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61ST CONGRESS 1

2d Session

J

SENATE

f DOCUMENT

I

N o . 522

NATIONAL MONETARY COMMISSION

Evolution of Credit and Banks
in France
From the Founding of the Bank of France
to the Present Time

BY

ANDRE

LIESSE

PROFESSOR AT THE CONSERVATOIRE NATIONAL DES ARTS ET METIERS
AND AT L'ECOLE DES SCIENCES POLITIQUES.—MEMBER OF THE
INSTITUT INTERNATIONAL DE STATISTIQUE, ETC.

Washington : Government Printing Office : 1909




NATIONAL MONETARY COMMISSION.

NELSON W. ALDRICH, Rhode Island Chairman.
EDWARD B. VREELAND, New York, Vice-Chairman.
J U L I U S C. BURROWS, Michigan.

J E S S E OVERSTREET, Indiana.

E U G E N E H A L E , Maine.

J O H N W. W E E K S , Massachusetts.

PHILANDER C. K N O X , Pennsylvania.

ROBERT W . BONYNGE, Colorado.

THEODORE E . BURTON, Ohio.

SYLVESTER C. SMITH, California.

J O H N W . DANIEL, Virginia.

LEMUEL P . PADGETT, Tennessee.

H E N R Y M. T E L L E R , Colorado.

GEORGE F\ BURGESS, Texas.

HERNANDO D . MONEY, Mississippi.

A R S E N E P . P U J O , Louisiana.

JOSEPH W . BAILEY, Texas.

ARTHUR B . SHELTON, Secretary.




A. PIATT ANDREW, Special Assistant to Commission.

TABLE OF CONTENTS.
Page.

Preface: Purpose and arrangement of this study

5

PART I.
T H E BANK OF FRANCE AND T H E DEVELOPMENT
TO 1848.

OF CREDIT, 1800

Introductory
Chapter I.—Founding of the Bank of France
II.—The charter or privilege of the Bank of France—Crisis
of 1805

7
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26

III.—The fundamental statutes of the Bank of France—It
comes into closer relations with the State, 18061814—Panic of 1814
IV.—The Bank under the Restoration—Founding of departmental banks
V.—The Bank under the Monarchy of July—Founding of
comptoirs or branch offices, and the competition with
departmental banks
VI.—The beginnings of the railroad industry—The panics of
1846, 1847, 1848—The departmental banks of issue
are incorporated with the Bank of France, which
becomes the sole bank of issue
VII.—A brief survey of the general course of business in the
first half of the nineteenth century in France—
Credit and industrial beginnings
PART

32
43

47

54

66

II.

THE BANK OF FRANCE—THE CREDIT M O B I L I E R - T H E FIRST COMPTOIR D'ESCOMPTE.

Introductory
Chapter I.—The Bank of France, sole bank of issue—Its operations
with the State—Founding of establishments called
" H a u t e Banque"—Industrial loans and speculation.
II.—The Soci£te Generate du Credit Mobilier and the Pereires,
1853-1866
III.—The first Comptoir d'Escompte and the development of
commerce—The laws of May 23-29 and July 24,
1867, on companies
IV.—The Bank of France from 1860-1875:
I. Before the Franco-Prussian war
I I . The Franco-Prussian war and its results
I I I . The great loans and the payment of the war
indemnity




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83
96

109
125
137
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Commission
III.

FROM 1875 TO THE PRESENT TIME.
Introductory
Chapter I.—The situation of France after the war—A glance at the
development of saving and savings institutions
II.—The crises of 1882 and 1889—A brief outline of the
operations of the Bank of France, 1875-1889—The
Comptoir d'Escompte
III.—The crisis of 1890-91—Intervention of the Bank of
France in behalf of the Bank of England
IV.—The credit companies and their development—Extension of their operations—Their general method—
Their present situation
V.—The credit companies and the local banks
VI.—The Bank of France—Renewal of its privilege—Present
situation—I ts r61e in the crisis of 1906-7
General conclusions

Page.
161
165

170
187

193
217
224
235

APPENDICES.

I.—Note on the Credit Foncier de France
II.—Note on the Credit Agricole Mutuel




4

241
255

PREFACE.
The object of this study is to afford a connected view
of the basic facts and most noticeable features of the
credit system and banks in France from the year 1800 to
the present time. It is designed, therefore, not as a history
in which multiplicity of detail is apt to obscure a view of
the subject as a whole, but as a coordinated outline of the
successive stages in the development of credit and of the
institutions which distribute it.
This outline is divided into three very unequal periods:
The first—a period of beginnings, of slow growth, of
formation, during which the Bank of France succeeds
in gaining a complete monopoly—extends from the foundation of that establishment until about 1848.
The second and shorter period is a time of transition.
It extends from 1848 to about 1875. During these
twenty-five years new institutions and new forms of credit
associations make their appearance. Better laws facilitate the organization of these credit associations as well
as of all kinds of associations, both industrial and commercial. It includes the war of 1870-71 and its immediate results. This event seems to have hastened the
development of the credit system or at least to have
given it a stimulus, arising from the consequent reaction
against the misfortunes which had overwhelmed the
country. France begins to recover and finds, in her sturdy




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spirit of economy and her ability to save, the elements
productive of new vigor and potency.
The third period, which might be called the period of
full maturity, extends from 1875 to the present time. In
this interval the organization of the credit system is put
on a firm footing as the result of a century's evolution.
In this evolution the various critical movements are
described and explained—the political, economic, and
financial crises—constituting, as it were, the pathological
growth of the credit system and banks in France.
The study is supplemented by the addition of two
appendices, of which the first portrays the development of
the Credit Fonder and its results, while the second outlines the rather recent organization of the Credit Agricole;
thus completing a series of observations, impartially set
forth, and designed to assist specialists seeking the solutions of problems along these lines.
ANDR£ LiESSE.
P A R I S , March 30,




1909.

6

EVOLUTION OF CREDIT AND BANKS
IN FRANCE FROM THE FOUNDING OF THE BANK OF FRANCE
TO THE PRESENT TIME.
PART I.

THE BANK OF FRANCE AND THE DEVELOPMENT
OF CREDIT, 1800 TO 1848.
EVOLUTION AND DEVELOPMENT OF CREDIT AND CREDIT
INSTITUTIONS IN FRANCE FROM THE YEAR 1800.

INTRODUCTORY.
Law's bank.—The bank compromised in certain undertakings.—Failure of Law's
bank and "system."—The liberty of issuing bank notes in France from 1721 on.—
The Caisse d'Escompte.—Dangerous relations of the Caisse d'Escompte with the
State.—Its difficult situation.—Its liquidation.—Commercial banks during the Revolution.—Prudence of the commercial bankers.—Founding of free banks of issue,
1796-1800.—The Caisse des Comptes Courants, 1796.—Conditions of discount.—
Its issues.—A difficulty overcome.—The Caisse d'Escompte Commercial, 1797.—
Origin and nature of this establishment.—Capital.—Issue.—The Comptoir Commercial, 1800.—General Commercial Association of Rouen, 1798.—Services performed by these banks of issue during the last few years of the eighteenth
century.

The son of a Scotch banker named Law succeeded in
obtaining from the Regent on May 2, 1716, permission to
organize a bank of issue. It was called the Banque
Generate, and was opened the following month. If
Law, the president of the bank, had kept within
the normal bounds of operations of banks of this
kind, it is probable that he would have rendered a
real service to commerce and industry. Instead of this,
he soon associated the bank with vast and uncertain




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enterprises aimed at the exploitation of the colonies;
and presently the Banque Gen^rale was brought into
closer relations with the State, and on June 4, 1718, took
the name of the Banque Royale. All the departments
of private and public finance fell into Law's hands. The
issue of bank notes by the bank and the issue of shares
by the different companies that he founded soon became
an abuse. Neither bank notes nor shares represented in
reality any certain value. Stock-jobbing and wild speculation hastened the downfall of what was called Law's
system. .The Banque Royale closed its doors in 1721, and
the various companies founded by Law were liquidated at
great loss. It was a disaster which caused the ruin of a
large number of people. The memory of this failure
remained fresh in the minds of all classes of people, even
the poorest, during the whole of the eighteenth century,
and it was a long time before any one dared to found
another bank of issue.
Although the monopoly which Law had obtained from
the Regent in 1716, namely the exclusive right to issue
bank notes, had been abolished in 1721 by an edict which
gave the right of free issue.
Not until fifty-five years later did anyone try to organize
a bank of issue; even then the establishment was not
called a bank, so closely was the name associated with
Law's failure. On March 24, 1776, when Turgot a was
Minister of Finance, Planchaud and Clouard, the first a
Swiss, the second a Scotchman, founded a bank of issue
a In 1767 an attempt was made to found a bank of issue to which the
name of Caisse d'Escompte was already given, but as a matter of fact it
did not go into operation.




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and

Banks

under the name of Caisse d'Escompte. This concern
was chartered as a limited liability partnership (sous
forme de commandite), and, after some difficulties at the
start, succeeded in doing a moderately good business.
However, it was not long before the Comptrollers of Finance, d'Ormesson first and afterwards Calonne, being
short of money, borrowed from it. From this moment
dates the first blow to the soundness of the credit of the
Caisse d'Escompte. Except for these dangerous relations with the State, the Caisse d'Escompte engaged in
a normal and regular banking business, including the
issuance of bank notes. But repeated state loans and
government interference in its management completely
altered its character. Yet the directors were men
of ability and worth; Lavoisier, the celebrated chemist,
was one of them. The National Assembly, which had
just convened, spent much time discussing the undertaking. Mirabeau was always unfriendly to it, while, on
the other hand, Dupont de Nemours tried to defend the
true principle of banks of issue, asserting that a bank without a privilege, not involved in business relations with a
debt-ridden and needy State, without the prerogative of
forced currency, can not do otherwise than pay in coin on
demand the value of every note issued.
Soon the Caisse d'Escompte, as a result of closer and
closer relations with the State, became nothing more
than a branch of the public administration of finance,
until, deprived of the resources it had been counting on,
it appealed to the Government to take its affairs in hand
and offered to give the Minister of Finance a statement
of its assets and liabilities. Apart from the one error




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of forming an alliance with the Government, the Caisse
d'Escompte had made every possible effort to protect the
interests of its clients. For some time the State had been
issuing assignats or paper money through the emergency
bureau {Caisse de VExtraordinaire).
Issues of bank
notes and assignats were in competition. The paroxysms
of the Revolution completed the disorganization of the
Caisse d'Escompte. Several of its administrators—Lavoisier, Vandernier, and others—mounted the scaffold, and
lastly Cambon issued a decree suppressing the institution
altogether. Its liquidation, begun in 1793, was not finished until the time of the First Empire. It is needless
to add that the stockholders lost the greater part of their
investment. The Caisse d'Escompte lasted seventeen
years.
The cause of its downfall is to be sought in the abnormal political events which succeeded each other at that
time. However, in all that concerns proper banking operations, the Caisse d'Escompte was wisely administered,
and would have been of real service to commerce if it
had not allowed itself to become the State's banker,
lending money to the State without sufficient security,
and receiving nothing in return but privileges which
could not fail to be disastrous to it.
The revolutionary disturbances gradually subsided. A
reaction set in, vigorous in proportion to the violence of
the political and social upheaval which had gone before
it. Although France emerged from this long ordeal exhausted and disorganized, business had not been utterly
destroyed. The transactions necessary for the barest sub-




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and

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sistence of the citizens gave employment to commerce and
industry, and made some sort of credit necessary. Commercial banks, engaging only in discount operations, collections, and running accounts {comptes courants), had quietly
and steadily kept on in spite of the Reign of Terror, the
ordeal of the wars, and the dangerous and ruinous flood
of assignats. Many of these banking houses were very old.
That of the Mallets, which is still in existence, was founded
in 1723. These bankers were, for the most part, Protestants whose families had taken refuge in Switzerland after
the revocation of the edict of Nantes. Among them was
Perregaux, of Neufchatel, who employed as a clerk Jacques
Laffitte, and made him his successor; then too there was
Vernes, who toward 1772 had in his employ Necker, afterward Minister of Finance. These bankers had learned the
art of credit and the handling of capital in Switzerland,
chiefly at Geneva, where banks had always been prosperous. They maintained the course of current business,
and, as we shall see, were always extremely prudent, even
in dealing with Napoleon. They did not allow themselves
to be cajoled into granting the State favors of credit which
would have cost them dear.
When order was reestablished and the State had ceased
issuing worthless paper money, commercial banks undertook to found on discount the issue of bank notes. The
first was the Caisse des Comptes Courants, established
June 29, 1796, with headquarters in Paris at the Place
des Victoires. The capital stock was moderate, amounting to 5,000,000 francs, divided into 1,000 shares of 5,000
francs each. This institution was the work of a great




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number of Paris bankers, 0 who joined together in this
way to make their collections, etc. The Caisse kept
the funds of these individual banks, and, moreover, rediscounted their commercial paper. This bank was called
" caisse/' for, as we have said, the word bank, recalling
that of Law, still terrified the public. This Caisse des
Comptes Courants was therefore a bankers' bank. We
shall see presently that the first regulations of the Bank
of France were copied from it, and, in short, that the
Caisse des Comptes Courants was transformed later into
the Bank of France. It discounted commercial paper at
a maximum time limit of ninety days, three indorsements being required.
The Caisse caused interest or discount rates to fall
from 9 per cent to 6 per cent. It made handsome profits,
which fact encouraged the setting up of other banks of
the same kind. Its circulation, including bank notes in
the coffers, amounted to 20,000,000 francs. The only
notes issued were of denominations of 1,000 and 500
francs. It encountered no difficulties, except perhaps
the following circumstance, which was, however, quite
accidental: About seventeen months after its founding,
in November, 1797, the bank was robbed of some 2,500,000
francs, which was rather a large sum for the Caisse des
Comptes Courants. The news spread rapidly. Bearers
of bank notes became alarmed and appeared in crowds at
the doors. But the bankers who had founded the Caisse
des Comptes Courants immediately united and declared
themselves personally responsible for the liabilities of the
Caisse. Although at that period the form known as a
0
Several of them had gained experience in administering the affairs
of the Caisse d'Escompte.




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limited liability partnership {commandite) had not been
established by law, it was already in existence. The
stockholders of the Caisse showed on this occasion that
they knew how to make a decision and assume responsibilities. The Caisse did an excellent business; its situation
therefore was strong, and the panic proved momentary.
Another establishment was organized in 1797 shortly
after the forming of the Caisse des Comptes Courants.
This time the scheme was not promoted by bankers but
by merchants, who wished to procure in this way facilities
for their own business, rather than to seek profits directly
from banking operations. The institution was called the
Caisse d'Escompte du Commerce. The origin of the
Caisse des Comptes Courants was sufficiently indicated
by its name, and the entirely commercial character of
the Caisse d'Escompte du Commerce is shown in the
same way. This will explain the bitter resistance of
the latter concern to being merged in the Bank of France,
while on the other hand the Caisse des Comptes Courants joined forces with it willingly and at once. The
Caisse du Commerce (as it was called for convenience)
seems indeed to have yielded only to force. The Bank
of France, in spite of all Napoleon could do, was destined
to remain in reality a bankers' bank. Now, the interests
of the Caisse du Commerce were entirely different.
The nominal capital of the Caisse du Commerce
amounted to 24,000,000 francs, represented by 2,400 shares
of 10,000 francs each. But the shareholders had not paid
in more than a quarter of this sum—that is to say, 6,000,000
francs. Its board of directors was made up of merchants
of all kinds, grocers, haberdashers, cloth merchants, silk




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merchants, etc. The undertaking was successful. Its
issue never exceeded 20,000,000 francs.
It may be well to mention another bank, founded at
this time, as a result of the success of the two establishments whose origins and workings we have just
described briefly. It was called the Comptoir Commercial, and was founded in 1800. It was usually known as
the Caisse Jabach. In comparison with the others this
bank had one interesting peculiarity: In addition to notes
of the denominations of 1,000 and 500 francs, it issued
notes for 250 francs. The Caisse Jabach carried on a discounting business, the only one, of course, which justifies
the issue of bank notes redeemable at sight.
Lastly must be mentioned the founding at Rouen in
April, 1798, of a bank of issue, which also made discounts.
I t took securities with two names, with a maximum maturity of one hundred and eighty days. It is seen that
in the matter of maturities it departed from the custom
of the Caisse des Comptes Courants, which took paper of
not over ninety days, or just half as long. This bank
issued notes of the denominations of 1,000, 500, 250 and
100 francs. No note as small as 100 francs was issued
by any Paris bank. It is not probable that this house
did a large business, or that it had deposits of any great
amount with which to make discounts (as a matter of fact
it allowed interest to its time depositors), for the issue did
not go beyond the very moderate sum of 200,000 francs.
It can not be denied that after the terrible years of the
Revolution, in the midst of the confusion and anarchy of
the Directory, these credit establishments, in spite of
difficult conditions, survived, maintained their credit, and




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were of real service to the commerce and bankers of Paris.
They gave not the slightest occasion for complaint or
interference on the part of the public authorities. Without any sort of privilege, having no connection with the
Government, they were able to meet their obligations even
in the midst of serious panics.
How does it happen, then, that this most satisfactory
state of freedom came to an end and that in the course
of a few years there was organized in Paris a bank with
the exclusive privilege of issue? Is it due to a series of
natural causes? No. Not one of the Caisses just described had occasioned disaster or invited suppression.
The new state of things came from the idea of credit
which existed in the mind of General Bonaparte, as well
as from his tendency to centralize everything, and because
the Government at that moment was in great need of
money. By following logically the development of the
facts we shall see that the prime motive was the allpowerful will of Napoleon.
It was necessary to make these few introductory remarks
in order to show the conditions which existed at the time
of the founding of the Bank of France—a bank which was
to possess later the sole right of issue for the whole of
France, influencing at the same time the general organization of the credit system of that country. It is at the
present moment the center and pivot of the system. And
yet, it is not through the Bank of France, through its own
action, but independently of it—making of course due
allowance for the rdle that circumstances have bestowed
upon it—that this evolution of credit institutions has
taken place.




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CHAPTER

I.—The founding of the Bank of France.

Reasons for founding the Bank of France.—Napoleon wanted a bank of his own.—
Preparation for founding the Bank.—Capital of the Bank of France.—Its transactions.—Its organization.—Difficulties in the way of raising the Bank's capital of
30,000,000 francs.—The intervention of the sinking fund.—The Bank's first resources.—Delay in disposing of the first shares.—The first subscribers.—The
assistance of the National Lottery.—First charges of the Bank.—Obligatory relations between the Bank and the State.—The bank notes of the Caisse des Comptes
Courants.—The first operations of the Bank.—Tendency toward a single bank of
issue.—The First Consul's schemes of centralization.—First conference with the
Caisse d'Escompte du Commerce.—Resistance of the Caisse d'Escompte du Commerce.—Manoeuvres against the Caisse d'Escompte.—The final agreement with
the Caisse d'Escompte.

At the time when the foundations of the Bank of
France were laid, as well as during the whole period of
the Empire, the press and writers in general had so
little freedom that it is impossible to obtain, either
through books or other authentic documents, trustworthy
details or exact information concerning the circumstances
which led to the creation of the Bank.
Baron Pelet (de la Lozfere), who was admitted when a
very young man to Napoleon's Council of State, published
in 1833 ° the notes he had collected while he was a member of that great body. He tells us on the subject of the
founding of the Bank of France (p. 248): "The rate of
interest on money was then 3 per cent a month. It was
determined to lower this rate, and especially to have an
establishment which would take the government's paper
and help its operations." This means that the credit
concerns were not willing to take government paper or
the drafts of the government contractors, because they
a Opinions de Napolion sur divers sujets de Politique et d'administration
recueillies par un membre de son Conseil d'Etat. Paris, 1833.




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lacked confidence in the Government. Further proof
of this fact is given by the same author (p. 249, same
volume). Here he sets forth the difficulties which arose
in 1804 between Napoleorf and the Bank of France. " He
(the Emperor) in the year 1804 bitterly reproached a
deputation from the Bank because there was, right in its
midst, an opposition party which kept the obligations of
the collectors-general from being discounted and also refused to give commerce the necessary accommodations.
The truth of the matter is that the Bank already held
government obligations to the amount of 25,000,000 or
30,000,000 francs, and that the alleged commercial effects
which it had refused were those of Hervas, Michel, and
other contractors, whose paper was nothing more nor less
than government paper. The Bank had in circulation
bills for 75,000,000 francs, and must of necessity be prepared to honor them on demand. Napoleon wanted the
Bank to increase the issue to 100,000,000 or 150,000,000,
at the risk of not being able to satisfy the bearers."
All the facts so far as known tend to prove that
First Consul Bonaparte took the initial steps toward
founding the Bank of France. He could not get what
he wanted from the free banks. On the other hand, he
felt that the Treasury needed money, and wanted to
have under his hand an establishment which he could
compel to meet his wishes. It appears indeed from this
extract from the notes of Baron Pelet that nearly three
years after the founding of the Bank, Napoleon,
then Emperor and undisputed master of France, did
not hesitate to speak sharply to the directors of the
1971—10




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Bank, who were little inclined to discount the paper of
the government contractors.
It is very likely that he broached the subject more in
particular to certain bankers who were near him, especially Perregaux, who had come from Neufchatel several
years before the Revolution and founded at Paris a very
prosperous banking house. The directors of the Caisse
des Comptes Courants, among whom was Perregaux, were
probably notified, for they came together and drew up
the plan of a new establishment which was to take over
the Caisse des Comptes Courants.
It would certainly seem that here originated the idea of
creating a new bank of issue. However, public opinion,
as represented by merchants and citizens of all classes,
was brought into play. A certain number of these men
met and prepared a petition addressed to the Directory,
in which the signers requested the formation of a new
credit institution. This occurred toward the end of 1799
and the first days of January, 1800.
Previous to this manifestation the first plan of the
general statutes of the projected bank had been submitted
to the Minister of Finance. On January 6, 1800, the regents, but recently elected, MM. Lecoulteux-Canteleu,
Mallet, Perregaux, Nautort, Perrier, and Perre, went to
the Minister of Finance and laid before him " t h e principal features of the protection" which they asked of the
Government.
The plan was to create a bank of discount, circulation,
and issue with a capital of 30,000,000 francs. The figure
was large for the time. How was this capital to be




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raised? This difl&culty had been foreseen. To solve
it they had prepared to merge the Caisse des
Comptes Courants and the new bank, which was to be
called the Bank of France. On January 18, 1800, the
general assembly of the stockholders of the Caisse des
Comptes Courants voted to dissolve this company and
enter the new combination.
The capital stock was fixed at 30,000,000 francs
and divided into 30,000 personal shares of 1,000
francs each. The Bank of France, according to its
first statutes, was to engage in the following transactions: Discounts, collections, running accounts, the issue
of notes payable to bearer on demand, and commerce in
gold and silver bullion. It was also to open a sort of
savings department called the savings and investment
bureau, allowing interest to depositors. But for some
reason this department was little patronized, and was
abolished in 1808. At first it paid 5 per cent on deposits;
later 4 per cent.
A regents' council of 15 members was to administer the
affairs of the Bank of France; its direct management was
entrusted to a committee of three regents, and its supervision was committed to a council of three censors. A
general assembly consisting of the 200 largest stockholders represented the whole body of stockholders. Five
shares were enough to give the holder a vote, and he had
as many votes as he had multiples of five shares, not
exceeding a maximum of four.
The very day on which the Caisse des Comptes Courants
was dissolved, a decree of the consuls authorized the




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Minister of Finance to lease for the Bank the state building
known as the "Oratory/' and " t h e former church which
makes a part of it." And there the Bank was installed,
in property belonging to the State, which showed already
what close relations existed between the new establishment and the Government.
All this was effected without obstacles. Not so the
getting together of the capital of the Bank. The great
difficulties which were encountered here are officially
stated in the report laid before the stockholders of the
Bank on October 17, 1800. Here is the passage:
"The regents who were in charge of the Bank being
convinced, owing to the scattered state of capital, that it
would be useless to expect that the 30,000,000 francs
which were to serve as banking capital would be subscribed promptly, simply by calling together stockholders,
their first care was to call to the attention of the Government the protection and cooperation necessary to
insure the success of the proposed establishment*
"The very day of their election, the directors addressed
a petition to the Minister of Finance requesting him to obtain from the consuls the permission to deposit in the
Bank of France the funds accruing from the bonds furnished by the collectors-general of the departments, and
destined by the law of the sixth Frimaire preceding to the
paying off of the public debt, and also to guarantee the
payments of these ame collectors-general. An order of
July 18, 1800, granted the request, and 5,000,000 francs
were deposited in the Bank in return for 5,000 shares registered to the credit of the sinking fund.




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"The Bank having got its first start through this fund
could now commence operations in competition with the
Caisse des Comptes Courants, which was then doing business ; but for fear of disturbing the money market by this
division of resources, the regents determined to make
every effort to unite the two establishments whose competition might prove dangerous."
Even in this official report, which was intended to
disguise some of the difficulties encountered in raising
the capital stock of the Bank, it is perfectly clear through
the very testimony of the founders that this establishment
got its first start by official order, from the sinking fund
of the state debt. That amount, however, made only onesixth of the capital. Subscribers for shares had not appeared in great numbers. During the first year (1800)
only 7,447 shares 0 were taken, and this only after uniting
with the Caisse des Comptes Courants. Among the earliest subscribers are found the following: First Consul
Bonaparte; his brother Joseph Bonaparte, J. Murat,
Hortense Beauharnais, then aides-de-camp such as Duroc
and Lemarois, and finally, Senator Sieyes and several
other members of Napoleon's immediate circle, including
Barbe-Marbois, Cretet, Cambaceres, etc.
In the early part of March, 1800, a new decree of the
consuls directed that the reserve fund of the national lota

Only 7,590 shares received the dividend at the end of the second half
year of 1800; 12,348 shares received the dividend of the first half of 1801;
14,705 that of the second half of the same year. It was only for the fiscal
year 1802 t h a t the number 30,000 was reached, and even then because a
subscription took place in October and November, 1801. I t was on this
occasion that the shares of the Bank commenced to be quoted on the
Paris Bourse (October 27, 1801).




