank were referred to committees in both houses, both of
which exonerated the bank from the charge of bad manage­
ment and condemned the suggestion of the President,
whether a national bank, “ founded upon the credit of the
government and its revenues, might not be devised which
would avoid all constitutional difficulties, and at the same
time, secure all the advantages to the government and coun­
try that were expected to result from the present bank.”
The House on May 10, 1830, tabled, by a vote of 89 to 66,
resolutions that the House would not consent to the renewal
of the bank charter and on May 29th tabled, by a vote of
95 to 67, resolutions calling for a comprehensive report of
the proceedings of the bank.1 Similar votes in favor of the
bank were given in the Senate. The President was mild in
his allusions to the subject in the annual messages of 1830
and 1831 and the Secretary of the Treasury was even allowed
in the latter year to incorporate in his annual report a strong
argument in the bank’s favor. It is not improbable that
Jackson might have been persuaded by the eminent finan­
ciers of his party to consent to a re-charter if the matter had
not been made an issue b}^ Henry Clay in the presidential
The political dangers of a great central bank were demon­
strated in the campaign of 1832. President Jackson had
given the country in the main a firm and successful admin­
istration and it was necessary for Clay and the Whigs to
create political issues upon which to make a respectable
contest against him. There were dangers in making the
tariff the controlling issue, because different Whig States
were on both sides of the question. Clay determined to
make the campaign upon the issues of internal improvement
and the recharter of the bank. It was natural that he should
1Sumner, Andrew Jackson, 247.



accept the sentiment of the financial portion of the commu­
nity in favor of the bank as the sentiment of the whole and
he was so confident of success that he feared Jackson would
evade the issue. The resolutions adopted at Baltimore on
December 12, 1831, at Clay’s instigation, declared that the
President, “ is fully and three times over pledged to the
people to negative any bill that may be passed for rechartering the bank. ’’ Biddle and the real friends of the bank who
were not politicians protested strongly against making the
recharter a party issue, but Clay forced them to the choice
between sustaining his party as the friends of the bank or
going without political friends. Professor Sumner declares
that “ Jackson never was more dictatorial and obstinate thaii
Clay was at this juncture.” 1
The fight was opened in the Senate on January 9, 1832,
when Senator Dallas presented the memorial of the bank for
the renewal of its charter. Biddle came to Washington,
opened headquarters, gave sumptuous entertainments, and
defended the bank vigorously before the committee of inves­
tigation appointed by Congress. The bill for the recharter
was passed through both houses, only to encounter a veto
message from President Jackson on July 10th. The issue
was thus made up for the presidential election, exactly as
Clay desired it, but the response of the people was 219 elec­
toral votes for Jackson, 49 for Clay, and 18 for all others.
The executive triumphed, as usual in a contest with Con­
gress, and the doom of the bank was decided.
The bank had five years of life before it. Its credit was
good and it still held the public deposits. It was not gener­
ally supposed that these would be withdrawn un til near the
date for the termination of the charter, as had been the case
with the public deposits in the first Bank of the United
States. Jackson’s blood was now up, however, and he
needed no further stimulus to crush his enemy. The bank
made two serious blunders during 1832 and 1833 in its rela­
tions with the Treasury. It undertook to make a private
arrangement with the Barings regarding the payment of
1 Andrew Jackson, 257.



$5,000,000 of government three per cent, securities, which
the Secretary of the Treasury had notified the President of
the bank as early as March 24, 1832, would be paid from the
surplus revenues. A contract was made through a private
agent of the bank for extending these securities, which were
to be assumed by the bank and the interest paid to the gov­
ernment. The object was to retain possession of the public
money, on deposit with the bank, which was worth seven
per cent, in the discount market, rather than permit it to be
withdrawn for the redemption of the debt. When the cir­
cular of the Barings got into the newspapers in October,
Biddle was obliged to disavow the contract and made a lame
explanation to Secretary Mcl^ane for seeking to delay the
payment. The other case was the attempt to collect dam­
ages upon the amount of a bill of exchange drawn upon the
French government, which was refused payment by the
French Minister of Finance, because the money had not
been appropriated by the Chambers. The bill was taken up
by the Paris agents of the bank, and charged against it.
Secretary Mcl*ane paid the principal, $961,240, which had
been covered into the Treasury, back to the bank and
offered to pay actual costs. The bank insisted upon fifteen
per cent, damages, under a law of the District of Columbia
relating to protested paper, and deducted the amount from
the government dividends. The government sued and the
Supreme Court decided against the bank.
Performances like these on the part of President Biddle
convinced Jackson that the bank was weak and confirmed
his purpose to suspend the further deposit of public monies
in its custody.1 Mr. McL,ane was transferred from the
Treasury to the State Department during the spring of 1833
and William J. Duane of Pennsylvania was made Secretary
of the Treasury. Duane was a conservative and able law­
yer, with little of the politician in his make-up, and when
1Jackson also believed that if the bank retained the public funds,
it would be able to buy up the votes in Congress necessary to make
two-thirds and pass a recharter bill over his veto.—Sumner, Andrew
Jackson, 299.


h is t o r y of m o d e r n b a n k s of is s u e .

the President insisted upon his suspending deposits in the
Bank of the United States and making them in future in the
State banks, Duane refused to comply and the President re­
moved him from office. Roger B. Taney, who afterwards
became so odious in the free States as Chief Justice of the
Supreme Court, was transferred from the Department of Jus­
tice to the Treasury on September 23d, and began the deposit
of the public funds in the State banks.
The contest which followed in Congress belongs to the his­
tory of politics rather than that of finance. The Senate re­
jected the nomination of Taney for Secretary of the Treasury
and rejected the President’s nominees for government direc­
tors of the bank, apparently upon the remarkable ground
that they were disposed to insist upon too accurate a knowl­
edge of the bank’s affairs. The Senate called for the paper
which Jackson had read in the cabinet regarding the removal
of the deposits on September 18th, and received the reply
that the Senate had 110 constitutional right to interrogate
him on the subject of his communications with his heads of
departments. Clay introduced a resolution which was passed
on March 28, 1834, by a vote of 26 to 20, declaring that the
President had, “ assumed upon himself authority and power
not conferred by the Constitution and the laws, but in deroga­
tion of both.” The President sent a protest against this
resolution to the Senate on April 17th, which that body ten
days later voted, 27 to 16, was a breach of the privileges of
the Senate and should not be entered on the journal. The
friends of Jackson appealed to the people and gained enough
seats in the Senate to pass resolutions on January 16, 1837,
expunging the previous resolutions from the records.
The Bank of the United States obtained a charter from the
State of Pennsylvania on February 18, 1836, for thirty years.
The bank agreed to pay a bonus of $2,000,000 to the State
and $100,000 per year for thirty years, besides various sub­
scriptions to the stock of transportation routes, which Ben­
ton described as bribery of the legislature and the people.
The shares in the bank owned by the United States, amount­
ing to $7,000,000, were paid in four annual instalments at



the rate of 115.58. New stock was sold to replace the gov­
ernment stock, leaving the capital intact at $35,000,000.
The capital was too large for local commercial needs and
Biddle branched out into loans on stocks of uncertain value,
many of which proved worthless after the crisis of 1837.
The bank suspended at that time with the other banks of
the country, but was compelled to suspend again in 1838,
and again in 1841, after which it went into liquidation. The
creditors were paid, but the shareholders lost their entire
interest. Biddle had resigned in March, 1839, leaving the
bank, according to his view, in a prosperous condition. He
was indicted during the liquidation for conspiracy to defraud
the shareholders. The indictment was quashed, but Biddle
was ruined financially and died within five years insolvent
and broken-hearted.1
The principal items in the accounts of the second Bank of
the United States up to the time of its final suspension are
shown in the following table :
YE A R .



I 84O

L O A N S.


D E P O S IT S .

$ 6 , 568,794
16 ,045,782
10 , 838,555
1 1 , 756,905
5, 061,456
2, 332,409
2, 616,713


$ 3,598,481
12 , 924,145

S P E C IE .

$ 3,392,755
15 , 708,369
8, 417,988
3, 770,842
4 , 153,607
1 , 469,674

The present method of dealing with public monies in the
United States is one of the results of the war over the United
States Bank. Secretary Taney, under Jackson’s instruc­
tions, deposited public money in certain State banks,—most
of them selected because their officers were friendly to the
administration and characterized by its critics as the “ pet
banks.” The government imposed upon them the condi­
tions of giving security in certain cases, of issuing no small
1 Sumner, Andrew Jackson, 342.



notes and of keeping one-third of their reserve in specie.1
The State banks undertook by mutual agreement to honor
each other's notes and drafts, but the crisis of 1837 caused
a general suspension and the payment of $25,000,000 of the
deposits in bank-notes bearing an average depreciation of ten
per cent. Secretary Taney in his report for 1834 urged legis­
lation to sanction the use of the State banks as depositaries,
but the bill prepared on the subject failed in the Senate.
The suspension of the banks in 1837 led President Van Buren,
in his annual message of that year, to recommend that the
public funds be kept exclusively by public officers and that
nothing but specie be received for dues to the government.
This plan—embodying substantially the features of the
present independent treasury system—was several times de­
feated, but was finally enacted June 30, 1840. One-fourth of
all dues to the Treasury were to be paid at once in specie,
and an additional fourth each year until the whole were thus
The success of Harrison and the Whigs resulted in the
repeal of the independent treasury law August 13, 1841, and
two national bank bills were passed, only to be successively
vetoed by President Tyler. The public monies were de­
posited in the banks or not, at the discretion of public offi­
cials, until 1846, when the independent treasury system was
again established by authority of Congress. The policy of
refusing State bank-notes for government dues continued
until the creation of the national banking system during the
Civil War. That system gave the government the security
of its own bonds for the bank-notes, and the national bank­
ing act provided that the notes should be “ received at par
in all parts of the United States in payment of taxes, ex­
cises, public lands, and all other dues to the United States,
except for duties on imports; and also for all salaries and
other debts and demands owing by the United States to in­
dividuals, corporations, and associations within the United
States, except interest on the public debt, and in redemption
1 Kinley, 17 .




of the national currency.’’ 1 The national banks were again
made the depositaries of public money during the first ad­
ministration of President Cleveland, but were required by
the Secretary of the Treasury to deposit United States bonds
as security for such monies in much the same manner as for
the security of national bank-notes. The amount of deposits
in the banks on August i, 1888, when Secretary Fairchild
made a report on the subject to Congress, was $54,475,055,
exclusive of $4,052,021 on deposit to the credit of disbursing
officers. The number of banks among which these deposits
were distributed was about three hundred and the largest
deposit was $1,100,000. The policy of Secretary Windom
and the absorption of the surplus reduced these deposits after
1892 and their entire amount on January 2, 1896, was $14,271,280.* The independent Treasury continues to transact the
bulk of the public business and sub-treasuries are maintained
at New York, Philadelphia, Boston, Baltimore, Cincinnati,
Chicago, St. Louis, New Orleans, and San Francisco.
1 Act of June 3, 1864, Sec. 23.
*The resumption of the deposit policy in 1902 is described infray 436

The Condition of the Country When They were Adopted— Success
o f the Suffolk System and o f Banking on General Assets— The
New York Safety Fund and Security Systems— Unhappy Experi­
ence in the West and South with Banks of State— The Effects of
the Civil War— Failure of the Security System— General Statis­
tics o f the State Banks.


HE systems of banking authorized under the laws of
the various States of the United States offer examples
of nearly every form of note issues and every degree
of success or failure. The economic development of the
country between the Revolution and the Civil War was in
an experimental stage as well as its political development.
The rules of sound banking had not yet been worked out
even in the older countries of Europe, as the mistakes and
failures of English, French, and Austrian banking abund­
antly show ; but to ordinary sources of error and risk were
added in the United States the elements of experiment and
uncertainty in every department of human activity. The
Englishman or Frenchman might not be a good banker, but
he could at least form an intelligent estimate of the volume
of trade with which he had to reckon and the conditions un­
der which it was carried on. His problem was simply to
work out, according to sound rules, a mathematical prob­
lem for which the necessary elements were known. With
the American, on the other hand, every element was an un­
known quantity. He had to guess at the first element in his
equation, and if he guessed wrongly absolute accuracy in




his further computations could not possibly yield a true
A new country, poor in specie and in loanable capital, is
almost forced by the necessities of her situation to adopt
monetary devices which would not be tolerated under better
conditions. Some of these devices would be comparatively
harmless if their true character were understood and they
were used with moderation ; but their tendency is mislead­
ing and intoxicating to the average mind and they are usu­
ally so abused as to offset the little benefit which might be
derived from them. The most successful banking systems
under State law in the United States were those of New
York and New England, where the surplus capital of the
country in the earlier days was concentrated. The least suc­
cessful systems were in the newer and poorer sections of the
country and they grew progressively worse as inexperience
and poverty seemed to make more imperative the necessity
for creating something out of nothing. Four distinctly
marked systems of note issue were in operation in the United
States side by side almost up to the close of the Civil War
and it is not surprising that the conglomerate currency
which they created has left unsavory memories behind it.
These four systems were: Issues upon general assets; issues
protected by a general safety fund ; issues based upon public
securities; and issues based upon the faith and credit of the
1 The principal sources for the preparation o f this chapter have been
the monographs prepared by Mr. I,. Carroll Root for the “ Sound
Currency Committee ” of the New York Reform Club ; the report of
John J. Knox, the United States Comptroller o f the Currency, for
1876 ; the report prepared by Mr. Henry H. Smith, Assistant Register
of the Treasury, in response to Senate resolutions of July 26, 1892,
printed as Sen. E x. Doc. 38, 52d Cong., 2d Sess. ; and the report of
Comptroller A. B. Hepburn for 1892. The investigations of these
gentlemen have brought together and co-ordinated a mass of material
which would otherwise have to be sought with great labor from a
variety o f sources. Mr. Root has further favored me with an examina­
tion o f this chapter and the suggestion o f some changes, which I have



The best illustration of the system of banking upon gen­
eral assets is afforded by the banks of New England, and
especially by the banks of Boston, which became the centre
of the New England redemption system. The note issues
of the New England banks were permitted in many cases
to exceed the proportion to capital which is now consid­
ered safe, and they were not subject until late in their
history to thorough official supervision; but in spite of
these defects of the system, the notes usually circulated at
par and specie was attracted to New England when driven
from other sections of the country by depreciated paper.
The first local bank in New England, and the second of the
kind in the United States, was incorporated by act of the
General Court of Massachusetts on February 7, 1784, with
a maximum capital of $300,000, and was called the Mas­
sachusetts Bank. No limitations were imposed in the original
Massachusetts law upon note issues, but an act of 1792 pro­
hibited notes below $5, and the bank was directed to limit
the amount of n ces, together with *‘ money loaned by them
by a credit on their books or otherwise,’’ to ‘4twice the
amount of their capital stock in gold and silver, actually
deposited in the banks and held to answer the demands
against the same.” A general law was passed in 1799, pro­
hibiting banking by unincorporated companies or the fur­
ther issue, except by the Nantucket Bank, of notes below
$5. This provision was modified in 1805 so as to permit the
issue of bills of $1, $2, and $3 to the amount of five per cent,
of paid-up capital. This limit was increased in 1809 to fifteen
per cent., reduced in 1812 to ten per cent., and again in­
creased in 1818 to twenty-five per cent., which remained the
limit during the life of the State banking system.1
An act was passed in 1803, requiring semi-annual re­
ports of condition by the Massachusetts banks to the State
officials, and it appeared that at that time seven banks were
in operation with a capital of $2,225,000 and a circulation of
$1,565,000. An attempt was made in 1811 to found a State
1 Root, New England Bank Currency, “ Sound Currency,” Vol.
XI., No. 13, p. 4,


bank occupying a similar relation to the Commonwealth
that the United States Bank had occupied towards the
national government, but the State capital was never sub­
scribed and the authorized capital was reduced in 1817
from $3,000,000 to $1,800,000.1 The charter of this bank
and of the Merchants’ Bank, also incorporated in 1811,
served as the model from which most subsequent charters in
Massachusetts were drawn. One-fifth of the capital was
required to be actually paid in before the beginning of
business ; the stockholders were individually liable to the
amount of their stock in case of loss arising from misman­
agement, and the liabilities, exclusive of deposits, were
limited to twice the amount of the capital. The limit upon
circulation, which was thus incidentally imposed, was re­
duced iu the case of most of the later banks to 150 per cent.
The Massachusetts and other New England banks main­
tained specie payments in 1814, when those of other parts of
the country suspended, and the current of specie towards
New England swelled the holdings of the Massachusetts
banks alone, from $1,513,000 in 1811 to $6,946,542111 1814.
The total banking capital authorized had increased in 1828
to $9,075,000 and thirty-six new banks were incorporated
in the four years ending with that date. A new banking
law was passed on February 28, 1829, which applied to banks
thereafter incorporated and to those obtaining an increase of
capital or an extension of their charters. The limit of the
notes which a bank might circulate was reduced to 125 per
cent, of the capital and the total of the debts, exclusive of
deposits, was limited to twice the capital. A provision was
made against the practice of issuing notes promising pay­
1 The State subscribed $400,000 to the capital of the Union Bank of
Boston, which was incorporated in 1792, and was generally a subscri­
ber at the formation o f new banks for the next twenty years. About
$1,000,000 o f bank stock in this way came into the hands of the State
and afforded a generous dividend until it was sold in 1812 to meet
some unusual expenses. The State does not seem to have abused its
share in the ownership b y interference with the management of the
banks.— M artini Boston Stock Market, cited in Comptroller’s Report
for 1876.



ment with interest at a future date, by which the banks had
endeavored to escape the obligation to pay cash on demand
to depositors and note-holders. An effort was made to evade
this provision by issuing deposit books, making the same
promise. They were first issued mainly to depositors, but
they came to be extensively issued during the pressure of
1834 in discounting paper. The General Court passed a law
ill that year prohibiting the practice.
The organization of banks in Massachusetts proceeded
with alarming rapidity during this period of speculation,
and at the end of 1836, seventy-eight new banks had been
added to the sixty-two older banks, and forty-three of the
latter had obtained an increase of capital. Several banks
succumbed towards the close of the year, but the Boston banks
were mainly sound and followed the New York banks reluc­
tantly on May 12, 1837, the suspension of specie pay­
ments. An act of 1809 imposed a penalty of two per cent,
a month on banks which failed to redeem their notes in
specie. This provision was not enforced in 1837, and the
General Court suspended it until January 1, 1839, in the case
of banks which kept their circulation within seventy-five per
cent, of their capital, redeemed notes below $5 in Boston,
and below $3 elsewhere, and complied with some other condi­
tions. Voluntary resumption took place throughout the State
on August 13, 1838. Failures still continued among the mush­
room institutions which had been created during the period of
speculation, and thirty-two Massachusetts banks wound up
their affairs between 1837 and 1844. The necessity of more
efficient supervision by the State was made plain by the
crisis of 1837, and three bank commissioners were authorized
to make annual examinations of all the banks and special
examinations when they thought proper. This law was
repealed after five years, but the Massachusetts banks were
now upon a sound basis and failures were few during the
twenty-five years before the creation of the national system.
Only two failures occurred between 1840 and 1855, and the
notes in both cases were paid in full.
Most of the bank charters were renewed for twenty years



in 1831 and expired on October 1, 1851. The renewal in the
latter year was made the occasion of several changes in the
banking laws. One of these revived the board of bank
commissioners with the same powers of examination as in
1838. Another change of law imposed liability upon stock­
holders for the redemption of notes, in case of failure, to the
amount of their stock, without the former limitation in re­
gard to mismanagement. The speculative mania which pre­
ceded the crisis of 1857 resulted in the creation of fifty-eight
new banks in Massachusetts with a capital of $14,400,000
and 157 increases in the capital of existing banks, amounting
to $18,745,000. Several failures took place, but the note­
holders suffered little loss and a committee of the legislature
in 1856 reported against the granting of further charters.
The condition of the State banks of Massachusetts in 1862,
just before absorption into the national system, showed 183
banks in operation with a capital stock of $67,544,200; circu­
lation, $28,957,630; deposits, $44,737,490; loans and dis­
counts, $127,592,511 ; and specie, $9,595,53°The banking systems of the other New England States
were generally based upon the principle of issuing notes
against assets and the banks maintained close relations with
those of Boston. The legislature of Maine took advantage
of the expiration of a number of charters in 1846 to adopt
some changes of law to afford greater security for circulating
notes. The Act of August 10, 1846, provided that for the
amount of circulation issued in excess of fifty per cent, of
the capital, one dollar in specie should be kept for three dol­
lars in bank-notes and that the total circulation should never
exceed the capital plus the amount of specie on hand. The
State of Vermont created in 1831 a safety fund modelled
closely upon that of New York. Each bank thereafter char­
tered was required to pay into the State Treasury, in six
annual instalments, the sum of four and a half per cent,
upon the amount of its capital stock, and in case the fund
was reduced by the failure of any bank it was to be restored
by assessments by the State Treasurer, not exceeding threefourtlis of one per cent, in any one year upon the capital of


the banks. An act was passed by the General Assembly in
1842, relieving the banks from contributions to the safety
fund in case the directors should execute satisfactory bonds
to redeem according to law all bills issued and to pay depos­
its on demand.
The banking laws of Rhode Island were peculiar in the
facilities which they extended to banks for recovering debts.
The first bank charter,—issued to the Providence Bank in
1791, and creating the fifth chartered bank then existing in
the United States,—provided that upon any note or other
instrument expressly made payable at the bank, the Presi­
dent or certain of the directors might cause a demand to be
made upon the debtor, in case of his failure to make pay­
ment at maturity, and in case the obligation remained un­
paid for ten days, these officers might write to either of the
clerks of the courts of common pleas or of the superior
court and order such clerk to issue a writ of execution capias
satisfaciendum fieri facias, and attachment of real estate
upon which the debt and costs might be levied, whereupon
the clerk was required to issue such an execution, to be
served by any sheriff or deputy. Subsequent charters did
not even require demand in writing or protest, but author­
ized the officers of the bank to order the clerk of one of the
courts to proceed to issue the execution. This drastic
method of collecting debts under the “ bank process ” made
banks very popular investments with capitalists and ac­
counted for their rapid increase up to 1818. An act was
passed forbidding the further granting of such charters, but
the decision of “ the Dartmouth College” case in the
Federal courts, denying the power of the grantor of a char­
ter to change the terms except with the consent of the
grantee, delayed any provision for withdrawing the pow­
ers of the “ bank process” from banks already possessing
them. The arbitrary character of this process and the hard­
ships it inflicted aroused strong popular feeling and resulted
in an act of 1836 abolishing the privileges of “ the bank
process ” and limiting the banks thereafter to the same reme­
dies as individuals for the collection of debts. Sixty-one



banks then existed in Rhode Island, of which thirty pos­
sessed the powers of the “bank process.”
The peculiar feature of the New England bank circulation
was the Suffolk system of redemption, which was established
in order to protect sound banking currency from being driven
out of circulation by the inferior currency of other States.
The suspension of specie payments south and west of New
England in 1814 resulted in the introduction of depreciated
notes across the Connecticut border and drove the Connec­
ticut bank-notes into private hoards or brought them to the
banks for redemption in specie. The banks of Maine en­
countered a similar situation prior to the suspension of specie
payments in 1837. They were forbidden by law to issue
notes below $5, with the object of keeping the currency
saturated with coin, but this purpose was defeated by the
circulation of the small notes of the banks of neighboring
States. The banks of Boston found themselves, even before
the close of the last century, under somewhat the same com­
petition from the country banks of Massachusetts. The
Boston banks at first undertook to send the country notes
promptly home for redemption, but the banks protested
against this policy. The Boston banks then refused to re­
ceive the country notes altogether. The result was the
hoarding of “ Boston money,” which was sold at a small
premium to persons having payments to make at the
banks, while the channels of circulation were filled with the
country notes, which were known as 4‘ foreign ” or “ current
Several attempts were made in Boston to establish a
redemption office for sending notes home for redemption,
but it was not until 1813 that a systematic method of clear­
ing and redemption for bank-notes was put in operation by
the New England Bank. The discount on the notes of
“ foreign” banks was larger than the actual expense of
redemption justified, and the New England Bank gave
notice that it would charge only the actual cost of sending
foreign money home for redemption and obtaining the
specie for it. The execution of their plan brought down



the discount on “ foreign ” notes from four or five per cent,
to one per cent, for notes of Massachusetts banks and some­
what more for those of other States.
The Suffolk Bank was incorporated in Boston in 1818 and
the directors determined to give special attention to foreign
exchanges. A committee appointed to consider the subject
in 1819 reported that it was expedient “ to receive at the
Suffolk Bank the several kinds of foreign money which are
now received at the New England Bank, and at the same
rates.” They recommended that if any bank should make
a permanent deposit of $5000 with the Suffolk Bank, with
such further sums as were necessary from time to time to
redeem its bills taken by the Suffolk Bank, such bank
should have the privilege of receiving its bills at the same
discount at which they were purchased. They recommended
that the banks of Providence and Newport and twenty-three
others keeping an account with the Suffolk have the
privilege of receiving such of their bills as were received by
the Suffolk bank at the same discount as taken, without the
permanent deposit of $5000, provided these banks would
make all their deposits at the Suffolk Bank and at all times
have money to redeem the bills taken.1 The policy to be
adopted towards banks refusing to make a deposit was to
send their notes home for redemption. These recommenda­
tions were put in force and the lively competition of the
Suffolk with the New England Bank soon forced exchange
on Massachusetts notes to one-half of one per cent., or
even less.
The notes of the Boston banks were still crowded out of
circulation by the slight discount on the notes of the country
banks and it was found in 1824 that the permanent circula­
tion of the eleven city banks, with a capital of $11,150,000,
was not more than $300,000, while the country banks, with
a capital of less than $9,000,000, had a circulation of
$7,500,000. An agreement was made between the Suffolk
and six other Boston banks by which a fund of $300,000 in
their notes was furnished the Suffolk, to be paid out in
1Whitney, 7-8.



equal proportions in the purchase of country bank-notes.1
The tendency of this policy was to force the city notes into
circulation and withdraw the country notes unless they
were maintained absolutely at par by the action of the
country banks. The plan was vigorously resisted at first
by the country banks and the Boston association was
decorated with such opprobrious names as the “ Holy
Alliance’’ and ‘‘ Six-tailed Bashaw.” The country banks
were forced to yield, however, and most of them consented
to make the permanent deposit of $2000 which was now
required, in addition to a sufficient sum for current redemp­
tions. The notes of those maintaining their redemption
fund were received at par and were charged up against them
once a week or as often as might be convenient. The Suf­
folk Bank charged interest whenever the amount redeemed
exceeded the funds to the credit of the issuing bank, but
received the notes of all banks in good standing and placed
them to the credit of the bank sending them in.
A sort of clearing house was thus established which
enabled the issues of one bank to be set off against those of
another in making settlements. The effect of restoring the
country notes to par was to reduce the circulation of sixteen
Massachusetts banks within six months by $382,781 and to
increase the circulation of the Boston banks by $283,497.
When any bank refused to join the Suffolk system, the
Suffolk Bank simply presented its notes for redemption.
This course soon convinced the majority of the country
banks that it was better to clear through the Suffolk Bank
than to maintain an unequal competition with neighboring
banks, which had the prestige of belonging to the Suffolk
system and whose notes were at par throughout New Eng­
land. The suspension of specie payments in 1837 put an
end to enforced redemption for a time, but the majority of
the banks continued to settle their balances through the
Suffolk Bank and their bills passed current all over the

John Amory Lowell, who served on the “ Foreign Money Com­
mittee ” for forty-two years, and William Lawrence, prepared this
plan and report.