21

National

Monetary Commission

tery should be deposited at the Bank. Little by little
they succeeded in this way in disposing of 15,000 out of
the 30,000 shares—that is, half of the capital stock stipulated in the statutes.
The Government had been in reality the first subscriber,
through the agency of the sinking fund, but it had made
the condition that in return for this first cooperation the
unpaid obligations of the collectors-general should be met
in full by the Bank of France to the amount not only
of the sums standing to the credit of the sinking fund
(which had deposited at the Bank funds proceeding from
the bonds furnished by the collectors-general) but also
an amount equivalent to the total of the shares bought
by the Government, which, as we know, amounted to
5,000,000 francs.
So the State gave with one hand and took away with
the other. Having been placed at the very beginning
under the protection of the Government, the Bank was
forced little by little to tighten the bonds from which
it could no longer escape. Although Perregaux, president
of the Bank, declared in his report of October 17, 1800,
that the Bank " negotiates with the Government only
when it finds it advantageous to do so and receives all
its usual securities," the new institution of issue was not
as free as Perregaux declared, as was proved by the
sequel. At any rate, the State had sold without scruple
the greater part of its shares. In 1801-2 (in the year X),
of the 5,000 shares that the sinking fund had bought in
the beginning, all but 500 had been sold.
It was with the bank notes of the Caisse des Comptes
Courants that the Bank of France began operations. At




22

Evolution

of Credit

and

Banks

the time it was incorporated with the Bank of France
this establishment brought the following resources:
Francs.
5,000,000
6, 000, 000

Specie
Commercial paper

It had in addition, either in circulation or in its coffers,
20,780,327 francs in bank notes. It brought also a very
substantial credit, and the technical experience of its
administrators. So the notes of the Caisse des Comptes
Courants became the first fiduciary money of the Bank.
It was in 1808 that the notes of the Caisse des Comptes
Courants disappeared entirely from circulation. They
were probably withdrawn in 1807.
In the first year's activity (1801, year IX) the Bank
discounted commercial paper to the amount of about
89,000,000 francs. The following year its discounts
doubled, reaching in round numbers 180,000,000 francs,
while its circulation during the second year amounted to
30,000,000 francs.
Besides the Bank of France, several other banks of
issue which we have mentioned above were still in operation. The most important among them was the Caisse
d'Escompte du Commerce. The idea of the First Consul
from the start was to make of the new concern an institution which he could have under his control. This appears
in the very beginning, when a deputation from the bank
council, accompanied by M. Cretet, Councillor of State,
who had an important share in these events, asked him
for government protection. Not being familiar with
financial questions, and especially with questions of banking and credit, he simply applied to this matter his ideas
of centralization. It may be surmised from the opinions




23

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Monetary

Commission

he expressed afterwards in public that he was already
turning over in his mind the plan for a single bank of issue,
with a view of using it to further his projects and ambition.
To attain this end the first method tried was diplomacy.
Negotiations were opened in April, 1802, to induce the
Caisse d'Escompte du Commerce to carry out of its own
accord its fusion with the Bank. They were from the
start exceedingly difficult. The Caisse d'Escompte refused to be merged in the Bank. When the directors
were assured that in the matter of the issue of bank notes
the unity of the issuing establishment was a necessity and
an advantage to the public, they answered, on May 14,
1802, " t h a t the Caisse d'Escompte with 6,000,000 francs
of capital issued bank notes to the value of 20,000,000
francs, while the Bank with a capital of 30,000,000 francs
had a circulation of only 30,000,000 francs.'' The argument was good, for the aim of issuing bank notes is to keep
in circulation, in the form of bank notes payable to the
bearer on demand, paper money with a real value, easy to
handle and representing commercial paper which is held
until maturity in the safe of the bank which makes the issue.
The capital is there only to make good the non-payment of
commercial paper on maturity. Now, discount intelligently handled ought to suffer only small losses; a reserve
of specie in the coffers should suffice to cover these losses
and redeem the bank notes which have been issued on
the basis of unpaid effects. Credit by issue does not
mean circulation in the form of paper money of specie,
but of short-dated commercial bills.
The Caisse d'Escompte was slow in being persuaded,
and held out for a long time. What happened finally has
never been cleared up. The press, as we have said, was




24

Evolution

of

Credit

and

Banks

not free, and there is no trace of the methods (probablydespotic) which were resorted to at the moment to convert the administrators of the Caisse d'Escompte. An
English newspaper, the London Courier, which published
letters from France, received one dated October 9, 1802,
in which it was said that the State had applied several
times to the Caisse d'Escompte to discount its obligations
and had been refused. Then, as it was alleged, a wellknown expedient had been resorted to—that of collecting
a great quantity of bank notes of the Caisse d'Escompte
and presenting them all at once one fine morning for
redemption. The establishment paid them. The Caisse
went through the same ordeal a second time and held out
successfully against the Government. At last, still according to this English correspondence, the Government,
being weary of the struggle, sent an armed force to close
the offices of the Caisse d'Escompte.
But, let it be repeated, there is in existence no authentic document proving these facts. However, even if they
are not to be considered as certain, it is possible to assert
that the directors of the Caisse d'Escompte du Commerce
consented to unite with the Bank only because they saw
that further resistance would be useless. The final agreement with the Bank was not signed until August 25, 1803,
more than four months after the Bank of France had
been invested with the exclusive privilege of issuing bank
notes in Paris.
Naturally, the Factorerie and the Comptoir Commercial
and the Comptoir Jabach disappeared likewise, or at least
were incorporated with the Bank.




25

CHAPTER

II.—The charter or privilege of the Bank
of France.

The Bank of France is given the exclusive right to issue bank notes in Paris.—
The law of April 14,1803, 24 Germinal, Year XI.—Duration of the privilege.—Increase of capital.—The right to discounts extended.—Fixing the dividends.—Personnel of the regents' council.—The real situation.—The balance was not maintained between the circulation and the convertible resources.—The crisis of 1805.—
The Emperor's departure for Germany. Rumors that were circulated.—Reduction of amount of discounts.—Limiting the redemption of notes.—Normal appeal
to the provincial banks.—The mistakes that had been made.—The bad effect of
relations between the State and the Bank.

From the facts that have just been stated it will not
be difficult to foresee their only possible outcome. It is
obvious that the Bank of France was destined to receive
the sole right of issue. And what is more, this was nothing but a stopping 'place on the way to the final goal,
namely, handing over the establishment to the head of
the State.
Although the event was planned beforehand, a slight
panic which made itself felt in the course of 1802 (the
year XI) was seized upon as a pretext for carrying out the
idea of a single bank of issue. The pretext was a sufficiently flimsy one, for the banks of issue, including the
Caisse d'Escompte du Commerce, had given no occasion
for complaint.
It was the law of April 14, 1803, which radically changed
the statutes of the Bank. As the president of the stockholders said in his report of the year X I I (1804), it
was not so much a commercial as it was a political law.
Its underlying provisions were as follows: The Bank of
France was henceforth to have the exclusive privilege of
issuing bank notes. The Caisse d'Escompte du Com-




26

Evolution

of

Credit

and

Banks

merce, the Factorerie, and other companies which issued
notes in Paris, ceased to have the right to issue new
ones from the date of publication of the law of Germinal. They were to withdraw all notes from circulation
within the very short period of six months or thereabouts. No bank could be organized in the provinces
without the consent of the Government. The Government reserved the right to grant the privilege of issue,
and to fix the maximum of notes issued, declaring at
the same time that these notes could not be manufactured elsewhere than at Paris. The privilege was to
last fifteen years, from the first Vendemiaire, year XII
(September 24, 1803). The capital of the Bank was
raised to 45,000,000 francs by creating 15,000 new shares.
The smallest denomination for Bank of France notes was
to be 500 francs, and 250 francs for any departmental
banks that might be founded. In the statutes of the
year VIII, the shareholders alone had special rights to
discount; in future, they were no longer to enjoy this
privilege; every merchant, manufacturer, banker, etc.,
on satisfying the general requirements, could be admitted
to discount his paper at this establishment. The annual
dividend was fixed at 6 per cent, not including the income
on the surplus capital invested in government stock, which
could be distributed in addition to the 6 per cent. Seven
regents out of fifteen and the three censors were to be
chosen from the manufacturers, mill owners, or tradesmen who were shareholders in the Bank. Every member
of the company could have but one vote, whatever the
number of shares he held.




27

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Monetary

Commission

Let us note at this point that the capital stock was
raised from 30,000,000 to 45,000,000 francs without the
slightest commercial necessity.
To all appearances, from the year VIII to the year X I I ,
the Bank had increased in rather large proportions its
"portfolio" of commercial paper—in other words, its discounts. Here are the comparative figures (maximum and
minimum) relative to the reserve, the commercial discounts, and the circulation of bank notes for the years
VIII and X I I :
[Million francs.]
Commercial discounts.

Reserve.
Maximum.
Year VIII, second half year
(i8oo)__
Year X I I (1803-4).. -

Minimum.

6
5

11

25

Maximum.

21

76

Minimum.

5
S3

Circulation.
Maximum.

23
70

Minimum.

9
54

Average rate of interest, 6 per cent.

But, according to the opinion of Mollien, who was not
unfriendly to the Bank of France, there was in what was
called the commercial "portfolio" only a very small per
cent of real commercial values. These large figures were
mostly made up of government paper or that of the
contractors.
In reality, they were not liquid values, capable of being
realized in specie quickly or on short notice, making it
possible to redeem bank notes without running the risk
of bankruptcy in case of a panic. M. Gautier, who was
afterwards deputy governor of the Bank, states positively
in his study on the institutions of issue in France and




28

Evolution

of Credit

and

Banks

America, that out of 97,000,000 francs of paper discounted
there was as much as 80,000,000 which represented obligations of the collectors-general taken at 6 per cent, and
which the Bank would not have been able to rediscount,
even at 12 per cent. On the other hand, from the year
VIII to- the year XIII, the Bank had advanced to the
public Treasury 722,000,000 francs; the total of all
discounts during this period of six years was scarcely
three times this amount. Now, in the year XIII, the
circulation of bank notes had reached nearly 80,000,000
francs. The maximum reserve had not gone beyond
24,000,000 francs, and the "portfolio" contained not
more than 17 per cent of real commercial paper, that
is, of negotiable paper or paper convertible into
specie. Notice that we have spoken of the maximum
reserve; the minimum fell the same years (1804-5) "below
2,000,000 francs. At the slightest economic disaster, the
Bank, placed in this abnormal situation, must necessarily
get into difficulties.
We will not describe in detail the transactions with
the Merchants' Association, conducted by the celebrated
army contractor, Ouvrard. This company had dealings
with the Treasury. It discounted effects at the Bank, in
return for which the latter gave bank notes, increasing by
that much the circulation. Now, these effects were
credit paper, and the Bank had taken them only to oblige
the Government, then represented by Baron Marbois,
Minister of the Treasury. In addition to this, after the
Emperor had set out for Germany, the rumor was circulated in Paris that he had carried away the metallic




29

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Monetary

Commission

reserve from the Bank to fill his army coffers. The
statement was not true. To be sure many soldiers had
come to draw money from their accounts at the Bank in
order to take the field. As a result of the working of all
of these causes, a real panic arose. Bank notes were
presented in great numbers at the doors of the Bank of
France. The directors of this establishment made the
mistake of restricting their discounts—a disastrous proceeding at such a moment. The bank notes depreciated
10 and 15 per cent. The Bank was reduced to a partial
suspension of payments; it limited the redemption of
notes to 600,000 francs a day. The Bank acted more
wisely in sending to the provincial bankers paper on their
own localities, asking them to send back the value of
this paper in specie.
What mistake had been made? Issuing more bank
notes than the needs of commerce justified. And in
exchange for what securities had the Bank made this issue?
In exchange for the credit paper of the government contractors; in exchange for the obligations of collectorsgeneral which could not be paid, because the directors of
the Merchants' Association had already received the money
that these obligations represented. At the critical moment
the specie in the coffers fell to 782,000 francs on September
24, 1805, in the face of a circulation of 63,000,000 francs.
Order was reestablished by the end of a month. The
victory of Austerlitz helped, and also the more or less
regular measures that had been adopted pell-mell, good
and bad together. It was certainly, too, the opinion
people had of the relations of the Bank with the State




3°

Evolution

of Credit

and

Banks

that had aggravated this crisis. It is moreover a typical
example of the mistakes that may be committed by a
bank of issue, both in becoming involved in a difficult
situation and in trying to escape from it by expedients
which are for the most part more harmful than efficacious.
Napoleon, on returning from Germany, was much
alarmed at this crisis, the real causes of which he did not
clearly grasp. He wanted to have the Bank "more in
his hands," and, with this in view, prepared a new constitution for the establishment. It was the decree of January 16, 1808, which sanctioned these modifications.




31

III.—The fundamental statutes of the Bank—
It comes into closer relation with the State, 1806-1814.

CHAPTER

The law of April 22, 1806.—Decree of January 16, 1808, ratifying the law of April
22,1808.—The Bank creates branch offices in the provinces.—Limited transactions
of these Comptoirs.—Their disappearance.—The Bank of France from 1808 to the
fall of the Empire.—Industry in France at the end of the eighteenth century and the
beginning of the nineteenth—National expositions at Paris under the Empire.—
The efforts of learned men.—Political obstacles.—Napoleon's anxiety for his Bank.
His study of the question.—Napoleon asks Mollien to explain the nature of a bank
of issue.—The Havre note.—Masterly statement of the true mechanism of a bank
of issue.—Extracts from the Havre note, May 29,1810.—The opinion of Mollien on
the nature of the operations of a bank of issue.—The last years of the Empire.—
Danger of holding state paper in panic times.—Crisis of 1814. Panic of holders of
notes.

According to the law of April 22, 1806, the committee
of three which had been chosen from the regents named
by the stockholders to govern the Bank, was replaced by
a governor and two deputy governors, named by the head
of the State. The first governor was M. Cretet, Councillor
of State. He assumed his duties April 25, 1806. This
governor was nothing more than a functionary, subject
to the dictates of the State. The privilege was prolonged
twenty-five years beyond the fifteen years granted by
the law of the year XI. The capital was doubled by the
issue of 45,000 new shares and raised, consequently, to
90,000,000 francs. The regents' council, still composed
of 15 members, was to include 5 manufacturers, merchants,
or mill owners, and 3 collectors-general. This introduction of manufacturers, tradesmen, and collectors-general
into the board of directors came from Napoleon's notion
that the crisis was caused by the bankers themselves.
He was not overfond of them, especially since the Consu-




32

Evolution

of

Credit

and

Banks

late, when they had refused him money, and he distrusted
them because he saw that they made use of the Bank to
advance their own interests.
In placing Cretet at the head of this establishment,
Napoleon, knowing the tendencies of the governor and
his administrative skill, transformed the Bank of France
in reality into a state bank whose capital was furnished
by private individuals.
The annual dividend was composed, first, of a distribution not to exceed 6 per cent of the original capital; second, of a second distribution equal to two-thirds of the
remaining profits. The other third was kept in reserve.
The imperial decree of January 16, 1808, ratified the law
of April 22, 1806. It was there specified that the Bank
should create in the principal provincial towns branch
offices, chiefly in places where they would serve the needs
of commerce. Several months later, a decree of May 18,
1808, regulated the organization of these branches. The
rate of discount was fixed at 5 per cent. Once a year the
Minister of Finance was to make a report on the transactions of each branch office, and propose, if it were judged
necessary, a lowering of this rate. In obedience to this
order, branches were created on June 24, 1808, at Lyons
and Rouen. The Bank had the exclusive right of issue only
in the towns where it had branch offices. The State could
therefore give this privilege to other establishments in other
places. A third branch was founded at Lille May 29,1810.
This latter was not successful, and closed its doors in 1813.
It had been very little patronized, and its affairs were not
difficult to liquidate. The branch at Rouen had a rather
1971—10




3

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Monetary

Commission

brisk business for several years. People in Rouen were
already used to banks of issue and to bank notes. We
have seen above that in that town there existed a very
prosperous institution of issue when the founding of the
Bank of France and the suppression of the right of free
issue of bank notes were decreed by the Directory. The
Lyons and Rouen branches each lasted nine years, and
were closed in 1817. The latter had discounted in this
time commercial bills to the amount of 160,000,000 francs,
or an average of 17,500,000 francs a year. The profits
had not been large. The Lyons branch had been a little
more active, as the location was more favorable to business than Rouen. The first few years were fairly good.
It was not until 1810 that the Bank sent to its branch
offices notes of the denomination of 250 francs. On this
occasion the rate of discount, which had been 5 per cent,
was lowered to 4 per cent. But the foreign invasions and
the slackness of business which marked the downfall of the
Empire brought about the closing of the branches. In
reality, the Bank had not become much involved in this
scheme. If these establishments made some profits in the
first years, they saw them disappear and even change to
losses in 1817, when they ran short 100,000 francs.
The law of 1806 and the decrees of 1808, which confirmed and at the same time aggravated it, had, as we
have seen, brought the Government and the Bank closer
together. At that period the Bank was chiefly a state
concern. For four years, until 1812, no difficulties were
encountered. To be sure, business was dull, the political
situation was uncertain; continual wars interfered with




34

Evolution

of

Credit

and

Banks

the setting up of industrial and commercial enterprises.
Capital was abundant and idle. The year 1810 was the
only one which can be reckoned in any degree active; the
Bank made discounts amounting to a total of 715,000,000
francs, and that thanks to the lowering of the interest rate
to 4 per cent. But at the beginning of the year 1812 it
had in the coffers 114,000,000 francs in specie, and in circulation 117,000,000 francs in bank notes; commercial discounts amounted to only 15,000,000 francs; in the course
of the year they even fell as low as 10,000,000 francs. It
was the Treasury which furnished bills for discount.
Thus in 1811 the Bank discounted state obligations to the
value of about 15,000,000 francs. These obligations went
under the name of excise duties {droits reunis), and had
to do with the tax or octroi on goods brought into the city.
In 1812 the same kind of obligations were discounted
again for the sum of 2,000,000 francs. In addition, an
advance of 40,000,000 francs had been made to the State
in the preceding years on the obligations of the collectorsgeneral. At this moment, therefore, the principal client
of the Bank was the Treasury, and the Bank was neglecting
for the Treasury the interests of its clients in industry
and commerce.
However, it was not the elements of economic progress
that were lacking in France. In spite of the Revolution,
in spite of the anarchy of the Directory and the grave
financial disturbances resulting from it, a renewal of industry, a veritable revival of the arts, business, and inventions had taken place. This is proved by the number of
expositions held at that time.




35

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Monetary

Commission

The first exposition which was opened in Europe was
organized by France. It was held in the Champ de Mars,
and lasted a week, but was not a very brilliant affair.
There were n o exhibitors, of whom 10 or 12 received
prizes. The expositions of 1801 and 1802 were more successful. Carcel received a prize for his lamps, Jacquart
for his machine loom, Ternaux for woolen stuffs, Montgolfier, of the town of Annonay, for his paper, Fauler for
his morocco leather. At the exposition of 1802 were seen
cashmere shawls, imitating those of India, Sallandrouze
carpets, and Sevres porcelain. After the victory of Austerlitz a new exposition was planned, and the buildings
erected on the parade ground of the Invalides. Twentyseven gold medals were distributed, 146 silver medals, 326
honorable mentions, etc. The following table will give
an idea of the increasing importance of these expositions:
Exhibitors.
First exposition
Second exposition _
Third exposition _ _
Fourth exposition _

1798

no
220

1802

1806

54o
I , 422

The discoveries in chemistry which revolutionized at
that time certain industries, as, for example, the manufacture of artificial soda, the improvements in the paper
industry, and, finally, mechanical inventions for spinning
and weaving—all these were the vanguard of the one
supreme invention most marvelous of all, namely, the
steam engine. Chaptal, Berthollet, Conte, Vauquelin,
Th&iard, Jacquart, and others were working to bring out




36

Evolution

of

Credit

and

Banks

of science new industries. But political obstacles arose,
hindering economic progress. Even though the nearly
continual wars supported themselves, and though they involved the manufacture of arms and munitions, and so
furnished employment to the industries connected with
the equipment and maintenance of armies, they took away
many hands from agriculture, manufactures, and commerce. Peace is the first necessity of business prosperity.
Business enterprises can not be launched without a fair
certainty that no unforeseen event will bring them to
grief. This explains the very slight commercial activity
of the Bank during these years, but the years to follow
are still more unfavorable and more filled with trials for
this institution.
Napoleon was solicitous for all that concerned the
Bank—his Bank as he called it in discussions in the Council of State. He urged his ministers to study the subject.
Among them was Mollien, Minister of the Treasury, 0 a
highly educated man, very learned both in economic
theory and practice. Napoleon was attached to him not
because of any liking for him, but because he was useful.
Mollien dared tell the truth to the Emperor; he was never
a courtier. Napoleon had asked him his opinion on the
Bank of France. The Emperor was (May, 1810) at Havre,
and in correspondence with Mollien in regard to founding a branch office of the Bank at Lille. In a letter
dated May 20 he said to his Minister of the Treasury,
after speaking of discount at Rouen: " Make me a report
a There were at that time, and during the whole period of the Empire,
two Ministers of Finance: The first, Gaudin, Minister of Finance, or
Receipts; the second, Mollien, Minister of the Treasury, or Expenditures.




37

National

Monetary

Commission

which will help me to understand the nature of the deposit
of the Bank of France. Who issues the bank notes?
Who receives the profits? Who furnishes the funds?"
Mollien replied in the celebrated memorandum called the
Havre note, in which he makes clear the true theory of
banks of issue. This was called the Havre note, because
the Emperor was still at Havre, and wrote to Mollien on
receiving it: "This is the first thing I have ever read on
the subject that is perfectly clear, well thought out, and
without abstractions; I had an idea of having it printed,
but I should like to know first if there would be any
objection. Take this memorandum to the Bank as coming
from me and give them a chance to attack it in your
presence.''
We will give the most important points of this document.
The question is admirably stated, and it is here that must
be sought trustworthy information as to the true mechanism of a bank of issue. It is, let us note in passing, sufficiently surprising that Napoleon adopted so readily such
daring ideas: "The purpose of this capital (the 30,000,000
francs decreed by the law of the year VIII) was not to
give the bank the funds necessary to exploit its privilege;
this capital is not the instrument of its discounts, and
can not be used for discounts. The privilege of the Bank
consists in the right to create and manufacture special
money for its discounts. If a bank used its capital for
discounts, it would not need any privilege. * * * It
is independently of its capital that it creates by its notes
its true and only discounting medium. * * * The
necessity of furnishing capital is imposed on the founders




38

Evolution

of Credit

and

Banks

of a bank only in order to provide those who accept its
notes as real money with a pledge and guaranty against
the errors and imprudences that this Bank may commit
in the use of its notes, or against any losses it may suffer
from admitting doubtful bills to discount; in a word (to
use the technical expression of commerce), against its bad
paper (avaries de son portefeuille).
" Since a bank issues and must issue notes only against
good and valid bills of exchange, having two or three
months to run at the outside, it should have on hand in its
'portfolio' in bills of exchange a sum at least equal to
the notes issued; the bank is then in a position to withdraw all its notes from circulation within the space of
three months, simply as a result of the successive falling
due of the loans, and this without involving any part of
its capital."
Mollien shows next that a bank of issue must be a
bank engaging only in operations of commercial credit;
that its administrators must refrain from all participation, direct or indirect, in industrial or commercial enterprises ; and he expresses himself very clearly on this point
as follows: "Discount, as it is practiced by a bank on
everything discountable in a particular place, is such an
important and delicate operation, demanding so much
attention, so much foresight, so much care, such minute
observation of the methods used by each tradesman, and
the adjustment of supply and demand in each locality,
of the circumstances which may lessen or increase day
by day the credit of each signer of a bill of exchange—
all these duties are such that the operation does not




39

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Monetary

Commission

admit the intrusion of any other interest. Those who
decide on discounts are the judges of trade; they ought
not to descend into the arena of commerce. ,,
It should be noted here that Mollien advocated the
privilege of the Bank, but for Paris only. He did not
advise extending it to the whole of France, nor did he
think that discounts of provincial banks could be profitably managed from Paris. He admitted, however, the
feasibility of branch offices, knowing that Napoleon was
in favor of them; but the Minister of the Treasury in no
way disguised his belief as to the precautions necessary
in such a case. Let us say that the fears of Mollien were
not justified. What explains his timidity on this point
is that the railroads and telegraph were not yet in existence, and communication between Paris and the provinces
was slow and difficult and often uncertain.
Having made this digression to show the economic
situation of that time, and the attitude of Napoleon and
his minister, Mollien, toward the Bank of France, let us
resume the account of the progress of the Bank, which
we left at the end of 1812.
The year 1813 was unfavorable. The Empire was visibly beginning to decline. The loans of the Bank to the
Treasury exceeded 340,000,000 francs. The discounts fell
to a total of less than 30,000,000 francs. It is true that
the circulation of bank notes diminished as well. After
being at 134,000,000 francs maximum and 82,000,000
francs minimum in 1812, it fell to a maximum of
95,000,006 francs in 1813.
At this moment the Bank was creditor of the State for
the amount of 54,000,000 francs (40,000,000 francs direct




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of Credit

and

Banks

loan and 14,000,000 francs on the excises), without counting the advances on the obligations of the collectorsgeneral. But, in addition, the Bank possessed a capital of
35,000,000 francs invested in government stock (rentes
d'Etat). How was this capital to be realized on at such a
critical moment? For the Bank had not sufficient available funds to meet its engagements payable at sight.
If we examine the maxima we shall see that the Bank
had in its coffers 39,000,000 francs in specie, but it owed
at sight 95,000,000 francs on bank notes in circulation
and 23,000,000 francs on current accounts of depositors; in
a word, 39,000,000 francs versus 118,000,000 francs. Its
"portfolio" was not easy to rediscount, composed as it
was of state paper. A part of the capital, of course, was
in the 35,000,000 francs invested in government stock.
But how was this stock to be sold off? At the price to
which it had then fallen the Bank would have lost on the
purchase price. It would have forced the price of this
stock still lower if such a quantity of it had been put on
the market. Finally, the State, which had so much
influence on the Bank, would not have,allowed this
operation to be carried through, because of the depression which it would have caused on the Bourse. In the
month of December the Bank redeemed notes for about
40,000,000 francs. But as the crisis grew more acute the
general council of the Bank asked to restrict redemptions
to 500,000 francs a day, beginning with January 20, 1814.
This state of things lasted until April 14, 1814. Toward
January 20, at the height of the panic, at the moment of
the invasion, the Bank borrowed 6,000,000 francs, with-




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Commission

out which it would have been obliged to suspend payments entirely. This loan, in all probability, was made
by one or more private bankers in Paris.
As soon as the political crisis was over, the affairs of
the Bank resumed their normal course. Nothing was
modified in its organization, although Laffitte and the
general council had proposed to bring the Bank back to
its original purpose before it had become a ward of the
State. It was proposed also to keep the exclusive privilege of issue only for Paris, to give up provincial branches,
and to leave the election of the governor to the stockholders. But these plans could not come up for discussion. The Ministers of Finance were perplexed with too
many grave problems at that moment, and when Gaudin,
former Minister of Finance under the Empire, was nominated governor in 1820, all hope of liberal reform took
flight. Two motions, had been laid before the Chambers
of Deputies in that interval (1814-1820), one on November 16, 1814, the other on April 13, 1818; both aimed at
a reaction against the imperial decrees which had reduced
the Bank to a state dependency. These two plans came
to nothing.




42

CHAPTER

IV.—The Bank under the Restoration—Founding
of departmental banks.

Several banks have the privilege of issue in France. The departmental banks.—
Conditions of issue imposed on these three banks.-—Difficulty of founding
departmental banks.—Crisis of 1818.—From 1818 to 1830.

The liberal ideas of Laffitte and his friends, though they
had not succeeded in modifying the despotic constitution
imposed on the Bank by the Empire, resulted at least in
several liberal measures in another quarter. The most
important was the establishing of departmental banks.
These banks also had the privilege of issue in the centers
where they were established and even in a little wider
circle.
They were of real service to the towns and districts
where they were situated. The need of them was all
the greater because, as we have seen, the Bank of France,
after opening a number of branch offices, had closed them
following several years of poor returns.
Three departmental banks were founded under the Restoration; they were, let it be remembered, banks of issue.
Here is a short account of each of them:
The Bank of Rouen (May 17, 1817).—Capital, 1,000,000
francs; charter to last nine years; right of discount for
Rouen, Havre, Paris; right of paying interest on deposits,
even sight deposits (it exercised this right); right of issue;
its charter was renewed in 1826; the bank increased its
capital at intervals and when it disappeared in 1848, for
reasons that we shall explain later, the capital was
3,000,000 francs.




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Bank of Nantes.—Chartered May 18, 1818; did not
begin operations until January 1, 1822; original capital,
600,000 francs; right to pay interest on deposits; right
to discount paper on all the markets in France; right of
issue; this bank, too, increased its capital at intervals; in
1840 it was 3,000,000 francs. It restricted its privileges
of discount to Nantes, Paris, and Bordeaux.
Bank of Bordeaux.—Chartered by royal decree November 23,1818; original capital, 3,000,000 francs; same rights
as the two preceding banks. The Bank of Bordeaux went
through more acute crises than those of Rouen and Nantes.
Its capital was not increased, properly speaking, since
in 1843 it was still 3,150,000 francs. In the beginning
it had great difficulty in getting the public to accept its
notes. People gradually got used to them, however.
As we know, the Bank of France had submitted in its
statutes to no special conditions for the issue of bank
notes. Not so the departmental banks. In the first
place, they had the privilege of issuing notes only for
their headquarters and several other towns mentioned in
their statutes. Then the total of their engagements payable at sight could in no case be more than three times
the metallic reserve. But these banks, contrary to the
condition imposed on the Bank of France, could choose
their own directors, at least until 1840.
In order to establish a departmental bank under the
Restoration, it was necessary to obtain the consent of the
government offices and the council of state. In the
offices, as well as in the council of state, there still prevailed the formalism, slowness, and red tape by which




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and

Banks

France had been governed despotically during the Empire.
On the other hand, the Bank of France, although it had
closed its branch offices, did not see these new establishments founded without a certain anxiety. It used its
influence on the central government to delay their
creation. So there were many obstacles to overcome in
obtaining permission to found a departmental bank.
And, even when the permission was granted, the bank
was obliged to work within rather narrow limits. Conditions were imposed on the directors in banking statutes which were not of the least use in protecting the
interests of the public, and yet were a hindrance to the
extension of business. In spite of this, these concerns
prospered. As we shall see further on, they increased in
number under the Monarchy of July. The Bank of
France, alarmed by this competition, began anew -to
found branch offices after the Revolution of 1830.
In 1818 the Bank suffered a crisis, caused by the demand
for capital, made first by France, to pay the indemnity to
the Allies, then by other countries, such as Austria, Prussia,
Russia, etc. These loans diminished the supply of specie,
especially in the Paris market. The cash in the coffers
of the Bank fell to 34,000,000 francs at a moment when
the sight liabilities amounted to more than 160,000,000
francs. This time the Bank did not ask to limit payments,
but resorted to the expedient of refusing to discount all
paper having more than forty-five days to run. The
object of this was to avoid increasing the discount rate,
but the proceeding is open to severe criticism. It would
have been better if the Bank had obeyed the law of supply




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Commission

and demand. In limiting discounts to short-dated bills,
it embarrassed merchants, who needed money all the
more, in that they had on hand nothing but sixty and
ninety day paper. They would willingly have paid a
higher rate for the credit they needed. On the other hand,
in maintaining discount at the same rate as formerly
during a crisis caused by a scarcity of specie, the Bank
gave an undue advantage to holders of short-dated paper,
and yet this paper was not to fall due until a month and
a half later. In our opinion, it is a great mistake for a
bank of issue not to vary the rate of discount according
to the fluctuations of the money market.
The history of the Bank from 1818 to 1830 offers no
feature sufficiently noteworthy to serve as a subject of
study. The total of its issue showed a tendency to increase. In 1818 its maximum reached 126,000,000 francs;
in 1830, 239,000,000 francs. Its minimum was 87,000,000
francs in 1818, and 214,000,000 francs in 1830. From
1820 to 1830 the minimum of circulation or issue
approached the maximum. There was a like tendency
in the specie reserve. As for the commercial discounts,
they underwent fluctuations by periods lasting several
years; they diminished from 1819 to 1824, and increased
until 1829, at which time there was a depression.
Excepting for the year 1830, this depression was somewhat visible until 1835.




46

V.—The Bank of France under the Monarchy of
July—Founding of comptoirs or branch offices—Renewal
of the privilege, and competition with departmental banks.

CHAPTER

Discount crisis of 1830.—Political causes of the crisis.—Lack of intermediary
bankers.—Necessary evolution of credit with a single bank of issue regulated in
its operations.—Loans on securities, 1834.—Formation of new departmental banks.—
Plurality of banks of issue.—Branch offices of the Bank of France.—Crisis of
1836-37.—Renewal of the privilege of the Bank. It is prepared in 1840.—The
representatives of the departmental banks lay a request before the authorities.—
The law of May 21, 1840. Extension of privilege.—The privilege is confined to
Paris.—The balance sheet must be published every three months.—The State
ceases chartering departmental banks.—The Bank keeps the rate of discount
at 4 per cent. Too high a rate.—Capital is cheap.

The Revolution of 1830 did not injure in the least the
particular credit of the Bank. Government stock did not
even pass through the fluctuations usual in such circumstances. But this is not true of commerce'and industry
in general. To relieve the embarrassment of several local
markets it was necessary to adopt unusual measures.
As the Bank took paper only with three signatures, the
Government used its influence and had a credit of
30,000,000 francs voted by the Chambers on October 17,
1830, to be applied to discounting commercial paper with
two signatures. A provisional establishment was opened
a few days after the voting of this credit to handle these
loans. It bore the name of Comptoir d'Escompte, and
lasted from October 26, 1830, to September 30, 1832, or
twenty-three months. It had received from the State
1,760,000 francs out of the appropriation of 30,000,000
francs. The city of Paris was authorized furthermore to
go security for this provisional bank with the Bank of




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France to the amount of 4,000,000 francs. It was an
intermediary between commerce and the Bank; it furnished the third name, and rediscounted its paper at that
establishment of issue. In these twenty-three months
it discounted more than 37,000 bills, valued at over
20,000,000 francs. This Comptoir discounted paper on
Paris at 4 per cent; on the provinces at 5 per cent.
Banks of the same nature were organized in answer to
the same needs in certain maritime centers or ports, such
as Rouen, Nantes, Rochefort, and in certain manufacturing towns, such as Reims, Troyes, and a few others.
This was not a monetary crisis, like the one of 1818,
when France had to pay the foreign armies camped on her
soil, and also the war indemnity exacted by the allies.
The crisis of 1830-31, which lasted until about the middle
of 1832, had a political cause. The Government of July
was not thought to be firmly established, and the ease with
which the Revolution of 1830 had been accomplished
aroused continual fears of a new change of rule.
The Bank suffered much from this state of things. In
1832 the maximum figure of its commercial discounts did
not amount to more than 30,000,000 francs. Its reserve,
however, was very high, and reached a maximum of
282,000,000 francs, and a minimum of 217,000,000. The
maximum circulation in 1832 was 258,000,000 francs, and
the minimum 202,000,000 francs. Therefore its banknotes in circulation represented for the most part the
metallic reserve. If the Bank was not of more service
then, it is because intermediaries were lacking—that is
to say, bankers who by adding their own names to the




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Evolution

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Credit

and

Banks

bills discounted by them, and already bearing two names,
could rediscount this paper at the Bank of France. With
a system in which a single bank has the exclusive privilege of issue, accepting for discount paper with three names
only, or with two names accompanied by collateral security, intermediary banks of discount are necessary. We
shall see this inevitable tendency develop little by little
in the organization of French banks. Even at the very
beginning, the Bank of France was a bankers' bank.
Later, we shall see it become the bank patronized by the
credit associations when its privilege had been extended
to the whole of France. As business expanded, the general
activity of banking operations naturally expanded also.
We shall see, too, that the Bank of France became in this
way the pivot on which revolves the whole credit system
of the country.
The statutes of the Bank had permitted it heretofore
to make loans only on short-dated state securities; the
law of May 17, 1834, authorized loans on all state securities without stipulation as to maturity. From this time
on the Bank made loans against deposits of French
government stocks.
After 1835 new departmental banks were created. In
1835 a departmental bank was founded at Lyons with a
capital of 2,000,000 francs, and a twenty-year privilege of
issue. The Bank of Marseilles, with a capital of 4,000,000
francs, was chartered the same year, and was very successful. In 1837 another one was opened at Lille, with a capital
of 2,000,000 francs. The same year that of Havre was
chartered and in 1838 the Bank of Toulouse, with a
1971—10




4

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Commission

capital of 120,000 francs, and the Bank of Orleans, with
a capital of 1,000,000 francs.
This was the last to be created, as the Government
refused to charter any others. We have already said
that the Bank of France was naturally suspicious of the
founding of these establishments, although its own
privilege was limited to Paris. In the beginning, however, the Bank was inclined to be favorable to the opening of these departmental institutions of issue, but
afterwards it tried to keep them from multiplying, and
set about organizing branch offices in the departments.
These nine departmental banks were well administered
and performed much useful service. It has been ascertained that in the very unfavorable year of 1847 these
banks, with a total capital of 23,400,000 francs, discounted
commercial paper to the amount of 850,000,000 francs—
in other words, thirty-two times their capital, whereas the
discounts of the Bank were only twenty-seven times its
capital.
These departmental banks, therefore, subsisted under
very nearly normal conditions, by virtue of rendering
services. They might have come to an agreement to
make their bank notes interchangeable, but no such
thing came about.
The Bank of France, from 1835 on, opened branch
offices in certain towns, and kept on increasing their number, always with the sanction of the State. They soon
came under the provision of the law of March 25, 1841.
Branch offices could not be formed without a state
charter. They were under the direction of the Bank.




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Banks

The general council of the Bank fixed the rate of discount.
The Bank had the exclusive privilege of issue in the
towns where branches were established. The notes had
to be manufactured at Paris and furnished by the Bank
in denominations of not less than 250 francs. Each
branch office had to redeem its own notes; but the
redemption of a note from the central Bank in Paris by
a branch was optional; the same was true for Paris
regarding the effects of the branches. The directors and
censors were named by the Bank; the governor by the
State. As a result of this law, 15 branches were opened
between 1841 and 1848.
The crisis of 1837 was caused by events in the United
States. President Jackson was engaged in a bitter
struggle with the Bank of the United States, a centralized and single bank of issue. A business disturbance
resulted, which made itself felt in France and England.
It was a monetary crisis. The coin which had left the
country during the last months of 1836 returned gradually toward the end of 1837. The crisis was not a
serious one, and was met without much difficulty by the
French credit institutions.
The privilege of the Bank of France, granted at first
for fifteen years, was extended by the law of April 22,
1806, to twenty-five years, making forty years in all.
The Bank began in 1838 to ask for renewal, but the
question was not taken up in the Chambers until 1840.
The departmental banks, profiting by the fact that a law
for the Bank of France was under consideration, tried to
get more latitude for their own transactions. They were




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subjected to very narrow regulations, which cramped
them and made it impossible for them to perform the
services which might normally be expected. No heed
was paid to the representatives of these banks or to the
protest that they made.
The law of May 21, 1840, continued until December 31,
1867, the privilege of the Bank, which was to expire in
1843. This extension was granted with the reservation
that the privilege could be changed or even withdrawn
on December 31, 1855, if a law passed in one of the
two preceding sessions of the Chamber of Deputies should
so decide. The capital of 67,900,000 francs was officially
recognized; this sum could neither be increased nor
diminished except by law. The Bank was authorized
to make loans on French Government effects of any
kind whatsoever.
The question of complete privilege, extending to the
whole of France, it is seen, does not figure in the law of
May 21, 1840. It was understood that the privilege was
renewed for Paris only, and when the Bank wished to
found branch offices it must obtain special permission
from the Government. That question was avoided; it
was not mentioned in the discussions carried on in the
Chambers.
Strangely enough, the necessity of publishing quarterly
reports was made a matter of debate, though it would
naturally seem that the first duty of a credit establishment, especially one enjoying a privilege, is to keep the
public informed of its operations. It was decided, then,
that the Minister of Finance should publish every three




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Credit

and

Banks

months t h e statement of the Bank averages for t h e preceding trimester, and every six months the result of
operations for t h e half year, including the dividend rate.
I t should be mentioned t h a t from this day on t h e
S t a t e issued no more charters for departmental banks.
The Bank of France, on t h e other hand, increased its
branch offices. A certain number were opened each
year from 1841 until 1846.
During t h e whole period from 1840-1846 there were
no disturbances or difficulties of any kind. The business of t h e Bank prospered, its credit extended. The
departmental banks, in spite of the requests of their
representatives, failed entirely in their a t t e m p t t o get
more liberty in their operations.
The circulation of t h e Bank continued t o increase
from 1840 to 1846. I n t h e latter year it reached a
m a x i m u m of 311,000,000 francs and a minimum of
243,000,000 francs. But, on t h e other hand, t h e commercial discounts were not on the increase. As for t h e
specie reserve, it amounted in 1846 t o a m a x i m u m of
252,000,000 francs and a minimum of 150,000,000 francs.
I t is true t h a t there was at t h a t time a dearth of
business transactions, b u t there is no doubt t h a t the
Bank held its discount rate at too high a figure, considering t h e abundance of capital from 1840 to 1846.
E v e n t h e State, finding it cheaper t o borrow elsewhere,
did little business with t h e Bank from 1837 to 1846.
However, in spite of this calm, France was about t o
be visited by a succession of panics, which h a d various
causes, in t h e midst of which t h e Monarchy of July was
destined to go under.




53

VI.—The beginnings of the railroad industry—
Panics of 184.6, 1847, 1848—The departmental banks of
issue are incorporated with the Bank of France, which
becomes the sole bank of issue.

CHAPTER

Delay in constructing railroads in France. The period from 1823 to 1839.—The
extension of the railway system in France. The law of June 11, 1842.—Call for
credit for the construction of the railroads.—Bad crops in 1846. Wheat famine
in France.—The panic of 1846-47.—Measures adopted by the Bank.—Error of the
Bank.—End of the financial crisis of 1847.—The Bank resumes the 4 per cent
discount rate December, 1847.—Bills for 200 francs.—Political crisis of 1848.
Panic.—Able and courageous attitude of the administration of the Bank of France
(1848).—Forced currency. Decree of March 15, 1848.—Notes of small denominations. Their advantages and disadvantages.—Comparison of the crisis of 1848
with that of 1846-47.—Elements of time and place which must be considered.—
Several departmental banks issue bills for 25 and 50 francs.—Duty of a bank of
issue in panic times.—Weekly publication of the Bank balance sheet, hitherto
published only once in three months.—No clearing house (chambre de compensation) in Paris at that time.—Departmental banks.—Difficulties experienced
by departmental banks. Possible solutions of these difficulties.—Incorporating of
the departmental banks of issue with the Bank of France on April 27 and May 2,
1848.

Capital was abundant and idle in France from 1840 to
1846; the rate of interest had consequently lowered. On
the other hand, the construction of the new means of
transportation—railroads—had not gone on as rapidly in
France as in certain other countries. From February 26,
1823, when the first grant was made, until 1840, a little
over 100,000,000 francs had been used for building railways. In 1837 there were in France only about 149
kilometers of railroad of general utility and 27 kilometers
of industrial railroads. At the end of 1841 the Government had issued concessions for 805 kilometers of industrial railroads; it had itself built 78 kilometers. In
reality, at the end of 1841 there were only 575 kilometers
of lines of general utility being operated and 65 kilometers
of the industrial lines.




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Banks

The critics in the Chambers who blamed the Government for not favoring and making easy the construction
of the railways, added to the fact that money was cheap,
induced the Government to take action. The law of June
I I , 1842, was made for the purpose of hastening the extension of railways in France. It should be mentioned that
the State intervened as the associate of the companies.
In 1842 the number of miles of railroad for which grants
had been made wras 947 kilometers, and 4,133 kilometers
at the end of 1847. The lines in operation had risen from
665 kilometers at the end of 1842 to 1,927 kilometers at
the end of 1847.
After going too slowly at first there was now a tendency
to go too fast. The obligations resulting from grants
made, added to the sums already spent, amounted to a
total of nearly 2,000,000,000 francs at the end of 1846.
The companies had appealed for large sums, and people gradually got used to loans that would not have been
thought so easy to carry through a few years before.
And it was at this moment above all that the real character of the French people was revealed; in a word, their
resolute love of economy, which may be best summed up
by the word prudence. This has been the mainstay of
France for the last fifty years or more, and that is why
recovery came quickly after the disasters of the war of
1870-71. But if the spirit of prudence is a useful factor
in the wealth of a country, it has one disadvantage when
it is an only factor: It destroys or lessens initiative; to
a certain degree it paralyzes action; it does not dispose to
boldness in industrial and commercial enterprises.




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The call for capital had lessened the supply in the French
market. Another cause of hard times arose, too, in 1846.
That year the crop of cereals was poor in most of the
European countries, especially in France and England.
These two countries were obliged to purchase foreign
grain. The purchase of this product abroad increased the
figure of current imports and had to be paid for in specie.
The Bank of France would, therefore, have to be prepared
to see its metallic reserve diminish.
The extent of the famine was understood and foreseen
as early as the spring. From that time commerce set
about making foreign purchases. However, the Bank did
not feel the effect of these operations until July. From
1846 until the end of January, 1847, the reserve diminished by 173,000,000 francs. On December 31, 1846,
the specie in the coffers was scarcely 71,000,000 francs.
During the preceding month of October 53,000,000 francs
had been paid out at the Bank, in November more than
43,000,000 francs; or nearly 100,000,000 francs in two
months. This demand for specie ceased at the end of
January, because that was the time of the annual return
of specie, caused by the falling due of payments on sales
made by exporters.
The Bank then resorted to unusual means. It collected
at great expense about 2,000,000 francs in specie from the
departments, and sacrificed its government stock to make
the purchase of about 45,000,000 francs' worth of bullion.
These measures were excellent in principle and due to
the prudence of the Bank's management, but they were
not all equally useful. At any rate the surrender of




56

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Credit

and

Banks

50,000,000 francs capital in the form of government 5
and 3 per cents, payable in Russia, was not necessary,
for at that moment the reserve had gone up again to
110,000,000 francs. This transaction with the Russian
Empire resulted, however, in making a better rate of
exchange for the French importers.
The Bank made the mistake of increasing too late the
rate of discount. It had maintained it at 4 per cent for
a long time, when the current rate was less. Then the
Bank kept the rate at 4 per cent during the whole time
of the panic and put it up to 5 per cent January 14, 1847.
It should have raised it sooner and not at the time when
all the metallic deposits were commencing to flow in.
Without any question, a privileged bank, for the very
reason that it is privileged, ought not in time of crisis to
limit discounts in order to save its reserve at all costs.
It ought to serve commerce and not tend to restrict its
issue. It should supply credit abundantly; the privilege
makes this a duty. • This being the case, the Bank came
to the rescue too late.
The failure of three railroad companies lessened the
expenditures on great public works.
All the operations of the Bank at the time of the panic
just described, together with the slackening of work on
the railroads (and also the gradual disappearance of the
difficulties coming from the grain famine of 1846), helped
to restore business to its normal course. At the end of
December, 1847, the Bank resumed the 4 per cent discount rate that it had always maintained since 1822.
This stability may well seem strange, because in the space




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Commission

of twenty-five years the price of capital, even in a
calm market, must necessarily vary. A fixed discount
rate has certain important advantages; it enables commerce to calculate the price of discount in advance
and to make a very nearly exact forecast of costs in its
plans. But, on the other hand, a bank of issue, placed
in a position to see the fluctuations of capital and the needs
of commerce, should warn the merchants, its patrons,
and the whole body of people having business interests, of
the change in the state of credit. It should signal any
degree of scarcity by raising the rate of discount. At
times this increase is nothing more than a warning, in
which case it should be slight. In certain other cases,
when money is easier, the Bank must not hesitate to
lower the rate of discount. In fact, the discount rate
of a bank of issue, especially if it is the only one and with
a privilege, is a sort of official barometer which private
banks consult in fixing their own disount rate. As these
private banks may rediscount their ^commercial paper at
the bank of issue, they usually follow its discount rate.
This was especially the case until the great credit companies began to make discounts on a vast scale with the
large deposits that the public gradually entrusted to them.
The law of June 10, 1847, reduced the denomination of
the smallest bill issued by the Bank of France to 200
francs. These bills were not put in circulation until the
28th of the following October.
If the Bank of France was no longer seriously disturbed
by the crisis, the trouble was not entirely at an end for commerce, which was still straightening out business entangle-




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Credit

and

Banks

ments and asking for credit and specie from the private
banks.
When the revolution of 1848 broke out, on February 24,
these private bankers lost their heads completely. They
wrote to their correspondents in the provinces that they
were obliged to stop business and go into liquidation.
This decision increased the panic in Paris, and caused it
to spread to the departments, where commerce and the
banks had been disposed to stand up against the shock.
The Paris merchants, seeing this defection, applied to
the new government for aid. The latter decreed on
March 7, 1848, the formation of the discount bank (Comptoir d'Escompte) which we shall study later.
Meanwhile, the Bank of France alone was left standing
to bear the brunt of the crisis. It faced the situation
with courage and ability. The Paris bankers, we have
said, were overcome by fear, and having already rashly
engaged their resources, could not come to the aid of commerce. The Bank, well advised at this conjuncture, did
not restrict discount and did not increase the discount
rate, which still remained at 4 per cent. In sixteen week
days, from February 26 to March 15, the Bank discounted
bills for 110,000,000 francs. The Treasury happened to
need money and withdrew the sum of 77,000,000 francs
from its current account, where it had a credit balance of
125,000,000 francs. The provincial branches followed the
same course. In the same space of time they discounted
commercial bills for 43,000,000 francs, and in addition put
11,000,000 francs at the disposal of the public services for
the most urgent needs.




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Monetary

Commission

Meanwhile, the Bank of France found itself in the
presence of a political panic which no argument could
calm. It resisted the shock without flinching. Between
February 26 and the evening of March 14 the metallic
reserve fell from 140,000,000 francs to 70,000,000 francs; on
the evening of the 15th it had fallen to 59,000,000 francs.
Under these conditions the general council of the Bank
asked the Government (1) that the bank notes should
have forced currency (or forced rating)—that is to say,
that the Bank should no longer be obliged to redeem
them in specie; then, that they should be considered legal
tender throughout the whole country—in other words,
that every creditor should be obliged to receive them in
payment of a debt, private individuals as well as the
financial agents of the state; (2) that the Bank of France
be permitted to issue 100-franc notes (200-franc notes had
already been authorized, as we have seen, by the law of
June 10, 1847). In panic times when coin is either scarce
or hoarded the advantage of small notes is considerable,
since they make it possible to settle small transactions.
It was even proposed to issue bills of still smaller denominations, such as 50 and 25-franc notes. But the
general council of the Bank objected, saying that the issue
of bills for 50 and 25 francs would send the metallic
money out of the country, causing it to be exported.
This problem can not be solved a priori. It is important
to know in time of crisis whether the scarcity of coin is
caused by a serious lessening of the national metallic
supply, brought about, for example, by unfavorable exchanges over a considerable space of time, or by an excess




60

Evolution

of

Credit

and

Banks

of speculation. In the latter case the supply of metallic
money may not have diminished, but as transactions can
no longer be settled except in coin in a large measure,
coin is more in demand and becomes scarce. But
if the scarcity of coin is due to a political panic, as in
1848, when everyone was afraid of being dispossessed of
his property, then it is a question of hoarding. The holders of coin hide as much precious metal as they can, judging that this is wealth par excellence, the wealth that can
be taken along in case of flight to a foreign country.
In 1848, the crisis was political rather than commercial.
It had not the same causes as the one of 1846 and 1847,
which was produced by the flow of coin abroad to pay
for wheat bought in Russia and elsewhere as a result of
the grain famine in France. The famine extended to
England, so that both the Paris and London markets were
deprived at the same time of their supply of metallic
money for their foreign payments. In 1848 it was the
political panic that made people hide crowns and gold
pieces.
But in a land where the memory of assignats was barely
50 years old, people were terrified, and it would have been
useless to issue 50 and 25-franc notes; in any case, can we
reproach the Bank for not consenting to the issue of small
notes ? We do not think so. At this time the Bank had not
yet the privilege of issue for the whole of France; it was face
to face with a provisional government; the existing means
of information and communication did not make it possible to keep precise track of affairs in provincial France and
in foreign countries. The members of the general council
thought that the 100-franc notes were probably small




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Monetary

Commission

enough, for the reason that they viewed bank notes primarily as paper money for the use of bankers or merchants,
while bills of the denominations of 50 and 25 francs were
intended for private individuals—for the small trade which
was not friendly to credit paper and was more easily agitated and thrown into a panic. However, it should be
pointed out that in 1848 it was the biggest bankers in
Paris who took fright and suspended payments.
Questions of credit, both in normal and abnormal times,
involve psychological elements peculiar to each nation,
and these must be carefully taken into account. The
compass of credit which normally points due north runs
wild and is no longer a guide in panic times.
However, it is worthy of note that the representatives
of the Government in the provinces, having been invested
in some sort with dictatorial powers, gave the departmental banks permission to issue notes for 50 francs, and
even for 25. These bills were circulated, especially at
Marseilles, not only in banking and commercial circles,
but also among the public. But if the Bank did not
consent to issue small bills, it had nevertheless the good
sense to give specie for the payment of workingmen and
employees, as well as for the purchase of provisions. It
made use of its notes for current commercial needs, for
settling accounts, for credit transactions.
The general council of the Bank asked permission,
besides, to increase the issues to a maximum of
350,000,000 francs. This was the necessary complement
of the first two measures. Moreover, it is not in panic
times that the total of the issues of a bank of circulation




62

Evolution

of

Credit

and

Banks

should be reduced or rendered stationary. Its function
is more useful at this moment than at any other; the
bank should create credit with its notes, being careful to
discount nothing but substantial commercial paper. In
this way commercial houses which are worthy of credit
are saved from sudden liquidation.
The Bank realized the necessity of not cutting off
supplies from commerce and industry at the critical
moment. It came to the rescue intelligently, and had no
occasion to regret it. In this time of general confusion
the Bank was ably directed.
Nothing is more calculated to inspire confidence in a
credit establishment than the frequent publication of its
true situation. This is its bill of health, and it ought
to state its condition with great accuracy. For if the
balance sheet indicates a falling off in one general direction, or an unusual increase in another, the public is forewarned, and this establishment may be justified by these
facts in adopting measures which the public would not
otherwise understand.
There was no clearing house in Paris at that time.
The one which exists to-day was not founded until 1872.
Checks were used little or not at all; their clearly defined
legal existence hardly antedates the law of August 14,
1865. The departmental banks, being also affected by
the panic of 1848, asked for a forced currency for their
notes and an increase in the total of their issues, which
had been fixed by law without regard to their capital.
These measures were a mistake, because these departmental banks could not circulate their notes except in the




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Monetary

Commission

towns where they were severally located. These notes
were nothing but local currency; forced currency, therefore, of no use in bringing about a transfer of specie from
one town to another. The financial agents of the State
could not take these notes, since they were not current in
Paris; they could not send them to the Minister of Finance.
The Bank of France, on the other hand, through its branch
offices, which used its notes, could make these moves.
For the departmental banks they were disastrous; they
created difficulties which brought about their disappearance and their merging with the Bank of France. The
mistake of the departmental banks in asking for a forced
currency was in not asking at the same time for the
unification or uniformity of their notes. Inasmuch as
their currency became forced and their maximum issue
was fixed by the State, and inasmuch as bills were nothing but paper money, it would have been necessary to
make them identical for all the banks. But the best
operation of all would have been to have their commercial paper rediscounted by the Bank of France in return
for its bills. Then, when depositors came to these establishments to ask back their funds, they could have been
reimbursed in money which was legal tender everywhere.
There was an undoubted error and lack of foresight on
the part of the departmental banks. They had failed to
use the most elementary prudence in not arranging
among themselves for the exchange on demand of their
notes.
This fusion was accomplished by two decrees. The first
authorized the merging with the Bank of France of the




64

Evolution

of

Credit

and

Banks

banks of Rouen, Lyons, Havre, Lille, Orleans, Toulouse,
and Marseilles, and the decree of May 2 merged the banks
of Nantes and Bordeaux.
Here are a few figures relating to these nine banks to
show their importance as a whole. Their total capital
amounted to 23,350,000 francs.
[Million francs.]
Average
of
metallic
reserve.
23-9
32.4
36.6
43-7
41. 7

Average
Average
discounts. circulation.