Union, while those of the other banks had only a local
circulation. 1
A branch redemption agency was established in Rhode
Island, by which the Merchants’ Bank of Providence received
at par from the Rhode Island banks the bills of all other
banks in New England and settled balances as far as
possible among the Rhode Island banks. Bills issued by
banks outside of Rhode Island were sent to Boston, and
Rhode Island bills were sent in bulk by the Suffolk Bank to
Providence. Legal encouragement was given to the Suffolk
system in Vermont by the Act of 1842, which levied a tax
of one per cent, upon bank capital, but remitted the tax to
any bank which should “ keep a sufficient deposit of funds
in the City of Boston, and should at that city uniformly
cause its bills to be redeemed at par.” All but three of
the Vermont banks were members of the system before 1848
and in 1850 all had joined. Several of the Maine banks
resisted for a time and received the support of the bank
commissioners in 1837, but their circulation became limited
to their immediate locality and the system was commended
by the commissioners in later reports.
The handsome profits derived by the Suffolk Bank from
the redemption system led to several efforts to establish a
rival institution. The work of the Suffolk Bank was so well
done that it was not until 1855 that these efforts bore tangible
fruit. The Bank of Mutual Redemption was then estab­
lished for the specific purpose of redeeming the currency of
the New England banks at par. The bank went into opera­
tion in 1858, with 135 New England banks interested as
stockholders and thirty-five keeping a permanent deposit
aggregating $143,000. The bank was admitted to the
clearing house after a struggle and most of the country
1 “ A t the time when the Suffolk system was at its best I lived in
Chicago. The notes of Massachusetts banks were in great request
there. They were considered the best currency going and they bore
a premium over the notes of Illinois and Wisconsin banks.” Testi­
mony of Horace White before House Committee on Banking, House
Report 1508, 53d Cong., 3d Sess., 84.



banks withdrew from the Suffolk and transferred their de­
posits to the Bank of Mutual Redemption. There was some
friction between the two institutions and it was feared in
some quarters that the entire system would be endangered,
but a mutual exchange of the notes of their patrons was
arranged between the two banks. The Suffolk Bank with­
drew from the system 011 November 1, 1858, upon the ground
that “ its main feature, the right to send home bills for specie,
cannot be given up without destroying its efficacy,” and
that “ under the existing circumstances the bank does not
wish to stand in the way of a trial of the attempted experi­
ment of a foreign money system to be conducted on less
stringent principles.” The Suffolk Bank continued to
receive country money at a discount of twenty-five cents
per $1000 and to share to this degree in the business of
The circulation of the New England banks in 1858 was less
than $40,000,000 and the redemptions for that year through
the Suffolk Bank were $400,000,000. Every note, therefore, on
the average, passed through the redemption agency ten times a
year, or a little less often than once a month. This frequency
of redemptions not only tested the solvency of the banks by
the ultimate test of a banking currency, but it kept the cir­
culation constantly adjusted to business conditions. The
redemptions through the Suffolk agency were $76,248,000
in 1834 and increased to $105,457,000 in 1837. There were
fluctuations during the period of specie suspension, but the
redemptions increased progressively to $137,000,000 in 1845,
$220,000,000 in 1850 and $341,000,000 in 1855, until they
reached their maximum of $400,000,000 in 1858. The ex­
penses of carrying on the redemption agency reached a
maximum of $40,000 in 1858, making an average expense
of ten cents per $1000. The suspension of specie payments
by the banks of the country at the close of 1861, as the re­
sult of Secretary Chase’s issue of government demand notes,
arrested the regularity of redemptions through the Suffolk
system and it was superseded before resumption by the
National banking system. The Suffolk system was never



sustained by formal law, but it maintained New England
bank currency for a generation at par with gold and pre­
vented any losses to note-holders larger than a fraction of
one per cent, of the entire volume of circulation.
New York tried two banking systems under which many
strong banks were created, but both of which failed in some
degree through defects of detail. The early New York
banks issued notes against their general assets and were
chartered under special acts of the legislature, which were
granted to some extent as political favors. The Bank of
New York was incorporated by Act of March 21, 1791, after
having done business for seven years under articles of associ­
ation drawn by Alexander Hamilton. This bank retained
a practical monopoly in New York City until 1799, when
the Manhattan Company began a banking business with a
capital of $2,000,000. The charter was obtained by the
management of Aaron Burr and would undoubtedly have
been refused by the Federalist majority in the legislature
if it had been clearly understood that it carried banking
powers; but the charter was granted for the avowed purpose
of supplying the City of New York with pure water and
cloaked the banking power under a general provision per­
mitting the company to employ its surplus in any moneyed
transactions not inconsistent with the laws of the State.1
Six additional banks were chartered up to 181 :c ; nine ad­
ditional in that and the following year, after the lapse of the
charter of the Bank of the United States; and twenty-four
more from 1813 to 1825.
Thirty New York bank charters were to expire between
1829 and 1833, and Governor Van Buren in the former year
urged upon the legislature a sweeping measure of reform.
He presented what is known as “ the safety-fund plan,”
which he stated had been presented to him by Mr. Joshua
Forman of Syracuse. Mr. Forman declared that “ The
propriety of making the banks liable for each other was
suggested by the regulations of the Hong merchants in
Canton, where a number of men, each acting separately,
1Roberts, 477,



have, by a grant of the government, the exclusive right of
trading with foreigners and are all made liable for the debts
of each in case of failure.” Mr. Forman did not propose
to extend this principle further than the guarantee of the
circulating notes, but by accident or design the bill which
passed the legislature made the safety fund liable for all the
debts of a failed bank. Each bank was required to pay
annually to the Treasurer of the State a sum equal to onehalf of one per cent, of its capital stock until the payments
should amount to three per cent. The first act, approved
April 2, 1829, provided for the distribution of the assets of
a failed bank in the usual way and that, after all the assets
had been turned into money and the final distribution made,
a court of chancery should enter an order showing the
amount necessary to discharge the remaining debts and
should authorize the Comptroller to pay the amount from
the bank fund. This law was modified by the Act of May 8,
1837, to enable the State authorities to take such measures
as might be necessary for the immediate payment of the
notes of any insolvent bank whose liabilities in excess of
assets should not exceed two-thirds of the bank fund. It
was not until 1842, after the failure of nine of the banks
incorporated under the safety fund system, that an act was
passed making the circulating notes only a charge against
the safety fund and leaving the other liabilities of the failed
bank to be paid from the assets.
The panic of 1837 put the safety fund to its first test and
compelled the State Comptroller to make heavy payments
in the redemption of circulating notes. Three important
banks in Buffalo failed early in May, 1837, with a reported
circulation of $413,961. The Comptroller announced that
their bills would be received in payment of canal tolls and
other debts to the State and they were maintained substan­
tially at par. The charters of two banks were repealed by
the Legislature in 1837 and their notes redeemed by the
State, but one of these charters was renewed and the pay­
ments from the safety fund were reimbursed. The safety
fund was practically intact in 1840 and stood at $870,615.



The next three years witnessed eleven failures, which prac­
tically wiped out the safety fund and compelled calls upon
the solvent banks to make it good. The redemption of
notes was suspended after the first four failures, because the
fund was deemed no more than sufficient to cover their
liabilities, but the Act of 1842 permitted the banks to antici­
pate their annual contributions by as much as six years in
some cases and to pay into the fund at par the notes of the
failed banks. The banks very generally took advantage of
this provision and made a good profit on notes of the failed
banks which had fallen into their hands at a considerable
discount. Their advance payments did not involve a loss
of interest, as the original law required the investment of
the bank fund and the payment of interest to the banks,
and the Act of 1842 granted seven per cent, interest on the
advance payments. Redemptions of notes up to September
30, 1850, were $1,614,577 and payments to other creditors
up to 1851 were $1,088,109.
The failure of the L,ewis County Bank in November, 1854,
with deposits of only $1,998 and outstanding notes for $148,545, found the safety fund no longer adequate to redeem
circulation. Future contributions up to i860 were pledged
for the redemption of the public stocks which had been
issued to obtain ready money to provide for previous failures.
The notes of the L,ewis County Bank were finally redeemed
twelve years later and the notes of the three banks which
failed in 1857 were provided for out of their assets. The
total contributions to the safety fund from its creation to the
abolition of the system were $3,104,999.
The safety fund system broke down primarily because
the fund was made to cover all liabilities instead of simply
the liability for note issues. The fact that another system
was adopted for banks organized after 1838 also operated to
the injury of the safety fund system, because no new banks
became contributors and the failure and withdrawal of some
of the old ones gradually reduced the number over whose
resources the liability was distributed. Another evil by
no means inherent in the safety fund system, but which



increased the demand upon it, was the issue of notes by
several of the safety fund banks in excess of the maximum
allowed by law. This defect was remedied in 1843 by an
act providing for the issue of notes registered and counter­
signed by the Comptroller and the surrender of the plates
with which the banks were then printing their notes. A
mistake was made also in basing the contributions of the
banks to the safety fund upon their capital rather than
upon their outstanding circulation. But the arrest of the
expansion of the system, the over-issue of notes in viola­
tion of law, and the distribution of the assessment in pro­
portion to capital, would not have prevented the success of
the safety fund system if the fund had been maintained
exclusively for the redemption of circulating notes. The
fund would have amply secured the notes of the New York
banks and ensured their prompt redemption at par, even
without the reduplicated security afforded by the constitu­
tion of 1846, which made the notes a first lien on the assets
and made stockholders liable, to the amount of their stock,
for the debts of a failed bank contracted after January 1,
1850. A careful estimate shows that the annual assessment
required on the average from 1829 to 1865 to keep the fund
good and redeem every dollar of the circulation of suspended
banks would have been less than one-fourth of one per cent,
of the banking capital, or about three-eighths of one per cent,
on the average outstanding circulation.1
Bank charters continued to be granted in New York by
special acts and to be subject to political favor after the
adoption of the safety fund plan and up to 1838. A cam­
paign for free banking,—in the sense of equal right to all
persons complying with fixed conditions,—was waged by
1Root, New York Bank Currency, “ Sound Currency,” Vol. II.,
No. 5, p. 15. Millard Fillmore, who was Comptroller of the State in
1848, showed that up to that time, covering the period of the most
numerous failures, the contributions to the safety fund had been
#1,876,063 and the outstanding circulation of the failed banks $1,548,558, leaving a surplus of $327,505, if the fund had been used simply
to guarantee circulation.

the Loco-Foco Democrats for several years and bore fruit in
the Free Banking Act of April 18, 1838. Individuals or
associations were authorized by this act to engage in the
issue of notes, which were to be delivered to them by the
State Comptroller, upon depositing with him the stocks of
the United States, of the State of New York, or of any
other State approved by the Comptroller, made: equal to a
five per cent. New York stock. Provision was also made
for issuing notes on bonds and mortgages on improved, pro­
ductive and unincumbered real estate worth double the
amount secured by the mortgage, and the notes were to
show whether they were secured by stocks or by mortgages.
The mortgage feature of the law opened the door to a paper
money Saturnalia as dangerous as the issues of Law’s Bank,
the assignats of the National Assembly, or the Land Bank
of Norway ; but fortunately the conditions attached to the
issue of notes for mortgages were somewhat severe and such
issues never attained any considerable proportion of the
aggregate circulation of the free banks. The (provision for
mortgages as a basis for circulation was repealed in 1863
and securities for note issues were restricted solely to stocks
of the State of New York and of the United States.
Individuals as well as associations were prompt to take
advantages of the free banking law and the amount of capi­
tal subscribed by January 1, 1839, was $10,838,175. The
actual circulation under the law at that time was only
$396,300, but the circulation had increased by December
1, 1839, to about $6,000,000, issued by seventy-six persons
or associations, with fifty-seven additional applications
pending. Eight of these banks went out of business
before January 1, 1841, and eighteen more followed in the
course of the next year. The notes were redeemed at an
average discount of twenty per cent, for those secured by
stocks and twenty-five per cent, for those secured by stock
and real estate. The results of the sales of securities up
to the close of 1850 showed aggregate receipts of $1,142,758
upon stocks which had been accepted as security for circula­
tion to the amount of $1,468,245. This afforded a dividend



of about 77 per cent, upon the circulation thus redeemed.
The New York stocks sold on the average for 92.86 per
cent. ; Michigan stocks came next at 72.95 per cent.; Indiana
bringing up the rear at 49.08 per cent.
The fact that individuals could issue notes under the free
banking law upon the deposit of securities led to many vi­
sionary efforts to exploit credit and resulted in 1844 in legis­
lation requiring an individual banker to deposit securities to
the amount of not less than $50,000 and to transact business
in the place in which he resided. A market was created in
New York for a time for securities which did not find a
ready sale elsewhere and quotations for such securities were
strengthened, but this market was destroyed by the Act of
1840, limiting the securities thereafter accepted to those of
New York. Such changes gradually strengthened the sys­
tem until there was little to be desired on the single ground
of security. The failures during the first twelve years of
the free banking system showed losses of $326,000, or only
$27,200 per year on an average circulation of about $6,000,000. This was less than one-half of one per cent, per year
and the losses in the remaining fifteen years of the operation
of the system averaged only $4800 per year on a circulation
of about $22,000,000, or less than one-fortieth of one per
cent. The circulation issued under the free banking law
was not a strong reliance, however, in times of pressure and
was threatened at such times, when strength was most
needed, by the decline in securities. It had little elasticity
and did not meet the demands of the business community in
this respect nearly so well as the circulation of the safety
fund banks. Defects of detail were gradually eliminated,
however, and the system was successful enough to attract
attention in Canada in 1850 and to become the model of the
national banking system of the United States in 1863.
The banking laws of New York were followed also in
many Western States, but not always closely enough to
assure the later systems the solidity of the original. The
State Bank of Ohio, created in 1845, was one of the best of
these institutions and its note issues were protected by a



combination of the safety fund and security principles. The
bank was not, as its name might imply, an institution of
State, but was owned entirely by individuals and acted as a
sort of board of control for the branch banks. Each branch
was required to deposit with the board of control ten per
cent, of the amount of its circulating notes, either in specie
or in the bonds of the State or the United States, as a safety
fund for the protection of the entire note issues of the bank.
Each branch was liable for the circulation, but not for the
other liabilities, of the other branches. The reimbursement
of the safety fund for notes redeemed was constituted the
first lien on the assets of a failed branch. The State Bank
of Ohio was eminently successful and was managed in much
the same way as the State Bank of Indiana. The aggregate
capital of the thirty-six branches in 1863 was $4,054,700 ;
circulation, $7,246,513 ; loans and discounts, $8,653,459;
deposits, $5,631,629 ; and specie, $2,216,982.
The State of Michigan enacted a safety-fund law in 1836,
but it was forgotten and ignored in the phrensy of paper in­
flation which swept over the State during the next few
years. The first session of the State legislature in 1837
passed a general banking law, which was followed up after
the panic in the same year by an act permitting new banks
to begin business in a condition of suspension of specie pay­
ments. Thirty per cent, of the capital was required to be
paid in specie, but this provision was evaded by borrowing
specie for a few days when the bank commissioners made
their tours of inspection. Any twelve free-holders could
form a bank if they were able to show a capital of $50,000,
including thirty per cent, in specie and the remainder in
bonds and mortgages approved by the Auditor General of
the State.1 The restraints of the law were so recklessly
violated that the State was soon flooded with $1,000,000 in
worthless bills. Banks were created after specie resumption
in the most inaccessible places, that their notes might not be
presented for redemption; and Eastern speculators took out
1Felch, Senate Ex. Doc. 38, 52d Cong., 2d Sess., 76.



Michigan charters and issued the bills in other States where
the standing of the banks could not be known. “ They
were at a great discount,’’ says Judge Cooley, “ as compared
with Eastern bills; the issues of one bank were at a dis­
count as compared with those of another; merchants kept
couriers by whom they hurried off to the banks of issue the
bills they were compelled to take, that they might if possi­
ble exchange them for something in which they had more
confidence. No ‘ circulating medium ’ ever before circulated
so rapidly.” 1 Fraudulent over-issues were frequent and in
many cases were not even recorded. Misery and bankruptcy
spread over the State, with their natural sequence of stay
laws and laws fixing the value at which the property of
debtors should be taken. The free banks were nearly all in
the hands of receivers when, in 1844, the Supreme Court of
the State decided that even the receiverships had no legal
existence, for the general banking act had been passed in
violation of the constitutional provision regarding corpora­
tions, which implied the necessity of a separate charter in
each case.
Banking laws basing the issue of notes upon securities
were adopted by Illinois in 1851, Indiana in 1852, Wisconsin
in 1853, and other States soon after. The restrictions which
experience in New York showed to be necessary to protect
note-holders received little attention in the West and the
rapid depreciation of the “ red dog” and “ wildcat” cur­
rency cast a suspicion upon State bank issues which has
survived to this day. Fifty-one of the ninety-four free
banks of Indiana suspended before the panic of 1857 and
most of those left tumbled like a house of cards in all the
States when the pressure came. A fictitious market was
created for securities, which brought prices that could not
have been otherwise obtained, and the stimulus was thus
given for the creation of public debt by the issue of securities,
the issue of bank-notes on the securities, the purchase of
more securities to be used as the pledge of new bank-notes,
1Michigan , 272.



and so on in an endless chain of debt creation and the infla­
tion of paper wealth. It was usually found when a bank
failed that the securities could not be marketed for their
face value and in many cases that there were no other avail­
able assets. The Bank Comptroller of Wisconsin reported
as late as 1863 a list of fifteen failed banks whose notes he
was redeeming at rates ranging from sixty cents to ninetyfive and a half cents on the dollar.1 The basis of redemp­
tion, however, was not coin, but United States Treasury
notes, themselves depreciated about thirty per cent., so that
it was necessary to multiply the one depreciation into the
other to obtain the scanty proceeds in coin of Wisconsin
notes based upon “ securities.” Free banking laws were
passed in eastern States, but the system made little headway
in those States against the established credit of the chartered
One of the most dismal chapters in American banking
history is that which records the creation and collapse of
banks owned and managed by the States. The Federal
Constitution sought to close the door against issues of the
legal tender paper money, which had worked such havoc
with prices and credit during the Revolutionary era, by the
decree that no State should “ emit bills of credit.” The
Supreme Court sustained the force of this prohibition in the
case of Craig vs. the State of Missouri (4 Peters, 410), and
decided that the certificates issued by the State and made
receivable for salaries and taxes, even though not full legal
tender, fell under the ban of the constitutional restriction.
A different spirit ruled the court when the case of Brisco vs.
the Bank of the Commonwealth of Kentucky was decided
in 1837. Chief-Justice Marshall had just died, but Justice
Story, who dissented from the majority decision, insisted
that his dead associate had agreed with him, that the pend­
ing case could not be distinguished in principle from that of
Craig vs. Missouri. The majority found a distinction in the
fact that the bills in question were issued by a bank under
1 Report of the Secretary of the Treasury on Condition of the Banks
at the Commencement of 1863, 204.



the direction of a president and twelve directors. They held,
notwithstanding the fact that the bank was exclusively the
property of the State, that the notes were not ‘‘ bills of
credit ” within their definition, which included only “ paper
issued by the authority of a State on the faith of the State,
and designed to circulate as money.,, 1
The mania for banks of State was already well on its
course before this decision was made. The Commonwealth
of Kentucky had been part owner in the Bank of Kentucky,
incorporated in 1806, and owned $586,400 of the capital
stock of $2,726,100 when the charter was repealed in 1822.
The Bank of Kentucky was hampered throughout its career
by State interference, but was paying specie and its stock
was at par when the State decided to set up a rival under its
own exclusive ownership and management. The new-comer
was the Bank of the Commonwealth of Kentucky, chartered
for twenty years by the Act of November 29, 1820, with a
capital of $2,000,000, which was increased December 22,
1820, to $3,000,000. The State availed itself of the power
to appoint additional directors in the old bank to pack the
board with pliant tools, who soon effected its ruin for the
benefit of the new institution. The Bank of the Common­
wealth, however, was a pitiable failure. Its notes had fallen
on March 22, 1822, to sixty-two and a half cents on the dol­
lar and they continued to fall until the entire State was
embroiled in a legal controversy which almost ended in
1 Brisco vs. Bank of Kentucky is reported in 11 Peters, 257. Prof.
Sumner declares that by this decision ‘‘wildcat banking was granted
standing ground under the Constitution ” and that “ the decisions of
the Supreme Court on the constitutionality of the Legal Tender Act
must have borne an entirely different color, if Marshall’s opinion had
prevailed in Brisco’s cas e.”—Andrew Jackson, 363. Judge Story went
so far, in his Commentaries on the Constitution, as to intimate that
if the question were a new one, it would be doubtful if the States
had power under the Constitution to incorporate banks of issue ; but
it is obvious that the permission to issue notes, circulating, like other
commercial paper, upon private credit, is very different from the
issue under public authority of legal tender money.—Kent, Commen­
taries, I., 408.



revolution. The hard times of 1818 had resulted in the
charter of forty-six banks with a total capital of $8,720,000,
but the demand for specie by the United States Bank drove
them to the wall and the State was left without solvent
banks. A more permanent legacy of the hard times was a
replevin law, passed in 1820, which gave debtors two years
within which to redeem their goods unless payment was ac­
cepted by creditors in notes of the Bank of the Commonwealth.
‘‘ The relief laws, ’’ of which the replevin law was one,
became the political issue of the hour. Judge Clarke, of the
Clarke County District Court, declared one of the provisions
of the replevin law unconstitutional, as impairing the obli­
gation of existing contracts. The Appellate Court sustained
Judge Clarke, in spite of an effort to remove him by an ex­
tra session of the legislature, but the relief party swept the
State in the elections of 1824, repealed all laws concerning
the Appellate Court and created a new Court of Appeals.
The Justices of the old court took the ground that their
offices were created by the Constitution and could be abol­
ished only by constitutional amendment. Their records
were taken from them and kept under military guard, but
the old court continued to meet and decide cases alongside
of the new. The next electoral campaign found the people
in more sober mood. The “ Old Court party ” elected sixty
members of the legislature against thirty-five of the “ New
Court party,” and at the next election a majority of the
Senate was secured and a bill was passed in December, 1825,
over the veto of the governor, by which all the laws consti­
tuting the new court were repealed.1 An act was passed in
1830 by which the Bank of the Commonwealth ceased to loan
money, apparently for the reason that no one cared to borrow
the sort of money which it issued. The Commonwealth of
Kentucky had a share in some banks afterwards established,
but it did not again attempt the folly of State management.
The State of Alabama had an experience with a bank of
State which, according to Governor Jones, has subjected the
1Shaler, 178-84.



people to a permanent tax of nearly $1000 per day for taxa­
tion to meet the cost of the experiment.1 An act was
passed December 21, 1820, to incorporate the Bank of the
State of Alabama, but it provided for a capital of $2,000,000, of which three-fifths was to be obtained by private
subscriptions. Subscriptions were slow in coming and the
difficulty was met by an Act of 1823, removing any limit
upon the capital and providing that the State should furnish
the whole. Various public funds were set apart to consti­
tute a part of the capital, among them the proceeds from the
sale of lands donated by Congress for schools, amounting to
about $1,300,000, and the funds of the University of Ala­
bama to the amount of about $500,000. These grants were
only a beginning, and between 1832 and 1837 the State
issued bonds to the amount of $13,800,000 for the increase of
the capital of the bank and to enable it to resume specie
The purpose of the founders of the bank was to distribute
the bank money as evenly as possible among the people of
the State and the original act stipulated that the loans
be apportioned among the several counties in proportion to
their representation in the General Assembly. Loans to a
single individual or corporation were not to exceed $2,000,
but this rule was not closely adhered to in loans to the
president and directors. The president and twelve direc­
tors were chosen by the General Assembly and the choice
of directors for the branch banks increased the number
annually chosen to between sixty and seventy. Candidates
for the assembly were compelled to promise their supporters
liberal loans in case of election and to exact pledges from
candidates for the directorships that the loans should be
granted. One of the hotel keepers of Tuscaloosa succeeded
in securing an election as director in 1832 and his hotel
swarmed with members of the legislature and persons
desiring to borrow money, who hoped to secure his support
in the negotiation of loans. Four other hotel keepers
1 Century, Cheap Money Experiments, 88.



realized that they were conducting business under a heavy
handicap and secured their own election as directors in 1834.
A director could not afford to refuse a discount requested by
a member of the legislature and the discounts of the bank
increased from $448,859 in 1826 to $20,642,473 in November,
1837. The circulation had swelled in the meantime from
$273>5°7 to $6,676,050.
Those were “ flush times” in Alabama and so complete
was the intoxication of the people with the paper money
craze that the General Assembly on January 9, 1836, passed
an act abolishing direct taxation in the State and setting
aside $100,000 of the bank money to defray the expenses of
the State government. The crisis of 1837 led to an investi­
gation of the discounts and it was found that over $6,000,000
were worthless. Confidence in the paper money, *‘ sup­
ported by the faith and credit and wealth of the State, ’* to
use the favorite phrase of the champions of government
paper money, suddenly collapsed and with it the whole
structure of business and credit in Alabama. The General
Assembly was hastily summoned in special session and
authorized a loan to the people of $5,000,000 in bank money,
which was increased by $2,500,000 in December; but the
fever had run its course, the charters of the branch banks
were repealed in 1842, and the charter of the State Bank was
not renewed when it expired in 1845. The assets of the
bank netted about $10,000,000 towards reducing the bonded
debt to the State, but $4,000,000 was a dead loss, in
addition to the public funds originally set aside for the use
of the bank. The effect of their experiment with a bank
of State upon the people of Alabama was indicated by the
provision of the constitution of 1867, that “ The State shall
not be a stock-holder in any bank, nor shall the credit of
the State ever be given or loaned to any banking company
or association or corporation.’’
Mississippi had a similar experience. Two early experi­
ments in State ownership with bad results did not deter the
people from the establishment of the Union Bank of Missis­
sippi in 1838 with a capital of $15,000,000. This capital



was to be raised by means of loans to be obtained from the
directors and the loans were to be negotiated through bonds
of the State for which the credit of the State was pledged.
The first block of $5,000,000 in bonds was sold at par through
Nicholas Biddle, president of the Bank of the United States.
The bank management exercised the wT possible judg­
ment in loans and advances and the bank ran its course
within four years. Post notes were issued, on account of
the suspension of specie payments, and the issues of the
bank and its six branches had increased in April, 1840, to
$3,337,665. The other banks vied with the Union Bank in
the issue of currency and at the close of 1839 the twenty-six
banks in the State professed to have a paid up capital of
$30,379,403, loans and discounts of $48,333,728 and a circula­
tion of $15,171,639. As the free white population of the
State at that time was only 170,000, the alleged paid-up
capital equalled $180 per capita, loans and discounts $285,
and circulation nearly $90. The State repudiated her obliga­
tions on the bonds issued and never attempted to pay them.
The results upon the community are thus set forth by Mr.
Henry V. Poor : 1
The $48,coo,000 of loans were never paid ; the $23,000,000 of notes
and deposits never redeemed. The whole system fell, a huge and
shapeless wreck, leaving the people of the State very much as they
came into the world. Their condition at the time beggars description.
Society was broken up from its very foundations. Everybody was in
debt, without any possible means of payment. Lands became worth­
less, for the reason that 110 one had any money to pay for them.
The only personal property left was slaves, to save which, such num­
bers of people fled with them from the State that the common return
upon legal processes against debtors was in the very abbreviated form
of “ G. T. T .” gone to Texas,—a State which in this way received a
mighty accession to her population.