50.0
55. 8
64. 2
77-2
85.0

54-7
66.9
74-3
86. s
90. 1

They had all made profits for shareholders. The bank
of Lyons yielded a dividend of nearly 29 per cent in 1847.
The crisis led to their disappearance, and established,
in fact, the monopoly of the Bank of France as a bank
of issue. The latter owed this advantage to the ability
of its administrators, to the lack of cooperation among
the departmental banks, and, finally, to the tendency of
the French to centralize everything.

1971—10




5

65

VII.—A brief survey of the general course of business during the first half of the nineteenth century—Credit
and industrial beginnings.

CHAPTER

Influence of individual directors in the administration of a bank.—The influence of
M . J. E. Gautier, deputy-governor of the Bank, on the preceding events.—A glance
backward.—Comparison of French foreign commerce before the Revolution and
during the first thirty years of the nineteenth century.—Railroad beginnings.—Economic movement created by railroads.—Foreign trade develops.—It doubles in
seventeen years.—Progressive increase of the operations of the Bank of France.—
Kind of credit to be given by a bank of issue. Commercial credit.—Loans on securities.—The kind of credit a bank of issue should not give. Industrial loans.—Dangers of certain inconvertible funds for banks of issue.—Foundation of industrial
loan banks (commandite).—The Caisse G6n6rale du Commerce et de PIndustrie,
founded by Laffitte.—Issue of sight bills to bearer and to order by J. Laffitte.—Inevitable disappearance of this concern in the panic of 1847.—Services rendered by
Laffitte's bank.—Other establishments, modeled after the Caisse Laffitte.—These
establishments disappear.—Causes of their failure.—Panic of 1848. Founding of
Comptoirs d'Escompte by the provisional government of 1848.—The Comptoir
d'Escompte of Paris and the provincial Comptoirs. Their basis.—Loans on
collateral. Creation of surety companies. (Sous-comptoirs de garantie)—
Beginnings of the Comptoir d'Escompte from March 4 to August 31, 1848.—
Provincial Comptoirs.—Important fact. The general warehouses.

The Bank of France became a sole bank of issue,
much more as a result of unforeseen circumstances than by
reason of any consistent plan or fixed policy. Singularly
enough, it was a revolutionary government which in actual
fact was largely responsible for handing over to the Bank of
France its complete monopoly. It was during a political
crisis when the theories most subversive to capital were
put forward that the directors of the Bank showed the
most decision and daring. To be sure, the directors had
before them the example of past panics. However, it is
important, too, to take into account the moral and technical worth of the men who direct an establishment. At
the time of the panics of 1846, 1847, and 1848 the governor of the Bank was Count d'Argout, who had been




66

Evolution

of Credit

and

Banks

nominated September 5, 1836, and remained in office
until June 10, 1857. It would seem that this personage
was not remarkable, at least in a business way. But he
had with him a deputy governor named J. E. Gautier,
who had formerly been a deputy from la Gironde and a
peer of France. Gautier was very well up in affairs of
credit. He had been nominated first deputy governor in
1833, and held the post until August, 1857. He published
a study of the first order entitled: "Banks and Credit Institutions in America and Europe," 0 in which are found the
true qualities of a banker who is thoroughly well informed
in the proper duties of a bank of issue. J. E. Gautier
published this study in 1839, s * x years after entering the
Bank; without any doubt he had a predominating influence on the conduct of affairs at difficult moments.
The French Revolution was the bankruptcy of royalty
much more than the bankruptcy of France itself. The
state finances were in a disastrous situation, but French
society, considered in its economic elements, was flourishing, although hampered by narrow and antiquated legislation. These obstacles, imposed by the ancient mould
of a decrepit organization, were all the more felt because
France experienced the same need of expansion that was
beginning to torment the other great civilized nations of
the world at that time.
As for foreign commerce, according to trustworthy estimates, it might be fixed at the end of the reign of Louis
XVI at about 1,000,000,000 francs, probably even a little
more. Under the First Empire, with boundaries much
a

Des Banques et des institutions de credit en Amerique et en Europe, published in the Encyclopedie du Droit, Vol. I I .




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Monetary

Commission

wider, it amounted to only 933,000,000 francs. Under
the Restoration, if general commerce is considered, it
reached that figure only in 1825.® At any rate during the
whole Restoration period special commerce did not reach
a billion. Its highest figure was 987,000,000 francs in
1829.
Let us note that the imports which furnished the
country raw materials for manufactures did not equal
until 1830 the total of imports of 1788; that is, 573,000,000
francs.
So it took France forty years to regain the ground
that it had lost in the world's market. It is enough to
tell briefly why this recovery was so slow and tedious
after the terrible years of the Revolution. The reasons
are:
The wars of the Consulate and the Empire, which gave
little opportunity for establishing lasting international
relations.
The restrictive measures adopted by Napoleon against
foreign commerce (continental blockade, etc.).
The changes of government and the two invasions of
1814 and 1815.
The payment of indemnities to the allies, and the
process of recovery of the country after the defeat and
the struggles of the various political parties.
The ultra-protectionist measures adopted by the
Restoration.
a
General commerce (commerce general) includes: (1) Special commerce; (2) transitory commerce—that is, merchandise which merely
passes through the country. The precious metals are not included in
these figures.




68

Evolution

of

Credit

and

Banks

In 1830 the usefulness of railroads begins to dawn
and, the possibilities of the steam engine. In France the
new method of transportation found many opponents.
It was not until 1841 that the railroads began to
have an economic effect on transportation and trade.
Here is a table which shows their slow advance until
1847:
Number of
kilometers
in operation.

Year

1841

Net
Gross re- ceiptsre- Number of Tons of
per
ceipts, in kilometer, passengers, merchanmillion in thousand in millions. dise, in million tons.
francs.
francs.
12. 9

1843
1844
1845
1846
1847

9-3

6.3

1. 0

14. 2
21. 0

573
600
829
831
880
1,322
1,832

1842

8.8

6.2

i.5

13-4

7-3

1.5

17.3
18.8

8.1

1.9

8.8

2.3

20. 6

10. 4
12.8

3-6

28.3
31-9
41. 1
65. 2

22, 4

2 5

It is plain that the influence of the new transportation
upon the movement of merchandise was very slight, since
in 1847 these railwavs had transported only 3,500,000
tons. a
But the construction of these lines had brought about
great business activity in the matter of borrowing capital
and purchasing the raw materials necessary for the
building as well as for the purchase or construction of
equipment. The railroad was not only a stimulus for
commerce and industry, but it was itself an industry, and
one of the largest, even, in each country by virtue of
the capital engaged and the horsepower of its locomotives. In other directions, through new inventions,




a

The French ton is 1,000 kilograms.
69

National

Monetary

C ommis s io n

through the increase of comfort under the Government
of July (1830-1848), domestic trade was developed at
the same time as foreign trade. Industry was influenced
by this fact; it became concentrated; large enterprises
were founded; moderate-sized enterprises consolidated
in response to the new conditions of the manufacturing
industry in which steam engines and power looms were
henceforth the chief factors.
Here are figures giving the increase of our foreign commerce from 1830 to 1847:
[Million francs.]
Special commerce.
Year.

General
commerce.

Total.
Exports.

1830

1, 211
1. 595
2,063
2, 428

1835
1840
184S
1846
1847

2,437
2,339

Imports.

489
520
747
856
920
956

453
577
695
848
852
720

942
1,097
1,442
1, 704
1, 772
1, 676

Commerce, then, doubled in seventeen years—general
commerce as well as special commerce; there was a falling
off in 1847 only because of the crisis. However, the importations in 1847 and in 1846 increased because of the
purchase of foreign grains during the famine. What were
the principal transactions of the Bank of France during
these seventeen years? The interesting point is to see the
total of its yearly discounts and the discount rate. We
will give merely the figures for each five years, except for
the last two years, 1846 and 1847—at the panic time.




70

Evolution

of

Credit

Discount of commercial

and

Banks

paper.

[Million francs.]
Year.

Paris.

Branches.

Total.

Rate of
discount.
Per cent.

1830

909
485
932
1, 007

1835
1840
1845

1, i 9 4
1, 136

1846
1847

179
396
43i
481

909
485
1,112
1,403
1,625
1,817

4
4
4
4
4

The total of discounts in 1848 was, however, less than
that of 1847, and amounted to only 1,544,000,000 francs.
The average reserve, which was 145,000,000 francs in
1830, was in 1840 nearly 247,000,000 francs; in 1846,
210,000,000 francs, and fell in 1847 to 122,000,000 francs,
then went up in 1848 to an average of 176,000,000 francs.
As for notes in circulation, their averages were: In 1830,
223,500,000 francs; in 1840, 223,500,000 francs (the same
figure); in 1846, 271,000,000 francs; in 1847, 251,000,000
francs; in 1848, 342,000,000 francs.
The signs of an increasing economic movement were not
lacking. However, the Bank of France, a bank of issue,
gave and could give in that period of industrial and commercial growth nothing but so-called commercial credit,
discounting commercial paper having a maximum maturity of three months. A bank of issue, which must always
redeem its notes on demand, would be taking risks if it
immobilized or rendered inconvertible its capital in other
uncertain operations. There is, indeed, one other operation, that of loans on securities, but here everything depends on the nature of the securities and the sum loaned




71

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Monetary

Commission

in relation to the quoted value of the security on the
Bourse. This operation may be a good one, or it may
serve as a pretext for very risky transactions, for there is
a tendency here to tie up capital if the security deposited
as collateral has not a current value on the stock market
and can not be easily sold or realized on if need be.
Therefore, a bank of issue can only make advances on
securities of recognized value, which are not likely to
depreciate easily. In reality, a bank of issue must not
and can not finance {commandite) industrial enterprises;
that is to say, lend capital, in any form whatsoever, to
create or transform an industry. This kind of operation
demands many months and even years, usually, to give
results. Meanwhile, the capital is tied up, and can not
be used in case of need to redeem the bank notes, which
should above all represent (i) either specie in the vaults,
(2) or commercial discounts which can be speedily converted into money, or, finally, (3) negotiable securities, but
for small sums only.
Also, when banks of issue hold government securities
to represent their notes, they have in reality nothing but
inconvertible funds. For, in case of a panic, they would
hesitate to flood the market with a quantity of these
securities all at one time; securities or government stock
would depreciate as a result of being offered suddenly,
thus diminishing the credit of this particular Government,
most probably, too, at a moment of political crisis or war,
exactly when the State needed all its credit.
The Bank of France did not depart from this line of
conduct. If in 1848 it helped industry to some extent
during the panic, it was with prudence.




72

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of

Credit

and

Banks

There was a lack, therefore, of credit concerns in France
to aid the progress of industry in general, and the railroad
industry in particular.
Several of these concerns were founded under the pressure of surrounding circumstances. People began to
realize vaguely that new economic conditions were demanding new forms of credit. But it will be seen that
these establishments, although they were useful, were not
fitted for the part they were supposed to play.
One of the most important of them was the one called
the Cause Generate du Commerce et de VIndustrie, founded
by Jacques Laffitte, who for a long time had had a commercial bank, and then had been ruined by engaging in
politics. He then gave up public affairs and worked to
found a bank of a new kind, intended to aid industrial
development.
Like all the concerns of this kind founded then, it was
chartered under the form of a limited liability stock company {societe en commandite par actions), since the Council
of State was unwilling to charter banking concerns under
the form of joint-stock companies. The Caisse G'enfoale
du Commerce et de VIndustrie opened its offices October
7, 1837. Its nominal capital was 55,000,000 francs; the
capital paid in was only 15,000,000 francs, itself a very
large sum for that time. The foundations of this credit
concern were very broad, too broad even, for it was
to engage in all kinds of financial operations, take all
kinds of risks. This was a new idea, and demanded a
well-defined and rigorous method of procedure—the use
of its own capital to the exclusion of deposits in running




73

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Monetary

Commission

accounts, which are too mobile to be used for backing
up and financing industries. This house made discounts
and collections, received running accounts, made loans
on securities, and advanced funds for silent partnerships in industrial enterprises, handled state loans, etc.
In spite of the monopoly of the Bank of France, Laffitte
also wanted to issue a sort of credit paper of his own,
with a view to aiding the operations of his house. To get
around the difficulty, he decided to issue sight bills to
bearer and to order. As for time of maturity, there were
several kinds, such as five, fifteen, and thirty-day notes.
These bills bore an increasing interest, according to the
length of time of maturity. They could not circulate except with an indorsement in blank. For interest-bearing
notes, the interest to date was added at each transfer.
This circulation was neither as simple nor as quick as
that of the bank note proper, but because the notes were
interest-bearing they were readily accepted. In 1837-38
the total issue of this paper went beyond 60,000,000 francs °
It fluctuated afterwards, until 1843, between 35,000,000
and 58,000,000 francs. Laffitte died in 1844 and was
replaced by three managers. From this time the issue
rose to 80,000,000 francs. In 1847 the Caisse Generate
du Commerce et de 1'Industrie ceased operations, being
ruined by the panic. This was a natural result, given
the method pursued and the multiplicity of risks incurred
by the bank.
Nevertheless, it had been useful. In 1837-38 the number
of bills discounted was 220,000, representing a sum of
more than 276,000,000 francs. These figures grew larger
< The average circulation was about 15,000,000 francs.
*




74

Evolution

of

Credit

and

Banks

and in 1844, the year when Laffitte died, the number of
bills discounted was 476,000, making a total of 358,000,000
francs.
The Comptoir General du Commerce, called the Caisse
Ganneron, was founded April 17, 1843; then the Caisse
Centrale du Commerce et des Chemins de fer was organized
with a capital of 7,500,000 francs, under the management
of M. Baudon. Still others, the houses of Bechet, Dethomas
& Co., with a capital of 15,000,000 francs, and Cusin,
Legendre & Co., with 2,000,000 francs capital, followed this
movement, etc. All these banks suspended payments in
the crisis of 1847. We have told what a panic burst out
in Paris and the provinces as a result of their sudden
decision to close their doors.
In reality these banks, some of which negotiated
railroad securities, should not have made discounts,
received deposits from merchants, or consented to open
running accounts; they had another mission to fulfil
with the capital belonging to them. The crisis would
scarcely have affected them at all if they had kept within
the limits of the functions for which they were intended,
and which were to be especially assigned to them later.
We have said above that the greater number of the
Paris bankers had suspended payments during the panic
of 1848, so that there was no longer any intermediary
between the Bank of France, which accepted only securities with three names, and the commercial public. Now,
the third name had been added by the intermediary banks.
The provisional government, ten days after the revolution of February 24 had put it in power, hit upon the
idea of founding a Comptoir d'Escompte in Paris. The




75

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Monetary

Commission

decree establishing the Comptoir is dated March 4. This
concern was to be called the Dotation du Petit Commerce.
On March 7 a decreee was passed creating discount banks
{comptoirs d'escompte) in all the industrial towns of France.
The basis of all the comptoirs d'escompte established
in France in 1848-49 is the same. Their capital was to
be formed by the cooperation (1) of private individuals,
(2) of the State, (3) of the municipalities; each to furnish
a third of the required capital. The first third was to
be entirely paid by private individuals (shareholders); the
second third, furnished by the State, was represented by
Treasury notes; the completing third by municipal obligations. In addition the State gave the greater part of these
comptoirs a loan of specie, which was to bear interest at
4 per cent. As a matter of fact, these loans were mostly
paid back by the end of three years. The comptoirs accepted bills on longer time than the Bank of France; they
had a maximum maturity of one hundred and five days; °
the comptoir at Lyons allowed only forty-five days.
As may be seen, the State and the municipalities furnished guaranties by their securities: Treasury notes and
town obligations; the State even loaned funds; and yet
the State stipulated no profits either for itself or for the
towns. The profits were to accrue implicitly and entirely
to the shareholders—a singular proceeding, truly, for a
popular Government which had come into power for the
express purpose of combating the financial oligarchy of
the Government of July. This may well seem a paradox.
a

This extreme limit, fixed by the decree of March 7, was disregarded by
certain comptoirs; the one at Metz went so far as to accept 150-day paper,
and the one at Nancy 180-day paper.




76

Evolution

of

Credit

and

Banks

The duration of the Paris Comptoir was limited, it is
true, to three years. It was, according to the intention
of the Government, a transition measure.
The capital of the Comptoir de Paris—capital paid in
by shareholders—was got together witlr difficulty in the
midst of the panic. People bought the shares as they
would lottery tickets, and the first shareholders were
insurance companies, the association of notaries and attorneys, and charity organizations. Only about 1,587,000
francs could be collected, and the State gave a subsidy
of 1,000,000 in addition to its third, making a little more
t h a n 2,500,000.

But it soon became necessary to extend the operations
of the Comptoir which, according to its principle, was to
make discounts and collections only. The crisis was acute
and there was a demand for loans on collateral also.
By the decree of March 24 this sort of loan was intelligently organized. Sous-comptoirs de garantie were instituted. These sous-comptoirs loaned on pledges of merchandise, on storehouse warrants, and finally on certificates and securities. Their capital was furnished entirely
by private industry. There were seven of these souscomptoirs in Paris, as follows: (1) The Comptoir of the
Book Trade; (2) the Comptoir of Metals; (3) the Comptoir of Builders and Contractors; (4) Comptoir of Colonial
Commodities; (5) Comptoir of Dry Goods; (6) Comptoir
of Textiles; (7) Comptoir of Railroads (founded 1850).
Until August 31, 1848, these sous-comptoirs had presented to the Comptoir d'Escompte bills valued at only
a little more than 58,000,000 francs.




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Mon etary

Commission

As for the Comptoir itself, it had made the following
transactions up to August 31:
Francs.

Discounts on bills
Discounts on warrants for merchandise
Collections._
___
Rediscount of commercial paper at the Bank of France*

80, 378,
6, 924,
15, 904,
59, 389,

326
166
956
215

In the provices the number of comptoirs was 67 in the
beginning, with a total nominal capital of 130,500,000
francs. In reality, the capital subscribed and paid was
somewhat more than 25,000,000 francs. The State subsidies amounted to a little over 10,000,000 francs, giving
an actual working capital of 35,000,000 francs.
These comptoirs, with this limited capital, did in three
years the following business:
Total
amount
of bills
Number of
comptoirs. discounted
(million
francs).
343-6
346.2
371.8

1848
1849
1850

These comptoirs came into existence through special
circumstances. They had been established in an abnormal way, with particular advantages. These advantages
were destined to disappear together with the needs which
had caused them to be granted. In June, 1853, a decree
brought the comptoirs under the common law. Twelve
of them in the provinces were reorganized either as jointstock or as limited liability companies (sous forme de
commandite). The Comptoir d'Escompte of Paris was
reorganized in 1854. We shall study it later. It is, in




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and

Banks

fact, through the development and various phases of
this institution that we shall follow the evolution of credit
in France.
It was to the provisional government of 1848 that was
due the establishing of general warehouses in Paris and the
principal cities of France. (Resolution of March 26, 1848,
confirmed by the decree of August 23, following.) For
the first time the French Government took measures
relating to those institutions which were to make easier
in the future collateral loans, by means of warrants or
receipts of goods in storage. This was a measure fertile
in advantages for the commercial credit of France.




79




PART

II.

THE BANK OF FRANCE—THE CREDIT MOBILIER—
THE FIRST COMPTOIR D'ESCOMPTE, 1848-1875.
INTRODUCTORY.

We now enter upon a new phase of credit in France.
Industrial progress, especially that in railroad construction; the extension of commerce, in spite of political
events; the future so full of promise from the economic
point of view, thanks to new discoveries; the ease with
which capital has already been collected for railroad construction; the fact of the existence of a single bank of
issue which recommends itself to the majority of people of
the period; the trend of public opinion toward industrial
and commercial enterprises under the impulse of certain
new theories, especially the doctrines derived from St.
Simon; the attainment of universal suffrage, which, it
was believed, would be the end of all revolutions; this
sum of financial, economic, and political events created
a new atmosphere, a new environment.
The Bank of France continued its r61e as a bank of
issue in a prudent enough manner; it fortunately continued to be much more a bankers' bank than a state
bank, although it had frequent relations with the State
and rendered it real services. In spite of its being on a
smaller scale and having much less importance than it
was to have later (i. e., a few years after 1870, when credit
1971—10




6

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Commission

societies are widening their scope), it was already the
center of relief in case of panic, and the support on which
rested the whole system of French credit. Circumstances
made it thus, without any preconceived theory; and it
turned out to be the point of departure for the present
organization of credit in France. You might conceive of
another organization perhaps better; this one is the result
of the historical evolution which we are trying to set forth.
Furthermore, during this period, between 1848 and 1870,
the Bank of France did not deviate too far from its fundamental attributes as a bank of discount. Although it
allows collateral loans, which began to increase very perceptibly from 1852 on, it did not enter into the dangerous path of either the direct or indirect commandite of
industries. Hence came as its reward in 1867 the renewal of its privilege almost up to the end of the century
(end of December, 1897).
But in this function which it ought not to fulfil, which
it does not fulfil, of entering as a silent partner into
industries or of favoring their creation, other institutions
are going to take its place. These will not undertake, as
did Laffitte or Ganneron or certain others (whose attempts
and relative success we have already seen), to practice
all kinds of banking operations together—discount, collections, silent partnerships, etc.; but they will involve
themselves in speculation without preliminary study,
without taking into account the true vital conditions,
which banks of this kind should conform to in order to
live. So we are going to witness the collapse of the bank
which sums up their aspirations and faults: the Credit
Mobilier.




82

I.—The Bank of France the sole bank of issue—Its
operations with the State—The founding of institutions
called "Haute Banque"—Industrial
loans and speculation—The Credit Mobilier and the Pereires.

CHAPTER

Liquidation of the panic of 1848.—The credit of the Bank's notes.—Renewal of the
privilege of the Bank up to 1867.—Widening out of the list of securities admissible
as collateral on loans.—The Bank widens the scope of its operations.—Changes in
the rate of discount.—Revival of business under the influence of four reasons.—
The Crimean war interrupts this boom, 1855. Rise in the discount rate.—The
right remedy.—A wise measure.—Buying of specie by the Bank, 1855-1856.—Renewal of the charter of the Bank of France (law of June 9,1857). New conditions.—
Increase of capital.—Loan to the Sf;ate.—Fifty-franc notes.—The result of small
bank notes.—The Bank's freedom in regard to discount rate.—Establishment of
branch banks.—The great panic of 1857.—Measures taken by the Bank.—Discount rate proportioned to the length of terms of payment.—Reaction after the
panic—Operation called "high finance."—Loans on securities previous to sale.—
Ample credit of France at this time.—The creation of capital by saving.—Characteristic facts regarding the elements of French finance.—Number of issues of railroad bonds sold by the Bank.—Dangers of such precedents.

After the great crisis of 1848, which was above all,
a political crisis—although the political situation still
gave some cause for alarm—public opinion, on top of this
rough shaking u p , as often happens under similar conditions, looked on t h e future with greater confidence.
When order was reestablished after t h e days of June, a
reaction set in. There was indeed a panic in 1851 a t t h e
time of t h e coup d'etat, b u t it was not, as in 1848, a sudden and unexpected change. The event, besides, h a d
been discounted by t h e business world.
Meanwhile, business was slack in consequence of t h e
panic which had followed t h e economic crisis of 1847.
The B a n k was anxious t o carry on business, a n d all t h e
more because its capital, on account of its absorption of




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C ommiss ion

the departmental banks, had increased from 67,900,000
francs to 93,250,000 francs. Because of this, too, its maximum limit of circulation, which was 350,000,000 francs,
was raised to 452,000,000 francs. It liquidated its dishonored bills rather successfully.
During the year 1848 it lent rather large sums to the
State, directly by opening subscriptions for. the loan, likewise to the cities of Paris and Marseilles, to the Department
of the Seine, to the hospitals and asylums of Paris and of
Lyons. Here are the figures:
Mar. 3 1 : Lent to the State without interest on treasury certificates
May 5: Lent to the Bank of Deposits and Consignments on
transfer of government securities
June 3: Opening to the State of a credit of 150,000,000 of
which the State took
July 24: Subscription to the state loan
Lent to the city of Paris, to Lyons, to the Department of the Seine, etc

i^ancs.
50, 000, 000
30, 000, 000
50, 000, 000
22,000,000
20, 000, 000

Finally, the Bank going beyond its usual functions,
had lent to different metal works about 34,000,000 francs
on mortgages in order to enable them to execute the orders
given them by the railroad companies. For all these
operations, the Bank issued a much larger number of
notes, especially in 200 and 100 franc denominations.
Soon commercial discounts worked easier in private banks,
and calm succeeded this storm in which panic—an evil
counselor in this special case—-had been the chief cause of
the trouble.
To sum up, the Bank of France managed very skilfully
in this difficult time, and was able to clear up this situation most honorably. Its notes suffered no depreciation during these disastrous months.
84




Evolution

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Credit

and

Banks

It may be said that on this occasion the notes of the
Bank went through the test of fire, and so from that
moment forth they enjoyed unquestioned credit; and to
such a degree that when quiet was restored, and when
coin minted in large quantity that year was very plentiful
and the Bank's reserve was very high, the public preferred
the notes—although they had forced currency—to specie,
and that toward the end of 1848. This explains why a
law authorized an increase in the amount of issue from
452,000,000 to 525,000,000 francs. The Bank, besides,
had very skilfully resumed specie payment as soon as it
could at the end of 1848. Forced currency was suppressed by law on August 6, 1850.
The following years can scarcely be said to have any
history.
Here are the average figures relating to reserves, issues,
and the figures relating to the total discounts during the
years from 1849 to 1853:
[Million francs.]
Total
Notes in
Reserve
discounts
(average). circulation (average).
(average).
1849

35o.4
457-8
596.6
584.8
452.8

1850
1851
1852
1853

421. 7

485.6
530.3
621. 2

659.8

1,028.3
1,171. 1
1,247.4
1,840.1
2,854.2

The average reserve, therefore, increased from 1849 to
1852, then it decreased, and we have to wait until 1859 for
it to reach 570,000,000 francs. As to issue, it had a general
tendency to increase without much fluctuation. The
average of notes issued in 1851 was less than the reserve.




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Commission

A t one time in t h a t year, October 2, the reserve
reached 626,000,000 francs, and for a few days it exceeded
t h e circulation by 110,000,000 francs.
On March 3, 1852, a decree renewed t h e charter of t h e
Bank u p to 1867, and this same decree authorized it to
m a k e loans on the shares a n d bonds of French railroads.
A few days after, the decree of March 22 gave it t h e same
authorization for t h e bonds of the city of Paris.
T h a t was necessary, for t h e Bank needed t o extend its
operations in order to utilize its power of issue. Besides,
it h a d a large reserve; indeed, t h e average reached in 1852
nearly 585,000,000 francs. Furthermore, railroad securities had become widely distributed in t h e hands of t h e
public.
T h e Bank, or a t least its directors, understood t h a t
new times require new methods. They changed t h e rate
of discount, which had remained fixed for t h i r t y years,
except in 1848, when it was raised to 5 per cent. They
lowered it for a certain time in 1852 and in 1853 t o 3 per
cent. They made it v a r y oftener, according to t h e needs
of the money market, and they showed themselves alive
to t h e real spirit of banking. B u t they became really
free in their movements in this m a t t e r only when, as a
result of t h e law of J u n e 9, 1857, there disappeared, as
far as t h e Bank was concerned, the absurd limitations on
t h e rate of interest fixed b y the laws against usury.
Business picked u p a t this time for several reasons: (1)
Because, the form of government in France being definitely settled since 1852, public opinion was reassured;
(2) because t h e B a n k of France had m a d e t h e conduct of




86

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Banks

its affairs more flexible; (3) because at that time two institutions were founded destined to give a stimulus to
business—the Credit Mobilier, which we are going to take
up, and the Credit Foncier, the development of which we
shall examine in another section of this work; (4) finally,
because the Comptoir d'Escompte de Paris, which was
destined to be merely provisional, because it was founded
during the crisis of 1848 to take the place of the banks
whose failures had left such a great void, now gradually
freed itself from state control, rendered real services to the
middle-sized and small trade, and became an important
banking house, devoting itself especially to so-called commercial operations. It is important, furthermore, to keep
in mind a cause that had been active for the past twelve
years—the extension of railroads. At that time, in 1853,
more than 4,000 kilometers of railroads were in operation,
supplied with more than 1,200 locomotives. Now, these
railroads were destined to double in seven or eight years.
It seemed as if business would go on growing in this
way, when the Crimean war broke out. This war necessitated large loans, which rose to about 1,540,000,000 francs.
That diminished capital on which industry and commerce
were making urgent demands. The Bank raised the discount rate to 5 per cent, then to 6 per cent. Its reserve
fell in November to 211,000,000 francs, while its discounts
were in October 480,000,000 francs—that is to say, double
what they had been at the same time in 1854. The Bank
then lowered to seventy-five days the limit for payment
of the bills it discounted. In 1856 it extended the limit
to ninety days and lowered the discount rate to 5 per




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Commission

cent; but these measures were not kept up in the face of
the events that followed.
Matters were hastening to a climax. Precious metals
became-more and more scarce. In November, 1856, the
reserve fell to 164,000,000 francs, and discounts rose to
520,000,000 francs. The cause was the war, which in pay
and food for the army had absorbed specie estimated at
about 800,000,000 francs. Adding to this other causes for
the exodus of capital, we find that at least 1,000,000,000
francs went out of the country.
Was the remedy to raise the rate of discount and
shorten the time of maturity on bills? To a certain
extent, yes. But as in this case a sudden export of
about a third of our metallic stock had taken place, the
Bank should have turned its attention to getting back this
lost stock. And it did. I t bought 254,500,000 francs
in specie, which cost it, with the premium and transportation, \y2 per cent. This happened in 1855. In 1856 it
imported 560,000,000 in specie, which cost it \% per
cent.
It was,easy to foresee that the privilege of the Bank
of France would be renewed. It was to expire in 1867,
and the law of June 9, 1857, prolonged this privilege
to December 31, 1897. This law doubled the Bank's
capital by the issue of 91,250 new shares, which
were assigned to the holders of the old shares. This
doubling of the capital, which had become too small for
the Bank's increasing business, was a safeguard. The
capital then reached 182,500,000 francs.




88

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Credit

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Banks

But out of the increased capital, 100,000,000 francs during the year 1857 had to be turned into the public treasury,
which gave the Bank in return government 3 per cents
at the very high price of 75 francs. The State made a
good thing by it. In reality these 100,000,000 francs were
used to diminish the debit balances of the Treasury and
helped reduce the figure (which was very high, as it happened) of the floating debt.
The Bank was authorized to issue 50-franc notes. An
excellent innovation in principle, but the Bank only used
this privilege in 1864, seven years later. Now, in times
of panic this kind of notes, like those of 100 francs, economizes coin in current transactions; and in prosperous
times, as they are easier to handle than specie, these small
bills tend to replace specie in circulation and force it
back into the coffers of the bank of issue. Scotch banks
which have issued and are still issuing notes for one
pound sterling have seen all the metallic money of the
country flow into their coffers.
This law of June 9, 1857, gave the Bank the right of
raising the interest rate as much as it judged necessary,
whereas before it could not exceed 6 per cent. It took
advantage of this liberty soon after. But the Bank of
France alone had this advantage by law; other banks
were not authorized to do likewise. It is true they went
beyond their right without being disturbed.
Finally, ten years after the law of 1857, the Bank could
be compelled to establish branches in the departments
where they did not exist. The Bank was in no hurry to




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found these branches. In 1867, although ten years after
the law, 25 departments were still unprovided for.
The panic of 1857 began in the United States. We
shall not enter into the details of its origin and development, but content ourselves with merely indicating two
of its causes—one has to do with our subject, the other
with the commercial relations of North America and
Europe in 1857.
The first of these causes is that many American bankers
had advanced money, made loans to industries, especially
to railroads, out of their deposits. They had thus tied
up capital, and when the panic came they did not
have the free funds that they would have had if they
had used their capital in short-term business, such as
commercial discount. The truth is there was overspeculation.
The second of these causes—for panics, especially large
ones, always have several causes—was that Europe in
1857, thanks to an excellent harvest, did not buy grain
of America. So the United States did not export any to
the Old World. Hence the rate of exchange was unfavorable to America, and the United States was obliged to
send specie over to pay for its importations, from London, Germany, etc.
The panic was terrible in September. Its reaction was
felt most of all in England, then in Germany, and to
some small extent in France. In this latter country
especially people felt the hard times, which affected
London and the principal business centers of northern
Germany.




90

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Banks

Now we have to concern ourselves here only with w h a t
happened in France and with what the Bank did t o meet
t h e crisis.
T h e B a n k of France took t h e standard method; it raised
t h e discount rate. At t h e beginning of October it raised
t h e rate to 6 per cent; on October 13 it raised it to 6.5
per cent; on October 21 it raised it to 7.5 per cent; finally,
on November 11, it was fixed a t 10 per cent.
The Bank of England had reached t h a t figure on
November 10. The Bank of France devised a rather
ingenious plan. I t made a scale of three rates 1 per cent
apart, in proportion t o the time to run until m a t u r i t y ,
and it continued to apply this system until December 20.
I t did not t r y b y other means to diminish discounts, and
from t h e very start it calculated what the extent and
t h e duration of t h e crisis in France would be. So, as
early as December 21, it returned to the 6 per cent rate
established a t the beginning of October.
As usually happens in like cases, there was much
unemployed capital after t h e panic—business was slack.
I n 1858 t h e average reserve in t h e Bank rose to
460,000,000 francs, a figure which had not been reached
since 1853. I n *859 a n d i860 the same thing was true,
as appears from t h e fact t h a t the average figure of t h e
reserve went u p to 570,000,000 francs in 1859 a n ( l m i860
t o 513,500,000 francs; t h e average balances due t o individuals on running accounts, which before had been fluctuating around 150,000,000 francs, rose, during these two years,
t o 237,000,000 and 209,000,000 francs, respectively, a sign
of business depression. The same phenomenon m a y be




9*

National

Monetary

Commission

observed on the eve of crises. Capitalists, witnessing
great speculations and large business enterprises and foreseeing a setback, keep their capital in reserve. This takes
place especially in France.
THE BANK OF FRANCE DISPOSES OF SECURITIES ( 1 8 5 8 - 1 8 6 1 ) .

Up to this time we have seen the Bank for the most
part occupied only in commercial banking—discount, loans
on conservative securities, transfers, and of course the
issue of bank notes. When it has engaged in making
advances or loans which did not really enter into the
business of commercial banks, it has been because it was
dealing with the State, to which it owed its charter. But
at the time we have now reached the great railroad
enterprises had got well under way; they saw how bright
their prospects were for the future. So they began looking
around for capital to extend the half-finished systems,
to finish the important lines, to better their equipment
and organization. This very busy period in France—
which was busy, too, in other countries—extended from
the revolution of 1848, or rather from the election of
Prince Napoleon as President of the Republic, almost to
the end of the Empire.
There was no lack of capital for railroad undertakings in
France at this time. France, which has been called the
land of the " woolen stocking," 0 because of its characteristic thrift, could easily furnish all the resources needed for
railroad construction and operation. However, the companies did not then, as now, call upon the public directly;
a This expression comes from the use made of woolen stockings as purses
for hoarding money in the country.




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Banks

a n d t h e y did not sell bonds a t all their ticket offices. They
h a d recourse to intermediaries. For five years past t h e
Societe Generate du Credit Mobilier (founded in 1853 b y
t h e Pereire Brothers and which we shall discuss later)
had already been undertaking operations in " h i g h
finance"—marketing
of securities, silent partnerships
in industrial companies etc. Was it t h e example of
this company which induced the Bank of France a t t h a t
time to follow t h e same course? I t is rather difficult to
say. I t really issued securities in 1858, either in its central establishment in Paris or in its branch banks. And it
did not do so cautiously in its capacity as simple intermediary, contenting itself with being only an intermediary, selling on commission; it advanced before any sale a
rather large sum on t h e obligations it was to dispose of.
This advance amounted to 100,000,000 francs a t a time
when t h e proceeds of t h e marketing of bonds of eight
companies—the Mediterranean, Dauphine, Midi, Geneva,
Orleans, West, East, and Ardennes—were t o a m o u n t to
about 246,000,000 francs.
I n 1858 it sold in this way 617,766 bonds at an average
price of 276.60 francs. I t h a d left 272,769 bonds, which
it disposed of b y subscription and with great success.
They rose in Paris to 562,298 and in t h e provinces to
424,589, making a total of 986,887.
The price of issue was 274.50 francs. During t h e
remainder of the year 1853 t h e Bank adopted t h e method
of selling which it had used at first and began t o sell a
great m a n y bonds over its own counters and those of
its branches; b u t t h e price of these bonds h a d gone u p
more t h a n 10 or 12 francs.




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It disposed in this way of 881,952 bonds for 287.50
and 288.75 francs.
New sales, this time by subscription, were made in i860
and 1861. This method facilitated the sale and the rise
in price of the bonds. One can estimate from what then
happened France's power to save and accumulate capital.
Thus in i860 the Bank offered to subscribers a much
larger number of bonds than formerly, no less than
1,023,000. The subscription rose to 1,627,817 bonds.
They were issued at the price of 292.75 francs. In
1861 there was a new offer by subscription of 786,000
bonds. The public rushed in; the issue was subscribed
for almost four times over. More precisely, bids were
sent in for 2,972,449 bonds.
These facts show what are the elements at the basis of
French credit to-day, and how, by the very nature of
things, France has been led to adopt it.
Indeed, not only did large capitalists take up these
bond issues, but the mass of middle-sized savers. And
it is because of these middle-sized and, later, small savers,
who create and supply the great bulk of capital in this
country, that the institutions of credit have been obliged
to regulate their progress in a conservative way, because
their depositors and a large number of their clients have
themselves the inborn prudence of all those who, possessing only a little capital, do not wish to run any risks
with it.
At any rate, during these four years the Bank of France
invested in this way for the benefit of the eight companies
which we have mentioned an actual, fully paid cash
capital of more than 1,200,000,000 francs.




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Banks

This sum, a large one at that period, did not bring
about a lower price for the bonds. The public had from
that time forth a field for its investments. The Bank of
France realized splendid profits in these operations.
People have asked if it ought to have done so, if it conformed to its statutes in thus engaging in the business
of marketing securities. There were, even among its
directors, men who criticised, while excusing, these
operations in high finance. In order to explain the
conduct of the Bank of France at this time, people have
said that the circumstances were exceptional; then the
convention of 1859 with the railroad companies had
given them the special help and warrant of the State.
The Bank was on too good terms with the Government
not to allow itself to indulge in operations which were
unusual, but profitable, to it. Nevertheless it is best not
to let a bank of issue create a precedent of this sort; for
taking its point of departure in this first evasion of its
statutes, it might later give itself up to operations of that
kind, dangerous and uncertain to the last degree for a
bank of issue.




95

CHAPTER

II.—The Societe Generate du Credit Mobilier and
the Pereires (1853-1866).

St. Simon's teaching. Its influence on developing business in France.—The
Pereire brothers. The part they took in creating the French railroad systems.—
Creation of the Credit Mobilier 1852. Its right to issue bonds. Useless restrictions. No censorship.—Aim of the Credit Mobilier. Its contemplated scheme.—
The principle of action of an investment and speculative bank.—What the Credit
Mobilier did during its first years. Services rendered. Its aid in railroad construction.—Large profits.—Difficulties caused by an enormous dividend.—Decline
after 1855.—Grandiose and dangerous ideas of its founders.—The plan of issuing
a single type of bonds.—Uncertain guaranties of the issues.—Spread of the system
to foreign countries.—No relations between the issues of bank notes and the issues
of crSdit mobilier bonds.—Note on the institution of M . Mires.—Trial of strength
against the Credit Mobilier.—The Soci&S Generate pour favoriser le dSveloppement du Commerce et de l'lndustrie en France.

The year 1852 was a remarkable one in the development
of a credit organization in France because of the founding of two dissimilar institutions, each answering to distinct needs: the Credit Fonder—which made a specialty of
giving credit on mortgages—and the Societe Generate du
Credit Mobilier Frangais.
This latter institution of credit was founded by Emile
and Isaac Pereire. They were brothers from Bordeaux
and came when quite young to Paris. The elder was a
stockbroker at first, the other an accountant in a bank.
Isaac got acquainted with St. Simon, the famous head of
the school to which has been given his name, and was a disciple of the master. He influenced his brother Emile who,
in 1830, went into the offices of the Globe, a newspaper of
St. Simon's. In 1831 both brothers went over to the
National, and soon separated from St. Simon. But from
their connection with him they imbibed the general ideas
of his school regarding the future and development of
industries.




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The ideas on an industrial civilization destined t o t a k e
the place of warlike and priestly civilization opened u p
new paths to m a n y thoughtful young men. Many of
t h e m gave u p t h e theoretic and in some sort religious side
of St. Simon's teachings to enter into business. Most of
them wTere successful. They went especially into the new
industry of railroading. One of them, Talabot, succeeded
another St. Simonian named Enfantin, as director of the
Paris-Lyons-Mediterranean Company. The first enterprise undertaken by the Pereire brothers was the railroad from Paris to St. Germain, begun in 1833. The
capital of 5,000,000 francs was furnished b y the houses
of Rothschild, d'Eichthal, Davillier, etc. Later t h e two
brothers started t h e Northern Railroad. Soon after
Emile Pereire became manager of the Paris-Lyons Railroad. He obtained the concession for the railroads
of t h e south, together with t h e canal parallel with t h e
Garonne River. In, brief, the Pereire brothers played a
very i m p o r t a n t part in the creation of French railroads.
B u t their most famous achievement was t h e Credit
Mobilier Francais, whose firm name was Societe Generate
du Credit Mobilier Francais.
Since t h a t time it has been
called simply Credit Mobilier.
The Credit Mobilier was founded with a capital of
60,000,000 francs, divided into shares of 500 francs each.
The charter of its foundation is dated November 18, 1852.
The subscription for shares was made by series of 400,000.
The first subscription gave t h e right to t h e second, share
for share; in t h e third subscription the subscribers to t h e
first two series benefited in the proportion of one new
share for two old ones; these two old shares could belong
1971—10




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either to the first or second series or to both. This scheme
was not a new one, having been used by Law.
This society had obtained the right to create obligations
for a sum equal to ten times its capital, namely, for
600,000,000 francs. Only one restriction was imposed,
and that, moreover, a rather hard one to enforce. The
society was not allowed to have in its liabilities a total
sum of more than 120,000,000 francs, that is, double its
capital, in the form of deposits in current accounts and
of obligations payable in less than a year. An important
fact to note is that no "council of censorship" was
created for this joint stock company. There was no
general supervision. Why? Perhaps they had purposely
forgotten this machinery, which might have been considered as an awkward check, if it really worked, and
as a useless device if it merely registered tamely the
wishes of the board of directors. Now, in a joint stock
company, supervision is indispensable and it must be
exercised as far as possible by independent men, without
hindering the progress of the company. What, then, did
the founders of this new institution of credit aim at? Its
principal founder, Isaac Pereire, defined its object thus:
The Credit Mobilier is at one and the same time (1) a
society engaging in commandites; (2) a financial society;
(3) an investment bank for lending and borrowing; (4) a
bank of issue.
As a society engaging in commandites it had to put its
resources and its credit at the disposal of important industries and use them to promote large enterprises which it
backed and helped to direct.




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Credit

and

Banks

As an investment bank for lending and borrowing, it
had to negotiate loans and investments, whether in regard
to public credit or industrial credit; it made its intervention felt whether by opening subscriptions for loans or by
lending directly, or else by marketing the obligations of
different companies, or by operations on the Bourse:
" Carry-overs," purchases, sales, etc.
As bank of issue, it had to issue its own obligations
representing securities of every kind: state funds, bonds
of industrial companies, etc., in which it was authorized
to trade.
It was a delicate matter to undertake these operations.
Speculation is useful, and banks of this sort are indispensable in the modern credit organization of a country. But
it is of great importance for these operations to be carried
on with the private capital of the bank that undertakes
them. To issue bonds representing securities in the bank's
possession is to call upon the general public to put
money into enterprises difficult to learn about and judge
wisely. Such capital is the vanguard in industrial enterprises and it runs great risks. It is true that because of
these risks it makes large profits possible. Then, too, this
credit society with its speculative operations, and founded
as it was without any adequate system of supervision, was
absolutely sure to make mistakes.
During the first year, 1853, it carried through the following transactions:
1. Subscriptions to the state loan of 250,000,000 francs
for the Crimean war.
2. Marketing of bonds of the railroad companies of the
South, the East, and the Grand Central.




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3. Marketing of the bonds of the Credit Foncier.
4. Loans on " contangos " on the Bourse which made the
interest rate on these ''contangos" drop from 12 per cent
to 3 per cent.
That year it declared dividends equal to 13.4 per cent
on the paid-in capital.
The second year, 1854, it continued its business as a
financial society; it offered to take up a quarter of the
state loan of 500,000,000 francs for the Crimean war; it
advanced to the stockholders of the railroad companies
(who were to pay for their shares in instalments) the
sums needed to meet the successive payments. It also
marketed railroad bonds. But it began to play on a very
large scale its part as a society engaging as silent partner in great industrial enterprises.
It patronized a real estate construction company—
the Compagnie Immobiliere de Paris—especially founded
to lengthen the Rue de Rivoli, and to cooperate, while
making profits, in beautifying Paris.
It created a maritime or navigation company, with
schemes for foreign commerce, colonization, and armament.
Its directors founded the Austrian Railroad Company.
France began from this time on to carry its credit and
some of its capital to foreign countries.
The year 1855 marked the summit of success and power
of the Credit Mobilier. It continued to give very substantial help to French railroad companies. It marketed
their bonds; but also underwrote their loans, advancing
in this way 18,000,000 francs in return for 65,000 bonds to
the Western Company, which had been formed by a merger




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with several small roads. In 1854 it had helped to
incorporate into one company several different companies
which managed the omnibuses in Paris. In the same
way it brought about the merging of all the gas-lighting
companies of Paris.
The part the company played in regard to railroads
was excellent. Thanks to the Credit Mobilier, the railroads during the years from 1855 to 1857 were able to
go on with their construction work, in spite of the latent
crisis caused by the Crimean war, and the constant calls
on public credit made by the State, which in 1855 negotiated a third war loan of 750,000,000 francs.
This year, 1855, was very productive, and one might
say very prosperous for the Credit Mobilier. The profits
amounted to no less than 28,000,000 francs. The directors tried to use a portion of the dividend, and instead
of paying it all, to give only a fraction of it to the shareholders in order to avoid an unusual rise in the price of
shares. But this arrangement had to be abandoned on
the advice of the Government, and 40 per cent on the
shares was distributed as dividends.
In 1856 the Credit Mobilier turned its efforts to foreign
countries, especially to railroad enterprises. It was interested in Austrian, Russian, and Spanish railroads.
From 1855 on, the reports of the Societe du Credit
Mobilier became much less detailed and explicit. Its
decline was beginning. This society sought too much
after concessions and monopolies and only rarely took
part in affairs which had no political connections. It
turned its attention especially to privileged companies,
such as railroading, navigation, or general transportation




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in cities. From another point of view it was too anxious
to subscribe to state loans. Its head men, it seems, were,
moreover, on excellent terms with the public authorities.
That led the Credit Mobilier to take part in the operations
we have already mentioned, of a real-estate company
working to beautify Paris. The Credit Mobilier tied up
a lot of capital in this undertaking. In its balance sheet
of October 31, 1857, it carried a credit in its favor of
80,000,000 francs against that real estate company.
The Credit Mobilier was not able to carry out the first
intention of its founders in regard to issuing notes as
they had wished. Their desire would have been to issue
a single type of bonds representing all the securities
quoted on the Bourse. This special type of bonds
would have presented only a difference relating to the
terms of payment. Some, short dated, would have corresponded to the temporary investments of the society;
the others, long dated, would have been equivalent to
the securities which the society had successively acquired
and which had no set terms of payment, such as state
funds and industrial shares. The single type of bonds
was to have the advantage of facilitating business on the
Bourse, and was to "assume the characteristics and
play the role of paper money," as the founders of this
institution expressed it.
The danger of such operations is patent. It is issuing on
an issue. In such an emergency how could the public
be assured that the industrial or other values represented
by the Credit Mobilier bonds really stood for industrial
wealth, such as raw materials, machinery, factories, mer-




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chandise? How could this same public know if these
industrial values would earn revenues to pay interest to
the holder of Credit Mobilier bonds? Further, admitting
that the very difficult management of such an institution,
working under such risky conditions, had been the best
possible, it would have been necessary that the capital
securing these operations should amount to more than
that of the Credit Mobilier, which was 60,000,000 francs.
Now, as we know, its founders would have liked to issue
600,000,000 francs in bonds. A capital of one-tenth of
that, certainly, was not enough to cover the risks of
decline and especially of intrinsic loss in the securities
owned by the society. In any case this capital ought to
have been invested safely and in such a way that it could
be available on the first alarm and when needed.
This was not all. Its founders hoped to spread to
other countries their idea of the mobilizing of securities
by the one kind of bond. They tried to found a credit
mobilier in Austria and succeeded in establishing one in
Spain. They had ambitious aims, and thought that they
could unify the circulation of securities, not only in
France, but also in Europe. In this way they thought
no capital would remain unproductive.
But in matters relating to credit, and especially credit
tied up in silent partnerships, " there's many a slip
'twixt cup and lip." The risks in industries and also in
stock-exchange speculations are too great to allow of such
hopes. If the issue of a bank note, properly so called,
offers every security, it is because it represents shortdated commercial paper, bills which are the result of




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operations already transacted, the real security of which
(although not acknowledged) is merchandise of current
sale and consumption. Short terms of payment (fifteen
days, one, two, or three months) give continual assurance of available funds; the certain operation of the sale
of a piece of merchandise, which sale will allow the payment of a bill falling due, is likewise safe, when the discount of paper is submitted to an enlightened examination. There is then no connection between the issue of a
bank note, which represents bills of commerce, or cash,
and the issue of bonds representing state securities, or industrial securities, the safety of which is not of a kind to allow
their circulation to such a wide extent. To be sure, these
bonds were to be paid on maturity, whereas the bank note
must be paid on sight. Nevertheless these bonds were subject to the ups and downs of the market, and at the times
they were due, they had to be paid, and, what is more, to
have their interest guaranteed each year. With what?
With the income on industrial shares and state funds, and,
even then, it was necessary to allow these bonds a higher
interest than that on state funds. Otherwise how could the
public be expected to prefer the bonds? As to industrial
shares, their dividends were destined to be an important
resource. But in that case it is dangerous to enter as a
partner into a new industry the fate of which you can not
foresee. You should therefore become a partner only in
those enterprises already on the road to success, but then
partnership banks (banques commanditaires) were not
established for such enterprises which find credit easily
enough in commercial banks, since their capital is already




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Banks

raised, and they need funds only for running expenses.
Hence it follows that partnership banks, useful and necessary in industrial countries, are not destined to follow
the methods devised by the founders of the Credit
Mobilier.
Besides, this method fortunately was not applied on a
large scale by the founders of the Credit Mobilier. Nevertheless the speculations carried on by it and under its
influence caused many failures. The growth of speculation in France dates from this time.
Finally, the first condition for a partnership and investment bank (banque commanditaire et de placement) is to
have enlightened directors, acquainted with industrial
conditions in such a way that they will not be carried off
their feet by the enthusiastic reports of engineers or inventors, and risk capital in impossible enterprises or those
predestined to failure. To this end there is needed a staff
of business men, both well informed and practical, with
no pretensions to being universal or ubiquitous. Now,
these were not the particular qualities sought after by the
Credit Mobilier in choosing the directors for its industrial
companies. The fact may be cited that in 1863 one of
these directors belonged to the administrative board of 19
companies, engaged in almost as many different kinds of
business, and calling for very wide and different aptitudes. The capital of these companies represented three
billion and a half francs.
After having tried in vain to have the Bank of Savoy
continued (Savoy was annexed to France in 1865); considering that they would not be able to use this bank, as




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they hoped, for issuing bank notes; and having need then
of capital, they doubled their capital, raising it in 1866
from 60,000,000 to 120,000,000 francs. But that was a
bad year. The fiscal year of the Credit Mobilier showed
a net loss of nearly 8,000,000 francs. In 1867 there was
great embarrassment and growing difficulties. The founders retired. On November 30, 1867, their successors
stated that the losses then amounted to 47,500,000 francs.
From that time on the Credit Mobilier virtually entered
into liquidation.
Since that period no houses of that kind have been
founded on those same principles in France. Many small
banking houses meanwhile have done business in disposing
of securities, but they have not had the ambitions or the
importance of the Credit Mobilier. Since then a large
establishment, the Banque de Paris et des Pays-Bas, carries on this business of an investment bank, and of helping
to create new industries, chiefly those on a large scale;
it also negotiates public loans. But this bank has not
attempted, any more than the Banque de V Union Parisienne (which carries on the same operations) to take up
again the system of issuing bonds representing the
securities it possesses.
The three successive institutions established by M. Mirfes
all rested, almost exclusively, on the idea of speculation.
Hence the operations consisted in buying and selling on the
Bourse public securities, industrial and railroad shares, etc.
M. Mir£s's first establishment was called Caisse des Actions
Riunies. It was founded on the principle of the commandite.
Its original capital was 5,000,000 francs, in 1,000-franc




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Banks

shares, which could be subdivided into share coupons of 500
francs. Its success was rather marked during its earlyyears . M. Mires wanted to extend its field of operations, and
under the name of Caisse et Journal des Chemins defer® he
enlarged his first house, increasing the capital to 12,000,000
francs. This time he tried to imitate the Credit Mobilier,
which had just increased its capital. He wanted soon to
be as large as the Credit Mobilier and increased his capital
to 50,000,000 francs. The establishment was called Caisse
Generate des Chemins de fer. M. Mires had not, like
Messrs. Pereire, any very firm friends in the Government
at that time; the higher administration did not favor his
operations. He was active in outside schemes and took
part in the Spanish loan of 800,000,000 reals; he undertook to float the Roman railroad company, and the Turkish loan, etc. Soon his institution went under. He was
an energetic man, but had founded banks on a false idea
of industrial credit. He did not render any services, but
rather helped to spread the taste for gambling and speculating in France.
Here I must mention another establishment founded in
1862 after the disappearance of the Caisse Generate des
Chemins de fer. The lucrative workings of the Credit
Mobilier, which had up to that time revolutionized the
methods of capitalists and acquired a real vogue, forced
a certain number of Paris bankers and large capitalists to
found a house on the model of that established by the
Pereire brothers. It could not start out as a joint-stock
company. It needed an authorization which it could not
°He had founded in 1842 the Journal des Chemins de jer, a financial
paper.