Several other Southern and Western States went through
similar experiences. The Union Bank of Florida, chartered
by the territorial government on February 12, 1833, with a
capital of $1,000,000, was assisted by the issue of State bonds,
1Money and Its Laws , 540.



of which more than half were sold in Europe. The pro­
ceeds were loaned on stock and mortgages, mainly to stock­
holders, and the circulation was run up in 1839 to $551,747.
A committee of the legislature made an investigation in
1840 and their report was very unfavorable to the bank.
The State government, after the admission of Florida to the
Union, refused to recognize the privileges of the Union
Bank and the Secretary of State reported in 1858 that its
circulating notes were worth not more than twenty cents on
the dollar. A real estate bank was one of the features of
the Arkansas system, towards which the subscribers to the
stock were required to pay nothing in, but merely to secure
their subscriptions by mortgaging their real estate. The
working capital of the institution was obtained by the issue
of State bonds, of which $2,000,000 were authorized. “ A
prudent expansion of the currency of the State” was one
of the avowed objects of the bank and loans were made
within a year after opening on December 12, 1838, amount­
ing to $1,585,190. The circulation of the bank at this time
was only $156,910, but specie payments were suspended and
circulation was increased in May, 1840, to $759,000. The
notes suffered a discount of forty to forty-five per cent, and it
was soon discovered that the collection of loans on maturity
was a far different matter from making them. The directors
made an assignment on April 2, 1842, and the notes of the
bank afterward passed for about twenty-five per cent, of
their face value in specie. A like experiment had been
going on in the meantime with the Bank of the State of
Arkansas and the total amount of unredeemed bonds issued
by the State on behalf of both banks, including interest, up
to October 1, 1868, was $4,993,503.
Illinois tried several experiments at issuing money upon
“ the credit of the State,” and the circulation of the State
Bank of Illinois, incorporated in 1821, did not exceed $300
000. Even this moderate limit did not keep the notes from
falling within three years to twenty-five cents on the dollar,
and in 1825 an act was passed requiring the cashier of the
bank to collect all the signed and unsigned notes in his pos­



session and bum them in the public square of Vandalia, in
the presence of the governor and the judges of the Supreme
Court. The next State Bank was incorporated in 1835 and
$2,000,000 of the capital subscribed by the State was paid by
the issue of bonds, which were taken by the bank at par.
Assistance was also given to the Bank of Illinois at Shawneetown, but both banks collapsed in 1842 and the State was
saved from much actual loss by the surrender by the banks
of the State stock, which was burned in the Capital Square
at Springfield in the presence of the legislature. The Con­
stitution of 1848 provided that no State bank should there­
after be created nor should the State own any banking stock.
Tennessee authorized a State Bank in 1820, which issued
$1,000,000 in inconvertible notes in loans of $500 each upon
real estate mortgages worth double the amount.1 The notes
quickly dropped below par and the bank closed in 1832.
Louisiana incorporated the Union Bank of Louisiana in
1832 upon similar principles with those of the Union Bank
of Florida and issued $7,000,000 in State bonds to provide
the capital. Bonds to the amount of $10,004,000 were issued
to two other institutions, but all three failed in 1842 and the
State enacted a sound banking law, under which she became
in i860 the fourth State in the Union in banking capital and
the second in specie holdings.8 The essential feature of the
law was the requirement that the liabilities be covered onethird by specie and the remaining two-thirds by commercial
paper having not more than ninety days to run. Louisiana
prohibited State subscriptions for bank stock in her constitu­
tion of 1852. Georgia, Vermont, Missouri, Delaware and
the Carolinas all tried State ownership and management of
banks, but the first two early abandoned the experiment.
The others ceased to be banks of issue with the establish­
ment of the national banking system. The Farmers’ Bank
of Delaware was never much under political influences and
is still conducted as a bank of discount and deposit. The
Bank of Missouri had a coin reserve of one-third of its cir­
1Knox, Rhodes's Journal of Banking, Oct., 1892.
2 White, Sound Currency, Vol. II., No. 1, p. 5.


culation and its connection with the State ended in 1866 by
the sale of the State stock.
The State Bank of Indiana stands out, in the language of
Mr. Horace White, a “ notable tribute to sound banking
principles from the weltering mass of bank failures of the
period covered.’’ The first bank of State was created origi­
nally as a private institution and adopted by the constitu­
tion of the State upon her admission in 1816 as a public
bank. The experiment was a failure and it was not until
1834 that the State Bank of Indiana was incorporated, with
ten branches. The parent bank, with a president and five
directors elected by the legislature, acted as a sort of board
of control over the branches, each of which was organized
with a capital of $160,000 and chose one director as a part
of the board of control. The two essential differences be­
tween the Bank of Indiana and the other banks of State were
the payment of the capital in actual cash and the issue of
notes upon liquid assets. The State, which took half the
capital of each branch, paid its proportion in silver and ad­
vanced five-eighths of the private capital by the sale of five
per cent, bonds in London, taking mortgage security for the
final payment by the shareholders and crediting them with
the dividends paid by the bank. The remaining threeeighths of the private capital was paid in cash by the share­
holders, and each shareholder was made liable for an
amount equal to his stock and the branches were jointly
liable for each other’s debts. The bank had a circulation in
1839 of $2,951,594.
The State Bank maintained a high credit, but was unable
to obtain the renewal of its charter upon its expiration in
1857 because of a provision in the new constitution of 1851
that ‘‘ the State shall not be a stock-holder in any bank after
the expiration of the present bank charter.” The State
realized profits of $3,500,000 on the $1,000,000 invested in
the institution, and its management had done so much for the
development of the State that special privileges were given
to a new State Bank of Indiana which was chartered March
3, 1855. The act of incorporation was quietly carried



through by a syndicate of politicians, who became large
subscribers to the stock of the various branches. They
opened negotiations with the managers of the old bank for
the sale of the franchises and the latter made the purchase
upon the condition that Hugh McCulloch, who had been for
twenty years manager of the old Fort Wayne branch, should
be made the president. The bank weathered the crisis of
1857 without suspending specie payments and rapidly retired
its circulation when gold went to a premium in 1862. The
bank was required by the conditions of its charter to pay its
notes in coin, but a decision was obtained from the Supreme
Court of the State that the United States legal tender notes
were lawful money and could be lawfully used for the re­
demption of the notes. The circulation was reissued upon
this basis, but upon the imposition of the ten per cent, tax
on the circulation of State banks the State Bank of Indiana
wound up its affairs with ample assets and unimpaired
The suspension of specie payments at the outbreak of the
Civil War drove gold and silver from circulation and required
an expansion of bank-note issues to maintain the volume of
the currency. The Suffolk system continued in operation at
Boston, but the notes failed to flow in as rapidly as before
for redemption. The fact was noted and commented upon
by the reports of the bank commissioners of Maine, New
Hampshire and Massachusetts in their annual reports at the
close of 1862 and among the reasons assigned was the fact
that ‘‘ in the present unsettled state of public affairs, the
people have more confidence in the bills of the local banks
than in any other paper currency.” 2 Other reasons sug­
gested were the large sums carried by soldiers to the seat of
war and other sums left to be expended by their families,
and the large amount of Eastern bills sent to the West by
1McCulloch, Ch. xi.-xii.
2 Report of the Bank Commissioners of Maine, December 8, 1862,
in Annual Report of the Secretary of the Treasury on the Condition

of the Banks of the United States at the Commencement of the Year
1863, p. 3.



New York banks, to fill the gap created by the winding up
of local institutions. The bank commissioners of Massa­
chusetts maintained that when specie payments are sus­
pended, “ and bills are no longer redeemable in gold, a great
motive for sending them home is withdrawn, since, if in good
credit, they are as valuable as anything which can be got in
exchange for them. Men hold them and hoard them, there­
fore, precisely as they would do with specie, and the volume
of the currency becomes greater precisely as its current grows
more sluggish.”
It was very generally feared that the banks would sell
their gold at a profit as it attained a high premium over legal
tender paper, but the New England banks generally held on
to their specie as a provision for the protection of their
creditors and as security for future resumption. The com­
missioner of Maine reported, regarding the sale of specie
for a premium, that “ No instance has come to our knowl­
edge where any bank has done anything of this kind ; and
certainly it cannot have been practised to any great extent,
for the comparative tables show that, notwithstanding the
suspension act, the specie in our banks has decreased only
some $40,000.” The New Hampshire commissioners re­
ported that ‘‘ the banks have not only kept their faith with
the public, in retaining their specie in the vaults, but have
actually increased the aggregate amount of specie, $38,827.52,
or more than twelve per cent.” The Massachusetts com­
missioners undertook to discourage sales of specie and de­
clared that they “ regard the sale of gold by the banks as
altogether illegal, so long as they refuse to pay specie on
their obligations. *’
One of the disadvantages of-issuing bank-note circulation
on securities was disclosed at the outbreak of the war in the
sudden fall in value of Southern State bonds pledged by
Northern banks to secure their circulation. This shrinkage
in the value of the security for the notes was especially felt
in Wisconsin. The case of the Koshkonong Bank, whose
stock amounted at par to $48,000, of which all but $3,000
was issued by Southern States, was one of the worst, but



was typical of many others. The net proceeds of the bonds,
when sold in the New York market, were only $21,769 and
afforded the billholders only fifty-four and three-fourths per
cent, on the dollar against an apparently well secured cir­
culation of $39,779. The Bank Comptroller of Wisconsin
was compelled to call upon nearly all the banks to make
good the depreciation of stocks and their position became
so precarious that a joint resolution was passed by the legis­
lature on February 15, 1861, suspending further calls for
additional securities. The Comptroller declared that “ a
general failure, involving three-fourths of all the banks, was
imminent unless relief in some shape was granted ; and there
is scarcely any occasion for doubt but at least eighty out of
the one hundred and nine then existing banks would have
The resolution of February was rescinded early in April
and another call was made upon the banks to bring up the
value of their stocks. Thirteen banks failed to respond and
resisted the action of the Comptroller in the courts. The
stronger banks gradually replaced Southern securities by
those of Northern States and continued business upon this
basis until the establishment of the national banking system.
A shrewd stock jobbing scheme was put in operation by
some of the bankers in the meantime by buying up depreci­
ated currency at a great discount and offering it to the
Comptroller for redemption in the better class of bonds,
which could then be sold at a handsome margin over the
cost of the currency. The Comptroller refused to permit
the withdrawal of bonds except in such a way as to leave
the better bonds in the custody of the State as security for
the remaining circulation, bul \e modified this policy when
he found speculators holding < . to the notes, in anticipation
of their final redemption from he proceeds of the stock, and
surrendered good and bad stoc s in fixed proportions.1
The New England banks fe the pressure of the repudia1 Report of G. Van Steenwyck, tank Comptroller of Wisconsin,
Madison, October 1, 1861. House <x. Doc. 25, 37th Cong., 3d Sess.,



tiou of Southern obligations, but they had been preparing
for it. Deposits fell in Boston from $20,811,889 on October
8, i860, to $17,176,778 on December 10th, and specie reserves
fell on December 17th to $3,491,348,—far below the limit re­
quired by law. The whole amount of Southern indebted­
ness to the North was estimated by intelligent merchants in
New York and Boston at $200,000,000, and a large part of
it was lost by the breaking out of war.1 The Boston banks,
however, succeeded in restoring their specie reserves by
March, 1861, to $5,601,871, and the manner in which the
banks of the State met their losses is thus described by the
bank commissioners:
The system pursued by them for many years, of making an annual
reservation of a portion of their yearly earnings, had in some measure
protected them against unusual amounts of dishonored and worthless
paper. By the bank returns on the last Saturday of October i860,
the net profits then on hand amounted to 16,360,539. n , or 9r9gper cent,
of the aggregate banking capital of the Commonwealth. And we do
not hesitate to express the opinion, based upon the examinations we
have made during the past year, and from information specially ob­
tained from other banks, principally in Boston, that, notwithstanding
the losses which some banks must inevitably sustain, the whole
amount of final loss growing out of our difficulties with the South
will be more than covered by the general surplus, thus leaving the
aggregate bank capital free and unimpaired.2
1 Some estimated it at #200,000,000 to New York alone.—Rhodes,
III, 560. The honorable conduct of the New Orleans banks is pleas­
antly referred to by Secretary Hugh McCulloch. The branches of the
Bank of Indiana in the southern part of the State, he says, “ had
large dealings with men who were engaged in the Southern (Missis­
sippi) trade, and when measures were being instituted for the seces­
sion of Louisiana from the Union, and, indeed, after the ordinance of
secession had been adopted, these branches had large cash balances
and large amounts of commercial paper in the New Orleans banks.
Against the remonstrances of the secession leaders, and in disregard
of threatened violence, these cash balances and the proceeds of the
commercial paper as it matured were remitted for according to direc­
tions,—not a dollar was withheld .”—Men and Measures of Half a
Century, 139.
2 House Ex. Doc. 25, 37th Cong., 3d Sess., 50,


The growth of the capital and business of the State banks
of circulation is shown in the following table :





B A N K S.





C A P I T A L ST O C K .

251, 875,292
290, 772,091
327, 132,512
260, 171,797
204, 838,175
301, 376,071
332, 177,288
343, 874,272
429, 592,713
418, 139,741


$324, 119,499
365, 163,834
525, 115,702
492, 278,015
462, 896,523
312, 114,404
310, 282,945
413, 756,799
557, 397,779
657, 183,799
69i, 945, 58o

D E P O S IT S .

$ 75,666,986
91, 792,533
230, 351,352
259, 568,278

Tradition has handed down unhappy memories of the State
banks, which have been distorted by the lapse of time into
conceptions very different from the facts. The several sys­
tems, taken in the aggregate for the entire country, had the
great practical defect of lack of uniformity. This defect
was great enough to obscure the essential merits of many of
the State systems and to make any system which was
national in its scope and uniform in its character attractive
to the business community of the whole country. Whatever
the merits or defects of the State systems, the currency in
circulation was judged by the worst of the systems, for by
the operation of Gresham’s law that currency tended to drive

out of circulation all kinds which were superior; and even
where this was prevented by laws or local conditions, the
bad currency was a constant source of irritation from the
very necessity of discriminating, in receiving money pay^
ments, between the bad and the good. One of the require­
ments of the modern business world is undoubtedly a
uniformity of currency which shall obviate the necessity for
discrimination and make every dollar of equal exchange
value with every other. This condition was not met by the
aggregate of State currencies and the fact that it was fully
met by the New England currency at its best may easily
have been obscured, in the minds of New Englanders, by
the multiplicity of good and bad currencies from other sec­
tions which caused perpetual inconvenience.
The national banking system of later years garnered up
the lessons of many experiments with banking upon securi­
ties, adopted most of the good and discarded most of the
bad features, and afforded the country two of the great bene­
fits of a sound currency,—security and uniformity. The
necessity of discrimination between currencies ceased when
every dollar in circulation rested upon a common basis,—the
credit of the national government. The necessity of paying
high exchange rates, or surrendering the notes of distant
banks at a heavy discount, ceased also when every note
became as good in one part of the Union as in another.
Coupled with these great benefits of the new system was the
feature of Federal supervision and examination, which
arrested the creation of fraudulent banks at the outset and
subjected them annually or oftenerto the power of visitation
by the national authority. The three great benefits,—secur­
ity, saving of exchange, and Federal supervision,—are al­
most inherent parts of a national system. The fact that
they have been associated with a particular national system
has led many to believe that there can be no other equally
good, and that enmity to the present banking law is enmity to
the principles of sound finance. But all these benefits can
be obtained under national law with the added benefits,
which the present system lacks, of a banking currency ample



for the demands of business, without the help of government
paper money, and flexibly responsive to those demands.
The foundation of a national currency upon evidences of
public debt is dangerous and unscientific and proved fatal to
some of the State currencies before the Civil War. A com­
parison of the State systems shows a distinct line of cleavage
which is far from favorable to the principles of the present
national banking law. This line of cleavage separates the
banks issuing currency against general assets, like those of
New England, Indiana, and Louisiana, from those issuing
circulation, on the other hand, against securities, like the
banks of New York, Illinois, and Wisconsin, and those
established under the parental care of the State, like the
Bank of the Commonwealth of Kentucky, the Union Bank
of Florida, the State Bank of Alabama, and the Bank of
Mississippi. The experience of the New England and
Indiana banks is the triumphant vindication of the principle
of banking on general assets and issuing notes redeemable
in coin on demand, which is supported by the critics of the
present national system and the advocates of a banking
currency. The banks issuing circulation on securities, with
their pitiable failures and their wildcat banking, were the
prototypes of the national system and afford a hint of what
that system would become if note issues based upon State
and municipal securities were substituted, as is sometimes
proposed, for note issues based upon national bonds. It
must be remembered, moreover, that perfect as the secur­
ity seems for bank-notes under the national system, it is a
security which has followed the ups and downs of govern­
ment paper money. There was neither purpose nor pretence
of maintaining the notes of national banks at parity with
coin while the notes of the government itself and the bonds
by which bank-notes were secured were depreciated. Bank­
notes remained from 1864 to 1879 at par with government
obligations because those obligations themselves were far
below par in coin.
If the banks issuing circulation upon securities were the
model for the national banks of to-day, the banks of State

which, existed before the war were the models and the
prototypes of the Federal treasury management under the
rigime of legal tender paper. Their issues were not bank­
notes in the sense in which banking currency is opposed to a
government paper currency, but they were simply the bills
of credit of the State resting upon the credit of the
State as completely as the paper roubles of the Bank of Rus­
sia. The fact that they were hardly ever maintained at par
in coin, in spite of the great wealth and undoubted hon­
esty and good faith of the people of the various common­
wealths, is a practical demonstration of the folly of attempting
to do a banking business upon general credit without quick
assets. The lesson of the history of the State banking sys­
tems, reduced to its simplest terms, is the success of the
systems based upon the banking principle and the failure of
the systems based upon the deposit of securities, like the
national banking system, or based simply upon the public
credit, like the government currency system of the United
One of the essential errors of early banking in the United
States was the undue expansion of credit upon slender re­
sources. It is an error common in a new country and one
from which the United States and Australia, in more recent
years and under other systems of note issue, have not been
exempt. The impression has been assiduously cultivated
by the opponents of a banking currency that the early
American banks issued a volume of circulating notes enor­
mously in excess of the legitimate demands of business.
This impression is absolutely unfounded and the proof is
afforded by the figures. Some of the State banking cur­
rencies were over-issued in the sense that every dollar which
is not kept at par with the metallic standard is improperly
issued, but the aggregate banking currency of the country
was at no time over-issued in the sense that an equal volume
of good money was not capable of ready and healthy absorp­
tion by the legitimate demands of business. The circulation
of all forms of money in the United States between 1880 and
1895 has ranged between $21.71 and $24.44 and has only



recently been regarded, with the slackening of business ac­
tivity, as beyond the volume required by business needs. It
is only necessary to compare such figures with those of the cir­
culation prior to the Civil War to show how erroneous is the
assertion that the currency was unduly inflated in volume
during the years of State banking. The following table
shows the circulation of both bank-notes and specie at vari­
ous dates, including the years of largest circulation,—the
difference between the bank-note circulation and the total
money in circulation representing the specie :

l8 lO


E S T IM A T E D B A N K ­
N O T E S O U T S T A N D IN G .

$ 10,500,000
149, 185,890

T IO N .

$ 26,500,000

P O P U L A T IO N .

9 ,633,822

C IR C U L A ­
C A P IT A .






State of the National Finances at the Beginning of the War—The
Suspension of Specie Payments and the Loan Policy of Secretary
Chase—The First Plans for the National Banking System—
Changes in the Circulation—The Necessity for a New System
and the Plan of Secretary Carlisle—The Adoption of the Gold
Standard in 1900, and Later Efforts to Secure Banking Reform.


HE national banking system of the United States had
its origin in the management of the finances during
the Civil War. The system was hardly in operation
until the war was two-thirds over, but it offered a market
for the public securities which contributed materially to
raise their price in the depreciated paper with which the
government discharged its obligations. The system afforded
the country for some years a currency having the advantages
of uniformity and security, and possessed in these respects a
great advantage over the bank currency of the different
States which had before been in use. The national bank­
ing system, however, great as were its services in absorbing
the evidences of the public debt, always lacked the essential
feature of a purely banking currency. The currency was
without elasticity, in the sense of responsiveness to the
demands of business, and the volume fluctuated only with
the price of securities. The gradual reduction of the public
debt has removed the basis for national bank-note circulation
until it has become but a minor factor in the currency sys­
tem of the country, and a strong demand has arisen for the
separation of the note issues from public securities.



39 7

The United States at the outbreak of the Civil War were
conducting their financial operations through the independ­
ent Treasury. The notes of the State banks formed a large
part of the medium of exchange in private transactions, but
only specie was accepted in payments to the government.
The aid of the banks was not sought in handling funds, in
making transfers, in placing loans, or in paying interest.
This at least was the theory of the independent Treasury,
although in fact the absence of proper depositaries led many
public officers to deposit their funds temporarily in the banks
at their own risk.1 The circulation of the country outside
of the Treasury on July 1, 1861, consisted of $246,400,000
in specie and $202,005,767 in the notes of State banks,
making a total of $448,405,767, or $13.98 per capita.2 The
essential question for Mr. Chase, Lincoln’s Secretary of the
Treasury, was whether the operations of a great war could
be carried on through these instrumentalities. The question
was the occasion of much discussion at the time and has never
been answered to the satisfaction of all sides. The answer of
Mr. Chase was that the operations of the war could not
be carried on upon a basis of specie and State bank paper.
The government was obliged almost at the outset to abandon
the position that it was able to carry on its own finances with­
out the help of the banks. Some small loans had been placed
by public subscription during the administration of Buchanan,
but it was perfectly obvious that great sums could not be
obtained quickly except from the banks, which had the
keeping of the transferable capital of the country. Secre­
tary Chase held a conference in New York on August 9,
1861, with representative bankers of New York, Philadel­
phia, and Boston. They agreed to advance to the Treasury
$150,000,000 in gold, to be secured by three-year notes bear­
ing interest at 7.30 per cent., and to be reimbursed as the
proceeds of the sale of bonds were covered into the Treasury.
This union of the banks of New York, Boston, and Phila­
delphia in support of the public credit was one of the most
1Kinley, 60-61.
2 Finance Report, 1894, p. cviii.


important events of the war and committed the conservative
business element conclusively to the side of the Union and
the policy of coercion of the seceded States. The banks of
the three big Eastern cities had an aggregate capital of
$120,000,000, a circulation of $16,964,749, deposits of $125,617,207, and coin reserves of $63,165,039, the latter being
equal to forty-five per cent, of demand liabilities.1 They
had already made an agreement in November, i860, when
secession compelled them to contract their business and pre­
pare for a period of stress, for issuing clearing house certifi­
cates and making the specie of all the banks available as
a common fund.2
Congress passed an Act on August 5, 1861, relaxing the
provisions of the sub-treasury law so far as to permit the
Secretary of the Treasury to deposit any money obtained
from loans to the credit of the United States Treasurer in
such solvent specie-paying banks as he might select.8 The
banks accepted this law as authority for the use of the ordi­
nary means of commercial exchange,—bank-notes, checks
and drafts,—in the transactions of the government. They
recommended to the Secretary, therefore, that he should
take the proceeds of the advances made by the banks by
drawing checks and drafts upon the banks, in favor of
public creditors. They suggested that this would not only
prove of great practical convenience, but would diminish
the hoarding which would take place if the banks paid out
their coin and reduced their reserves while uneasiness as to
the future prevailed in the business community. Secretary
Chase, to the surprise of nearly every financier, declared
that the Act of August 5th had no such meaning or intent
and that he should require payment of the advances in coin.
The subject was warmly discussed between the Secretary
and the bankers, but the Secretary’s purpose was unshaken
and the banks yielded rather than break off negotiations
so important to the maintenance of the public credit.
1Poor, 557.
* Bolles, III,, 23.
3 Acts of Thirty-seventh Congress, 1st Sess., Ch. 46, Section 6.



One of the acts of the special session of Congress in the
summer of 1861 authorized loans in several forms, including
non-interest bearing notes of denominations less than $50,
payable on demand by the assistant treasurers at New York,
Boston, and Philadelphia. These notes were not made legal
tender and Secretary Chase, in recommending them, declared
that “ The greatest care will, however, be requisite to pre­
vent the degradation of such issues into an irredeemable
paper currencjr, than which no more certainly fatal ex­
pedient for impoverishing the masses and discrediting the
government of any country can well be devised.” Notwith­
standing this brave language, the Treasury began to issue
the new notes early in August. They were very reluctantly
accepted as currency and the banks refused to receive them
except as special deposits. The new notes threatened to
bring infinite disorder into the currency system by the ele­
ment of inflation which they involved. The banks filed a
prompt protest against thus trifling with the circulating
medium while they were straining their resources to with­
draw capital from active industry and divert it to the uses
of the government. The Secretary intimated that he would
suspend the issue of such notes until other resources were
exhausted, but that he did not regard it as proper to pledge
himself openly not to exercise a power conferred by law.
This was before the advances by the banks had begun, and
upon this assurance they began to pay coin into the sub­
treasury at the rate of about $5,000,000 at intervals of six
days. The attempt to secure popular subscriptions for the
seven-thirty notes through the agents of the government
resulted in subscriptions of only $24,678,866, and the banks
themselves came forward and took the notes and agreed to
negotiate their distribution among the people. So perfect
was the public confidence in the associated banks and so
rapid the circulation of the money that the specie in the
banks had not been materially reduced after the payment of
the second instalment. The gold paid by the banks into
the sub-treasury was disbursed by public officers and
through the channels of circulation found its way back into



the banks. There was no apparent reason why advances
should not be made in this manner to meet all the demands
of the war without impairing the solvency of the Eastern
banks. Fears were expressed in some quarters that the
coin would gradually be absorbed by the Western banks,
some of which were on a rather shaky foundation and had
issued notes secured by the bonds of the seceded States.
This evil had not begun to operate, however, before Secre­
tary Chase again began to put in circulation a mass of de­
mand notes issued directly by the government.
The Secretary did not long respect his assurances to the
banks. The promise was given in August and heavy issues
of notes took place in November. They were not cordially
received as a means of circulation and were largely presented
to the sub-treasuries for redemption in coin. The Treasury
had little coin except that drawn from the banks, and the
coin reserves of the latter now began to decline without any
signs of recuperation. The specie in the New York banks,
which was $49,733,990 on August 17th and $42,318,610 on
December 7th, fell to $29,357,712 on December 28th. A
conference was held with Secretary Chase and he was as­
sured that the Treasury notes could not be received by the
banks at par with coin and that their steady infusion into
the currency would send gold to a premium as well as create
an inflation of the paper circulation which would drag down
the value of bank-notes in the same manner as the Treasury
notes. The Secretary stubbornly refused to change his pol­
icy and the banks voted to suspend specie payments on Mon­
day, December 31st.1 The government necessarily followed
1 Prof. Sumner seems to ignore the effect of the government issues
of the demand notes and declares that the banks suspended, “ without
any earnest attempts to avoid it, and certainly without any necessity.”
—History of American Currency, 194. Secretary Chase, on the con­
trary, did not appear to blame the banks, but declared that unex­
pected military delays had increased expenditures, and diminished
confidence in public securities, and that “ These conditions made a
suspension of specie payments inevitable .”—Report on the Finances,
1862, 7.



suit, for the independent Treasury afforded no adequate fund
of coin for keeping afloat such a mass of paper as Mr. Chase
proposed to put into circulation.
This suspension, less than six months after the first
serious conflict at Bull Run, opened the way for the long
experience of irredeemable paper currency which ended only
with the resumption of specie payments on January 1, 1879.
The legal tender notes, which followed quickly on the heels
of the demand notes, changed the standard of value in the
United States, drove gold across the ocean or into private
hoards, deprived us of foreign help and sympathy,1advanced
prices from one hundred to two hundred per cent., and added
enormous^ to the profits of speculators and to the costs of
the war to the people of the country. The price of gold
advanced steadily from the suspension of specie payments
until the summer of 1864, when it touched 285. The whole­
sale prices of nearly all articles climbed upward with the
gold premium and retail prices in many cases advanced still
more, increasing the paper cost of every contract for carrying
on the war. The government was obliged to sell its secu­
rities for depreciated paper, and to apply the proceeds to
settlements in the same inflated medium. A computation of
the proceeds of $2,565,233,591 received from the sale of pub­
lic obligations for paper currency during forty-five months
ending September 30, 1865, put the gold value at $1,705,347,632, representing a loss to the government by its
depressed credit of $860,000,000, or more than the entire
bonded debt left in force at the beginning of the fiscal year
There have always been those who have maintained that
the suspension of specie payments was a necessary condition
1 In the case of America there was a further ev il; being a new coun­
try, she ought in her times of financial want to borrow of old coun­
tries ; but the old countries were frightened by the probable issue of
unlimited inconvertible paper, and they would not lend a shilling.—
Bagehot, The English Constitution, Ch. i., Works, IV., 46.
2 H. C. Adams, “ American War Financiering,” Pol. Sc. Q’rly., Sep­
tember, 1886, I., 374.



of war. The managers of the associated banks of the East
recognized no such necessity until Secretary Chase began to
flood the country with government paper money for which
he had no means of redemption. They pointed out that
transactions to the amount of $20,000,000 were settled daily
in New York, without coin or even notes and that the settle­
ment of an additional one or two million dollars daily for
the government could be easily effected by the same ma­
chinery. It was only necessary that the government should
have in hand at any one time enough currency, even if it
insisted upon coin, for the transactions of a few days, while
the means of giving mobility to the capital and resources of
the country constantly existed in the hands of the banks.
When the Secretary showed himself immovable upon the
subject of issuing irredeemable notes, the suggestion was
made to him that, if this dangerous path must be trod,
it could be done much more safely through the banks
than directly through the Treasury. In the forcible
language of Mr. George S. Coe, it was represented to Mr.
Chase: 1

That if an irredeemable paper currency was the inevitable resort, it
would be more expedient and economical for the government not
to become involved in its dangers, but to impose the duty and respon­
sibility of issuing the notes upon the banks, who would naturally be
compelled to keep the day of redemption continually in view. Thus,
as a suspension of coin payment was about to be declared, it was prac­
ticable to preserve from distribution and set aside the forty millions
of coin then owned by the banks, together with one hundred and fifty
or sixty millions of government bonds, which could be taken by
them as a special security for two hundred millions of notes, which
could then be immediately issued by the associated banks from their
own plates, and be verified and made national by the stamp and signa­
ture of a government officer. And that such an issue, so supported
by coin and bonds, at once simple and expeditious, would serve the
temporary purpose required, with little if any deterioration below coin
value ; and that it would be then practicable for the banks to con­
tinue, without further agitation, their advances. But the Secretary
declined to entertain this suggestion ; preferring the system of na­
tional banks which he had already conceived.
1 “ Financial History of the War,” Bankers9 Magazine , Jan.. 1876.



Secretary Chase made the fatal mistake at the outset of
relying upon loans to supply the means of carrying on the
war instead of appealing to the productive resources and
the patriotism of the people. His recommendation, at the
special session of Congress in the summer of 1861, was to
raise $80,000,000 by taxation and $240,000,000 by loans.
Of the amount raised by taxation $65,000,000 was required
for the ordinary expenses of the peace establishment,
$9,000,000 was to pay the interest on the new debt, and
$5,000,000 was to go to the establishment of a sinking fund
for its final payment. It is no afterthought to declare that
this policy of timidity was not approved by the country. A
meeting of bank delegates was held in Washington on
January 11, 1862, which recommended a tax bill to raise
$125,000,000 in addition to the usual duties on imports. A
resolution was introduced in the House four days later de­
claring in favor of an annual revenue of $150,000,000. This
resolution passed the House with only five dissenting votes,
and its beneficial effect was shown by the advance of six
per cent, bonds from 90 to 107. The New York Chamber
of Commerce, on April 24th, adopted a memorial to Con­
gress declaring “ that the masses of the people are ready
and desirous to contribute their quota to the ordinary and
extraordinary revenues of the country,’’ and that the
public expenditures demanded an annual revenue of at least
It was not until his annual report of 1863 that Secretary
Chase awakened to the importance of taxation as a means
of supporting the public credit, and suddenly expressed his
desire for providing ‘‘ for the largest possible amount of ex­
traordinary expenditures by taxation.” The net ordinary
receipts, exclusive of loans, were $51,919,261 for the fiscal
year ending June 30, 1862; $112,094,945 for the fiscal year
1863; $243,412,971 for 1864; $322,031,158 for 1865; and
$519,949,564 for 1866. If these figures could have been
moved backwards a single year, the effect upon the credit
of the government, the price of gold, and the depreciation
of the legal tender paper would have been striking, even

if the change had not made it unnecessary to depart from the
metallic standard. It is probable that of the $6,844,571,431
computed 1 as the cost of the war up to the resumption of
specie payments in 1879, $2,000,000,000 could have been
saved to the tax-payers and the public debt would no longer
exist. Outside and beyond these considerations, moreover,
was the injury done to depositors in savings banks and to
other creditors by payment in a depreciated dollar, and the
injury to laborers, whose wages were far from keeping pace
with the advance in paper prices.2
It has been necessary to refer to the financial policy of
Secretary Chase in order to show the conditions out of which
grew the national banking system. The system was a part
of the Secretary’s policy of carrying on the war by means of
loans, and was intended to make a market for American
securities and to maintain their price. One of the first effects
of the suspension of specie payments was the increase of the

1 Bolles, III., 244. Mr. Edward Atkinson computes the war ex­
penditures for the seven years, 1862 to 1868, exclusive of the peace
establishment, at $4, 150,000,000, of which ‘‘not less than $2, 200,000,000
was paid for war material and supplies, the prices of which were
raised by the depreciation of bad money.” The average advance in
prices in the four years of war over the prices of i 860 was 87 per
cent., which increased the cost of material of war $ 1,000,000,000.
Since that time we have paid more than five per cent, interest for
thirty years on seven-tenths of this sum, amounting to $ 1,050,000,000.
—“ The Cost of Bad Money,” Harper's Weekly, Oct. 12, 1895, X X X IX .,
2 Wholesale prices followed the gold premium in a majority of
cases at once or at an interval of about a month, but the advances in
many retail lines were undoubtedly much more rapid. Wholesale
prices, moreover, remained stationary for nearly a year after the gold
premium began to fall, and then only followed it downward at long
removes. See the admirable article of Fred Perry Powers, “ The
Greenback in War,” Pol. Sc. Q'rly , March, 1887, II., 79. Mr. Atkin­
son, in the article quoted above, computes the transfer of profits from
wage earners to speculators or capitalists, as the result of the legal
tender laws, at $ 7,000,000,000 in the seven years 1862- 68,— $40 per
head annually, or $120 for a family of three, exclusive of enhanced
payments directly for taxes, out of an average income of about $450
per family.



circulation of the existing banks. The banks were very pru­
dently conducted when the war cloud first threatened, but
they were soon confronted by a real demand for additional
circulation to take the place of the gold which disappeared
with the suspension of specie payments. The circulation
of the country outside the Treasury, which had been
$448,405,767 on July 1, 1861, had declined to $334,697,744
on July 1, 1862. The entire mass of specie in circulation
on the earlier date, which was $246,400,000, had disap­
peared, except about $25,000,000 on the Pacific Coast.
United States notes and demand notes had been pumped
into the circulation to the amount of $125,905,665, but they
did not fill the void left by the flight of gold and silver.
The scarcity of currency was more than remedied by July
1, 1863, when the total had been swelled to $595,394,038,
of which $312,481,418 was in United States notes and
$238,677,218 in the notes of the State banks. The circulation of the latter had increased about $53,000,000 within
the year.
Secretary Chase inquired in his first annual report in the
autumn of 1861 whether, as the bank-note circulation con­
stituted a loan without interest from the people to the banks,
sound policy did not require that the advantages of this loan
be transferred, in part at least, from the banks, representing
only the interest of the stock-holders, to the government,
representing the aggregate interest of the whole people.
The Secretary suggested that Congress had power to control
the credit circulation, and that circulating notes might be
issued under national authority and secured by the pledge
of United States bonds. He outlined the advantages of his
proposed measure thus:
Its principal features are, (rst) a circulation of notes bearing a com­
mon impression and authenticated by a common authority; (2d) the
redemption of these notes by the associations and institutions to
which they may be delivered for issue ; and (3d) the security of that
redemption by the pledge of United State stocks, and an adequate
provision of specie.
In this plan the people, in their ordinary business, would find the


h is t o r y of m o d e r n b a n k s of is s u e .

advantages of uniformity in currency ; of uniformity in security ; of
effectual safeguard, if effectual safeguard is possible, against deprecia­
tion ; and of protection from losses in discounts and exchanges;
while in the operations of the government the people would find the
further advantage of a large demand for government securities, of in­
creased facilities for obtaining the loans required by the war, and of
some alleviation of the burdens on industry through a diminution in
the rate of interest, or a participation in the profit of circulation,
without risking the perils of a great money monopoly .1

The Committee of Ways and Means of the House of
Representatives set to work upon a bill and made a careful
study of the banking laws of the various States. The Secre­
tary’s scheme was based upon the New York free banking
law and had been urged upon Mr. Chase as early as August,
1861, by Mr. O. B. Potter of that State. Some improvements
on the New York plan were incorporated in the bill of the
committee. The provisions relating to the reserve fund were
drawn largely from the banking laws of Louisiana, and other
features were adapted from the laws of Ohio and Illinois.
It was pointed out early in the public discussion of the plan
that the volume of circulation would depend upon the price
of bonds rather than upon the needs of the money market,
and opposition was pronounced among the New York bank­
ers. Thaddeus Stevens reported against the bill, and its
necessity was postponed for the time being by the issue of
legal tender notes. Mr. Chase returned to the subject in his
annual report for 1862, and his language in favor of basing
the monetary circulation on evidences of the public debt
sounds very like that adopted by Mirabeau, in urging the
issue of the assignats upon the French Assembly.2 The
Secretary declared:
Every dollar of circulation would represent real capital, actually
invested in national stocks, and the total amount issued could always
be easily and quickly ascertained from the books of the Treasury.
These circumstances, if they might not wholly remove the tempta­
tion to excessive issues, would certainly reduce it to the lowest point,
while the form of the notes, the uniformity of devices, the signatures
1 Report on the Finances, 1861, 19.
2 Vide Ch. xxiii.



of national officers, and the imprint of the national seal authenticating
the declaration borne on each that it is secured by bonds which re­
present the faith and capital of the whole country, could not fail to
make every note as good in any part of the world as the best known
and best esteemed national securities.1

The time was more nearly ripe for such a device than in
the preceding session, and a bill was promptly introduced
in the House by Mr. Hooper of Boston, who had given much
attention to the subject during the summer. Senator Sher­
man introduced a similar measure in the upper branch,
which was passed and went to the House on February 12th.
Much of the argument in the Senate was based upon the
fact that the existing banks were increasing their circulation,
without the restraining influence of specie payments, and
were using the constantly swelling volume of government
paper money as a means of redemption. The debate in the
House was opened by Mr. Spalding of New York, who had
enjoyed the doubtful honor of fathering the legal tender law.
The bill passed the Senate by a vote of 23 to 21; passed the
House on February 20th by a vote of 78 to 64, and received
the signature of the President on February 25, 1863. The
measure proved to be defective in some of its details, how­
ever, and was superseded by the Act of June 3, 1864. Banks
to the number of 134 had been organized when the Comp­
troller of the Currency made his first report in November,
1863, but no notes appeared until late in December. The
system was hardly in operation, therefore, until the war was
within a j^ear of its end, but the fact that it had been au­
thorized undoubtedly contributed to create a market for
securities and to maintain their price.
The essential feature of the new banking law, so far as
concerns circulation, was the provision that circulating notes
should be issued by the Comptroller of the Currency upon
deposits of United States bonds, to the amount of ninety per
cent, of the face value of the bonds. No bank could be
organized with a less capital than $100,000, except in places
with a population not exceeding six thousand, where a

Report on the Finances, 1862, 18.


h is to r y o f m o d e rn b a n k s o f issu e .

bank might be organized, with the approval of the Secre­
tary of the Treasury, with a capital of not less than $50,000.
At least fifty per cent, of the capital was required to be paid
up before beginning business and the remainder in instal­
ments of ten per cent, of the whole amount of the capital
at the end of each month. The bond deposit was fixed at
not less than $30,000 nor less than one-third the capital
stock. Provision wras afterwards made by the Act of June
20, 1874, for the withdrawal of circulating notes at the
option of the banks and the surrender of an equivalent
amount of bonds by the Treasury, provided that the
amount of bonds on deposit should not be reduced below
$50,000. The limit was further reduced in 1882, for banks
having a capital of $150,000 or less, to one-fourth of their
capital stock, but limitations were set upon both the retire­
ment and the issue of new circulation. The withdrawal of
currency was not permitted to proceed at the rate of more
than $3,000,000 per month for the entire country, and a
bank reducing circulation was not entitled to receive any
increase for the period of six months from the time it made
a deposit of lawful money, in lieu of the bonds, for the
redemption of outstanding notes.1
The new banking currency was put upon the same depre­
ciated paper basis as the bonds and legal tender notes of the
government. It could not have circulated otherwise in com­
mon with United States notes, for it would have been at a
premium, like gold, or would have been presented to the
banks for redemption in gold for hoarding. The law made
the notes redeemable in “ lawful money/ * Redemption of
this sort was simply the exchange of a note secured by one
government obligation for another, and was of so little value
that the banks were seldom troubled by the presentation of
their notes, although they were required to carry large quan­
*This limitation proved troublesome to a few banks which desired
to take out circulation quickly during the panic of 1893. The limi­
tation upon taking new circulation was repealed by the Act of March
14, 1900, and the limit upon withdrawals was increased to $9,000,000
per month by the Act of March 4, 1907.

tities of legal tenders as a part of their lawful reserve.1 The
banks in Albany, Baltimore, Boston, Cincinnati, Chicago,
Cleveland, Detroit, Louisville, Milwaukee, New Orleans,
New York, Philadelphia, Pittsburg, St. Louis, San Fran­
cisco, and Washington were required to keep a reserve in
lawful money equal to twenty-five per cent, of their aggregate
notes in circulation and deposits. Banks outside of these
“ reserve cities ” were required to keep a reserve of at least
fifteen per cent., but three-fifths of the reserve in these cases
might be deposited with banks in the “ reserve cities.”
Hugh McCulloch was the first Comptroller of the Cur­
rency appointed under the new law, and it is to his ability
and good judgment that much of the success of the new
banking system was due. He had been president of the
admirably managed Bank of the State of Indiana, and went
to Washington in 1862 to oppose the national banking bill.
His opinions underwent a change after the bill was amended
in the following year and became a law, but it was with
some surprise that he received the invitation to become the
head of the new system. He stipulated for absolute control
over the choice of his employees and for permission to re­
sign the place as soon as the system was well organized.
The First National Bank of Philadelphia was the first au­
thorized to begin business, on June 20, 1863. Several other
certificates were issued on the same day, but the Western
banks were generally more prompt to come into the national
system than those of the East. Mr. McCulloch discusses
some of the objections to the new system and the manner in
which he met them, in the following passage of his me­
moirs :

1 It was the distinct proposal of Secretary Chase that the notes
should he payable, “ after resumption, in specie, by the association
which issues them, on demand ; and if not so paid will be redeema­
ble at the Treasury of the United States from the proceeds of the
bonds pledged in security .”—Report on the Finances, 1862, 17. But
this safeguard was not adopted, and the banks continued, long after
resumption by the Treasury, to redeem their notes only in paper



There were four causes for the unwillingness of the State banks to
become national banks.
F irst: The apprehension that the national system might prove to
be a repetition of the free-bank system of the West, which had been a
disreputable failure.
Second: The opinion that in becoming national banks, and issu­
ing notes secured by Government bonds, their interests would be so
identified with the interests of the Government, their credit so de­
pendent upon, so interwoven with, the public credit, that they would
be ruined if the integrity of the Union should not be preserved.
Third : the danger of hostile legislation by Congress, or the annoy­
ances to which they might be exposed by Congressional interference
with their business for partisan purposes.
Fourth: The requirement, that in order to become national banks,
they must relinquish the names to which they had become attached,
and be known by numerals.
I had no great difficulty in satisfying the bankers with whom I had
personal interviews or correspondence that three of these objections
were unsubstantial. In answer to the first, I pointed out the impor­
tant particulars in which the national system differed from the freebank system of the West, in the requirement that the capitals of the
national banks should be real, and fully paid up; that their circula­
tion was to be secured by United States bonds, with ten per cent,
m argin; that in case of the failure of a bank, its notes would be at
once redeemable at the United States Treasury ; that all the banks
would be subjected to frequent examinations by men appointed by
the Treasury Department. In answer to the second, I took the
ground that the interests of the State banks were already so involved
with those of the Government, that the fate of the latter would be the
fate of the former also ; that whether they remained State banks or
became national, they would stand or fall with the Government. In
answer to the third, I expressed the opinion that there was as little
to fear from Congressional as from State legislation; that if there
was trouble to be apprehended in either direction, it would be in the
control which the banks might have over Congress, rather than in
annoying interference by Congress with their legitimate business.
To the fourth I could make no reply. It seemed to me to be unrea­
sonable that the State banks should be required, in order to be con­
verted into national banks, to surrender the names that had been
made honorable by the manner in which their business had been
conducted, and accept for a name, a number.1

1Men and Measures o f H aifa Century, 168, 169.

4 1I
The last point was finally conceded by the Secretary, and
banks were allowed to retain their old names with the pre­
fix “ national.” When this was yielded, says Mr. McCulloch, “ they came into the national system with a rush,—
Boston, as is her wont in all enterprises, taking the lead.”
An Act was passed in 1873 forbidding the use of the word
‘‘ national ’* in the titles of banking institutions not organized
and transacting business under the National Currency Act.
The destruction of the State banks as banks of issue by
taxation was not a component part of the national banking
system at its origin. Secretary Chase, in his first annual
report, suggested the possibility of taxation, in order to
transfer to the government some of the profits of circulation,
and he remarked, in his second annual report for 1862, that
he had ‘‘ heretofore advised the imposing of a moderate tax
on corporate circulation, and now renews the recommenda­
tion as the best means of reduction and gradual substitu­
tion.” The first banking act provided that any State bank
holding United States bonds to the amount of fifty per cent,
of its capital stock might deliver them to the United States
Treasurer and receive circulating notes equal to eighty per
cent, of the face value of the bonds transferred, and that
upon the failure of such a bank the bonds should be declared
forfeited to the United States and the circulating notes should
be redeemed and paid at the United States Treasury. These
provisions for State banks were omitted from the Act of
June 3, 1864, and Comptroller McCulloch, in his annual re­
port for 1864, suggested the query whether “ the time has
not arrived when all these institutions should be compelled
to retire their circulation? ” He stated that he had not felt
like recommending such action ‘‘ as long as there was any
uncertainty in regard to the success of the national banking
system,” and he limited his recommendations to taxation
“ which should be sufficient to effect the object without
being oppressive.” 1 The result was a provision in the
Revenue Act of March 3, 1865, laying a tax of ten per cent.