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get, because the Credit Mobilier stood in its way. I t
ended by getting its authorization in 1864. The Government had become more liberal in this respect, and the law
of May 23, 1863, o n limited liability companies, was the
beginning of hoped-for legislation still wider in scope. The
statutes of the Societe pour le Developpement du Commerce
et de VIndustrie en France were then approved. The nominal capital was 120,000,000 francs, and the actual capital
60,000,000 francs. A fact to remember is that this bank,
aiming to be a partnership and investment bank, also carried on all the other operations of commercial banks. It
did not practice the division of risks; on the contrary, it
mixed them up just as did the Maison Laffitte-Gouin, of
which we have spoken. This point of departure needed
to be dwelt on to show the evolution followed later on by
the French credit societies.




108

III.—The first Comptoir d'Escompte and the development of commerce—The laws of May 23-29, and July
24, 1867, on companies.

CHAPTER

Review of the chief reasons for creating the Comptoir d'Escompte at the time of the
panic of 1848.—Certain comptoirs d'escompte continued to exist after the panic of
1848. That in Paris develops.—The interesting study of the Paris Comptoir d'Escompte in its relation to the history of French credit.—The Comptoir d'Escompte
de Paris. Lengthening the existence of this society to 1857.—The increase of the
original capital in 1853.— The Comptoir d'Escompte of Paris gradually loosens its
ties with the State and the city of Paris.—Lengthening the existence of the Comptoir d'Escompte. It pays back the State and becomes freer.—The Comptoir d'Escompte is authorized to advance money on titles and subscriptions.—Development
of the Bank.—The treaties of 1860 with England. Extension of commerce.—Special
commerce of France with foreign countries before and after the treaties of I860.—
Widening the field of operation of the Comptoir d'Escompte.—It is allowed to start
agencies in France, in the French colonies, and in foreign countries.—Facilities
and guaranties for new operations.—Founding of agencies in Asia.—Its capital
doubles. -State guardianship of credit companies.—The Comptoir d'Escompte
helps the colonial banks.—Services rendered by the Comptoir in Asia.—It starts
other agencies in Asia.—Increase in business.—The capital, doubled again,
reaches 80,000,000 francs.—The laws of May 23 and 29,1863, and of July 24,1867.—
Law of 1863.—Law of 1867(Societes en Commandite par Actions).—These laws were
indispensable in view of the evolution of industries and the growth of important
enterprises.—Growth of savings in France. Capital is created there.—The Comptoir d'Escompte enlarges its business.

We have just described the founding, the working, and
the decline followed by the disappearance of the Credit
Mobilier, an institution of the so-called partnership and
investment type. We have seen the causes of its fall; the
mistakes it committed, and also to a certain extent the
services it rendered. Now we are going to trace the evolution of a bank of commerce, properly speaking, practicing the fundamental business of that kind of bank,
namely, discount. Besides, it is the origin of the large
credit companies, which appear in embryonic form, with
the Comptoir d'Escompte.




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In 1830 there had been an ephemeral Comptoir
d'Escompte, which a crisis at the close of 1830 and 1831
had caused to be founded under almost the same conditions as the one we are going to talk about. Its capital
had been furnished by the State. Its operations lasted
two years. Its creation had been agreed upon so that it
could serve as intermediary between merchants, manufacturers, etc., and the Bank of France. Other private
banks had raised the rate of discount. Now, the Bank of
France accepted only paper or commercial effects with
three signatures; it was rather expensive to get the third
signature. This establishment, then, was started for the
purpose of making the third signature cheaper.
The Comptoir d'Escompte, founded in 1848, in the
midst of a panic more serious than that of 1830-31,
grew out of conditions not unlike those which gave birth
to the ephemeral Comptoir d'Escompte of 1830.
We have, moreover, traced above the facts which led to
the organizing of comptoirs d'escompte by the provisional
government of 1848. We have seen what services they
rendered. It was supposed that, like the Comptoir d'Escompte of 1830-31, they were destined to disappear when
the panic was over. Now, to note a rather curious fact,
this creation of the State's, which had received its first
modest capital like a sort of charity collection, which had
above all owed its organization and earliest resources to
the State and to the city of Paris, did not disappear, nor
did certain other Comptoirs in the provinces founded
under the same conditions. The Bank in Paris was
destined little by little to rise and free itself from its




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of Credit

and

Banks

connections with the State and city of Paris which had
been necessary at the start; then to overcome many
prejudices in order to improve its statutes, and to have
these improvements accepted by the public authorities.
It is an interesting subject for study because it was the
opening wedge, if one may so express it, for those institutions which .later on, under the name of Grandes Societes de Credit, modified so fundamentally the general
organization of credit in France. Better still, it has served
to a certain extent as a guide in this evolution. Several
of these credit societies, indeed, started by being banks
more given to speculation and investment than to commercial operations. The Comptoir d'Escompte, on the
contrary, has always fulfilled the functions which its firm
name indicated and its origin had given it. Though it
happened to deviate momentarily from this line of
conduct in order to speculate in the most dangerous
way imaginable for a credit company, and though
it disappeared in the storm it had started, the new
and reorganized Comptoir d'Escompte took up again
the good traditions of the old one, and was able at its
organization to apply all the improvements necessitated
by the needs of modern commerce and industry. So the
Comptoir d'Escompte is the type of the French credit
institution. It stands all through the latter half of the
nineteenth century to the present day as the sign post on
the road followed by credit institutions in France.
In 1850 the first lengthening of the term of existence of
the Comptoir d'Escompte de Paris was made to extend
to March 18, 1857. Its capital was still about the same




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Monetary

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as at the start—that is, very unimportant—and rose
to 4,200,000 francs. But it had at its disposal about
8,000,000 francs in deposits and current accounts, and
the Treasury continued its subsidiary loan of 3,000,000
francs. Bills of all kinds discounted in 1850 rose to a
total of nearly 128,000,000 francs., That year the shareholders felt that they had achieved something not only
for the public good, but also very profitable for themselves, since they received a dividend of 7 per cent of
the nominal capital. Success increased in the years
following.
In 1853 the capital was increased to 20,000,000 francs.
Why? Because the original capital of 6,500,000 was too
small to offer a sufficient guaranty, since the business of
the Discount Bank had increased very greatly. In 1852
the discount of bills with two signatures, that of warrants or receipts of merchandise, bills coming from branch
banks, made up a total which, with the addition of foreign
securities, rose to more than 248,000,000 francs; and the
Comptoir d'Escompte had, according to the statement of
June 30, 1852, 15,000,000 francs in current credit accounts—that is to say, 15,000,000 francs in deposits.
Adding the non-negotiable guaranteed capital to these
20,000,000 of accumulated capital—capital furnished by
the State and the city of Paris—the whole capital reached
33.333.ooo francs.
But this gradual transformation of an institution supported by the State which, as it grew, was freeing
itself little by little from this protection, was destined
to bring about a lessening of the guaranties sanctioned
by the State and the City of Paris. The share capital




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Banks

increased at the same time that the guaranteed capital
remained stationary. It was then decided to reduce the
guaranty of the State and the City of Paris from a third
to a fifth of the total capital. Moreover, the Government
announced to the directors of the Comptoir d'Escompte
that the issue of share capital was to be carried out before
December 31, 1854, so as to allow the cancellation at
that date of the guaranties and the repayment of the
3,000,000 francs loaned by the State.
This decision took on a general character in the law
of June 10, 1853, f° r ^ w a s applied to the Comptoir
d'Escompte of Paris and those of the departments.
These measures were necessary because in 1853 the
discounts reached more than double what they had been
in 1852—that is to say, 500,000,000 francs.
While taking back its guaranty, the State prolonged
for a term of thirty years, beginning March 18, 1857, the
duration of the Societe du Comptoir d'Escompte. Thus
the Comptoir d'Escompte became free. Formerly, indeed,
the directors nominated by the Minister of Finance represented the State's interests. They supervised all operations, since these could not be carried on without their
authorization. The Minister himself alone authorized the
sending out of dividends to the shareholders. Three
delegates of the Paris municipal council represented the
interests of that city and took part in the meetings of
the council of administration and the general meetings
of shareholders.
New statutes were drawn up and approved by the
decree of July 28, 1854. The directors were in future to
IgyI

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be nominated by the general meeting of shareholders.
The Minister of Finance had nevertheless reserved for
himself the right of approval. Its operations became
more extended. To all those which it was accustomed
to carry on were added others, such as advances on
government securities, on shares, and bonds; the
opening for a third party, and at a commission agreed
upon, of subscriptions to public loans, or to loans issued
for the capital needs of all joint stock companies, always
subject to the authorization of the Minister of Finance.
In spite of this interference the Bank, which from that
time forth was called the Comptoir d'Escompte de Paris,
carries on its business under its new statutes.
Here, finally, is a table of the operations in discount of
this institution from 1853-54 to 1859-60:
Average
Sum total of current
Total number
of
credit
1 of bills
discounts accounts,
discounted. in million in million
francs.
francs.

Financial year.

1853-54
1854-55
1855-56
1856-57
1857-58
1858-59
1859-60

1

837,000
877,000
936,000
942,000
985,000
999.000
1,000,000

628
653
704
682

665
663
680 |

19
18
18

The number of commercial bills discounted increased,
but the sum total in million francs, after having
increased, too, until 1855-56, went down in 1856-57.
You see, nevertheless, what services the Comptoir rendered
to trade; the average of each bill in 1856-57 was found
to be 723 francs in round numbers. The falling off of




114

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Credit

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Banks

the sum total of discounts during the last year has to
do with the crisis of 1857. The crisis lasted until 1S59,
for we see the figure representing the total of discounts
going down to 665,000,000 francs in 1857-58, and to
663,000,000 francs in 1858-59. The rise began again
in 1859-60. The current credit accounts did not increase and show rather a falling off from 1853-54 to
1858-59. It has been said that at that time capital
was being absorbed by public loans and by loans
to large railroad companies. We must also note that
the Bank was not allowed to accept in current accounts
a sum more than one and a half times the net cash
capital. This clause prevented the current accounts
from increasing, and at bottom this measure favored
the Bank of France. In any case this restriction diminished public confidence.
COMMERCIAL TREATIES OF i 8 6 0 .

We have seen the movement of high finance set in motion in France between the years 1849 and 1865 by the
public loans for wars or needs of the budget, and loans
made by the railroad companies. The review of the
Credit Mobilier has enabled us to trace in its development
the important part played by these two chief causes in
the accumulation of capital and its circulation in France
during this period of fifteen to eighteen years. These
facts emphasize the phenomenon of the creation of capital
by saving, and it is a striking point that France, even
at that time, was sending money out of the country to
finance industrial enterprises, especially railroads.




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But if these elements of productive power were the
cause of a general economic activity in France, they
did not have^uch an immediate effect on commerce and
international exchanges as the treaty with England, concluded on January 23, i860. France giving up the narrow
protective system followed until then, threw wide open its
frontiers to English trade. The country did not have to
repent it. The following table shows the movement of
special commerce during the five years before the commercial treaties of i860 and the years which followed until
the war of 1870-71:
[Million francs.]
Imports.
1,594
1,989

i855
1856
1857
1858
1859
i860
1861
1862
1863
1864
1865
1866
1867
1868
1869

Exports.
i,558

1,873
1.S63
1,640
1,897
2,442
2, 199
2,426
2,528
2,641

1,893
1,866
1,887
2, 266
2, 277
1,926
2, 242
2,642
2,924

3.304

3,088
3,180
2,826
2, 790

3,153

3,075

2,793
3,026

Total.
3, 152
3,882
3.739
3.450
3,9o6
4. 174
4,368
4.441
5,o68
5,452
5,729
5,973
5,852
6, 094
6, 228

Now, here are some statistics showing the general commercial development of railroads between the years 1855
and 1869. We have not given the figures for every year,
thinking that those given are enough to show the enormous growth of length of lines and of the movement of
traffic during this period.




116

Evolution

of

Credit
French

Year

1855
i860
1865
1869

and

Banks

railroads.

Total net Net kilo; Length of proceeds, inj metric pro- Number of
ceeds, in passengers,
roads, in
by milthousand
I kilometers.) million
lions
francs.
francs.
i55

31-0

230
310

25.0

385

5,037
9, 167
13.227
16,465

23-3

23-5

33-o
56.5
81.5
I I I . O

Number of
tons of
merchandise, in million tons.
10. 6
23.0

34.o
44-o

The Comptoir d'Escompte of Paris did its best to profit
by the revival of trade destined to follow the conclusion
of the treaties of January 23, i860, with England, and
helped on by the development of French railroads.
First of all, it was important to extend the workings
of this credit establishment both at home and abroad.
So it had to win a little more liberty, and not remain
under too narrow a charter. The State, indeed, had
only conceded under restricted conditions its right to
become a stock bank under the title of Comptoir
d'Escompte de Paris. This time the Government
did not refuse to back up the plans of the institution. The decree of May 25, i860, approved the modifications of the statutes put forward by the directors.
These modifications were the authorization to start
agencies in France, in the French colonies, and abroad,
with the approval of the Minister of Finance. Further,
in order to carry on operations made necessary by these
agencies, the Bank was authorized to accept orders, drafts,
and letters of exchange which should be secured by transfers of bills of lading and bottomry; to discount up to a
term of one hundred and eighty days sight commercial
bills backed up by bills of lading.




117

National

M on etary

Commission

A few days later two agencies were founded, one in
Shanghai, China, the other in Calcutta, India.
On August 30, i860, the Comptoir d'Escompte was
authorized to double its capital from 20,000,000 to
40,000,000 francs. The issue of 40,000 new shares was
entirely successful.
Let us point out here this fact, that an institution of
credit must be authorized, as we have just seen, in order
to increase its capital. The management of institutions
of credit founded as joint stock companies, or even in
the form of silent partnerships, was under the protection of the State. So it is not to be wondered at
that a greater number of important credit companies
are not founded. Except for the unexpected revolution
of 1848 and the panic which resulted from it the Comptoir
would probably never have existed. It was, indeed, the
first credit society in France which attained its definitive form from the start, that of a bank of commerce—
that is to say, of discount with all the operations that
go with it.
About the same time, in i860, the Comptoir d'Escompte
helped with loans of money certain colonial banks
(those of Martinique, of Reunion, and Guadeloupe).
These banks of issue were obliged to put their capital
into government securities as a guaranty for issuing
their notes for equivalent sums. Now, their power of
credit was soon spent. After having turned into money
the securities which they held—that is to say, put into
circulation that part of the state debt which they possessed—nothing was left them to do business with. The




xi8

Evolution

of

Credit

and

Banks

Comptoir d'Escompte guaranteed credits for them or
loaned them money, and later it extended this operation to the banks of Guiana and Senegal.
And so the Comptoir was established in the Far East,
and its influence was felt in our colonies. It soon showed
that its agencies were useful. The one in Shanghai,
besides its current business, collected the war indemnity
due the French Government after our Chinese expedition. Moreover, the new treaty gave French merchants
the right of opening up relations with the Chinese Empire.
So it was a valuable help to our countrymen. In Calcutta the economic movement took on all the greater
importance because the civil war in the United States
made India the center of the cotton supply for Europe.
These first successes caused new Asiatic agencies to be
founded in 1861 and 1862 in Bombay, India; Saigon,
Indo-China; and Hongkong.
During this time the business of the Comptoir was
spreading and taking on an importance little in keeping
with its capital. It had extended greatly its activities
in the provinces, in the principal French cities, having
accounts with the bankers of these cities and keeping
their accounts in turn. Profits were good. For the
financial year 1865-66 the dividend was 12.7 per cent
on the capital. It is true that the discount and banking
operations had been 1,000,800,000 francs for that year
and that in Indo-China business had amounted to more
than 700,000,000 francs.
The capital then was increased to 80,000,000 francs.
The subscription succeeded admirably, which was not
surprising.




1x9

National

Monetary

Commission

THE INFLUENCE OF MORE LIBERAL LEGISLATION ON
BUSINESS IN GENERAL AND ON CREDIT IN PARTICULAR.
I n t h e period from 1863 to 1867 new laws were passed
which have h a d a very great influence on t h e developm e n t of large industries and credit institutions. W e
shall t a k e these laws into account only so far as they
concern t h e latter.
Before t h e law of May 23-29, 1863, no joint stock comp a n y could be founded without t h e authorization of t h e
ruler a n d without his approval of t h e act which constit u t e d t h e society. This law did away with this authorization, b u t stipulated t h a t t h e capital of t h e society
could not be more t h a n 20,000,000 francs. T h e shares
forming t h e capital fixed on b y t h e founders were to be
completely subscribed for, b u t t h e law required t h a t only
a quarter of t h e capital issued be paid in. T h e directors nominated b y t h e general assembly of shareholders
(which approves t h e statutes) m u s t own in equal lots
one-twentieth of t h e society's capital, and t h e shares
forming this twentieth were not t o be sold. They were
personal and untransferable. One article of this law
stipulated with reference t o supervision t h a t t h e general
assembly of shareholders should pick out one or more
special commissioners to report to t h e general assembly
on t h e condition of t h e society. Then certain measures
for publicity were enacted (the registering of t h e statutes
a n d amendments of these statutes in t h e court record
office) and other measures of order a n d procedure for t h e
general assembly of shareholders.




120

Evolution

of

Credit

and

Banks

The law of July 24, 1867, repealed the law of June 23,
1863. This law of 1867 treated with limited liability
partnerships issuing shares (societes en commandite par
actions) and joint-stock companies. It no longer limited
the capital stock of companies and it increased the publicity by requiring the statutes or changes of statutes to
be inserted in at least one newspaper, specified for receiving legal notices. As in the law of 1863, the directors
were to be chosen for six years, but they were eligible for
reelection. The number of shares which they may own
was determined by statute. Finally this law, while organizing a sort of parliamentary system for joint-stock
companies, of which the general assembly of shareholders
was the foundation, gave real freedom, a more flexible
instrument than the law of 1863, to industry, trade, and
banking.
The law was indispensable because of the growth of
large industries, and the natural concentration of capital.
The old mould had to be broken in order to keep up with
the general economic movement marked by the controlling influence of new scientific inventions and their application to industry. The steam engine, the locomotive,
the beginnings of electricity—all revolutionized the conditions of industry. Concentration of capital was becoming necessary even then, and a mathematical function, as
it were, of the tendency of industries to concentrate.
Besides, this capital did not belong to large capitalists;
capital was being collected also in the middle classes and
all ranks of society.




121

National

Monetary

Commission

Here is an indication of this fact, as shown in the
development of savings banks.

Year.

Number
Number
of savings of branch
banks.
banks.

159

i835
1841
1851
1861
1865
1867

301

366
459
497
513

55
159
159
243
475
564

Balance
due depositors
(million
francs).

62.1
249.7
0158.0
401. 0
493-0
57i.o

Private
property
of the
banks
(million
francs).

5
10
13
14

a f h i s low figure is due to the panics of 1847, 1848, 1849, and also to the political
crisis of that period.

In the year 1869, preceding the Franco-Prussian war,
the balance due to depositors rose to 711,000,000 francs.
That was only an indication. The middle classes
were investing their money in railroad and city bonds
and in government securities. The Credit Mobilier and
the other institutions of that kind did not create the
taste for saving money in France; they only directed it
toward transferable securities. It is even a fortunate
accident that the Credit Mobilier gradually disappeared,
succumbing under mistakes which opened the eyes of
the least farseeing to the danger of speculative crazes.
We in France have not always been immune from these
crazes since then, but the attacks for most of the savers
have been only temporary. The great majority of the
very numerous persons who accumulate capital has
always after the storm taken up again the patient, persistent work of saving.




122

Evolution

of

Credit

and

Banks

Now that we have set forth these reflections and these
facts to show in what surroundings the French credit
institutions developed and what laws helped in this development, we may return to the Comptoir d'Escompte.
The Comptoir d'Escompte had in its general meeting
of December 8, 1866, raised its capital to 80,000,000 francs
and established a reserve fund of 20,000,000 francs.
In 1867 it enlarged its sphere of action by establishing
new agencies. In France it founded one at Nantes (1867),
at Lyons (1868), and at Marseilles (1869). Abroad it
established those at London (1867), Yokohama, Japan,
and Alexandria, Egypt. The Comptoir had as wide interests in foreign countries as in France.
Its agencies at Nantes and Marseilles, both seaports,
put it in touch with firms having business with our colonies, or with those numerous and often rich firms which
had business with Egypt, India, and the Far East. Finally,
the agency at Lyons was very efficacious because of the
accommodations it gave silk merchants for extending in
that city the silk market which it had succeeded in wresting from London a few years before.
In 1869-70, on the eve of the Franco-Prussian war,
the total business of the Comptoir reached 3,086,000,000
francs, an enormous sum for that time, and this business
was made up as follows:
Francs.

Discounts
Foreign agencies
Home agencies
Other operations

„

Total. _

3, 086, 000,000

The dividend that year rose to 9 per cent.




1, 187, 000,000
1, 096, 000, 000
438, 000, 000
365, 000,000

123

National

Monetary

Commission

We are far from the modest beginnings of the Comptoir; indeed, we have seen its first capital formed like a
charity collection, at the most distressing time of the
panic of 1848, when it was started. It had always been
true to its purpose of a discount bank, and soon found
itself brought into business relations with the most distant foreign countries. Circumstances forced this, as, for
instance, the first war with China and the difficulty at
that time of competing with the provincial banks which,
since the increase in the number of branches of the Bank
of France, found help in this great issuing establishment,
which rediscounted their commercial bills for them.
Nevertheless, in the last period we have gone over, it
founded agencies in the most important French cities. It
is none the less the pioneer in the founding of foreign
agencies.




124

CHAPTER

IV.—The Bank of France from i860 to 1875,

Tendency of the Bank to have a large cash reserve.—Unproductive circulation.—
Difference in the evolution of the Bank of England and the Bank of France.—The
Bank of France gradually becomes the depository of French specie.—Gold purchases as a means of increasing the reserve.—The panic of 1864.—Its causes.—
First symptoms.—Acute period of the crisis.—The Bank buys gold.—The interest
on loans on securities becomes different from the iMe of discount.—The law of
March 3,1852, in regard to loans on railroad securities.—Its consequences.—Panic
of 1856-57.—Panic of 1862-64.—The interest on loans on securities was the same as
the discount rate.—The Bank establishes an increase in interest on loans on securities as compared with the discount rate.—The issue of bank notes representing
loans on securities. Dangers of its exaggeration.—Issues and discounts of the
Bank from 1864 to 1870.—Note on a fact seemingly paradoxical; differences in
1865-66 of 6 per cent between the discount rate of the Bank of England and the
Bank of France.—The panic of 1865-66 in London in its relation to the Paris money
market.—Moral obligations of the Bank toward the Government. Its financial
help in war time.—Legal currency and forced currency (August 12, 1870).—The
right to increase the issue.—Bank's loans to the State.—Loan to the city of Paris.—
Precautions taken by the Bank.—Disadvantages of a state bank in time of war.—
Forced payments to the Paris Commune.—Increase in discounts.—Services rendered by bank notes.—Growth in economic activity after the war of 1870-71.—Collection of bills the time of payment of which had been extended.—The loss in the collection of extended bills is very small.—Deep lying causes of commercial customs.—
Increase in the limit of issue for the Bank of France.—Flexibility of the system
subject to the intelligent action of the public authorities.—Comparisons with the
Bank of England.—Terms of payment of the war indemnity.—Method of payment.—Interest in explaining these operations.—Secondary conditions.—Loan of
2,000,000,000 francs in June, 1871.—Loan of 3,000,000,000 francs in July, 1872.—
Success of the loan of 1872.—Loan by the Bank of France to the State.—Agreement
with a syndicate of bankers.—France's progress in the knowledge of the conditions
of credit.

I.—BEFORE THE FRANCO-PRUSSIAN WAR.

Let us return to the Bank of France, which we left in
i860 after its operations of marketing railroad securities.
We know that it had already increased the number of its
branch banks.
The following table shows the development of its operations; it will help us on several points to make the
observations which certain figures call for; we divide the
interval before the war into periods of two years each.




125

N ational

Monetary

Commission

[Million francs.]

Year.

1859
1861
,1863
1864
1865
1867
1869

Average
reserve.

Average
circulation.

Number
of bills
discounted.

57o.o
368.6
305-0
252.1
439-6
845.0
,190.o

716.4
745.o
796.0
761.9
839.0
1,081. 5
1,354-5

3,395»i63
4,188,471
4, 280,378
4,698,437
4, 734-997
5,001,881
5,656,600

Average Rates of discount.
Sum
total of of combills dis- mercial MaxiMinicounted. '' portfolio."
mum.
mum.

4,7I40
5.307.6
5.7o6. 7
6,546.3
6,039. 7
5, 723.0
6,635.0

484. o
531.3
568.7
635-0
595-8
530.7
568.0

Percent.
4-5
77.
8.
53-

Per cent.
3-o
5.o
3-5
3.o
3-°
2.5
2-5

We see first of all that the reserve has risen in this
space of time from 368,000,000 to nearly 1,200,000,000
francs—that is, it has more than tripled. The circulation of bank notes has also increased, but has not quite
doubled. The discounts have not increased, as is shown
in the column containing the average total of the commercial " portfolio," which in 1869 was the same as in
1863—568,000,000 francs. The notes in circulation, then,
in large part represent specie—that is, the reserve.
If we deduct from the average total of circulation the
average total of commercial bills, we have left 786,500,000
francs, which are an important part of the circulation
representing specie and having nothing in common with
the credit through issue; this is called unproductive circulation in institutions of issue. To be sure, we must
take into account advances on securities; but during
these nine years the average total of collateral loans,
which reached nearly 181,000,000 francs in 1861 and
166,000,000 francs in 1862, fluctuated after that between
75,000,000 and 85,000,000 francs.