Report on the Finances, 1864, 54.

per annum upon the circulation of State banks paid out by
them after July i, 1866. This provision, tfierefore, did not
take effect until a year after the practical close of the war,
and was intended to drive the State banks out of competi­
tion with the national system and to enlarge the market for
United States bonds.
There was still in circulation on July 1, 1864, $179,157,717
in State bank-notes and only $31,235,270 in national bank­
notes. The State bank-notes amounted to $142,919,638 on
July 1, 1865, three months after Appomattox, but had been
slightly surpassed by the national bank-notes, which now
amounted to $146,137,860. The arrival of the date for the
enforcement of the ten per cent, tax, a year later, found
$19,996,163 in circulation in State bank-notes and $276,012,713 in national bank-notes. The State bank-notes dwindled
to $4,484,112 a year later, and their last appearance in the
Treasury reports was on July 1, 1876, when the amount was
stated at $1,047,335. The Act levying the ten per cent, tax
was several times revised and was extended in the Act of
March 26, 1867, to every national or State banker paying
out the notes of any town, city, or municipal corporation
after Maj^ 1, 1867.1 The law was finally re-enacted by sec­
tions 19, 20, and 21 of the Act of February 8, 1875, so as to
apply the ten per cent, tax to persons, firms, or corporations
1 The Attorney General, on November 21, 1893, in an opinion re­
garding a clearing house certificate of deposit, declared that the paper
was “ not within the meaning of the statute,” and cited the rule of
law that “ If there is any doubt as to the meaning of the statute impos­
ing this tax the doubt must be resolved in favor of exemption.”—
Official Opinions of the Attorneys General, XX., 682. The Solicitor
of the Treasury gave an opinion on September 28, 1894, in regard to
a proposed issue of county bonds of small denominations for use as a
local currency, “ that no statute of the United States prohibits the
issue of county bonds in any denomination.” He also observed “ that
the word ‘ county’ is not enumerated among the corporations, bank­
ing associations, etc., mentioned in the statute; nor can the word
‘ notes ’ be held to include county bonds.” Both these opinions re­
ferred to the similar language of the Act of February 8, 1875, then in



paying out tlieir own notes or those of any person, firm, or
corporation other than a national banking association.1
Several of the States passed laws to aid the State banks
in organizing under the national system and many of them
made the change during the years 1864 and 1865. The
number of banks organized for the year ending October 31,
1864, was 453 with an aggregate capital of $75^366,950, and
the number organized for the year ending October 31, 1865,
was 1014 with an aggregate capital of $242,542,982. This
was the 3'ear during which the impending levy of the ten per
cent, tax drove nearly all banks desiring to continue their
circulation into the new system. The number of organiza­
tions for the year ending October 31, 1866, was only 62 and
for the next year only 10. The reorganization was accom­
plished with little friction and without arresting the ordinary
business of the banks. The stocks of many of them increased
in value and Comptroller McCulloch declared in 1864 that
he knew “ of no instance in which their real market value
had been injuriously affected.’’ Congress gave a preference
by an Act of March 3, 1865, to State banks not having over
$75,000 of capital in entering the national system, but, in
view of the ten per cent, tax on their notes, it was a rather
humorous observation which was made by Comptroller
Clarke, who succeeded Mr. McCulloch, that “ nearly all of
the State banks voluntarily changed.”
The original limit imposed on the national bank circula­
tion was $300,000,000, and it was provided that $150,000,000
should be apportioned to banks in the States and Territories
according to population and the remainder at the discretion
of the Secretary of the Treasury, with due regard to existing
banking capital, resources, and business. Some conflict
1 These sections refer in every case to “ notes” or “ circulating
notes,’* and Mr. Edward Atkinson of Boston has expressed the con­
viction that they do not impose any tax upon certificates of deposit
given by national, State, or private bankers to their depositors, even
though such certificates might be printed for even amounts and used
for general circulation .—
Journal of Commerce and Commercial Bul­
letin, Monday* July 29, 1895.



resulted between this provision and that giving preference to
the State banks, and the Comptroller permitted the organi­
zation of the latter without limit. No stable State banks
existed in some of the Western States, so that their share
of banking capital was reduced to a minimum, and the diffi­
culty was increased with the restoration of the Southern
States to th^ Union. The Act of July 12, 1870, therefore,
authorized an increase of $54,000,000 in the bank-note circu­
lation, to be apportioned to banks “ in those States and
Territories having less than their proportion, ’* and a new
apportionment was directed to be made as soon as practicable,
based upon the census of 1870. Provision was also made
for withdrawing $25,000,000 of circulation from banks in
States having an excess.
The withdrawal of circulation was found to be difficult,
because the notes did not reach the banks or the Treasury
for redemption. It was only for the interest of the stock­
holders of new banks to compel redemption, by paying a
premium to brokers to sort out notes subject to withdrawal
and send them to the Treasury. The inflation bill vetoed
by President Grant in 1874 contained a provision for adding
$46,000,000 to the bank-note circulation. Congress took a
new tack after the veto, and provided for the withdrawal of
$55,000,000 of circulation from States having an excess and
its issue in States having a deficiency. This Act,—that of
June 20, 1874,—was the first to provide for the voluntary
retirement of circulation by the deposit of lawful money
with the United States Treasurer and the return of the
bonds to the bank. The panic of 1873 and the redundancy
of currency which followed, led to the voluntary retirement
of circulation, so that no requisitions upon the Eastern
banks were required to execute the Act of 1874. The Act
for the resumption of specie payments, approved January
14, 1875, wiped out any specific limitation upon the amount
of national bank-notes and declared that ‘4each existing
banking association may increase its circulating notes in
accordance with existing law without respect to said aggre­
gate limit; and the provisions of law for the withdrawal and



re-distribution of national bank currency among the several
States and Territories are hereby repealed.”
The national banks bore an honorable part in bringing
about the resumption of specie payments. A few bankers
who had extended their speculations beyond legitimate
limits undoubtedly desired to see the rigime of irredeemable
paper perpetuated, but the majority were earnestly in favor
of return to a specie basis. Secretary McCulloch strongly
urged resumption in his first annual report in 1865 and was
authorized by the Act of April 12, 1866, to receive legal
tender notes for bonds and cancel the notes to an amount
not exceeding $10,000,000 in the first six months and
$4,000,000 in any one month thereafter. The maximum price
of gold, which had been 233.75 in 1865, was 167.75 in 1866
and 145.625 in 1867. Secretary McCulloch reduced the out­
standing legal tenders from $422,424,007 on March 31,1866,
to $356,000,000 in February, 1868. The fear of contraction,
stimulated by the reaction from the fever of the war specu­
lation, seized upon Congress and the further retirement of
legal tender notes was forbidden by the Act of February
3, 1868.
The Resumption Act was the outcome of a caucus com­
mittee appointed by the Republicans in December, 1874, to
frame a measure upon which the party could unite. The
previous session had witnessed the passage of the inflation
bill, increasing the limit of legal tender issues to $400,000,000 and authorizing an addition of $46,000,000 to the bank­
note circulation, to be distributed to banks in the West and
South. The bill was vetoed by President Grant and the
inflation fever was checked. The Resumption Act was
hurried through Congress within six weeks after the begin­
ning of the session and was intentionally left in clumsy and
ambiguous shape in order to hold votes. Senator Schurz of
Missouri repeatedlj7 inquired of Senator Sherman, who had
the bill in charge, whether the legal tender notes redeemed
in coin, as proposed by the bill, were to be retired and can­
celled. Mr. Sherman refused to give a definite reply and
Mr. Schurz voted with the Democratic Senators against

the bill.1 Its redeeming feature was the provision for the
resumption of specie payments at the New York subTreasury on January i, 1879, and the issue of bonds to
obtain the necessary coin.
The success of specie resumption depended largely upon
the action of the banks. They held more than $125,000,000
in legal tender notes, of which nearly one-third was in New
York City. A run upon the sub-Treasury for gold by means
of these notes would have quickly compelled a new suspen­
sion of specie payments. The subject of resumption was
discussed by the banks and a committee was appointed to
confer with Secretary Sherman and agree upon a common
course of action to sustain the public credit. The Assistant
Treasurer at New York was invited to become a member of
the Clearing House and balances between the banks and the
Treasury were proposed to be settled through the Clearing
House. The banks voluntarity decided to decline receiving
gold as a special deposit, to abolish special exchanges of
gold checks at the Clearing House, and to receive and pay
balances without discrimination between gold and legal
tender notes. This action dissipated all serious fear of the
success of resumption, and on December 17, 1878, gold sold
at par in the gold room of the New York Stock Exchange.
The banks, in the language of Mr. Bolles, at the beginning
of the war “ parted with their gold to aid the government,
and now, when resumption was accomplished, they were
content to take whatever it desired to give.” 2
It was the policy of the Resumption Act to reduce the
volume of United States legal tender paper at the rate of 80
per cent, of the new national bank-notes issued and to con­
tinue redemption until the legal tenders should be reduced
to $300,000,000. The expectation that the bank currency
would rapidly expand to fill the void left by the retirement
of the legal tenders was not fulfilled. The circulation
1 Mr. Sherman, when Secretary of the Treasury, resolved this doubt
in his annual report for 1877, in favor of re-issuing the notes, but his
opinion was soon deprived of practical importance by the resolution
of May 31, 1878, forbidding the further retirement of legal tender notes.
2Financial History of the United States, III., 301.


secured by bonds reached a maximum of $350,692,966 on
December 1, 1873, and fell rapidly from that time until
November 1, 1876, when the amount was $301,658,372.*
The price of bonds as well as the redundancy of currency
was beginning to exercise the restraining influence on bank­
note circulation which in subsequent years forced it within
a narrow compass. The contraction of the bank-note cir­
culation and the retirement of government currency alarmed
the advocates of an ample money supply and led to the
resolution of May 31, 1878, providing for a second time that it
should not be lawful ‘‘for the Secretary of the Treasury or other
officers under him to cancel or retire any more of the United
States legal tender notes.” The volume of legal tenders in
circulation on the day the Act became law was $346,681,016,
and has remained rigid at this amount since that date,
except for the addition of the Treasury notes issued under
the Sherman law and the temporary retention of notes in the
There was a slight tendency to increase bank-note circula­
tion for a time after the revival of business in 1880,2 but the
increase was sharply arrested in the winter of 1881 by the
passage of a bill requiring the banks to deposit a new issue
The aggregate circulation on the earlier of these dates was $352,and on the later date 1323, 241,308. The difference between
“ secured ” and actual circulation is made up by deposits of lawful
money with the United States Treasurer for the redemption and can­
cellation of notes still outstanding, for which the bonded security has
been withdrawn by the banks. This “ lawful money ” fund is reduced
as fast as the notes are redeemed from it and retired, but the with­
drawal of bonds was so rapid that the amount ran as high as $ 107,588,
447 on July 1 , 1887. The fund stood at $54, 207,975 when the Act of
July 14, 1890, (Section 6) directed that it “ be covered into the Treasury
as a miscellaneous receipt” and that redemptions be made thereafter
from the general cash. The notes outstanding redeemable in lawful
money on September 30, 1908, were $48,639,442.
2One of the causes of the decline in secured circulation, as the date
approached for the resumption of specie payments, was the fact that
the price of the bonds was falling in currency in order to accommo­
date itself to the gold basis. This made it profitable to sell before
the premium disappeared, as the currency obtained for the bonds was
appreciating in value as it approached parity with gold.



of three per cent, refunding bonds as security for circulating
notes. This limitation on the class of bonds was accom­
panied by a drastic provision repealing the authority to
reduce circulation and withdraw bonds. The banks gen­
erally preferred to retain the existing bonds, paying higher
rates of interest, even with the loss of circulation, than to
submit to such a measure, and 141 banks hastened to deposit
$18,764,434 in lawful money for the retirement of their notes
and the withdrawal of their bonds in anticipation of the
enactment of the bill. The measure was vetoed by President
Hayes, but the result upon the secured circulation was to
reduce it from $322,654,721 on February 1, 1881, to $305,587,202 on March 1, 1881. Many of the bonds were de­
posited again after the adjournment of Congress and the
circulation increased to $332,398,922 on January 1, 1882.
A gradual decline, whose results may be observed in the
following table, marked the history of the secured circulation
from 1882 to 1892 :

l8 8 l





487, 781,551
503, 347,901
501, 392,171
485, 557,771
47 I, 60Q,396
461, 557,515
534, 378,265
555, 865,165
584, 726,915
598, 239,065
623, 791,365

695 148,665
693, 353,165






348 624,953
342, 333,837
309, 890,415
328, 773,639
332, 398,922
165, 205,724
146, 372,588
127, 742,440

I90,6 l 6, l 60

350, 848,236
354, 128,250
321, 672,505
323, 791,674
344, 355,203


317 443,454
296 771,981


197 230,405
177 287,846
208, 538,844
206, 513,653



It is obvious that a currency system whose permanent
circulation was reduced to $125,000,000 for a population of
63,000,000, had ceased to serve one of the chief purposes for
which it was created. The causes are to be found in the
rapid payment of the national debt, which reduced the pos­
sible basis for circulation; the high price of bonds, which
reduced the profit on circulation; and the steady stream
of silver money which was pumped into the monetary sys­
tem under the laws of 1878 and 1890, crowding out other
forms of currency. Hostility to the national banks, though
frequently expressed in the southern and western parts of
the country, was a result rather than a cause of their shrink­
ing circulation. There was filibustering in Congress against
the bill to extend their charters, but the fact that their dis­
counts and deposits remained unshaken is the best proof
that the business community never seriously doubted that
the system would survive. The original law gave the banks
corporate powers for twenty years and the new bill proposed
their continuance for another twenty years. Mr. Crapo, of
Massachusetts, who was in charge of the bill in the House,
failed twice to secure consideration, because under the rules
it required a two-thirds vote, but he obtained the necessary
votes on May 1, 1882, and the bill passed the House on
May 17th, by a vote of 125 to 67. It passed the Senate with
amendments on June 226. and became law on July 12th.
The essential cause of diminishing circulation was finan­
cial rather than political and was chiefly found in the grow­
ing wealth and credit of the country. The bonded debt of
the United States shrivelled from $1,639,567,750 on June 30,
1881, to $610,529,120 on June 30, 1891, and the result was
the wiping out of two large bond issues and almost the
extinction of a third. The national banks, which had
$360,488,400 in bonds on deposit to secure circulation at the
earlier date, had only $142,508,900 on deposit at the later
date, although the proportion to the whole remained almost
exactly the same. The price of bonds, as secure gold invest­
ments, rose to such a point that their investment value fell
far below three per cent., and their price was enhanced by



the large purchases by the government in advance of matu­
rity made necessary by the enormous surplus accumulating
in the Treasury. These purchases of bonds at a premium,
exclusive of redemptions at par at maturity, were $51,464,300
for the fiscal year 1888 ; $120,674,450 for the fiscal year 1889 ;
$104,546,750 for the fiscal year 1890; and $45,175,200 for
the fiscal year 1891, after which purchases ceased. The high­
est average price paid by the government for four per cent,
bonds was 128.66 in 1889, when $38,106,400 were purchased.
The lowest average price was 124.23 in 1891, two years
nearer maturity, when $42,641,250 were purchased. 1 These
bonds remained, after the maturity of the four and a half
percent, loan in 1891, the chief source of security for national
bank-note circulation, and their price, including the premium,
could be more profitably loaned in many cases in the open
market than by obtaining ninety per cent, of the par value
of the bonds in circulating notes.2 The clamor of dema­
gogues against the “ double interest” derived from the
circulating notes and the interest on the bonds was less
eloquent of the facts than the steady withdrawal of bonds
because circulation had ceased to be profitable. The increase
in circulation since 1891 has been due to the fall in the
premium on the bonds as they have approached maturity
and to special causes, referred to elsewhere, connected with
the crisis of 1893 and the bond issues of 1894, 1895 and
The effect of the increase of the silver circulation under
the Bland-Allison Act of 1878 and the Sherman compromise
Act of 1890, in driving bank-notes out of existence can only
be roughly estimated. It was probably much less potent

1 These figures are taken from a communication of Secretary Car­
lisle to the Senate, Sept. 26, 1893, in response to a resolution of that
body.—Sen. Ex. Doc. 18, Fifty-third Congress, 1st Sess.
* The recommendation was several times made by the Comptroller
of the Currency, and embodied in bills introduced in Congress, after
the resumption of specie payments, that the banks be authorized to
issue circulation to the face value of the bonds deposited as security,
instead of ninety per cent, of that value; and such a provision was
finally made in the Act of March 14, 1900.



than the rise in the price of bonds, and had more effect in
expelling gold than bank-notes from the circulation. The
Bland Act, which was passed over the veto of President
Hayes on February 28, 1878, authorized the Secretary of
the Treasury to purchase not less than $2,000,000 nor more
than $4,000,000 worth of silver monthly and coin it into
standard silver dollars of 412^ grains each, nine-tenths
fine. Every Secretary of the Treasury confined his purchases
closely to the minimum and the aggregate purchases, until
the act was superseded by the Act of 1890, were 291,272,019
fine ounces, at a cost of $308,279,261, which was coined into
378,166,793 standard silver dollars. The Act of 1890, which
was approved by President Harrison on July 14th, took effect
thirty days after its passage and provided for the monthly
purchase by the Secretary of the Treasury of four and a
half million ounces of silver bullion at the market price,
and the issue of Treasury notes ‘‘ redeemable on demand in
coin,” in payment for the bullion. The purchases under
this act were 168,674,682 fine ounces of silver at a cost of
$ i 55,93i ,o°2. These two measures added to the circula­
tion, therefore, $534,097,795 in currency secured by silver,
although the notes issued under the Act of 1890 are redeemed
in gold, and have been treated in most respects by the gov­
ernment upon the same footing as other United States legal
tender notes. The provision of the Act of 1890 authorizing
purchases of silver bullion was repealed on November 1, 1893,
but the portion repealing the Act of 1878 was left in force,
so that all purchases of silver ceased on that date. The
currency in circulation outside the Treasury on that date
was $1,718,544,682, of which $498,121,679 was stated to be
in gold coin, $78,889,309 in gold certificates, $472,710,610
in the two forms of legal tender notes, $384,443,050 in silver
and silver certificates, and only $197,745,227 in national
bank-notes. The bank-notes formed less than one-eighth
of the circulation, and the $11,566,766 in the Treasury
formed a much smaller proportion of the money there held.
The redemption system established by the national bank­
ing act of June 3, 1864, provided for redemption in lawful

money of the United States at the office of the issuing bank
and at some designated bank in a reserve city. The banks
of the reserve cities were required to have a redemption agent
in New York. The fact that the notes could be redeemed
only in government paper money, which was of no greater
value than the notes, prevented any general movement for
redemption and gradually filled the channels of circulation
with worn and mutilated currency. The notes of the banks
distant from the reserve cities drifted only slowly into the
redemption agencies and they were rarely sent at the expense
of the bank which received them to the issuing bank for
redemption. Several propositions were made to enforce
prompt redemption, but nothing was enacted into law until
1874. The banks were required by an act of that year to
pay into the Treasury of the United States a fund equal to
five per cent, of their circulation, which was to be constantly
kept good, for the redemption of mutilated notes. Mutilated
notes received by any of the banks or the sub-Treasuries
were to be sent to Washington for redemption and the
expenses of the entire redemption agency and of the trans­
portation of the notes were charged against the banks and
then taken from the five per cent. fund.
Redemptions under the new system have been sufficiently
rapid to withdraw notes which are badly worn, but have not
been rapid enough to give elasticity to the volume of the
currency. Where redemptions under the Suffolk system,
with a circulation of $40,000,000, were $400,000,000 per year,
redemptions under the national system were never higher,
down to June 30, 1907, than 65.84 per cent, of average
circulation for the year, and were often below 40 per cent.
The maximum proportion was attained in 1905, when re­
demptions were $308,298,760 with an average circulation of
$468,285,475, but the proportion of redemptions fell in 1906
to 55 07, and in 1907 to 40.77 per cent. Annual redemptions
under the Suffolk system, therefore, were ten times the cir­
culation, while those under the national system have been
less than one-half of the circulation. Economy of manage­
ment was greatly in favor of the Suffolk system. For the



fiscal year 1907, under the national system, with an average
circulation of $589,445,599, and redemptions of $240,314,681,
the charges, exclusive of transportation, were $160,549, or
at the rate of about 67 cents per $1000. This rate, while
much lower than the charges for earlier years, compares with a
charge per $1000 under the Suffolk system of about ten cents.1
The original banking act authorized the Comptroller of
the Currency to appoint suitable persons to make examina­
tions of the affairs of the banks at such times as the Comp­
troller thought proper and to make a full report to him.
These officials were to be paid by the banks, but the expense
was a charge levied by the Comptroller, and fixed by him,
so that it did not make the examiner in any way subservient
to the bank. Examinations were originally made on an
average of about once a year, and other information was ob­
tained by the Comptroller from four reports of condition re­
quired during the year, not at the end of each quarter, but
at such dates as he saw fit to designate. The frequency of
these reports was increased in 1870 to five per year, and the
examinations were gradually made more severe as defects in
the existing system were disclosed. The same person made
all the examinations within a given district until the spring
of 1893, when Comptroller Eckels adopted the plan of shift­
ing the examiners of adjoining districts from time to time
and of making two examinations during the year instead of
one. The original purpose of the system of examination
was the protection of the government and of the stockhold­
ers against palpable fraud, and was not intended to remit in
any degree the vigilance of the directors of the banks. The
public came by degrees to look more and more to the gov­
ernment examinations for the assurance of the soundness 01
the banks, and the system has become one of the most im­
portant and characteristic features of American banking.
The rapid expansion of the banking business of the coun­
try is indicated in the following table, showing the number
1 Report on the Finances, 1907, 235- 37. Total cost of redemptions
from 1874 to 1907 was $5,695,609, which included transportation
charges of about $2, 100,000.

1T O R Y

O F M O D E R N B A N K 'S O F IS S U E .

natioi banks, with discounts and individual deposits1:
































8l 8,996, 3II

166 448,718
500 650,109




§ 10,666,095



the Co
first d





1 169 177,557

,, ,,

1 230 456,213

, ,

1 234 202,226


, ,

1 583 941,484

1 ,932 , 393,206

, ,
, ,

2 001 032,625
2 166 615,720


90 I , l 6 0 , I I 0

, ,
4,463. 267,629
4 . 585 , 337,094
4, 840, 367,677
2 100 350,318



568, 530,934
546, 236,881
507, 368,618
596, 586,487
598, 114,679
540, 510,602
682, 846,607
618, 517,245
604, 512,514
19 450,492
183 479,636
522 507,829
558 699,768

643 , 337,745

, ,

1 006 452,852

, ,
1 106 453,008
987 649,055


, ,
1 ,602,052,766
1 436 402,685






1 695 489,346
1 720 550,241
1 639 688,393
1 916 630,252
2 225 269,813
2 380 610,361
2 623 997,521

3 ,T59 , 535 , 59 i

3 300 619,898
3 612 499,598
4 088 420,135
4 115 650,294
4 105 814,418
4 720 284,640

gures are taken from the reports of condition called for
ptroller, and the dates are those of the reports nearest to
of the year for which they are given.



The suspension of purchases of silver bullion and the issue
of circulating notes under the Sherman law left the United
States, in view of the limitations of the national bank-note
circulation, without any means of materially increasing
their currency. The importance of a currency system more
adapted to commercial needs, and capable of greater expan­
sion in the South and West, was under discussion among
Democratic leaders for several years before the panic of 1893
and began to assume definite shape during the discussion 011
the repeal of the Sherman law. It was believed by many
that the clamor for the free coinage of silver was largely
stimulated by the lack of an elastic circulating medium in
the newer sections of the country and that this clamor
would end, except in the small silver-producing States, if
such a medium were provided. The democratic national
platform, adopted at Chicago, June 21, 1892, contained the
declaration, “ We recommend that the prohibitory ten per
cent, tax on State bank issues be repealed.” This declara­
tion was not interpreted by conservative members of the
party in the North as a declaration for unconditional repeal,
and when that question was submitted to the House of
Representatives on June 6, 1894, it was rejected by a vote
of 102 in the affirmative and 172 in the negative, the nega­
tive vote including 74 Democrats, nearly all from the Northern
The necessity of some new banking legislation was strongly
urged upon President Cleveland by Representative Oates of
Alabama and other prominent members of Congress while
the repeal of the Sherman law and the tariff bill were pend­
ing. The President spoke in an encouraging manner of
the necessity of currency reform, but he refrained from com­
plicating the other issues before Congress by any specific
recommendations until the meeting of the short session on
December 3, 1894. The dissatisfaction with the system of
note issues authorized by the national banking law and the
belief that a different system must be substituted had been
steadily growing, and the adoption of a new system was
advocated by many of the most influential bankers of New



York and Boston. A convention of bankers at Baltimore
on October 18, 1894, declared in favor of permitting the
issue of circulating notes by existing national banks up to
the amount of 50 per cent, of their paid-up capital, secured
by general assets and by a guarantee fund deposited by the
banks with the United States Treasurer. This guarantee
fund was to be paid into the Treasury to the amount of two
per cent, of the circulation of the banks the first year and
thereafter at the rate of one-half of one per cent, per year until
the entire amount was five per cent, of the outstanding circula­
tion, and the government was to have a first lien upon all the
assets of a failed bank, in order to ensure the redemption of
the notes to the holders. An emergency circulation was also
authorized to the amount of 25 per cent, of the capital, sub­
ject to a heavy tax upon the average amount outstanding for
the year. The exact rate of this “ heavy tax” was not
specified, but its purpose was to compel the retirement of the
“ emergency circulation ’’ when the demand for money was
not acute enough to justify a high rate of interest.
Manifestations like these paved the way for the formal
presentation of the subject to Congress in the message of
President Cleveland and the annual report of Secretary
Carlisle. The President urged in emphatic language the
necessity of radical currency reform, but he left the exposi­
tion of the details to his minister of finance. The need of
action was emphasized by the large exports of gold and the
continuous pressure of the redundant paper upon the dwind­
ling gold reserve. The proposals of Secretary Carlisle for
currency reform may be summarized in their important feat­
ures as follows:
1. Repeal all laws requiring, or authorizing, the deposit
of United States bonds as security for circulation.
2. Permit national banks to issue notes to an amount not
exceeding seventy-five per centum of their paid-up and un­
impaired capital, but require each bank before receiving
notes to deposit a guarantee fund consisting of United States
legal-tender notes to the amount of thirty per centum upon
the amount of notes applied for.


3. Provide that the circulating notes shall constitute a
first lien upon all assets of the issuing bank.
4. Provide a safety fund by taxation upon the banks for
the immediate redemption of the circulating notes of failed
banks and require the legal-tender guarantee fund of a bank
which fails to be paid into the safety fund, the safety fund to
be invested in United States bonds.
5. The Secretary of the Treasury may, in his discretion,
use any surplus revenue of the United States in the redemp­
tion and retirement of United States legal-tender notes, but
such redemptions shall not exceed an amount equal to
seventy per cent, of the additional circulation taken out by
national and State banks.
6. Suspend the ten per cent, tax on the circulation of
banks duly organized under the laws of any State, transact­
ing no other than a banking business, and complying with
the second and third provisions. The guarantee fund in
United States legal-tender notes was to be permitted to be
kept by the State banks in their own custody, but must at
all times equal thirty per cent, of the outstanding circulation.
Mr. Carlisle’s bill was reported to the House with some
amendments, but political divisions prevented its enactment.
The fact that the Fifty-fourth Congress, which met on
December 2, 1895, contained majorities politically hostile to
President Cleveland, prevented action during the remainder
of his term upon any plan of currency reform which might
bear the stamp of an administration measure. The President
confined himself to recommending measures for maintain­
ing the gold reserve and protecting public credit. Secretary
Carlisle simply renewed the recommendations, repeatedly
made in former years by the Comptroller of the Currency,
that the banks be given greater freedom of note issue by
permiSvSion to issue circulation to the par value of the bonds
deposited as security, and that the tax on circulation be re­
duced from one-half to one-quarter of one per cent, annually.
He pointed out that until 1883 there was a tax upon the
capital and deposits of national banks, as well as a tax upon
their circulation, and that from all these sources the govern­



ment received up to the close of the fiscal year 1895 the sum
of $146,902,962. From the tax on circulation alone the
receipts amounted to $78,107,006, while the total estimated
expenses of supervision, including salaries of officials, had
been only $15,636,976. The average annual cost of super­
vision, declared the Secretary, “ has been $473,848, while a
tax of one-fourth of one per cent, on the average annual
circulation would have yielded $680,294/ ’ The Secretary
also stated that *4The gain to the government on account of
national bank-notes lost or destroyed, and which are con­
sequently, never presented for redemption, is estimated to be
two-fifths of one per cent, upon the total amount issued, and
has, according to this estimate, amounted to the sum of
$2,805,715.” 1
The necessity for banking legislation which should give
greater flexibility to the note-issuing system, and protection
to the Treasury, had continued to be urged by far-sighted

1 The amount of paper currency lost or destroyed and never pre­
sented for redemption is much smaller than is popularly believed.
No exact figures have ever been obtained, because notes of the oldest
issues are occasionally received for redemption, and even an approxi­
mate estimate can be made only upon issues of many years standing.
No calculation based upon such issues has shown a laiger average
loss, except upon the small fractional currency, than one per cent,
and Secretary Carlisle’s estimate of two-fifths of one per cent, is
probably not too small. The percentage applies, however, to the
entire issues rather than to the net amount in circulation at any one
time. The entire issues of United States notes up to the close of the
fiscal year 1895 were $2,725,981,808, and two-fifths of one per cent, of
this amount would be about $10,000,000. The total issues of national
bank-notes to October 31, 1895, were $1,906,918,995, and the propor­
tion of estimated loss would be about $7,500,000. This loss, however,
will not be realized until all the recent issues have been many years
outstanding, which accounts for the variation from the estimate of
Mr. Carlisle. One of the proofs of the small percentage of loss upon
paper currency is furnished by the old demand notes, of which
$60,030,000 were issued and only $54,847, or less than one-tenth of
one per cent., were outstanding on June 30,1895. These notes, how­
ever, having been received for customs in common with gold, did not
remain so long in circulation as some other forms of paper currency.
Of $1 and $2 notes in circulation in Canada on June 3, 1871, less than
one per cent, were outstanding in 1894.—Breckenridge, 337.



financiers long after the effects of the crisis of 1893 had
passed away. The banking question was overshadowed,
however, in 1896, by the determined effort of Southern and
Western Democrats and of the silver-mining interests to se­
cure free coinage of silver. Against stubborn resistance in
the East and a sharp contest in the Southern States, the
silver element secured a majority of the delegates to the
Democratic National Convention and adopted a resolution
demanding “ the free and unlimited coinage of both silver
and gold, at the present legal ratio of 16 to 1, without wait­
ing for the aid or consent of any other nation.” Upon this
platform Mr. William J. Bryan was nominated for President,
and Mr. Arthur Sewall of Maine for Vice-President. A
large number of delegates from the East refused to be bound
by the declaration for free silver and subsequently, in Sep­
tember, 1896, with other Democrats who were opposed to
free coinage of silver, held a convention at Indianapolis,
which was notable for the presence of a majority of the his­
toric leaders of the party in many of the States. This con­
vention nominated Palmer and Buckner.
The Republican candidates were William McKinley of
Ohio and Garret A. Hobart of New Jersey. It was doubtful
up to the last moment before the meeting of the Republican
Convention how positive would be the Republican indorse­
ment of the gold standard, but ultimately the committee on
resolutions agreed upon a declaration, which was accepted
by the convention, that, until an international bimetallic
agreement was attainable, the 4*existing gold standard must
be preserved.” Upon this platform the Republican candi­
dates were elected, having an immense popular majority
east of the Ohio River and north of the Potomac, but a large
adverse majority in the remaining States taken as a whole.
The election of Mr. McKinley as President did not check
the demand for radical reform in the monetary and banking
system. This demand dealt with three branches of the sub­
ject—the affirmation of the gold standard, the retirement of
the government notes, and the adoption of a more flexible
bank-note currency. In order to crystallize the sentiment



of the business community, a movement was inaugurated
in Indianapolis to call a general convention of representatives
of chambers of commerce and other commercial bodies to
deal with the subject. The chief mover in this step was Mr.
Hugh H. Hanna of Indianapolis, and he became chairman
of the executive committee which was charged with carrying
out the purposes of the convention. A large convention was
held in Indianapolis in January, 1897, which authorized the
executive committee to appoint a monetary commission to
deal with the subject, if such a commission was not appointed
during the existing session of Congress. President McKinley
sent to Congress a message recommending the appointment
of a commission, but it was not acted upon. Thereupon
the Indianapolis executive committee appointed a commis­
sion of citizens, composed of T. G. Bush, of Alabama; W.
B. Dean, of Minnesota; ex-Senator George F. Edmunds, of
Vermont; Charles S. Fairchild, of New York, formerly
Secretary of the Treasury ; Stuyvesant Fish, of New York,
President of the Illinois Central Railroad; J. W. Fries, of
North Carolina ; Louis A. Garnet, of California, formerly
Director of the Mint; Professor J. Laurence Laughlin, Pro­
fessor of Political Economy at the University of Chicago;
George E. Leighton, of Missouri; C. Stuart Patterson, of
Pennsylvania ; and Judge Robert S. Taylor, of Indiana.
This commission completed its report in December, 1897.
A comprehensive plan was presented for dealing with each
of the three essential elements of the problem. Gold was
made the standard, all obligations of the United States were
made payable in gold, and to carry out these declarations a
separate division was created in the Treasury to be called
the Division of Issue and Redemption, which was to be the
custodian of the gold reserve. It was provided that the re­
serve should be maintained at twenty-five per cent, of the ag­
gregate amount of United States notes and Treasury notes,
then amounting to about $453,000,000, and also at five per
cent, of the outstanding silver dollars, then amounting to
$455,000,000. In order gradually to retire the government
paper, it was provided that United States notes and Treasury



notes should be cancelled at once to the amount of $50,000,000, and afterwards in such further amounts as should .
not exceed the increase in national bank-note circulation.
The reform of the bank-note currency was provided for
upon a graduated scale extending over nine years. The
amount of bonds to be required to secure bank-notes was
reduced to twenty-five per cent, of the capital of a bank, and
at the end of five years this requirement was to be reduced by
one-fifth annually. Thus circulation was gradually to be re­
lieved from its relation to the bonds, but it was to be protected
in the case of failed banks by a guaranty fund, made up at
first of a deposit in gold coin of five per cent, of the amount
of all notes issued and afterwards maintained by a graduated
tax on circulation. This tax was not to be imposed, except
at a nominal rate, upon notes up to sixty per cent, of banking
capital, but was to be at the rate of two per cent, upon the
next twenty per cent, of notes, and six per cent, upon notes
in excess of eighty per cent, of capital.1
A bill carrying out this plan was introduced in Congress
and was the basis of a measure reported by Representative
McCleary of Minnesota in June, 1898. A petition to the
Speaker of the House, asking consideration of this measure,
was signed by 146 of the 206 Republican members of the
House; but it was late in the session when this stage was
reached, and upon the promise of President McKinley that
the subject should be taken up with the party leaders at the
following session of Congress in December, further effort to
secure action was postponed until that time.2 A Republican
1Preliminary Report of the Monetary Commission, 49-58. This re­
port was also printed substantially in full in Sound Currency, Jan­
uary 1,1898, V., 1-16. The work of the Commission was explained in
an article by Mr. Fairchild, one of its members, in the North American
Review, for February 1, 1898; also reprinted in Sound Currency
February 1, 1898, V., 25-32.
2 It is declared by Mr. Hepburn that “ The Spanish War, which oc­
curred at this time (1898), united the patriotic support of the country
in favor of the administration. Republicans no longer entertained
any doubt of McKinley’s re-election and assumed a bolder attitude
in favor of the gold standard.”— The Contestfor Sound Money, 400.



caucus of members of the House, held in February, 1899,
authorized the appointment of a committee by its chairman
to frame a measure before the meeting of the next Congress in
December, 1899. This committee met at Atlantic City in
April, while the Republican members of the Senate Committee
on Finance met during the summer, and each presented a
measure early in the following session. In the House the
caucus bill was passed on December 18th by a vote of 190 to
150. In the Senate action was somewhat more deliberate,
but a measure was passed on February 15, 1900, by a vote
of 46 to 29. A conference was held on the differences be­
tween the two measures, and out of this conference emerged
the Gold Standard Act of March 14, 1900.
The Act of 1900 did not essentially change the basis of
the bank-note currency and did not provide for retiring the
government notes. In establishing the gold standard, how­
ever, and providing for its maintenance, it followed in the
main the lines laid down by the Indianapolis Commission,
except that it failed to provide for the redemption of standard
silver dollars in gold. A Division of Issue and Redemp­
tion was established in the Treasury, in accordance with the
Indianapolis plan. The gold reserve was definitely fixed at
$150,000,000, and was to be maintained, if necessary, by the
sale of three per cent, gold bonds. All the bonded obliga­
tions of the United States were made payable in gold. Lim­
itations were imposed upon the denominations of paper
currency, with a view to converting silver certificates into
denominations below $10, and the greenbacks into notes for
$10 and higher denominations, leaving the minimum denom­
inations of gold certificates, as under previous law, at $20.1
1The great demand for small notes arising in the period of business
expansion which culminated in 1907 led to a modification of these
provisions, by which the minimum denomination of gold certificates
was reduced to $10 and authority was given to the Secretary of the
Treasury, whenever he deemed the supply of small silver certificates
insufficient, to issue United States notes of the denominations of $1,
$2, and $5 in substitution for larger denominations to be cancelled.—
Act of March 4, 1907, Sec. 2.


Some important changes were made in the banking law,
but they were not of the character desired by the Indian­
apolis Commission. They tended rather to perpetuate and
encourage the existing system of bond-secured circulation
by providing for converting all the old types of bonds, ex­
cept the four per cents, of 1925, into a new issue running
for thirty years and paying only two per cent. The effect of
this provision was to increase the circulation obtainable upon
a given investment in bonds, because a larger amount in two
per cents, could be obtained than in bonds selling at a higher
premium. Another provision directed to the same end was
that the tax on notes secured by two per cent, bonds should
be one-half of one per cent, per annum, instead of one per
cent. Still another step designed to perpetuate the bond
secured circulation by making it more attractive to the banks
was to allow notes to be issued to the par value of the bonds
deposited instead of to only ninety per cent, of par.
Under the stimulus of these provisions of law a new di­
rection was given to the movement of the national bank­
note circulation. It had shown a declining tendency prior
to 1892, which was checked to only a moderate degree in
the next few years by the demand for currency and by the
issue of several new classes of bonds. The bank-note cir­
culation stood on March 1, 1900, shortly before the passage
of the new law, at $249,516,227. With the advantages af­
forded by the two per cent, bonds, the reduction in taxation,
and the privilege of issuing to par, circulation increased by
about $90,000,000 before the close of the year 1900. The
increase was less rapid for a time, but again attained momen­
tum in 1903, and went on almost without interruption, until
the reaction in the spring of 1908 from the panic of 1907.
Old bonds were exchanged rapidly for the new two per cents,
and there was a steady tendency on the part of national banks
to draw bonds from the hands of private investors because
of the small return paid upon them.1
1The interest-bearing debt outstanding on October 31, 1907, was
$858,685,510, and of this amount $676,250,150 was in two per cent.
bonds. Of the latter $549,788,930 was deposited with the Treasury



Another important feature of the act of 1900, which con­
tributed in some degree to increase the new circulation, but
still more to increase the number of national banks, was the
reduction of the minimum capital required to create a na­
tional bank from $50,000 to $25,000. Many state banking
institutions availed themselves of this provision to enter
the national S5'Stem. From March 14, 1900, to October 31,
1907, the number of banks admitted to the national
system with a capital of less than $50,000 was 2389, with
total capital issues of $62,312,500; but of these only 1365 were
primary organizations, with total capital of $35,105,500, the
remainder being conversions and reorganizations of state and
private banks.1
The increase in circulation was stimulated to some extent
by the issue of three per cent, bonds in 1898 to the amount
of $198,792,660 to meet the expenses of war with Spain ; but
these issues had been out only about a year and a half when
the act of March 14, 1900, permitted their conversion into
two percents. By an act of June 28, 1902, Congress author­
ized the issue of $130,000,000 two per cent, bonds for the con­
struction of the Panama Canal, and of these $30,000,000
was issued in July 1906, and $24,088,040 in December, 1907.
These increases in the public debt were offset by the redemp­
tion of maturing four per cent, bonds in 1907 to the amount
of about $61,000,000; but the fact that the bulk of the debt
was now in the form of two per cent, obligations made the
banks the chief holders of the bonds and promoted the upward
movement of note circulation. The influence of all these
factors—increase in the debt, conversion of old debt into two
to secure note circulation and $78,424,350 to secure deposits of public
money in the banks.—Annual Report of the Comptroller for 1907,17.
1 Annual Report of the Comptroller of the Currency for 1907, 30.
Incorporations with capital less than $50,000 rose by July 31, 1908, to
2557, with total capital of $66,610,500. A classification made May 14,
1908, when the number of these incorporations was 2508, with capital
of $65,360,500, showed the number of banks in operation with capital
below $50,000 to be only 2137, with aggregate capital of $57,613,164.
The difference was due largely to increases of capital by small banks.



per cent, bonds, more favorable conditions for issuing circula­
tion, and facility for creating small banks—may be traced in
the following table of national banking progress from 1896 :
3 i1896


Two per
cent, bonds
Circulation. to secure
3.679 $658,304,915
909, 274,775
7,218 1,015,897,135
739, 165,313
7,33 i 1,032,632,135
7,428 1,053,670,435
7,5 i 4 1,068,534,175

The total assets of the national banking system rose on
Tanuary 13, 1914, to $11,296,355,138, of which loans and
discounts constituted $6,175,404,961; security holdings,
$1,020,494,711; specie, $780,490,209; legal-tender notes,
$201,429,211; bonds of all classes to secure circulation,
$736,600,910. Individual deposits were $6,072,064,752;
and circulation was $725,326,161.
While the Gold Standard Act of 1900 marked an impor­
tant stage in the financial progress of the United States, it
did not meet the desires of the Indianapolis Convention nor
of financial experts generally in giving elasticity to the bank­
note circulation. The great prosperity of the country, how­
ever, for the next few years, and the increase in the mone­
tary circulation by the influx of gold, detracted somewhat



from the interest felt by business men in securing a change
of law. The estimated gold stock, which was only $597,927,254 at the close of 1895, reached $1,419,943,124 at the
close of 1905, and the amount of gold in the Treasury in­
creased during the same period from $113,198,707 to $765,775,099. This was held largely against gold certificates in
circulation, which increased from $50,099,889 on December
31, 1895, to $527,493,869 on December 31, 1905, and subse­
quently to $767,005,869 on December 31, 1907. Pressure
continued to be felt every autumn in the movement of the
crops, but was relieved for several years by measures of
somewhat doubtful legality or policy adopted by Mr. Shaw,
who was Secretary of the Treasury from 1902 to March, 1907.
Among the measures which had frequently been resorted to
on previous occasions was the deposit of public money in
national banks. Mr. Shaw increased the number of such
depositaries from 468 on February 1,1902, to 1106 on Novem­
ber 1, 1906, and increased deposits during the same period
from $106,629,952 to $148,975,346/
The novel features of Secretary Shaw’s policies were the
acceptance of bonds other than United States bonds as se­
curity for deposits of public money ; exemption of the banks
from maintaining against public money the legal reserves
required against other deposits; the transfer to the banks of
public money which had already been received into the
Treasury ; deposits of public money with banks in anticipa­
tion of gold imports; and frequent modifications of his rul­
ings so as to modify the volume of bank circulation and of
public deposits as he deemed best. Several of these measures,
especially the first and second, were severely criticised upon
legal grounds, and the Secretary himself justified them upon
the ground that in 1902, “ but for what was then done, a
1 Finance Report, 1906, 36. The number of such depositaries was
further increased by Secretary Cortelyou in 1907 to 1421, but this
was under a mandate of the act of March 4, 1907, “ That the Sec­
retary of the Treasury shall distribute the deposits herein provided
for, as far as practicable, equitably between the different States and



panic would have ensued rivalling in severity any in our
history.” 1 The New York Clearing House banks refused
to accept immunity from reserve requirements, and the policy
of deposit of public money in the banks against engage­
ments of gold for import, which was first adopted in 1906,
was deliberately abandoned by Secretary Cortelyouin 1907.2
All these difficulties in the administration of existing law
afforded accumulating proof of the necessity for radical
changes in the American monetary system. Surplus reserves
in the New York banks, which were impaired but once from
the panic of 1893 to the autumn of 1902, fell below the legal
requirement in September of that year, and again twice in
1905 and four times in 1906.3 When finally, in the autumn
of 1905, rates for call money in New York rose on one occa­
sion as high as 125 per cent., the deficiencies of the existing
system were again brought into such prominent relief that it
was generally felt that the time had come for action. Mr.
Jacob H. Schiff, a well-known international banker, took the
lead in endeavoring to secure new legislation by the pre­
sentation of a resolution to the New York Chamber of Com­
merce, which was adopted in December, 1905, providing for
the appointment of a special committee of the Chamber to
frame a currency measure. This committee, after consulting
with the heads of leading foreign banks, made a report which
was adopted by the Chamber of Commerce, November 1,
The creation of a central bank of issue was recommended
by the Chamber of Commerce committee. It was proposed
1 Finance Report, 1906, 37.
8 In his response to the Senate in regard to his policy during the
panic, Mr. Cortelyou said, “ The Secretary did not feel called upon at
any stage of the crisis to interfere directly with the normal movement
of gold between international markets.” Sen. Doc. 208, 60th Congress,
1st Session, 13. Andrew declares that the policy adopted by Mr.
Shaw “ was an objectionable interference with the free movement of
gold reminiscent of mercantilist measures of the seventeenth cen­
tury.”—“ The Treasury and the Banks under Secretary Shaw,” in
Quarterly Journal of Economics, August, 1907, XXI., 547.
3 Andrew, idem., 561*



that such a bank should be under the direct control of a
Board of Governors appointed, at least in part, by the
President of the United States and that it should perform
some of the functions imposed under existing law upon the
United States Treasury. The argument for such an institu­
tion was summed up as follows: 1
The operations of central banks in Europe, especially in France,
Germany, Austria-Hungary, and the Netherlands, make it impossible
to doubt that the existence of such a bank in this country would be
of incalculable benefit to our financial and business interests. Such
a bank in times of stress or emergency would be able by regulation
of its note issues to prevent those sudden and great fluctuations in
rates of interest which have in the past proved so disastrous. Further­
more, it would have the power to curb dangerous tendencies to
speculation and undue expansion, for by the control of its rate of
interest and of its issues of notes it would be able to exert great
influence upon the money market and upon public opinion. Such
power is not now possessed by any institution in the United States.
Under our present system of independent banks, there is no centraliza­
tion of financial responsibility, so that in times of dangerous over­
expansion no united effort can be made to impose a check which will
prevent reaction and depression. This is what a large central bank
would be in a position to do most effectively. A central note-issuing
bank would supply an elastic currency varying automatically with
the needs of the country. This currency could never be in excess,
for notes not needed by the country would be presented for deposit
or redemption.

In view, however, of the political hostility supposed to
exist against a central bank, an alternative plan was suggested
for giving greater flexibility to the circulation of the national
banks. It was proposed that any bank having fifty per
cent, of its capital invested in United States bonds, against
which it had circulation, could issue additional circulation
in certain fixed proportions to capital, subject to a graduated
rate of taxation. In the case of a bank with a capital of
$100,000, the circulation authorized under the plan proposed
would be as follows :
1The Currency: Report of the Special Committee of the Chamber
of Commerce of the State of New York, 9.



$50,ocx) in notes secured by bonds, taxed one-half of 1 per cent.
$5,000 upon general assets, taxed 2 per cent.
$5,000 upon general assets, taxed 3 per cent.
$5,000 upon general assets, taxed 4 per cent.
$10,000 upon general assets, taxed 5 per cent.
$10,000 upon general assets, taxed 6 per cent.

The maximum circulation authorized under this plan was
estimated at the time of the report at $289,000,000, but this
was based upon the ability of each bank to issue the full
amount and upon limitation of the bond circulation in each
case to fifty per cent, of capital, since the provision of exist­
ing law was retained, that total circulation should not in any
case exceed capital.1
It was proposed that all the notes issued by a bank should
be of the same form and that future issues of United States
bonds should not be made available as a basis for the issue
of bank-notes. The proposed issue was to be protected in a
manner similar to that proposed by the Indianapolis plan—
the creation of a guaranty fund from the proceeds of taxa­
tion. It was also proposed that, in order to secure the
prompt redemption of notes, when no longer required in the
channels of trade, redemption agencies should be established
at sub-treasuries and other convenient points.
The adoption of the report by the Chamber of Commerce
was preceded by a few days by action at the annual conven­
tion of the American Bankers’ Association at St. Louis.
This convention adopted a resolution authorizing a committee
of fifteen members to frame a currency measure and to con­
sult with representatives of the committee of the Chamber of
Commerce. A smaller committee, headed by Mr. John L.
1 The maximum taxed up to four per cent, would be, under the
Chamber of Commerce plan, only about $124,000,000. The amounts
authorized under the bankers’ plan, presently referred to, were about
$206,500,000 under a tax of two and a half per cent., and $103,250,000
taxed five per cent. Vide article by the present writer, “ The Plans
for Currency Reform,” in New York Bankers' Magazine (December,
1906), LXXIII., 897, seq.