126

Evolution

of

Credit

and

Banks

It is a strange thing, and at first sight almost paradoxical, that when the very strict law of 1844 forced the
Bank of England not to issue, over and above a certain
figure, anything but gold certificates, the Bank of France,
without the intervention of any law, but simply by the
course of events and the spirit of economy among the
French people, saw this very idea of the law of 1844
carried out without any government interference. Indeed, not only were the French as a nation saving money,
but their savings flooded the money market because they
were not being used either in industries at home or in
the colonies, as was the case at that time in England.
To be sure, the Credit Mobilier sent French capital to
Austria, Spain, Russia, etc., to build railroads; in France,
too, the railroads had already required several billion
francs for their construction; but our capacity for accumulating capital gives us an extra amount of cash capital,
of which the Bank of France gradually becomes the depository. Aside from the great and far-reaching panic caused
by the Franco-Prussian war, in proportion as the Bank
spread its influence through France by means of its
branches this phenomenon took place more and more.
The consequence was that the Bank tried means different
from those it had applied before to protect its reserve.
In former panics in 1847 and 1855-1857 the Bank of
France bought gold to keep up an adequate reserve. In
this last panic it had recourse to this method to the sum
of almost 1,300,000,000 francs, purchases which cost it a
little over 1 per cent. Henceforth it no longer needed to




127

National

Mon etary

Commission

use this method to any extent except during the panic of
1864.
Where did this panic start ? It started in America. The
War of Secession was the immediate cause. The panic, as
is always the case, was first felt in England because of its
important relations with the United States, and then in
France.
The War of Secession greatly disturbed the supply of
certain products which Europe got from America. The
American cotton merchants called in at the beginning of
the war the money due them and found themselves
obliged to refuse the orders which had been given them,
and it was impossible for them to deliver those which they
had already accepted. In order not to shut down, the
European factories had to buy cotton in India. All this
caused great changes.
The beginnings of the panic were felt as early as 1861.
The preceding table shows that in comparison with 1859
the average reserve went down from 570,000,000 francs
to 368,600,000 francs; the discount went to 7 per cent,
with a minimum of 5 per cent. In 1865 there was a still
greater falling off in the average reserve. It went down to
305,000,000 francs. The minimum in November was even
as low as 200,000,000 francs. It did not drop lower than
that figure during the worst period of the panic, but the
discount rate went to 7 per cent, as in 1861.
In 1864 the panic was at its worst at the time of foreign
payments, the end of April to May, and September to
October. During the first period the reserve fell below
160,000,000 francs in spite of a rise in the discount rate to




128

Evolution

of

Credit

and

Banks

8 per cent. In the face of a greater and greater number
of bills'presented for discount, the Bank directors, because
of the growing demand for coin, decided again to buy gold.
Thus the Bank purchased gold abroad to the sum of a
little less than 240,000,000 francs. In September and
October the discount rate, which had been lowered for
some time, was raised to 7 per cent, then to 8 per cent,
with a special view to reestablishing the reserve. At the
end of the year the discount rate fell back to 4 ^ per cent.
The Bank had been authorized since 1834 to make advances on securities to private individuals. Up to about
1851 these operations were not very important, because
this kind of securities was limited to those of the State or
of cities. From the moment when the Bank could consent to advance money on a larger variety of certificates—
that is to say, transferable securities—when it could lend
money on stocks and bonds of railroads, of the Credit
Foncier, etc., this side of its business took on large proportions. The following table shows this progress. We
give only five-year intervals from 1834 to I ^ 5 i , and after
that every year up to 1870:
Loans on securities.
Total sums
advanced.
Francs.
1834
1840

27,600,000

1

Average
portfolio.
Francs.
7, 700, 000

70,500,000

10,500,000

52,300,000

11,200,000

76,700,000

_-.

184s

1850
1851
1852
1853
1854

j
j

18,800,000

51, 900,000

—-

1971—10—-—9




129

68,300,000

773.90o,ooo
471,400,000

---

10,800,000

523,500,000

129.500,000

89* 500,000

National

Monetary

Commission
Loans on securities.

Year.
Total sums
advanced.

Francs.
1855

_

Average,
portfolio.

Francs.

6 7 1 , 700, 0 0 0

105,200,000

1856

' 834, 800, 000

81,200,000

1857

j

353,600,000

52,500,000

1858

j

599.500, 000

97.000,000

1859

j 684, 200, 000

117,100,000

i860

; 651, 600, 0 0 0

122,800,000

1861

1

1862

11,303, 6 0 0 , 0 0 0

180,600,000

1863

j 9 9 9 , 200, 0 0 0

166,100,000

1864

472, 5 0 0 , 0 0 0

88,200,000

423,300, 000

84,200, 000

401, 800, 000

74,000, 0 0 0

1865

j

1866

! 420, 400, 000

77.400,000

1867

445,700,000

85,800,000

1868

433,400,000

84,100,000

1869

480,000,000

1870

542,000,000

94,200, 000
121,600,000

Let us remark again before drawing conclusions from
these figures that the law of June 30, 1840, had allowed
all public securities as guaranty for commercial bills
presented for discount with two signatures.
First of all we note that in 1852 the total loans for
the year rose to 523,500,000 francs, whereas they were
only 51,900,000 francs in 1851; in the same way the
average of the "portfolio" went from 10,800,000 francs
to 68,300,000 francs. The movement went on and
increased in 1853. The reason for this was the law of
March 3, 1852, which extended the loan operations of the
Bank to railroad stocks and bonds, whereas by the
terms of the law of May 17, 1834, the Bank could make
loans only on French government securities. After
dropping in 1854 these figures rose, and during the panic
of 1856 reached almost 835,000,000 francs for the total




130

Evolution

of

Credit

and

Banks

loans and 81,000,000 francs for the average during that
year. The panic had caused a call for loans to be made by
the holders of securities who needed cash capital or bank
notes. Next we see a falling off in the total and average
loans in 1857, then they went up in 1858 and reached
a total of nearly 600,000,000 francs and an average of
97,000,000 francs. In 1862 the total of collateral loans went
up to a figure unheard of till then, almost 1,304,000,000
francs, and the average to 180,500,000 francs; the following year we find respectively almost 1,000,000,000
francs in one column and 166,000,000 francs in the other;
it was another panic—the cotton panic brought about by
the War of Secession—which called forth this demand for
cash or bank notes. It was also the time when the Credit
Mobilier started out to market railroad securities. Everyone used what means he had to obtain credit and borrowed on securities when the discount on commercial bills
was not enough, railroad securities having become very
numerous on account of repeated borrowings.
Now, the Bank of France made its loans at the same
rate as that which it fixed for discount. In view of the
numerous demands for loans during these two years, 1862
and 1863, the Bank understood that it was necessary to
establish a higher rate for the interest on collateral loans.
Its directors saw rather late the usefulness of this measure.
In reality, transferable securities, stocks or bonds deposited as collateral for promissory notes, are not easy
to realize on by the depositor even when the need is
urgent. Too many obstacles prevent their being quickly
negotiable, even assuming that the loan has fallen due.




131

National

Monetary

Commission

It is understood that the margin between the market
quotation of the security at the moment of the loan and
the value below the quotation which the banker fixes for
the loan, guaranties the banker against all risk if this
margin has been cautiously worked out. But here one
might say that the sureness of the guaranty is in inverse
ratio to the availability of the capital loaned. Granting,
then, that payment has fallen due, you will call upon the
debtor to pay his debt. But he may fail to obey this call,
especially in a panic. Here you can not use the rapid
methods of procedure thought out for bills of commerce.
It is a collateral loan, so you have to reach the point of
using the right to sell the collateral. Now, selling government and railroad securities, etc., in time of panic, throwing great quantities of them on the market, necessarily
causes a decline in these securities and others of the kind
allowed as collateral on loans. To issue bank notes
against securities that can not be quickly realized on is
something a bank of issue ought not to do without caution. The problem was new at that time, and it was only
the heavy loans of 1862 and 1863 that began to alarm the
bank directors.
The method to employ was simple; it consisted in raising the interest on loans in comparison with the discount
rate. This is what the Bank did. The effects of this
measure were immediately felt; the total of loans remained around 400,000,000 to 450,000,000 francs. Here,
as a document that bears on this measure, is a table of
the differences in favor of discount demanded by the Bank
up to 1870.




132

Evolution

of

Credit

and

Banks

Extra interest on loans as compared with discount rate.
[Discount rate and interest on loans the same before March 24, 1864.]
Per cent.

From
From
From
From
From
From
From
From

March 24, 1864, to May 5, 1864
May 6, 1864, to May 25, 1864
May 26, 1864, to September 8, 1864
September 9, 1864, to November 2, 1864
November 3, 1864, to March 8, 1865
March 9, 1865, to May 31, 1865
June 1, 1865, to October 8, 1865
October 9, 1865, to November 1, 1871

1
o
1
o
1
%
1
}£

If we go back now to the table before this one, we see
that during the years which follow the panic of 1863-64
the metallic reserve rose by degrees. In 1869, on the eve
of the Franco-Prussian war, it rose on an average to about
1,190,000,000 francs, or, more precisely, 1,189,800,000
francs; the circulation of bank notes exceeded on the
average 1,354,000,000 francs. In 1868, moreover, the
average reserve already reached 1,174,000,000 francs,
and the circulation rose to 1,233,000,000 francs. The
amount of the reserve almost equalled the circulation.
The difference was less than 60,000,000 francs. But is
that a sign of prosperity? To prove that this sign is
fallacious it suffices to follow the fluctuations of the figures relating to discounts collected in the following table:
Average
discounts.

Average
rate of
discount.

Francs.

1865-

595,800,000

1866-

656,600,000

Per cent.
5.5i
3.63
6.50
3.72
3.67

1867-

530,700,000

2. 71

i868_

458,500,000

2.50

1869-

5 6 8 , 0 0 0 , 000

2. 50

1870.

738,000,000

3-99

1856.

493, 0 0 0 , 0 0 0

i86o_

493.300,000

1864-

635,000,000




133

National

Mon etary

Commission

Hence beginning with 1856, the year when the average
discounts reached a figure till then unknown, we see the
discounts rising in a few years to figures which fluctuate
around 600,000,000 francs. Then from 1867 this average
goes down to only 458,500,000 francs in 1868; at one
time even the discounts showed in that year a minimum
of 410,000,000 francs. The falling off in business previous to 1870 was directly connected with fear for the
political situation in Europe. Since 1866, since Sadowa,
war was thought to be probable between France and
Prussia, and this fear checked business transactions;
people did not dare to invest capital in industrial concerns.
You notice this in looking over the average balance of
individual current accounts at the Bank of France.
After having exceeded 200,000,000 francs in 1859 a n d
i860, it had fluctuated from 1861 to 1865 between
165,000,000 and 185,000,000 francs. But from 1866
it went up as shown by the following table:
Average balance of individual current accounts.
Francs.

1861
1862
1863
1864
1865
1866
1867
1868
1869
1870

164,
186,
170,
146,
176,
267,
311,
407,
348,
402,

200, 0 0 0
100,000
800, 0 0 0
500, 000
800, OOO
6 0 0 , OOO
300, 000
300, 000
600, 0 0 0
600, 0 0 0

REMARKS.

London experienced in 1865-66 a financial crisis in the
form of a money shortage, which was one of the most
severe that market ever had. There were several reasons
for it; one fundamental cause was the heavy demand for




134

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of

Credit

and

Banks

gold in India; another cause of weakness was in the
mechanism of the Bank of England, which, beyond its
loan to the State, can not issue notes without having their
value in gold in its treasury; finally, an unprecedented
public panic forced the closing of the most trustworthy
credit firms which operated only in the most conservative way, like the joint-stock banks. The curious thing
is that the discount rate went up to 10 per cent at the
Bank of England; it stayed three months at that level,
whereas that of the Bank of France did not exceed 4
per cent during this period, and even fell to 3.5 per cent.
This shows that gold was not being exported to England
from France. How can we explain that these two markets so near to each other should be so little subject to
the regulative law of supply and demand, while no
restrictive law in France opposed at that time the transportation or sale of gold to foreign countries?
Let us retrace first the fluctuations in the discount rate
at the Bank of England and the Bank of France from
October, 1865, to July, 1866.
Discount rate.
Date.

1865—October 2
October 5
November 12
December 28,
1866—January 4
March 15 _ ~
May 3__
May 8
May 11 -• _ _
May 12
July 16




_
____
__ _

_

-

Bank of
England.

_ _ - _
_ _.

_ _

_ _

Per cent.
5
6
__
7
7
.
8
6
- - 7
_
__
8
_
9
10
_ __
10

135

Bank of
France.
Per cent.
3
4
5
4
S
3
3
3-5
4.0
4.0
3.5

National

Monetary

Commission

The reason for this state of affairs seemingly so abnormal is that the panic of 1866 in London was purely local.
The English public greatly exaggerated the shipments of
gold to India. Passing troubles, which at other times
would not have been noticed, made depositors in certain
joint-stock banks lose confidence. The public made a
mad rush, and the result was that some of these houses
suspended payment. It was a genuine panic, which
brought about what we call to-day a run on the bank.
What happened next? These joint-stock banks, like all
London banks, helped to make at the clearing house, for
their own account and that of their clients, compensatory
payments and balancings of checks. These substitutes
for coin failing suddenly so far as these banks were concerned, a money scarcity followed. The machinery of
the clearing house is really very delicate and sensitive.
If it has just suffered a slackening or a sudden jerk,
the whole mechanism of London credit is affected. So
the Bank of England was called upon. Thanks to the
suspension of the act of 1844, this bank could issue an
extra allowance of notes amounting to £6,000,000, and
save its situation by gradually raising the discount to
10 per cent. Its reserve, which was £14,000,000, went
down to only £11,800,000 on May 23, being a diminution of £2,200,000. As for London exchange on Paris,
which varied then from 25.12 to 25.30, it went down
during the worst of the panic to 25.10. The exchange,
then, showed that it was rather more advantageous for
Paris to buy gold in London. In reality, the 10 per cent
rate of discount maintained by the Bank of England was




136

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of

Credit

and

Banks

kept up perhaps a little longer than necessary. In any
case London's rate of exchange at that time was not disadvantageous relatively to Paris and other European
markets, such as Amsterdam, Hamburg, etc. The rate
of exchange went up only on Calcutta.
At that time the intercommunication between the
European money markets was not as finely adjusted as
it is to-day. At the present time and under the same
conditions the rise in exchange would have been momentary, but it would have been felt just the same. There
are sympathetic crises, just as there are sympathetic
pains, which the delicate sensitiveness of the organisms
explains. Thus the crisis of 1866 had for its chief cause
the pains aroused by a slightly abnormal demand for gold
in India and especially by the increase in the needs for
actual cash caused by the suspension of the banks of
which we have spoken. On the other hand, the other
European markets had either a silver standard or bimetallism; so it is likewise easy to understand why they
thought so little of protecting themselves and showed
so little anxiety, since the London panic in its worst
period was characterized by a demand for gold. We
have seen that this demand was not very great, since
the continental markets did not have to export gold,
and the Bank of England itself had only a little over
£2,000,000 less than its normal reserve.
I I . — T H E FRANCO-PRUSSIAN WAR AND ITS CONSEQUENCES.

The Bank of France, bound to the State and holding
its privilege from the State, was naturally destined to
play a very active part in connection with it during the




"37

National

Monetary

Commission

war. The war that broke out in July, 1870—it was
declared by the legislative body on the night of July
14-15—was to show what an important financial machine
this establishment was for the Government, as well as
the aid it was to give it.
At the beginning of hostilities the Government had
recourse to it, and as early as July 18 borrowed 50,000,000
francs.
On August 12 a law decreed that the notes of the "Bank
should have legal currency and forced currency—that is
to say, that every creditor should be obliged to accept the
notes instead of coin and at the same value as current
coin; and by forced currency it is scarcely necessary for
us to explain that we mean the right of the Bank which
issues the notes not to redeem them in specie. The
same law raised the maximum of bank-note issue to
1,800,000,000 francs; then it authorized the circulation of
25-franc notes.
On August 14 the total issue was increased to
2,400,000,000 francs, and later to 2,800,000,000 (December 29, 1871).
The first defeats of the French armies brought about
the fall of the Imperial Government. A provisional government formed by the Paris deputies followed. As
it was composed of well-known political men, and as
prominent men of several parties gave it their support
in order to preserve domestic order, in the presence of an
invading enemy, the Government of September 4 was
accepted and obeyed. The Bank continued to act in its
relations with it as it had toward the regular government.




138

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of

Credit

and

Banks

This new Government sent a delegation into the provinces to organize armies. Most of its members lived in
Paris, which was occupied a few days later (September 19,
1870) by the Germans.
The Bank followed a similar course. M. Rouland, the
governor, remained at Paris with Deputy Governor M.
de Ploem; and M. Cuvier, the other deputy governor,
accompanied by M. O'Quin, went to Tours, where the
delegation of the provisional government was sitting.
During this terrible period the Bank helped the State,
both in Paris and in the provinces, by means of loans.
Here we give the list:
Advances of the Bank of France to the State at the time of the
war, 1870-71.
1870—July 18
August 18
August 19
September 24
December 5 (Paris)
December 5 (Tours)
1871—January n
March 13
April 15
May 17
May 30
June 10
Receivers-general of Metz and Strasburg
July
Total

a

Franco-Prussian
Francs.
50, 000, 000
50, 000, 000
40, 000, 000
75, 000, 000
100, 000, 000
100, 000, 000
400, 000, 000
50, 000, 000
75, 000, 000
150, 000, 000
90, 000, 000
50, 000, 000
30, 000, 000
210, 000, 000
1, 470, 000, 000

Almost 1,500,000,000 francs.
a
The Bank also paid into the Treasury in 1873, 150,000,000 francs in
gold. (Treaty of June 2, 1873.)




139

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Monetary

Commission

The interest on these loans was fixed at first at 6 per
cent, which was the discount rate at that time. After
January 22, 1871, the interest rate was lowered to 3 per
cent. The guaranties of these loans were treasury notes.
First of all in the treaty of January 22, 1871, it was agreed
between the Government and the Bank that the Government should reimburse the sums loaned it out of its first
available resources, either ordinary or extraordinary. But
circumstances were such that these sums were paid back
only at the end of a certain time.
In the same way the Bank advanced a sum of
200,000,000 francs to the city of Paris (after its surrender on January 28, 1871) to pay the war contribution
due according to the terms of the surrender. This loan
which, together with the expenses incurred in negotiating
it, rose to 210,000,000 francs, was arranged at the discount rate, and the sum was to be redeemed by the city
of Paris in six months. This debt was really cancelled
only in 1875.
These facts show that the Bank was able to .play its
part in these difficult times and to act effectively to help
the public authorities in the hard and painful task they
had to perform.
As a precautionary measure, as soon as the occupation
of Paris was feared, the Bank had sent to the provinces
part of its cash, the plates for the bank notes, and the
new notes in a great many boxes which were labeled in
such a way as to disguise their contents. This measure
was far from being useless, both against the foreign enemy




140

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of

Credit

and

Banks

and the domestic mob. The foreign enemy, it is true,
could not, because of the private character of the Bank,
consider its wealth as spoils of war, without trampling
under foot international law. The case would have been
entirely different had the Bank been a State bank. This
is an advantage not to be neglected, and it is not taken
into account often enough when the other numerous
and certain disadvantages of a state bank are being
enumerated.
As to the insurrection which broke out in Paris on
March 18, 1871, which set up a government called the
"Commune of Paris," it turned for financial help to the
Bank. It was only because they were forced and constrained that the Bank directors, living then in Paris,
gave successively several million francs to the delegates
of the finances of the commune. The sum thus turned
over reached 16,000,000 francs. The city of Paris then
had a credit of 9,400,000 francs at the Bank. In the
end the State and the city of Paris made themselves
responsible for a part of the amount, and the Bank had
to charge the rest to profit and loss. At any rate the
Bank should consider itself rarely fortunate in not having
been systematically looted by the insurrectional government of the commune.
But these are abnormal conditions and not to be too
much insisted on. They must simply be taken into
account for the moral prestige which they gave the Bank
and which it deserved in this circumstance




141

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Monetary

Commission

Let us now review as a whole the operations of this
institution during the "terrible year." To do this we
need only give the figures of the chief accounts during the
critical years; that is, until 1874, when the reserve at the
Bank went back to its average figure before the war.
This table will also help us to explain the panic of 1873.
In this period, too, the large war loans of June, 1871, and
July, 1872, were made.




142

[All figures denote millions of francs, except under the head of bills discounted.]
Discount rate.
Average
reserve.

1870.

1873-

1, 130. 7
551.5
728. 1
762.8

1874-

1, 130- r

1871.
1872.




Average
notes in
circulation.

1.544-3
2,075. 2
2, 400. 8
2,856.6
2,596.9

Number of
bills discounted.

4, 687, 762
2,432,412
5, 711,554
6, 781,420
6,947, 223

Sum total Average
of disdiscounts.
counts.

6,886.5
8,177.2
13.457- 2
14, 614. 6
12,240.5

738-1
1,164.o
2, 089. 4
«2,299.4
i,760.6

Maximum.

Minimum.

Per cent. Per cent.
6
2.5
6
5-o
6
5-o
5-o
7
4.0
5

a Note that in 1873 there were included in this total almost 1,300,000,000 francs of treasury notes.

Loans on securities.

National

Mon etary

Commission

The two columns of the sum total of discounts and of
average discounts clearly show the role in financial and
economic credit which the Bank then fulfilled. Before
1870, and during 1870 even (for the first quarter), the sum
total of discounts fluctuates between 6,000,000,000 and
6,500,000,000 francs; the average of discounts fluctuates
around 500,000,000 to 600,000,000 francs. After 1870
the sum total of discounts increased and reached over
14,500,000,000 francs in 1873 (a panic year), and naturally,
too, the average discounts rose in the same proportions
and attained to almost 2,300,000,000 francs in 1873. The
average reserve went down on the contrary; in 1871 it was
half what it was in 1870. It reached the figure it attained
before the war only in 1874. But in contrast to it, the
circulation made rather rapid progress; in 1872 it reached
2,400,000,000 francs. This same year (1872) the law of
July 15 authorized the Bank to raise its maximum of issue
to 3,200,000,000 francs. That was a useful measure, because in 1873 the preceding limit of 2,800,000,000 francs
was found to be surpassed by the average amount of circulation. During these difficult years the issue of bank
notes rendered great services both as a monetary measure,
properly so called, and as a means of discount:
As a monetary measure in that the Bank had been
authorized by the law of August 12, 1870, to issue 25-franc
notes, and later by the law of December 29, 1871, to issue
10 and 5-franc notes. We were no longer at a time
when in the midst of a panic—as in 1847-48—the Bank
was afraid of issuing 50-franc notes. These notes circulated without difficulty; at the beginning of the war,




144

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of

Credit

and

Banks

it is true, when the law of August 14, 1870, raised the
maximum issue of the Bank to 2,400,000,000, there was
indeed a difference of 15 per cent between the notes and
coin, but that was not for long. The loss of the note in
comparison with gold quickly fell to 1 and even one-half
per cent. In reality these notes, especially those of small
denominations—25, 20, 10, and 5 francs—always circulated at their face value.
The increase in discount is explained, moreover, by the
great activity in economic production which followed the
war. France had not lost her vitality. She had suffered
trials. Much capital had been destroyed in unproductive
ways. She had to fill up the void. It is a sort of natural
law of upbuilding which acts on occasions like this for
social organisms which are still healthy, just as it does
for physical organisms.
The following table shows the progress of our foreign
commerce during these years. It has to do with special
commerce.
[Million francs.]
Imports.

Exports.

2,867.4

2,802.0
2,872.5
3,761.6

3.566.7
3,570.3
3,554.8
3.507. 1

3,787.3
3, 704.0

Total.

5,669.0
6,439-2
7,331-9
7,342.1
7,208.1

This growth in our foreign commerce, which in 1873 w a s
nearly 1,700,000,000 in comparison with 1870 (a year
which shows about the average of the ten preceding
years), is all the more significant in that France had lost
Alsace-Lorraine, and with Alsace some very important
industrial centers.
1971—10




10

145

National

Monetary

Commission

This commercial progress, together with the investment
of French capital abroad (making France a creditor of
many foreign countries for the interest on very large
sums), explains how it was possible to meet the war
indemnity of 5,000,000,000 francs without paying more
than a small balance in actual coin and without depriving the country of specie.
The market at home was not less active than foreign
trade; the discounts of the Bank are an evidence of this.
In spite of the terrible crisis the country had passed
through credit was not affected a single instant. An
example of this is in the Bank's almost complete collection of the commercial bills, the time of payment on
which had been extended, and which in the provinces,
as well as in Paris, amounted to a total of nearly
900,000,000 francs. The extending of the time of payment had been a necessity. When France was invaded
by the enemy, when all able-bodied men were in the
army, during the months when Paris was occupied, trade
and industries concentrated all their efforts in providing
for everybody in general and for the troops in particular.
So payments had to be postponed, and laws and decrees
were made to extend the rights of creditors up to the
1st of July, 1871. The Bank of France seemed destined to be affected by these measures and to run the
risk of heavy losses. The commercial bills, which were
part of its "portfolio," and payment of which was extended from August 13, 1870, to July 12, 1871, amounted
in Paris to 630,000,000 and in the provinces to 238,760,000
francs.




146

Evolution

of Credit

and

Banks

Repayments made before the expiration of the last ex- j
tension

361,000,000

234,673,500

Remaining due with additions in 1872
Repayments in 1872

273,312,000
266,520,000

4,272,000
3,549»5oo

6,792,000

722,500

Remaining to be collected

There were other additions in 1873 a n d in 1874, but i*1
the end the Bank lost not more than 7,000,000 of the
868,000,000 francs of bills on which the time of payment
had been extended. That represents a loss of about 0.8
per cent which, under the circumstances, was very small.
Assuredly it is well to note that the Bank of France
discounts only first-class paper, with three signatures, or
two signatures with collateral security. Many of its
commercial bills were bills rediscounted for bankers.
Still, in view of the disasters France had then suffered, it
is evident that the slight loss in discounts shows strict
regard for meeting payments in commercial and industrial
circles. Discount, moreover, in France is always a very
safe banking operation, provided it is carefully watched.
The material for discount is good; as a result of the qualities of prudence inherent in the character of the people,
even the smallest shopkeepers are mindful of the bills they
have to meet and honor them.
The Bank of France—thanks to the successive extension
of its right of issue to 1,800,000,000 francs, then to
2,400,000,000 francs, soon after to 2,800,000,000, and
finally to 3,200,000,000 francs in July, 1872—was able to
meet the monetary situation and the needs of credit.




147

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Monetary

Commission

The Government has never hesitated any more than the
chambers to raise the limit of issue higher and higher. We
may even ask what is the use of this legislative restriction
on the maximun of issue. In any case as needs arise,
the Bank has been able to fulfil its function of relieving
commercial discounts by its notes whenever necessary.
Placed under the same conditions, the Bank of England,
saddled with the law of 1844, could not have rendered
such services as has the Bank of France. It is true that
in times of panic in London they do not hesitate to loosen
the shackles which Robert Peel so unfortunately forged,
and so there comes about the curious paradox that the
law of 1844, established to safeguard the Bank of England
%
in times of panic, becomes during those very panics an
awkward check, from which the Bank is provisionally
freed only to have the check put on again when times are
normal and there is no use for it.
We can see by examining the table inserted above, in
which are given the average totals for the principal
accounts of the Bank, that the discount rate constantly
rose from the last months of 1870 to 1874. If its maximum did not rise above 6 per cent, its minimum did not
go lower than 5 per cent during the years 1871 and 1872.
In 1873, because of the crisis that took place at this time,
the maximum discount rate exceeded 7 per cent. The
fact to note here is that during the four years from 1871
on, the average discount rate did not go below 4 per cent.
Now, in the years preceding the war of 1870-71, we must
go back to 1864, a year of acute panic, to find an average
higher than 4 per cent. The result is that from 1871 to




148

Evolution

of

Credit

and

Banks

1874, inclusive, the dividends sent out to shareholders of
the Bank reached figures unknown till then.
Here is a table giving the average rate of discount
and the net dividend per share. It allows us to make
a rapid comparison.
Average
discount
rate.

1861.
1862
1863
1864
1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880

Net
dividend.

Percent.
5 52
3 77
4 64
6 5o
3 72
3 67

Year.

Francs.

2 50

147
158
165
235
154
156
107
90
107

3
5
5
5
4
4
3

84
300
320
350
285
200
145

2 7i
2

So
99
71
IS
25
30
00

40

2 28
2 18
2

58

2 81

95
95
no
150

Only superficial minds could be astonished at the
contrast between the large profits realized by the Bank
in panic times and the general depression which panic
creates. The Bank, a house of refuge for credit, provided with the right of issue, but having to safeguard
the underlying supply of available funds constituted by
its metallic reserve, intervenes, to be sure, in panics when
the case is urgent. Automatically it gets its services
paid for through the necessity of protecting its reserve.