Hamilton, president of the Bankers* Association during
1906, had prepared a plan, which was presented to the
convention, but it was deemed best to secure harmony by
consultation among those interested in different plans, and
all of the members of the Hamilton committee were in­
cluded in the membership of the enlarged committee of
This committee met prompt^ in Washington in Novem­
ber, 1906, with the Hon. A. Barton Hepburn, president of
the Chase National Bank of New York, as chairman. A
plan was prepared which did not differ in principle from the
plan of the New York Chamber of Commerce, but changed
the basis of circulation so that a national bank might issue
an amount of notes without bond security to the amount of
forty per cent, of its bond-secured circulation, but not exceed­
ing twenty-five per cent, of its capital. These notes were to
be taxed at the rate of two and a half per cent, per annum.
An additional issue was provided for, in order to meet more
acute emergencies, to the amount of twelve and a half per
cent, of capital, subject to tax at the rate of five per cent.
This measure was introduced into Congress and was made
the basis of a bill reported favorably by the Hon. Charles N.
Fowler, chairman of the House Committee on Banking,
who had long taken a leading part in the agitation for an
improved currency system. This bill did not receive con­
sideration, however, during the session which ended on
March 4, 1907. At the annual convention of the Bankers*
Association held at Atlantic City in September, 1907, the
report of this committee was indorsed by a large majority
and the committee was continued, with power to adopt such
measures to secure legislation as it might approve.
Inevitably the serious conditions of the crisis of 1907
intensified the demand for reform. The demonstrated de­
fects of the s}^stem of banking isolation led to more serious
consideration than for many years of the project of a central
bank. Such an institution was recommended by Mr.
Ridgely, the Comptroller of the Currency, in his annual
report to Congress, and received endorsement in other influ­



ential quarters. Party leaders did not believe, however, that
public opinion was yet ripe for such a measure. In the
Senate the Finance Committee reported favorably a bill
introduced by Senator Aldrich of Rhode Island, extending
the system of a bond-secured note issue. This bill, as
reported, proposed to allow issues to a maximum amount of
$500,000,000, secured by the deposit in the Treasury of State,
municipal and railway bonds conforming to certain require­
ments.1 Such issues were to be taxed, however, at the rate
of six per cent., which provision, in view of reserve require­
ments, would make them unprofitable unless interest rates
went above eight per cent.
In the House a measure of a very different character was
introduced by the Hon. Charles N. Fowler, Chairman of the
Committee on Banking, and was ordered favorably reported,
with some amendments, on February 28, 1908. This meas­
ure provided for issues of notes on the general credit of
national banks to the amount of their capital and the retire­
ment of notes issued under the bond-secured system ; but, in
order to afford adequate assurance of safety, banks were re­
quired to contribute five per cent, of both note issues and
deposits to a guaranty fund, which was to ensure the prompt
payment of the deposits as well as the notes of a failed bank.
Notes issued under the measure were to be taxed at the rate
of two per cent, per annum, and were to be made responsive
to the changing demands of business by the creation of
twenty redemption districts. A motive for careful scrutiny
of each bank by the others in a redemption district was
created by imposing one quarter of the losses, in case of
failure, upon the banks of the redemption district, before
recourse to the guaranty fund ; a means of making such
scrutiny effective was afforded by the creation of committees
elected by the bankers themselves in each redemption dis­
trict with full power of visitation and examination. The
1The authority to issue notes on railway bonds was abandoned as
a part of the bill by an announcement made by Senator Aldrich on
March 17, 1908.

two per cent, bonds were to be purchased for the guaranty
fund, in order to leave the field clear for the issue of securi­
ties at a rate of interest better adapted to keep them at par in
the open market in case of war or other emergency. Pro­
vision was also made for the gradual retirement of United
States notes from the surplus earnings of the guaranty fund.
The bill of Senator Aldrich passed the Senate late in
March, but found so little favor with the House Committee
011 Banking, to which it was referred, that it was not re­
ported back to the House. Republican leaders in that body
felt that some measure should be passed which would afford
a safeguard against another suspension of currency payments
in time of stress by providing for a simple form of emer­
gency circulation. So strong, however, was the opposition
among commercial bodies to the perpetuation of the system
of basing note issues upon long-term obligations, instead
of upon the current business of the country, that a bill was
introduced in the House by Representative Vreeland of New
York seeking to meet this objection in part. This bill pro­
vided for the creation of associations in clearing house dis­
tricts, of which the member banks were to have the privilege
of issuing notes upon commercial paper deposited with a
committee of the association.
The Vreeland bill was preferred by many members to the
Fowler bill because it did not involve a radical departure from
the existing system. It was agreed upon by a Republican
conference, after various amendments, on May n , 1908, by
a vote of 128 to 16, and on May 14th passed the House by a
vote of 184 to 145. All the Democrats voting and fifteen
Republicans made up the minority.1 The Senate on the
next day substituted a modified draft of the Aldrich bill and
asked a conference. It was impossible at first to secure
agreement, but the necessity was so strongly felt of adopting
some measure which would leave the impression upon the
country that safeguards had been taken against another
suspension of currency payments, that a substitute bill was
finally presented only two weeks before the close of the
1 N ew York Journal o f Commerce, May 15, 1908.



session of Congress and was quickly passed through both
The new measure, which became law May 30, 1908, was
known as the Aldrich-Vreeland law, and was made avowedly
temporary in character by the provision that it should con­
tinue in force only until June 30, 1914. It authorized issues
of new bank-notes to an amount not exceeding $500,000,000,
which were to be made homogeneous in appearance and
character with the old notes by making the wording on all
read that they were “ secured by United States bonds or
other securities.,, Notes were to be issued to banks in any
one State in the proportion that national bank capital and
surplus in the State bore to the total of such capital and
surplus in the country, but this provision was subject to
exceptions. Notes authorized by the new law could be
issued only to national banks having a surplus of twenty
per cent, and having already notes in circulation under the
old law to the amount of forty per cent, of their capital; and
the total amount of notes issued under both the old and new
laws was limited to the combined capital and surplus of the
issuing bank.
Two separate methods were provided for obtaining the
new circulation. The essential feature of the original Aldrich
bill was preserved, that circulation might be issued upon
direct application to the Comptroller of the Currency, “ se­
cured by the deposit of bonds other than bonds of the United
States.” This provision was limited to State and municipal
bonds, and the amount which might be issued was restricted
to ninety per cent, of the market value of the bonds. The
other method of obtaining new circulation attracted the
greater degree of attention, because it was a new departure
in American currency legislation and was a short step in
the direction of basing note issues upon commercial assets.
Under this provision national banks were permitted to form
1 Although the new measure was resolutely opposed by Mr. Fowler
and other advocates of a credit currency, the conference report was
accepted in the House May 27th by a vote of 166 to 140, and in the
Senate on May 30th by 43 to 22.



national currency associations, which were to pass upon the
applications of their members for notes and to support each
other by a mutual guarantee. The security for the notes
in such cases might be “ any securities, including commercial
paper,” but notes could not be based on commercial paper
to a greater extent than thirty per cent, of the capital and
surplus of the issuing bank.1 The term, “ any securities,”
left the door open for the acceptance of railroad bonds or
any other bonds, stocks, or notes which might be approved
by the officers of the currency association and the govern­
ment. The issue of notes under these provisions was limited
to seventy-five per cent, of cash value in the case of com­
mercial paper, but was not limited to the par value of the
securities, as in the case of the notes issued directly by
the Treasury.
That these issues of notes should have a purely emergency
character was sought by the provisions regarding taxation.
Issues under the law were to be taxed at the rate of five per
cent, per annum, but as the redemption fund deposited in
Washington was required to be ten per cent., the issue of
notes could not afford a profit unless loaned considerably
above the rate of five and a half per cent. Moreover, the
rate of five per cent, was increased after the notes had been
in circulation one month by an additional one per cent, a
month, until after six months the rate was ten per cent.1
The new law contained a provision for the appointment of
a National Monetary Commission to report 4‘what changes
are necessary or desirable in the monetary system of the
United States.” This commission was made up of nine
senators and nine representatives, with Senator Aldrich and
Representative Vreeland as chairmen for their respective
chambers. This body made a thorough examination of
foreign banking systems, subcommittees held conferences with
leading bankers at the financial centres of Europe, and mono­
1The provisions of this act were extended to June 30, 1915, by the
Federal Reserve Act of December 23, 1913, and the rate of taxation
on notes, which was reduced by that act, was further modified and
other changes were made, by the act of August 4, 1914, as described
in Chapter XXVII., infra.


graphs were prepared for the commission by economists and
specialists on the banking systems of nearly every commer­
cial country. A greater degree of centralization in the func­
tion of note issue and in the custody of the gold reserves of
the country were the distinguishing characteristics of the plan
which was submitted by the commission to Congress in
January, 1912.1
This measure provided for a central institution to be
known as the National Reserve Association of the United
States, which was to issue all future bank-note circulation.
The association was to be constituted with an authorized
capital equal to twenty per cent, of the capital of subscribing
banks, of which one-half was to’be paid in and the remainder
to be subject to call. State banks and trust companies con­
forming to certain provisions and all national banks were
entitled to subscribe to the stock and to become members of
the association. The subscribing banks were to be grouped
into fifteen local associations, in the territory of each of
which was to be located a branch of the National Reserve
Association. The principal functions of the local association
were to exercise supervision over subscribing banks and to
see that paper offered for rediscount conformed to the law
and was adequately secured. The directors of the National
Reserve Association and of the district branches were to be
elected, to the number of thirty-nine, in such a manner as to
give recognition to the small banks and to business and com­
merce apart from banking interests. The governor of the
bank was to be selected by the President of the United States,
and was to be one of seven ex-officio members of the Board of
Directors, the others being two deputy-governors of the as­
sociation, chosen by the directors, and four public officials,—
the Secretary of the Treasury, the Secretary of Agriculture,
the Secretary of Commerce, and the Comptroller of the
Currency. The terms of the directors chosen by the
banks were to be for three years, one-third retiring each
R eport of National Monetary Commission, January 9, 1912, Senate
Document 243, 62d Congress, 2d Session.



The bank-notes authorized by the measure were to be
based upon the general assets of the Reserve Association,
subject to certain reserve requirements, and were to be a
first lien upon such assets. The amount issued up to
$900,000,000, including notes substituted for national bank­
notes already outstanding, was to be free from special tax;
but issues above $900,000,000 were to pay a tax at the rate
of one and a half per cent and above $1,200,000,000 at the
rate of five per cent.; but amounts fully covered by gold or
lawful money were to be free of tax.
The Reserve Association was required to maintain a re­
serve of not less than fifty per cent, against its demand liabili­
ties, both on account of deposits and notes, including new
issues of notes as well as those issued in place of outstanding
national bank-notes. It was provided that when the reserve
against liabilities should fall below fifty per cent., a graduated
tax should be paid, at the rate of one and a half per cent,
per annum for each two and a half per cent, of the deficiency,
and that when the reserve fell below thirty-three and a third
per cent., no further issues of notes should be made.
The bonds held by national banks to secure circulation
were to be taken off their hands at not less than par and
accrued interest by the National Reserve Association, which
was given the right to issue notes to the amount of bank­
notes which had been based upon the bonds. The Secretary
of the Treasury was authorized to exchange the two per
cent, bonds thus purchased for three per cent, bonds, running
for fifty years, which were to be held by the Reserve Asso­
ciation, with the right after five years, with the approval
of the Secretary of the Treasury, to sell not more than
$50,000,000 per year. The government was protected from
loss which might have resulted from the increased interest
charges on the bonds by the levy of an annual franchise tax
equal to one and a half per cent, of the amount of old bonds
converted into three per cent, bonds.
Existing national banks were permitted to keep balances
with the National Reserve Association and to count them
and the notes of the Association as a part of their reserves.


It was not made obligatory upon these banks, however, to
transfer their reserves from former reserve banks to the
National Reserve Association. They were given the privi­
lege of presenting commercial paper for rediscount to the
Reserve Association, when such paper consisted of notes and
bills of exchange issued or drawn for agricultural, industrial,
or commercial purposes. Notes or bills issued or drawn for
the purpose of carrying stocks, bonds, or other investment
securities were excluded from the classes of paper which
could be rediscounted by the Reserve Association.1 Paper
of this character having not more than twenty-eight days to
run could be discounted by the Reserve Association for in­
dividual banks; but if having a longer term to run could be
rediscounted only with the guarantee of the local association.
The Reserve Association was authorized, in case of serious
emergenc}', to discount the direct obligations of individual
banks having the guaranty of the local association and
secured by a pledge of collateral. The Reserve Association
was given authority to fix rates of discount from time to
time, such rates to be uniform throughout the United States;
to purchase and borrow gold; to deal in foreign bills of
exchange, and to purchase acceptances from member banks.
While the report of the National Monetary Commission
was not destined to be formally taken up by Congress, it
was the forerunner of an even more radical departure from
old banking methods, to be adopted within less than two
years; and the principle that the old system of bond-secured
notes must give way to a more scientific currency was given
official recognition, even before the report of the commission
was made to Congress, in the act of March 2, 1911, which
provided that future issues of Panama Canal bonds should
not be available as security for the issue of bank-notes.
1Similar definitions of the classes of business permitted were em­
bodied in the Federal Reserve Act of December 23, 1913, Sec. 13.


Its Origin and Growth—Foundation of the Bank of Montreal—The
Union of the Canadian Provinces and the Dominion—Banking
Reforms in 1870, 1S80, and 1890—The Effect upon the Security
of Note Issues and the Small Losses by Failure—Recent Sus­
pensions—The Reforms of 1900 and 1908.


HE Canadian banking laws now in force represent an
almost steady growth from comparatively crude con­
ditions to a perfected scientific system. Founded
originally upon Scotch models, the Canadian banks enjoyed
at first the freedom from even the police supervision of the
government which naturally arose from the fact that they
framed their own charters. Canadian banking was not
exempt from the risks and difficulties of the other institu­
tions of a new and growing country, and defects in the secur­
ity of the note issues and the protection of deposits were
gradually remedied as they were disclosed by experience.
The development of the Canadian system, however, has
been natural and symmetrical and most of the changes in
the law have had the approval of the leading bankers. At­
tempts have been several times made to substitute a govern­
ment currency or a specially secured circulation for the
elastic medium provided by the banks, but these attempts
have not been sufficiently successful to destroy the essential
advantages of the Canadian banking system. They have
resulted in putting a considerable volume of government
paper alongside the bank-note currency and in requiring a
certain percentage of this paper to be held by the banks in


their cash reserves, but they have not supplanted the bank­
note currency and are not likely to be permitted to, unless
the necessities of the government in time of war should be­
come paramount to the commercial interests of the country.
The history of Canada is that of several separate provinces
before the union in 1841. The movement for better banking
facilities began independently, but almost simultaneously in
each province early in the present century. The scarcity of
specie or of any other circulating medium in Lower Canada
was partially supplied by the “ Army bills” issued by the
government during the war with the United States and it
was not until 1817 that a banking company was formed.1
Previous attempts to found a bank had been addressed to
the local legislature of Lower Canada, but on June 23, 1817,
a meeting was held at Montreal at which an association was
formed with a capital stock of ^250,000. An office was
opened in August under the title of the Bank of Montreal,
without waiting for legal authority, and what afterwards
became the strongest institution of the Dominion was thus
established. The bank was simply a private partnership,
with unlimited liability of the shareholders, and continued so
until the passage of a charter by the legislature on March
17, 1821, which was approved by the royal government and
proclaimed on July 22, 1822.
Charters for the Quebec Bank and the Bank of Canada,
vsituated at Montreal, were passed at the same session of the
legislature and their approval by royal authority was pro­
claimed on November 30, 1822. The Quebec Bank had been
organized in a similar manner to the Bank of Montreal on
July 9, 1818, with a capital of ^75,000, and the Bank of
Canada had been organized on August 25, 1818, with a capi­
tal of ^200,000. The charter of the Bank of Montreal,
whose provisions were followed in the charters of the other
two banks, gave the institution corporate powers until June

1 The Army bills outstanding at the close of the war in March, 1815,
were ^1,249,996, but they were receivable for public dues and con­
vertible into government bills of exchange on London, and were re­
duced by May, 1816, to ^200,000.



i, 1831, and provided for the choice of thirteen directors,
who must be British subjects and holders of at least four
shares each. The principle of limited liability was applied
to the shareholders, without any obligation beyond the
amount of their subscription to the stock, but the directors
were to be liable to the stockholders as well as to the holders
of bank-notes in case the debts of the corporation should ex­
ceed treble the amount of the capital stock actualty paid in,
exclusive of the deposits. The bank was prohibited from
lending on land or mortgage, but might take such property
for debt contracted in the course of its legitimate dealings.
The fact that the acts passed by the provincial legislature
for the incorporation of these banks were based upon the
articles of agreement drawn by the incorporators made the
restrictions trifling which were imposed upon the banks.
There was no limit upon the volume of note issues except
the general liability of the directors for the aggregate indebt­
edness. There was no prohibition upon loans upon the
stock of the bank or upon loans to directors. The fact,
however, that each bank was established by a special law
afforded some measure of protection against indiscriminate
private banking and there was a disposition from the outset
to adhere closely to Scotch methods.1 An indication of this
is given by the prompt establishment of branches by the
Bank of Montreal at Quebec and by both the Bank of Mon­
treal and the Bank of Canada at Kingston in the upper
province. The banks received the notes of their competitors
and exchanged them and settled the balances in specie as
often as once a week, according to the Scotch system. The
Bank of Montreal employed an agent in New York for the
negotiation of sterling exchange and all the Canadian banks
of importance eventually had an agent or correspondent in
the American metropolis.
1 Mr. R. M. Breckenridge, in his admirable work, The Canadian
Banking System, published by the American Economic Association,
from which many of these facts regarding early Canadian banking
are taken, states that among 140 odd charter members of the Bank
of Montreal there were at least 90 Scotch names.


45 *
The importance of freedom of note issues in developing
banking in a new country is indicated by the early returns
of the Canadian banks, in spite of the considerable deposits
which they were able to obtain. The total deposits of the
three banks of the lower province in 1824 were ,£135,426,
while the circulation was ,£167,498; the deposits in 1825
were ,£151,637 and the notes in circulation ,£177,454; the
deposits in 1826 were ^176,475 and the notes ,£193,548.
The debts due to the banks, which may be assumed to
represent chiefly the discounts, were ,£529,363 in 1824,
,£585,265 in 1825, and ,£594,515 in 1826. The debts due the
Montreal Bank in the latter year were £371,334; Quebec
Bank, ,£111,523; and Bank of Canada, ,£111,658. The
banks secured the renewal of their charters in 1830 and 1831,
until June 1, 1837. The legislation of this time cut off
possible note issues by private bankers, by prohibiting notes
payable to bearer except when issued by banks incorporated
by law in Lower Canada. The total amount of notes in
circulation for less than $5 was limited to one-fifth the capi­
tal stock of the Bank of Montreal and notes for less than five
shillings were prohibited. Similar limitations were imposed
upon the Quebec Bank and the power was reserved to the
legislature to prohibit or limit entirely the circulation of
notes under $5.
The Bank of Canada found its business falling off in 1825
and after gradually reducing its capital stock went into
liquidation in 1831, upon the lapse of the charter. The
bank did not fail or suspend payments, but adopted a policy
of paying uncurrent and underweight coin, which led the
Bank of Montreal to refuse its checks and notes and caused
the rapid reduction of deposits until it became unprofitable
to continue business. A charter was granted to the City
Bank of Montreal in 1831, upon the representation of lead­
ing merchants that the capital of the existing bank was
“ altogether inadequate to the circulation of the valuable
articles of import and export which its geographic position
naturally brings to it,” and that the most effectual preven­
tive of the evil of monopoly “ is the admission of reasonable



competition, with its counteracting influence.” Another
Montreal bank began business in 1835 under the title of the
Banque du Peuple (Bank of the People). The principal part­
ners were Messrs. Viger, De Witt, and Co., who were fully
liable for the debts of the bank, while shares were issued to
persons having no share in the management and liable only
for the amount of their stock, according to the French
system of partnership en commandite.
The movement for a bank in Upper Canada, now consti­
tuting the Province of Ontario, assumed definite shape a
trifle earlier than in I^ower Canada, but the first charter
passed by the provincial legislature did not receive the royal
assent within the period provided by the charter to give it
validity, so that it became necessary to pass a new charter in
1819. The royal government again delayed action, but the
Bank of Upper Canada, situated at Kingston, was finally
authorized by proclamation of the royal assent on April 21,
1821, more than a year before such assent was granted for
the banks of I^ower Canada. The capital of the bank was
originally fixed at ,£200,000, but this was reduced in 1823 to
100,000. The general provisions of the charter were simi­
lar to those of the banks of Lower Canada, but notes under
five shillings were forbidden from the outset and the charter
was to remain in force until June 1, 1848. The government
subscribed for 2,000 shares of the capital at a par value of
,£25,000. A practical monopoly of note issues was conferred
upon the bank in 1823 by an act prohibiting banks from
carrying on business in the province, which did not redeem
their notes in specie within its limits. The development of
Upper Canada was somewhat more rapid after the establish­
ment of the bank than before, from a combination of causes,
and the capital stock actually paid in increased from ,£10,640 in 1823 to the full limit of ^100,000 in 1830. The debts
due by the bank increased from £107,598 on December 15,
1826, to .£260,557 on January 1, 1831, and the notes in circu­
lation increased during the same interval from ,£87,339 to
,£187,039. The bank encountered only the rivalry of an
institution purporting to be the Bank of Upper Canada under


a forfeited character, which soon collapsed, until the incor­
poration in 1832 of the Commercial Bank of the Midland
district. The capital of the new bank was fixed at ^100,000.
The capital of the Bank of Upper Canada was increased by
a like amount at the same session, and the utmost eagerness
was shown to purchase the stock. The Commercial Bank
within three years sought and obtained power to double its
capital stock and an act was passed incorporating the Gore
Bank at Hamilton with a capital of ^100,000.
The first bank charter in New Brunswick received the
royal assent as early as March 25, 1820. The institution
was known as the Bank of New Brunswick and was located
at St. John, with a capital of ,£50,000. The shareholders
were liable only for the principal of their stock, and debts
by the directors, either as principals or indorsers, were lim­
ited to one-third of the paid-up capital. The banks were
forbidden by an Act of 1838 to issue notes of a less denomi­
nation than five shillings. The first bank of issue actually
established in Nova Scotia was opened in 1825 at Halifax
under the title of the Halifax Banking Company. The
Bank of Nova Scotia, which was the first chartered bank,
was incorporated by an Act approved March 30, 1832, with
an authorized capital of ^100,000. The bank was without
a chartered competitor for five years and during its first ten
years divided profits among the shareholders at the average
rate of 8.9 per cent, and increased its capital to ,£140,000.
The issue of bank-notes for less than £5 was prohibited in
Nova Scotia in 1834.
The banking system of the Canadian provinces was thus
established on a comparatively safe and scientific basis,
similar to the Scotch system in the part played by the large
incorporated banks and their branches, but without any
serious control by law. The history* of the next thirty years
involves a mania for banking speculation similar to that
witnessed in the United States, on the part of the Canadian
people, and an effort to apply the rigid limits of the English
restriction act on the part of the home government at Lon­
don. The banking mania seized Upper Canada and resulted



in the creation of several joint stock banks between 1834
and 1837. The creation of such banks without a special
charter was brought to a summary end by an Act of 1837,
prohibiting the issue of circulating notes, except by banks
holding legislative charters, and making such issues a misde­
meanor. The banking phrenzy was not checked by this
salutary regulation. The House of Assembly had passed
a bill in 1833 to enable the Receiver General to issue notes
chargeable on the public, and a select committee in 1835 re­
ported in favor of a provincial bank, on the basis of loans
guaranteed by the province. These measures alarmed the
home government and resulted in a despatch to the Lieuten­
ant Governor August 31, 1836, directing him not to permit
any act touching the circulation of promissory notes or the
law of legal tender to come into operation in Upper Canada
without having first received the royal sanction. This
precaution was taken none too early, for bills were passed
during the session of 1836-37 increasing the banking capital
of the province from ,£500,000 to ,£4,500,000 and conferring
a power of note issue to the limit of £ “13,500,000/ The
Imperial government did not formally disallow these acts,
but returned them to the Colonial legislature for more sober
consideration. This course was effective and none of the
measures were re-enacted.
The union of Upper and Lower Canada was accomplished
on February 5, 1841, under the title of the Province of
Canada, and banking legislation was henceforth enacted in
uniform terms for the entire province. The government of
Upper Canada prepared for the union by the sale of the
government stock in the Bank of Upper Canada and the
separation of the government from official connection with
the bank. A scheme was brought forward soon after the
union by the Governor General, Lord Sydenham, for a pro­
vincial bank of issue under the direct authority of the gov­
ernment. Lord Sydenham was a personal friend of Lord
Overstone, the great champion of 44the currency principle ”
in England, and endeavored to engraft upon Canadian
1 Breckenridge, 77.



finances the separation of the functions of note issue and
banking which were imposed upon the Bank of England by
the Act of 1844. IfOrd Sydenham suggested a series of
resolutions for a bank, with no other powers than that of
issue, with an authorized circulation of ;£ 1,000,000 and an
excess issued only against coin or bullion. The authorized
circulation was to be protected by government securities, of
which the interest was to go to pay the expense of managing
the bank and any balance to the public Treasury. There
was a strong outburst of public feeling against destroying
the profits and efficiency of the existing banks and the con­
servatives, French Canadians, and a few supporters of the
party in power, united in committee of the whole on August
31, 1841, in a resolution “ that it is inexpedient to take into
further consideration during the present session the estab­
lishment of a provincial bank of issue, or the issue in any
way of a paper currency on the faith of the province. ’’ 1
The committee which considered Iyord Sydenham’s pro­
posals admitted the propriety of some uniform regulation of
the banks, and it had been repeatedly urged in circulars
from the home government. These recommendations con­
templated the usual safeguards against unsound banking,—
limiting the business of the banks to a proper banking
business, conducted after the subscription of the capital, and
involving forfeiture if specie payments were suspended for
sixty days. These restrictions were applied to the three
banks of Lower Canada when they sought a renewal of their
charters in 1841. Notes under five shillings were prohibited,
and notes under one pound were not to exceed one-fifth of
the paid-up capital. The various charters were to expire at
the end of the first session of Parliament after June or De­
cember 1, 1862. Double liability was imposed upon share­
holders, and nearly all the provisions for the public security
which had prevailed in either Iyower or Upper Canada were
now applied to the banks of the entire province. The pet
theory of the home government, that coin should take the
place of small notes, in order to constitute a healthy monetary
1Breckenridge, 112.



system, led to considerable correspondence in 1846, pending
the approval of a charter passed in that year, but the gov­
ernment finally consented to the retention of the $1 notes.
The mania for 4‘ free banking ’9 on securities seized upon
the Canadian people towards the middle of the century and
resulted in the law of 1850, based upon New York models.
William Hamilton Merritt was the author of the new law,
and he first brushed away the obstacles by the repeal of the
laws prohibiting the circulation of the notes of private bank­
ers. Such note issues were permitted, provided that the
banks formed for the purpose deposited Provincial securities
with the Receiver-General for not less than $100,000 as a
pledge for their notes. One of the objects of this legisla­
tion,—to broaden the market for Provincial securities,—was
indicated by the provision that these notes were to be exempt
from the tax of one per cent, per year imposed on the circu­
lation of the chartered banks, and that the latter might
surrender their circulation against their assets, and issue
notes upon deposits of securities. The notes, in case of
suspension, were to be paid from the proceeds of the securi­
ties, and any balance was to be applied, with the other assets,
to the settlement of the remaining debts of the bank. The
notes were to constitute a preferred claim against other as­
sets in case the proceeds of the securities proved insufficient.
The effort to drive the chartered banks into the secured
note system was carried further, in 1851, by a bill granting
certain exemptions from taxation to banks which were will­
ing to restrict their circulation to the maximum shown in
their last statement and to reduce it in three years to threefourths of the average for 1849 and 1850. Such banks were
permitted to issue additional notes to the amount held in
gold or silver coin or bullion, or in debentures issued by the
Receiver-General and reckoned at par. They were not re­
quired to deposit the debentures, but were required in case
of failure to apply them exclusively to the redemption of
their notes. The fact that the banks were required to hold
the debentures permanently, whether in the custody of the
government or in their own vaults, resulted in withdrawing



active capital from commercial banking and offering insuffi­
cient inducement to investors of banking capital. Five
banks were created under the law, of which two soon disap­
peared and three were continued under special charters.
The Bank of British North America, which operated in all
the provinces under a royal charter, apparently obtained the
greatest advantages from the secured note system by employ­
ing it prudently in connection with its other business. The
failure of the “ Free Banking Act ” was acknowledged as
early as 1859, but it was not repealed until the passage of
the Provincial Note Act of 1866.
The temptation to use the power of note issue for the
benefit of the State assailed the provincial authorities again
in 1866, when the government found themselves compelled
to raise about $5,000,000 to discharge the floating debt.
Mr. A. T. Galt, Minister of Finance, succeeded in carrying
a bill, which received the royal assent August 15, 1866,
assuming the power of the Province to issue not more than
$8,000,000 of notes, payable on demand in specie at Montreal
or Toronto and legal tender except at those offices. He did
not dare propose the immediate abolition of the bank-note
currency, but proposed an indemnity payment by the gov­
ernment of five per cent, per year, on the amount of notes
outstanding 011 April 30, 1866, until the expiration of the
charter of any bank which might accept the conditions of
the act and withdraw its own circulation before January 1,
1868. Banks willing to accept this offer were relieved from
the requirement to invest ten per cent, of their capital in
debentures and allowed to exchange them at par for Provin­
cial notes. The Bank of Montreal was the only institution
which accepted the new system and gradually substituted
Provincial notes for its own issue. This action separated
the interests of the Bank of Montreal from those of the
other banks and led the former to force the legal tender
notes into circulation as rapidly as possible in the settlement
of its balances. The Bank of Montreal was able to force
the other banks into holding legal tenders by threatening
to exact settlements in legal money, which the other banks

45 8


were thus compelled to set aside for the purpose. The result
was a reduction of the banking resources of the other banks
and the complication of the paper currency by the rival cir­
culation of the Provincial notes in competition with bank­
New Brunswick and Nova Scotia were brought within the
circle of Canadian banking legislation by the Act of 1867,
creating the Dominion of Canada, which conferred exclusive
authority in matters connected with currency, coinage, and
banking upon the Parliament of the Dominion. The charters
of existing banks were extended temporarily to the end of the
first session of Parliament after January 1, 1870, and several
provisions affecting the Canadian banks were extended to
those of New Brunswick and Nova Scotia. The Provincial
note issue was consolidated into an issue of Dominion notes
and redemption agencies were provided for in the capitals
of the four provinces. The banks in existence when the
Confederation became a fact on July 1, 1867, were eighteen
in Ontario and Quebec, five in Nova Scotia, four in New
Brunswick, and one operating in all the provinces under
royal charter.
The attempts to create a secured circulation or a gov­
ernment currency were renewed after the creation of the
Dominion, and the supporters of the former had the benefit
of the example of the United States and the active efforts of
Mr. E. H. King, the manager of the Bank of Montreal. A
scheme of this sort was taken up by Mr. Rose, the new
Minister of Finance, in 1869, and, according to his bill, was
to go into effect on July 1, 1871. The banks after that date
were to be required to reduce their unsecured circulation
twenty per cent, a year until the whole should be retired, and
were permitted to issue notes up to the amount of their capi­
tal stock actually paid in, bearing on their face the statement
that they were secured by the deposit of Dominion securi­
ties. These notes were to be legal tender throughout the
Dominion, except at the office of the issuing bank, so long
as they were redeemed in specie, and were to be protected by
a cash reserve amounting to twenty per cent, of the notes



and one-seventh of the deposits subject to call. The notes
were to constitute the first charge upon the assets in case of
insolvency. The opposition was so strong, and there were
so many measures whose success was more important to the
ministry, that Mr. Rose announced on June 15th the tem­
porary withdrawal of the plan for the session. Sir Francis
Hincks became Minister of Finance before the next session
and he abandoned the policy of a specially secured circula­
tion and contented himself with throwing some additional
safeguards around the existing bank-note system.
The charters of the banks were extended by the Act of
May 12, 1870, for a period of ten years, and the most impor­
tant changes of the period were then made. The desire for
a codification of the banking law led, however, to a more com­
prehensive act in 1871,1 which embodied the reforms of 1870
with some minor changes and many amplifications of detail.
The banks in 1870 surrendered the right to issue notes below
the denomination of $4 and secured in compensation the
abolition of the one per cent, tax and the repeal of the re­
quirement to keep one-tenth of their capital in Dominion
securities. The government assumed the issue of small
notes and the banks wrere required to hold not less than onethird of their cash reserves in Dominion notes. The severe
period of depression through which the Dominion passed
between 1874 and 1879, and the several bank failures which
occurred, led to further important changes in the banking
law when the charters were about to expire in 1880. The
bankers themselves came forward with the proposals for
reform and were now willing to accept several propositions
which they had before rejected. The minimum denomina­
tion of notes was changed to $5 and the banks were required
to retire the notes for $4 as soon as practicable. The pro­
portion of cash reserve to be held in Dominion notes was
increased to forty per cent. The use of the title of “ Bank ’’
by a private firm not incorporated under the laws of the
Dominion was made a misdemeanor, unless the words “ Not
1Act of April 14, 1871, “ relating to banks and banking,” 34 Vic­
toria, c. 5.



Incorporated ” were added to the title. This provision was
made to prevent the public from mistaking private bankers
for those holding charters and was extended in 1890 so that
any* such expression as u Bank ” or “ Banking House ” was
made illegal, whether the words “ Not Incorporated” were
added or not.
The history of the Canadian banking system between 1880
and the renewal of the bank charters in 1890 was a compara­
tively uneventful one, but experience of the banking law had
suggested a number of reforms which were carefully dis­
cussed before the renewal was voted. It was found that the
notes of the banks did not remain steadily at par in those
parts of the country far removed from the redemption
agencies. It was also found that, notwithstanding the
ample security for the final payment of the notes of failed
banks, they sometimes dropped to a discount when the
holders desired to realize upon them at once.1 The impor­
tance of concerted action to secure the reforms desired by
the public, without infringing upon the freedom of banking,
was keenly felt by the leading banks and they held a meeting
in Montreal on January 11, 1890, at which they resolved to
request an interview with Mr. Foster, the Minister of Fi­
nance. The request was granted and interviews took place
on January 25th and February nth and 12th. Several dif­
ferences of opinion developed regarding details, some of
which were carried before the Privy Council, but a thorough
revision of the banking law was enacted and received the
royal assent on May 16, 1890.2 The important features of
the Canadian banking system, as it developed from the legis1 “ Although the liquidators were ready to redeem within a month,
the discount on the notes of the Exchange Bank after its failure rose
as high as five or ten per cent. Redemption of the notes of the
Maritime Bank, though finally in full, was delayed for nearly three
years after the failure, and in the meanwhile its issues sold for as low
as forty cents on the dollar. In notes of the Central Bank of Canada,
Americans near Sault Ste. Marie found a profitable speculation by
buying them up after the failure, at ten per cent, discount.’*—Breckenridge, 315.
853 Victoria, c. 31, “ An Act respecting banks and banking.”



iation of 1870 and 1880 into that of 1890, may be discussed
under the following headings:
1. Security of note issues.
2. Elasticity of circulation.
3. Uniformity of circulation, without discount upon the
4. Inspection of accounts and security of general creditors.
5. Cash reserves and the use of coin.
6. Branch banks and the requirement of large capital.
1. The essential conditions which secure the note issues
of the Canadian banks are the duplicate liability of share­
holders, the first lien of note-holders upon the assets of a
failed bank, the Bank Circulation Redemption Fund, and
the five per cent, interest which accrues upon the notes of
failed banks from the date of refusal to redeem to the date
when readiness to redeem is again announced. The dupli­
cate liability of shareholders dates back to 1834 in Ontario
and 1841 in Quebec. The making of the notes a first lien
on the assets was suggested by the bankers in 1869, but was
abandoned because of the opposition of Mr. Hincks. He
feared that the impairment of the equal claims of other
creditors which this provision involved would lead to a run
by depositors and to the injury of the banks. The failures
between 1874 and 1879 compelled many note-holders to
realize on their notes at a great discount, in order to obtain
immediate use of their money,1 and dissatisfaction was so
great that the bankers again proposed in 1880 that the notes
be made a first lien. The total assets of each bank were
from six to ten times its note obligations and, if these assets
were lost, the duplicate liability of the shareholders would
still cover the outstanding notes. These resources consti­
tuted a security for the redemption of the notes which it
was believed would prove complete, and which the bankers
were willing to concede to the public for the privilege of
retaining unimpaired their power of note issue.
The Act of 1890 confirmed the provisions of 1880 for
making the notes a first lien on the assets, and added two
1Breckenridge, 289. Canadian bank-notes are not legal tender.



new provisions designed to keep the notes of a failed bank
absolutely at par during the period of liquidation. The
most important of these was the creation of a safety fund, to
be called “ The Bank Circulation Redemption Fund,” which
was to be raised by contributions from the banks, before July
16, 1892, to an amount equal to five per cent, of the average
circulation of each contributing bank. The redemption fund
is in the custodj^ of the Minister of Finance and bears interest
at the rate of three per cent, per annum. It is specifically
set apart for the payment of the notes of failed banks.
Redemptions are required to be made without regard to the
amount which the failed bank may have paid into the re­
demption fund, but when the redemptions, with interest,
exceed such payments, the Minister of Finance may call
upon the other banks to make good to the fund the amount
of such excess. These calls upon the other banks are limited
to one per cent, annually of the amount of their circulation
and the amounts thus paid by the banks are reimbursed to
them when recovered from the failed bank.1
The redemption fund afforded a guarantee, if it was
needed, that the notes of a failed bank would always be
paid in full. A further provision was made that the notes
of failed banks should bear interest at the rate of six per
cent, per year from the day of suspension to the date named
for their payment.2 The practical operation of this provision
has been eminently successful and has. in connection with
the guarantee afforded by the safety fund, made the notes
of a failed bank as valuable an investment up to the time
of redemption as a six per cent. bond. The holders of such
notes have had no difficulty in selling them at par to the
other chartered banks, to brokers or to persons having a little
1The omission of a limitation of this sort upon the liability of the
banks for the general-safety fund was one of the causes of hostility to
the banking plan of Secretary Carlisle, presented to the United States
Congress in his annual report for 1894. It was feared that the indefi­
nite character of the liability would excite alarm among depositors.
2Reduced to five per cent, in 1900.

th e

Ca n a d ia n

b a n k in g s y s t e m .


money seeking temporary investment. The legal money
of redemption under Canadian law is “ specie,” and the
gold standard is maintained with but little gold in circula­
tion. The banks, in making ordinary payments, were re­
quired by the law of 1880 to pay amounts up to $50, upon
request of the payee, in Dominion notes. This limit was
raised in the Act of 1890 to $100.
2. One of the important benefits inherent in the Cana­
dian bank-note circulation is its elasticity. This is not due
affirmatively to recent legislation, but is due to the success­
ful resistance of Canadian bankers to government proposi­
tions for a specially secured currency.1 The banks pay out
the notes when business activity demands them and the
notes drift back for deposit and the settlement of discounts
when business activity slackens. The circulation thus varies
in the course of the year by from fifteen to twenty per cent.
The month of October is usually that of the maximum cir­
culation and the month of January has been in recent years
that of the minimum. The first month of the year is usually
marked by a lull in business, which brings surplus notes to
the banks for deposit. The revival of activity in the Spring
calls out a few additional notes, but the circulation does not
increase materially until the movement of the crops sets in
in August. Then comes the steady expansion of note issues
to meet demand, which persists until the middle of November.
The following table shows for representative years the ex­
pansion of note issues in the Autumn and the return to
normal conditions in the following year:
1 Even in 1890 the theory of a circulation based upon evidences of
the public debt had considerable footing and was advocated by Sir
Donald Smith, President of the Bank of Montreal. It seemed to be
thought in Canada that such a system would benefit the larger banks
at the expense of the weaker and some of the opposition to the crea­
tion of a safety fund was apparently based upon the fact that it would
invest the notes of the weakest banks with the same credit as those
of the strongest.—Breckenridge, 320. This argument was necessarily
directed against convenience and uniformity.



Autumnal Variations in Circulation.

I 9°7


AUG. 31.


O C T . 31.


O C TO B E R .

$ 5,244,000



The banking experience of Canada in recent years is a
sufficient vindication against the charge that a banking cur­
rency leads to inflation. The volume of notes usually in
circulation exceeds by only a small ratio sixty per cent, of
the aggregate capital stock of the banks, although they are
allowed to issue to the full amount of their capital. Some
of the banks have occasionally touched the maximum limit
and the branches have been promptly notified by telegraph
when the limit has been reached. A real demand for money
from such banks is met by loans to them from banks which
have not reached the limit. The contracts for these loans
call for money, like other contracts, but it is understood that
they shall be paid in the notes of the lending banks, so that
the public get the benefit of the limit upon their combined
issues.1 If the Canadian system has been subject to legiti­
mate criticism in recent years, it has been in the failure of
banking capital to keep pace with the growth of the country;
and the increase in demand for currency has been met in a
large degree by the law of 1913, permitting issues on central
gold reserves.
3. The necessity of providing more fully for maintain­
ing the notes of all the banks at par in all parts of the Do­
minion, which was recognized in 1890, was due not so
much to any question of the solvency of the banks as to the
mechanical provisions for redemption. The convenience of
note-holders had already been partially provided for by mu1 Root, Canadian Bank-Note Currency, ‘‘Sound Currency,” II.,
No. 2, p. 7.



tual arrangements between the banks for the redemption
of each other’s notes. It would have involved a manifest
injustice, in view of the wide difference in character and
strength of the Canadian banks to compel each to redeem
the notes of all others against its will, but the banks were
ready to accept a mandatory law requiring each bank to
establish agencies for the redemption of its own notes at the
commercial centre of each province. It was accordingly
provided in the Act of 1890 (Section 55) :
The bank shall make such arrangements as are necessary to ensure
the circulation at par in any and every part of Canada, of all notes
issued or reissued by it and intended for circulation ; and towards
this purpose the bank shall establish agencies for the redemption and
payment of its notes at the cities of Halifax, St. John, Charlottetown,
Montreal, Toronto, Winnipeg, and Victoria, and at such other places
as are, from time to time, designated by the Treasury Board.

4. The bank-note circulation of Canada, under the oper­
ation of the redemption fund and the complementary re­
quirements, has, in the language of Mr. Breckenridge,
“ acquired a thoroughly national character; since 1890 it
has circulated from one end of the country to the other,
never causing loss to the holder, yet keeping unimpaired the
qualities for which, in its less perfect state, Canadians had
again and again refused to give it up.” 1 The fulfilment of
these conditions, with the elasticity and sufficiency which
usually accompany a banking currency, meet all the require­
ments of a perfect currency system. The protection of
the note-holder against both temporary and permanent loss
closes the case in favor of Canadian banks of issue. They
may be well or ill managed as banks of discount and deposit,
but, as such banks must exist under any currency system,
their bad management cannot be made an argument against
the power of note issue unless that power increases their power
for evil as banks of discount and deposit. Questions, there­
fore, relating to the management of the Canadian banks in
their discounting business, and the number of failures they
may have suffered, should not be confused with the question
1 The Canadian Banking System , 338.



of the success of their system of note issues in providing a
sufficient, elastic, and secure currency.
Having made this distinction, it may be admitted that the
Canadian banking system is capable of improvement in the
direction of official supervision. While discount banking is
essentially a private business, it is usually done by corpora­
tions holding special privileges by authority of the state,
and the subdivision of modem industries justifies the citizen
in asking that the state exercise the power of visitation and
supervision over such corporations, when they deal inti­
mately with the public, which he cannot conveniently ex­
ercise for himself. The weakest spot in the Scotch and
Canadian banking systems has been the absence of this su­
pervision, and, defective as government supervision often is,
it would probably have prevented some of the great losses
which have come to shareholders in those countries. The
proposal of government supervision in Canada has been sev­
eral times brought before Parliament, but has always been
resisted upon the grounds that public auditors or inspectors
could not ascertain accurately the real character of banking
assets, and that the fact of government inspection would
mislead the public into a confidence which might prove to be
misplaced. The project of inspection was renewed by Mr.
Foster in 1890, but the auditors whom he proposed were to
be appointed by the shareholders at their annual meeting.
The same objections which had been made on previous occa­
sions were renewed and the project of a formal audit was
again abandoned.
The larger Canadian banks are not, however, without a
system of supervision of their own, which ought to be more
efficient than that of government officers when there is no
collusion between the inspector and general manager. Such
collusion is not likely to be a frequent occurrence, because
the chief inspector is required by his duties to be a man of
independent judgment, of banking experience and reputa­
tion, and to receive a large salary. It is his duty to make
tours of the branches, annually or oftener, for the purpose
of examining the character of the discounts granted and the



general policy pursued. The mere verification of accounts
is performed by subordinates. The chief inspector, there­
fore, is the equal in character and position of the general
manager, and is exposed to few of the temptations of an
inferior. He confers with the latter and reports the results
of his inquiries regarding the standing of firms seeking dis­
counts. If the inspector is associated too closely by family
or other ties with the general manager, the fact is likely to
become a subject of business gossip and to impair confidence
in the bank. The establishment of the general redemption
fund has had a salutary effect in attracting the attention of
the banks to each other’s condition, because of the common
responsibility which the fund imposes.
The safeguards of the Canadian system have been such
that the entire losses to creditors, exclusive of shareholders,
since confederation in 1867, have been very limited in amount.
Only rarely even has it been necessary to assess share­
holders under their duplicate liability. '‘The record for
the years preceding 1867,” says Mr. Breckenridge, “ is
hardly less admirable, there being no failures in Nova Scotia
or I^ower Canada, while in New Brunswick the double lia­
bility of shareholders saved the banks’ creditors, and in Up­
per Canada the failure of the Bank of Upper Canada was the
only one which inflicted considerable loss.” 1 The Bank of
Upper Canada violated the rules of sound banking under the
stimulus of a period of rapid growth in Ontario, and made
heavy loans to lawyers, politicians, and the gentry. Much
money was lost in the land speculations of 1857, the capital
was reduced in 1861, the public deposits were reduced in
1863, another reduction of capital in 1866 failed to save the
bank, and payment was stopped September 18, 1866, with
liabilities of $3,402,000. The assets were nominally worth
$5,362,000, but gradually shrunk until in 1882 they were only
$420,387 against still outstanding liabilities of $1,380,015.
Of this liability $1,122,649 was still due the government,
which was open to the suspicion, by its tardy efforts to re«
3 The Canadian Banking System , 355



cover, that it had abused its power to obtain advances from
the bank during its period of prosperity.1
Six failures occurred in Canada between 1871 and 1881,
six between 1883 and 1889, and eight between 1893 and
1908. The notes in every case since 1881 have been paid
in full, but in some cases prior to 1890 they were redeemed
after considerable delay and after falling to a discount.
The capital of only four of these failed banks was larger than
$500,000, and in three of these four cases the assets and
deposit liabilities were assumed by other Canadian banks.
The first of these larger failures was that of the Federal
Bank of Canada, which increased its capital in 1883 to
$3,000,000, but was compelled to reduce it in 1885 to $1,250,000 on account of losses from Michigan lumber transac­
tions and loans in Manitoba. The other banks having
offices in Toronto came to the assistance of the Federal
Bank in January, 1888, and agreed to advance enough
money to pay off its entire liabilities and assume the assets,
if the bank would wind up its affairs.
The more important failures after 1890 were those of
the Commercial Bank of Manitoba, the Banque du Peuple
of Montreal, the Ontario Bank, and the Sovereign Bank of
Canada. The Commercial Bank succeeded to the business
of a private firm at Winnipeg in 1884 and assumed the heavy
risks which are often run by banks in new countries. Its
business was essentially local and its failure was not a sur­
prise to other bankers in the Dominion. The other banks
were critical as early as 1892 about accepting the drafts of
the Commercial Bank on Montreal, and in May, 1893, a
drain of deposits began. The bank paid out its notes for
a time to nervous depositors and thus increased its circula­
tion between May 31st and July 3d by the sum of $140,605,
while the deposits were reduced $i89,8i3.a The automatic

1Breckenridge, 175.
2 The purpose of depositors in accepting their deposits in notes
was to convert an ordinary claim into a preferred claim, but the pro­
cess of conversion was necessarily limited by the limit of circulation
allowed the bank, as well as by the certainty that the bank would
quickly be unable to settle its balances with the other banks.



operation of the Canadian system of redemption came into
play when these notes fell into the hands of other banks,
and the Commercial Bank was compelled to suspend with
liabilities of $1,344,269. The Banque du Peuple was com­
pelled to reduce its capital in 1885 from $1,500,000 to
$1,200,000, and suspended on July 16, 1895, with a circula­
tion of about $787,000 and with total liabilities of about
The Banque du Peuple closed its doors in the hope that
arrangements might be concluded with its creditors wT
would enable it to resume business within the period of
ninety days, for which continued suspension would, under
the law, ‘(constitute the bank insolvent and operate a for­
feiture of its charter or act of incorporation, so far as regards
all further banking operations.” 1 The notes remained
steadily at par and were redeemed before October 5th, ex­
cept $150,000, for which the money was held in the bank.
One of the plans proposed for reorganization was the issue
of deposit receipts to depositors, payable in from six months
to two years. The period of suspension passed, however,
without resumption, and it appeared at the meeting of the
shareholders on December 17, 1895, that overdrafts had been
granted to five individuals and firms amounting to $1,229,000,
and to four of the directors to the amount of $235,000. The
depositors eventually received 75! per cent, of their claims.2
The failure of the Ontario Bank with a capital of $1,500,000, on October 13, 1906, was not due to unsoundness in
the business of the bank, but to speculation by the gen­
eral manager in the New York stock market.3 Arrange­
ments were made by which the Bank of Montreal assumed
its assets and paid its liabilities to the public, several other
banks agreeing to indemnify the Bank of Montreal in case
of loss. The shareholders lost their entire investment, how1 Sec. 91.
2 Breckenridge, in Quarterly Journal o f Economics, August, 1900,

XIV., 543.

3 H. M. P. Eckardt, in N ew York Bankers' Magazine, February,
1907, I.X X IV ., 229.



ever, and were subjected to a considerable assessment.1 The
other large failure of the time was that of the Sovereign
Bank, which had been founded with high hopes and a
capital of $4,000,000, in April, 1902. So aggressive was
the bank and such large profits did it show, down to the
spring of 1906, that the Dresdner Bank of Berlin at that
time acquired a three-eighths interest in its capital, and the
event was hailed as opening a new era in international
But the Sovereign Bank ventured upon unsafe ground, it
became necessary to write off the whole of the reserve fund
of $1,250,000, and $1,000,000 of the capital in June, 1907,
and a radical change was made by the foreign bankers in
management and methods.3 Even reorganization failed
to save the institution and its doors were closed on Janu­
ary 18, 1908, with liabilities to the public of $16,174,408.
As in the case of the Federal Bank and the Ontario Bank,
other Canadian institutions found the assets of the failed
bank good enough to warrant their assumption of its lia­
bilities, and they were quietly taken over without a day’s
embarrassment to depositors or other creditors. The option
was given to depositors of withdrawing their funds in cash
or leaving them with the new depository.4
Of the four smaller banks which failed between 1893
and 1908, the first was the Banque Ville Marie in 1899,
with capital and reserves of $489,620 and liabilities to the
public of $1,766,841. The failure was essentially fraudu­
lent and depositors received only seventeen per cent, of
their claims. The second of these failures was that of the
Bank of Yarmouth in 1905, with capital and reserves of
$335,ooo and liabilities to the public of $362,207. The
Banque de St. Jean at St. John’s, Quebec, was closed on
1 Letter of A. St. L. Trigge, Secretary of the Canadian Bank of
Commerce, to the author, September 17, 1908. The assessment was
then estimated at about fifty per cent.
2 New York Bankers' Magazine, February, 1907, LXXIV., 229.
3 Ibid., August, 1907, LXXV., 248.
4 Ibid., February, 1908, LXXVI., 213.



April 29, 1908, with a capital and surplus of $326,386, and
nominal assets of $970,847. The Banque de Si. Hyacinthe,
in the same neighborhood, was finally closed June 23, 1908,
with capital and surplus of $406,235 and nominal assets
of $1,576,443. The first of these two failures showed large
elements of wrong-doing, but the second was less discredi­
table and depositors recovered a considerable proportion of
their claims. The Bank of Montreal was prompt to open
a branch in St. Hyacinthe, which offered accommodation
to the sound customers of the failed institution.1
5. The requirement of a fixed minimum reserve of specie
against liabilities was suggested by Mr. Hincks in 1869, but
he was convinced by the unanimous opposition of the bankers
that the requirement would prove more of an injury than a
benefit to the business community in times of stringency.
It was pointed out that a reserve which cannot be used is of
no avail in emergencies ; that if the proportion were low, it
would be treated by weak banks as always sufficient; and
that a part of a bank's best and most available funds often
consisted of balances in New York and London, rather than
specie in its own vaults. These arguments were conclusive
with Mr. Hincks, but they failed to convince Mr. Foster
when the plan of a minimum reserve was suggested to him
in 1890. The experiment of a minimum reserve had then
been longer in operation in the United States and was
believed to have produced beneficial results. It was pointed
out, however, that the small local banks of the United States
occupied a very different position from the great chartered
banks of Canada and that regulations which might be
necessary in the one case might not be in the other. Mr.
Foster's proposition was to require each bank to hold specie
and Dominion notes to the amount of ten per cent, of its
liabilities. The bankers carried the contest before the Privy
Council and at a hearing given them on February 22, 1890,
carried the majority with them and secured the exclusion of
any provision for the reserve from the government bill.3
1 New York Bankers’ Magazine, August, 1908, LXXVII., 241.
* Brecken ridge, 327.

4 72


One of the strongest arguments in favor of liquid reserves
and banking upon general assets, without government inter­
ference, is found in the comparative calm whi