149

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Monetary

Commission

When the cause of the panic is a long and costly war
like that of 1870-71; when people dread very serious,
unforeseen events (and they happened in this case), the
Bank with the sole right of issue must use but not abuse
its privilege. This is what the Bank did in 1870-71
and 1872. It covered the risk of having its reserve
depleted, and the risk which the extensions of payments
on bills might have brought about, by keeping its rate
of discount at an average rate, which does not seem to
have been too high, given the average rate of interest
on money at that time. So there is no occasion to be
surprised at the large dividends of the years 1871, 1872,
and 1873. Do we reproach doctors and apothecaries with
making more profits in times of an epidemic than in
normal times?
III.—THE

LARGE

LOANS AND
WAR

THE

PAYMENT

OF

THE

INDEMNITY.

When the preliminaries of peace were sig;ned at Versailles in February, 1871, it was stipulated that France
should pay Germany a war indemnity of 5,000,000,000
francs. In article 7 of the treaty of Frankfort (May 10,
1871) the payment of this indemnity was arranged on
the following terms:
Thirty days after order is reestablished in Paris
During the year 1871
May 1, 1872
March 2, 1874
Total

Francs.
500, 000, 000
1, 000, 000, 000
500,000,000
3, 000, 000, 000
5^000,000,000

Besides this the French Government had to pay on
March 3 every year interest at 5 per cent on the last
3,000,000,000 francs, and at the same time it could (by




150

Evolution

of

Credit

and

Banks

giving three months' notice) make advance payments
on the final payment due March 2, 1874.
As to the method of payment, it could be paid in gold or
silver, in bank notes of the Bank of England, the Bank
of Prussia, the Royal Bank of the Netherlands, the
National Bank of Belgium, in bills to order, or in negotiable bills of exchange of the highest character for the
full cash value on these same countries.
Here we have to do with banking operations, real banking operations, the foundations of which are both the
public credit, regarding the money borrowed by the State
to pay off its debt, and private credit, taking into account
the situation of France in this respect both with reference to the domestic and the foreign money markets.
It seems to us that, in a treatise of this kind on the
evolution of credit and credit institutions in France, all
these operations should be reviewed in their essential
points.
The exchange for the thaler was fixed at 3.75 francs;
that of the German florin at 2.15 francs. It was also
arranged, after the treaty of May 10, that 125,000,000
francs could be paid in notes on the Bank of France;
then it was agreed that 98,400 francs still owed by Germany to the city of Paris on the accounts of the payments
made by Paris on the 200,000,000 francs of the war indemnity should be carried over to the account of the
French Government. Part of the railroad system of the
East comprised in the annexed provinces having been given
to Germany for the price of 325,000,000 francs, this sum
was also to be deducted from the 5,000,000,000 francs.




151

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Monetary

Commission

The French Government remained in debt to the company for that sum.
The final amount to be paid to Germany may be shown
thus:
Francs.

War indemnity
Payments made on account:
Railroad Company of the East
City of Paris

5, ooo, ooo, ooo
Francs.
325, 000, 000
98, 400

325, 098, 400
Payments made in notes of the Bank of
France
125, 000, 000
450, 098, 400
Difference

4, 549, 901, 600

These 4,549,901,600 francs had then to be paid in German money in a certain number of payments; that meant
that the payments made in English or Dutch money had
to be converted into German money. The exchange
therefore fell upon the French Government. We have
been dealing as yet only with the principal. We must add
the interest, which was 301,145,078 francs, and this, added
to the capital stated above, made a total of 4,851,046,678
francs.
On this basis let us give the results of the two loans made
by the French Government to pay the indemnity.
The first was authorized by the law of June 20, 1871.
It was made in government 5 percents and by public
subscriptions. The price of issue was 82.50 francs.
Whereas the State asked for subscription to 134,000,000
francs of rentes, representing an actual capital of
2,000,000,000 francs, 296,821,760 francs of rentes (or
nearly 297,000,000) were actually subscribed for, representing a capital of 4,897,500,000 francs. Please note




152

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of Credit

and

Banks

that this result was obtained in June, 1871, not long after
the civil war, and while the monuments of Paris were
still smoking from the fires set by the insurgents of the
commune.
About a year later another loan was authorized by the
law of July 15, 1872. The amount was for 3,000,000,000
francs at 5 per cent. It was issued at 84.50 francs. The
success was much greater than that of the first loan, the
results of which had surprised more than one experienced
financier.
By the loan of July, 1872, France asked the public to
subscribe for 207,026,310 francs of rentes. The subscribers called for the tremendous sum of 2,592,668,435
francs (almost 2,600,000,000 francs), which represented
a capital of nearly 44,000,000,000 francs. The share
of foreign countries in this enormous total was more
than 26,000,000,000 francs; France's share about
18,000,000,000 francs.
To be sure we must take into account here the inflation
of subscriptions through fear of having them cut down.
Already in the case of the first loan subscriptions had been
cut down more than half. Still, while making allowances for this inflation, it is none the less true that the
anticipation which gave rise to it showed what confidence
financiers in all countries and the public in general had
in the solvency and credit of France.
Now the reason why France had good public credit
was because its private credit—bank credit—had remained
so good; and because in a few months the country had reacted with steady, vigorous, economic activity against the




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disasters it had suffered. This was shown in its foreign
trade and the receipt of taxes.
The first loan produced 2,225,000,000 francs; and out
of this sum 1,561,000,000 (or 70 per cent) were turned in
to pay the war indemnity.
The second loan—of course, after the cutting down of
subscriptions—produced 3,500,000,000 francs, of which
3,002,000,000 francs were used in payment to Germany—
that is, 87 per cent of this loan.
The principal of the indemnity was paid by these two
loans as well as the expenses, which amounted to a little
more than 14,500,000 francs. As to the interest, that
was deducted from the general funds of the budget. We
are going to enter into some explanations relating to the
operations brought about by these payments; but first
of all we must review in a comprehensive table the
categories of payments, which are three in number. I t
will then be easier to understand how France prevented
a large amount of specie from leaving the country, and
how it reduced the payments of this kind to a very
small sum.
METHOD OP PAYING THE WAR INDEMNITY.**
F I R S T CATEGORY.
COMPENSATIONS.

Money in account with the Railroad Company of the
East
Money in account with city of Paris
Total first category

Francs.
325,000,000
98, 400
325,098,400

B The payments which were to have been made during 1871, then May 1,
1873, then March 2, 1874—as we have said above—were completed before
t h a t date; the deposits for the payment of the last 3,000,000,000 francs
were made between August 29, 1872, and September 5, 1873.




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Banks

SECOND CATEGORY,
BANK NOTES; GERMAN COIN; SPECIE.

Bank of France notes
German notes and coin, brought in by the invasion
French gold coin
French silver coin
Total second category

Francs.
125,000,000.00
105, 039, 145. 18
273,003, 058. 10
239, 291, 875. 75
742, 334,079.03

T H I R D CATEGORY.
LETTERS OP EXCHANGE.

German funds in discharge of indebtedness

2, 799, 514, 183. 72

Funds other than German, including the marks banco, 1, 448, 812, 190. 54
Total third category

4, 248, 326, 374. 26

General total of three categories

5, 315, 758, 853. 29

As we see, out of this enormous sum of more than
5,315,000,000 francs only a little more than 378,000,000
francs were paid in French coin. And in reality only
275,000,000 francs in French coin left our territory a directly
for the indemnity, for France bought 93,000,000 francs
worth of silver bars from the reserve of the Hamburg Bank
and had them minted in France. These 3 78,000,000 francs
were paid in gold pieces and silver coined in 20, 10, and
5-franc pieces. You will notice that the number in
question is not an exact multiple of five. This anomaly is
explained by the fact that in this figure are counted the
prices of the money bags and sacks. b
The operation was conducted with skill and good judgment. It would have been difficult to avoid a monetary
crisis in France if the method of payment of the third
a

We shall see later that this operation caused nevertheless some rather
heavy gold exports.
& The price of the money bags was fixed a t 0.10 franc, and that of the
sacks at 1.65 francs.




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category had not been resorted to. Such a crisis would
have been especially fatal to trade since at that time discounts were increasing in very large proportions. At this
point we shall recall the average figures for the years
1871-72 and 1873 °f the reserve, the notes in circulation,
and the discounts of the Bank of France.
[Million francs.]
Average
reserve.

Year.

1871

551.5
728. 1
762.8

1872
1873

Average
of circulation.

2,075-2
2,400.8
2,856.6

Average
of commercial
discounts.
1,164.0
2,089. 4
2,299.4

In regard to gold, a few purchases were made on the
spot so successfully that the figure of 275,000,000 francs
indicated above has to be cut down again. Barely
250,000,000 francs were taken out of active circulation in
France.
On this occasion the Bank of France by an agreement
of May, 1873, lent 150,000,000 francs in gold to the State,
which formed the greater part of the sum paid in gold.
It was not the payment itself of the indemnity which at
this time made France lose a part of her metallic stock, a
part which seems to have far exceeded the sum of 250,000,000 francs. But we shall see that by its rebound the
payment of the indemnity indirectly caused gold to leave
the country.
The third category of methods of payment is the most
interesting, because it touches most closely commercial
credit and banking operations. The method adopted was
simple; it is the one any bank or merchant would have




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followed in paying a debt contracted with a foreigner.
Moreover, the Government from the start was beset with
bankers and dealers in exchange, who came and offered
foreign paper. France sent as much capital as possible
abroad by buying all paper for exchange, and all the possible bills it could get, no matter on what country. Then
as soon as the capital was collected in the form of these
foreign bills, it sent them to Germany. For the first
2,000,000,000 francs Germany had the English, Dutch,
and other foreign paper converted into German paper at
France's expense. France finding the cost of exchange
too high—it was more than 11,000,000 francs—took this
business upon itself and gained by it. This conversion was
made easily enough at London, because Germany at that
time was in debt to England for loans made during the
war in the form of short-term notes, and also for supplies.
The number of foreign bills obtained by the French
Government rose to more than 120,000. To find so many
bills three means were used:
1. The payment in foreign funds of subscriptions made
in France as well as of the anticipatory payments made
at home or abroad was encouraged by the loans of
2,000,000,000 and 3,000,000,000 francs.
2. The second means consisted in an arrangement which
was made at the time of the borrowing of 3,000,000,000
francs from several banking houses: an exchange operation was combined with the underwriting of the subscription to the loan by these banking houses.
3. The third means was to buy foreign bills directly on
the market.




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The first means (payment of the loan subscriptions in
foreign funds) gave the treasury a very large sum, viz,
1,773,000,000 francs.
The second method rested on the following agreement:
As in the case of the loan of 2,000,000,000 francs the Government turned to large banking houses which would have
been able, unassisted, to underwrite the loan. This was a
useless precaution, as we have seen; however, in such
troublous times and in spite of the success of the first
loan, recourse was had for the second loan to a group of
bankers. In the agreement signed with them it was
stipulated that they should furnish 700,000,000 francs in
foreign paper, which allowed them to receive a rather
large commission. It was also a way of interesting these
houses in the rate of exchange, since they had to buy exchange, and would not, therefore, force the price up. Fiftyfive banking houses belonging to all countries, some of which
were representing other houses, signed this agreement.
The first and second methods brought into the treasury
2,473,000,000francs in foreign exchange. So 1,775,000,000
francs remained to complete the figures given above.
This last sum was procured by the third method,
namely, direct purchase by the Government.
When we go to the bottom of the matter, we see that
what facilitated these operations was the confidence which
the world at large had in France, a country rich in
capital, whose activity since the war was a sign of great
vitality and productive power.
This is the place to remark on the export of gold
indirectly caused by the payment of the indemnity. In
selling all the foreign paper they could to the French




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Banks

Treasury, the bankers were creating a scarcity of available French effects on foreign markets; the result was
that those who owed money abroad were obliged to pay
by sending gold, because exchange having been sold to
this large new client, the State, had become very dear.
It is not for us to dwell at this point on the arbitrage
operations that the Government encouraged between certificates of rentes that were fully paid up and those that
were not; facts of this sort do not enter into the special
discussion of banking operations that we are engaged in
here.
A few quotations of exchange on London—London
exchange being the best index in judging money stringency—will show the fluctuations which our metallic
stock underwent as a result of these operations:
Paris exchange on London.
Francs.

1871—June 27
September 26
October 1 7
*
December 26
March 26
November 12
March 4
June 10

25. 22
25.45
26. 1%%
25. 73
25. 26
25. 68>£
25. 33
25. 5 7 ^

The quotations given here are the highest and lowest
reached during this period.
The average price of government purchases on London
was 25.494 francs. The highest price quoted on London
was 26.18^ francs gold, and the price of 26 francs was
kept up for two months. From the close of the year 1872
exchange became more normal. This was a result of the
agreement made with the syndicate of bankers.




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Here is a short table showing the fluctuations of the
premium on gold, 20-franc pieces, and bullion:
[Premium per 1,000.]
20-franc pieces.

Gold bars.

Year.
Maximum. Minimum. Maximum. Minimum,
8K

1871
1872

9K

1873

Par.

1874

29
16
12K
10

3
8
Par.

NOTE.—In the loan which the Bank of France made to
the State, to make advance payments, it furnished the
200,000,000 francs of the loan in gold. It seemed preferable, then, to ask the Bank for gold rather than notes.
The reason was that at that time the Bank had a reserve
of only 100,000,000 francs in notes before reaching the
limit of its issue. It did not care to raise this limit
for fear of causing the bank note to lose credit. It was
deemed better to leave the Bank in possession of its notes
to help it in making discounts. If it had given bank
notes to the State and used gold for its discounts, a part
of this gold would have been exported, and the case would
have been the same after all as giving gold to the State,
except, however, that the State gained gold thereby—discharging indebtedness at par—and the bank note in the
meanwhile kept its credit.
I t is important to emphasize here how much progress
France had made since the beginning of the century in
the understanding and habits of credit in connection
with the issue of notes; for when in 1805 it was rumored
that Napoleon had carried off gold from the Bank in order
to make war in Germany a mad panic broke out.




160

PART

III.

THE BANK OF FRANCE AND THE DEVELOPMENT
OF CREDIT, 1875 TO THE PRESENT TIME.
INTRODUCTORY.
Extension of the credit companies.—The Bank of France remains the center of the
credit organization in France.—Its gold reserve increases.—The railroad panic.
The agreement of 1883.—Panics of 1882 and 1889.—The panic of the local banks.

This third part comprises the study as a whole of the
period between 1875 a n d the present time.
It is a period especially remarkable for the development
of the great credit companies, first in France, then abroad,
by means of branch offices.
As the companies expanded, they tended to become institutions somewhat resembling the English joint stock
banks. They were not, properly speaking, banks for
financing industrial enterprises. They continued to carry
on large operations in disposing of securities, but were
principally concerned with selling securities that might
be called official—state and town funds, etc. They succeeded in building up an extensive discount business.
Their deposits, in fact, grew to large proportions. The
nature of these deposits and the character of their clients,
influenced the nature of their operations in making them
avoid taking risks. It is through these companies that
the surplus capital, not used in France, is invested abroad.
The Bank of France still remains the center of the
credit organization in France. Even if it makes discounts directly to clients, it is especially and above all
a bank of rediscount for bankers and credit companies.
1971—10




11

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Its role in this direction is becoming more and mote
clearly defined, in proportion as the business of the
credit companies expands. As the savings of France
increase its wealth, part of this wealth is converted into
capital invested abroad, France becomes creditor of
foreign countries, through the interest money that its
citizens receive, and so shows a favorable rate of exchange.
The country's stock of coin increases; as a result of
this the Bank of France sees its gold reserve grow. Its
silver reserve, on the other hand, tends to diminish. In
fact, since France stopped coining silver, owing to the
depreciation of the white metal, it is bimetallist on its
domestic, although gold monometallist on the foreign
market. Thus the gold reserve of the Bank of France
has lately gone beyond 3,600,000,000 francs. Its silver
reserve is lowered only by the use made of 5-franc pieces
to recoin fractional money.
This accumulation of gold has another cause. The
note of the Bank of France enjoys an unquestioned
credit; it is much in demand, and tends to replace gold
coin in circulation. It has, therefore, helped to bring
back to the coffers of the Bank a part of the stock of
gold in circulation.
This period witnesses, too, a still more marked decline
in the rate of interest. This is due to the abundance of
capital, and also to the ease with which it is placed at the
disposal of the public by means of the credit societies
and their mode of procedure, so different from that of
private banks.
Of course, this evolution did not take place without
crises and difficulties. Prosperous times, which always




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Banks

tend to produce excessive and risky speculation, are followed by periods of liquidation—of reflection, one might
say, which in turn is nothing but the natural consequence of the conditions brought about by such overspeculation.
In this case, one of these periodic crises was complicated
by a crisis in the national finances caused by too great
haste in completing the railroad system of France.
Prospective results loomed too large in the distance,
and dwindled as they came near. The whole thing
ended by the State's making an arrangement with the
railroad companies, which was a sort of necessary liquidation of affairs, and was called "the agreement of 1883."
However, in spite of many errors and useless State expenditures, tax returns came in regularly, and more prosperous years produced a surplus and furnished abundant
resources to the growing budgets. The price of state
stock rose steadily, as a natural result of the general
lowering of the rate of interest on money, owing to the
abundance of capital. This rise lead the Ministers of
Finance to make conversions. The profits of these
conversions, however, were quickly swallowed up in the
rising tide of expenses. There was a dark side to the
picture. The economic evolution was not accomplished
without difficulties and friction. We shall mention the
panic of 1882, simple enough in its causes; then the one
of 1889, which contains valuable instruction. The
Comptoir d'Escompte was destroyed by it, but soon rose
from its ashes and resumed the work interrupted by the
ruinous mistakes of a bad management. Henceforth it




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extended its activities by following a wise and profitable
plan of business.
The local or provincial banks suffered from the extension of the agencies of the credit companies, and up to a
certain point also from the increase of the branch offices
of the Bank of France, which has opened, especially of
late years, branches or suboffices and made "bankable''
many affiliated towns in numerous localities. Will the
local banks be able to adapt themselves to this new situation? Certain ones made the attempt, it seems, and were
changed to district credit companies; others disappeared;
still others remained, and confined themselves to certain
special functions.
Finally, we shall take occasion to explain the conditions under which the State in 1897 renewed the privilege
of the Bank of France. It asked services of the Bank in
the shape of loans and a share in the profits. The Bank,
however, remained self-governing and independent of the
State. We shall have to express fears for the future in
what concerns both the Bank of France and the credit
companies, with regard to the restrictive measures that
are being planned against them by a certain political and
social faction.




164

I.—The situation of France after the war. A
glance at the development of saving and savings institutions.

CHAPTER

Creating capital by economy is at the very foundation
of French finance. This particular characteristic became still more marked after the war of 1870-71. There
was need of it, to be sure, to heal the country's wounds,
to restore its military equipment, to organize new industrial undertakings or transform existing ones. The savings banks are an indication, especially in France, of the
development in the creation of capital. In the following
table we give for every five years the balance due depositors on December 31 from the private savings banks, and
also, after 1885, the balances due depositors on the same
date from the National Savings Bank, adding to this the
independent means of the private savings banks.
[Million francs.]
Private savings banks.
Year

Balance
due depositors December 31

Independent means
of the
banks December 31,

i875-

660. 4

21. o

1880-

1.280.2

188s-

2.211.3

1890-

2.911.7

1895-

3.395-4
3.264.o
3.376.5

29.9
47-5
73-3
105.9
138.3
166.5

Balance
due depositors December 31,
by National savings Bank.o

19001905-

154. 1

413-4
753-4
1, 0 1 0 . o
1, 2 7 8 . 0

0 Created by the law of April 9, 1881, under state guaranty.




165

Grand
total.

681.4
1.309.4
2,412.9
3.398.4
4.254.7
4, 412.3
4, 821. o

National

Monetary

Commission

The quinquennial average of the years which preceded
the war of 1870-71 of the balance due depositors on December 31 was 615,000,000 francs.
It is seen, then, in the thirty years from 1875 t o x 9°5
that the total funds of the French savings banks increased
from 681,000,000 to 4,821,000,000 francs, or nearly
5,000,000,000 francs, increasing sixfold. And, as we have
said, this is only one of the signs of the growth of capital.
In this interval the population had not increased to any
great extent; it was estimated in 1875 at 36,500,000, and
in 1905 at a little over 39,000,000 inhabitants.
And this progress in saving was made at a time when
the expenses of the budget were increasing.
Here is a list for the same years as in the previous table
of the resources put at the disposal of the Minister of
Finance through taxes and public revenues of all kinds.
The resources called extraordinary, which come from loans,
do not enter into the calculation.
Ordinary receipts of the budget.
Francs.
2,705, 300,
2, 957, 000,
3, 056, 600,
3,229,400,
3,416, 000,
3,814,000,
3, 766, 000,

1875
1880
1885
1890
1895
1900
1905

000
000
000
000
000
000
000

So, in thirty years the ordinary receipts of the budget
increased by 1,000,000,000 francs—no small additional
burden for the country. The quinquennial average of
ordinary receipts for the years preceding 1870 was
1,800,000,000 francs. The expenses of the war increased
the ordinary receipts by means of new taxes to




166

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2,406,000,000 francs in 1872, and to 2,679,500,000 francs
in 1873.
The free deposits of securities at the Bank of France
increased in large proportions (in spite of the competition of the great credit societies which organized an important service for this operation).
For the ten years preceding the war of 1870-71 the
average number of depositors was about 25,000 and the
average value of securities on deposit was 1,300,000,000
francs. The following table will give an idea of this increase:
[Million francs.]

Number
of depositors.

20,693
24,690
27,168
39,899
55,975
73,620
89,979
92, 508

Year.

1871..
18751880-.
1890189519001905-1906..

Securities
on deposit.
Current
value on
Bourse
December 24.
937456.
901.
II3988.
939
980
233

The increase of transferable securities in general has
been very large in France since the war.
Leon Say, in his remarkable report on the payment of
the war indemnity in 1875, estimated the value of foreign
securities owned by the French at from 10,000,000,000 to
12,000,000,000 francs. It is three times as much to-day.
It is not our intention to enlarge upon this question,
which must be treated by another author in another




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study. It will be enough for us to give these few figures,
the first one taken from M. Say, and the others from
M. Newmarck.
Estimate of foreign negotiable securities owned by the French.
1875
1880
1890
1900
1903

io, 000,000,
13,000, 000,
18, 0 0 0 , 000,
2 5 , 0 0 0 , 000,
28, 000, 000,

Francs.
000 to 1 2 , 0 0 0 , 0 0 0 , 0 0 0
000 to 1 5 , 0 0 0 , 0 0 0 , 0 0 0
0 0 0 t o 20, 0 0 0 , 0 0 0 , 0 0 0
0 0 0 t o 27, 0 0 0 , 0 0 0 , 0 0 0
0 0 0 t o 30, 0 0 0 , 0 0 0 , 0 0 0

The securities listed on the official Paris Bourse (according to the estimate of December 31, 1902) represent
the sum of 130,000,000,000 francs, divided into
64,000,000,000 francs in French
securities
and
66,000,000,000 in foreign securities. If to this are added
securities not officially quoted, and negotiable at the
bank, estimated at from seven to eight billion francs, we
have a total of nearly 140,000,000,000, of which about
90,000,000,000 are French still, according to statistical
estimates based partly on facts and partly on theory.
Without yielding too much to the magic of these figures,
it is certain that "movable wealth," to use a current expression, has been much increased in the last thirty years.
And this increase of capital in France is not the special
work of a group of capitalists but for the most part of the
middle-class citizens, as we have already had occasion to
point out.
But we will not insist further on the fact that a large
amount of capital was created in France by means of
economy; one need not be either an expert financier or a
professional statistician to discover it. There is no end




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of evidence. Moreover, the consequences of this accumulation of capital helped to emphasize still more the larger
supply of which it was the object. The rate of interest was
lowered, in general, and the discount rate in particular.
The State profited by this to make successive conversions
of its stock. The law of November 27, 1883, made the
conversion of 5 per cent stock to 4 X per cent; that of
November 7, 1887, converted the ^% per cent and 4 per
cent stock to 3 X per cent; then that of January 17, 1894,
converted the 4^2 percent to 3 ^ per cent; and, finally,
that of July 9, 1902, converted the 3 ^ per cent to 3 per
cent. These conversions involved a total capital of more
than 21,212,000,000 francs, and were all successful.
If we have called to mind these general points, it is
with a view to emphasizing one thing: The sources of the
accumulation of capital always end by influencing the
manner of organization and working method of the credit
institutions of a country. It is in national habits and
character that these have their principal roots. This
will appear presently, when we reach the study of the
credit companies. But, first of all, we must describe
briefly the crisis of 1882, then that of 1889, outlining at
the same time the operations of the Bank of France
during this period.




169

CHAPTER II.—The crises of .1882 and 1889—A brie}
survey of the operations of the Bank of France from 1875 to
1889—The Comptoir d'Escompte,
The construction of new lines of railroads after 1870-71.—The Freycinet programme.—Too small estimate of expenses.—Creation of redeemable government
stock.—Capital borrowed on redeemable 3 per cents.—Extraordinary expenditures
for public works, 1878-1882.—The State in difficulties.—The agreement of 1883.—
Speculation from 1876 to 1882.—Investment banks float large issues.—Success of
these issues.—The exaggerated rise in stocks.—The crash.—Intervention of the
Bank of France.—First effects of the panic. The rate of discount rises.—The credit
of the bank notes extends and increases.—Bank dividends resulting from the
panic.—The Comptoir, during the war, meets all obligations.—Precautions taken
to keep up relations between the foreign and home agencies.—The Comptoir continues its operations during the Commune.—It cooperates in 1871 in issuing 5franc notes.—The Comptoir shares the loans made necessary by the war.—The
deposits of the Comptoir after the war.—Fall in the price of silver. Business in
the Far East.—Converting and unifying of the Egyptian debt. Rdle of the Comptoir.—Increase in total of discounts.—Founding of agencies in Australia and San
Francisco.—Public works undertaken.—Competition of the other credit companies.—Continuation of the Comptoir for twenty years.—Conversion and loan operations.—Stagnation of business in 1887.—Political incidents, foreign and domestic.—
Idle deposits.—First loans to Metal Company.—Absurdity of this speculation.—
The Comptoir continues its loans.—Increased production of the copper mines.—
The Metal Company is unable to meet engagements.—Intervention of the Bank
of France.—Loan of 140,000,000 francs to the Comptoir.—How the loan was
made.—Advantages of the monopoly of issue for the Bank.—Guaranty of the
commercial paper of the Comptoir.—Good results of the liquidation of the
Comptoir.—Reorganization of the Comptoir.

The period from 1875 to 1882 was a time of undoubted
prosperity. This prosperity was destined to end in a
panic brought about principally by two causes. One is
time-honored, and both paves the way for panics and
makes them more acute: it is over-speculation. The
other was special and may be termed accidental, although
it had a precedent: it was the too great and too hasty
extension of our railroad system.
We shall consider the second cause briefly, recalling
only the facts necessary to the present account.




170

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After the war, the need of completing the railroad system was felt to be urgent. From 1871 to 1878 about
6,000 kilometers were put in operation. The railroad
lines of general utility, which counted, in fact, 15,632
kilometers in operation in 1871, had 21,435 in 1878. The
National Assembly had in its last sittings before adjournment approved an imprudent policy in this regard, and
the policy was continued. A first experiment which led
to the construction of a state system in 1878, one might
imagine, would have dampened the ardor of the megalomaniac and optimistic partisans of the construction of
many and extensive railroad lines. But nothing of the
kind. A plan was concocted to endow France, in the
course of a few years, with a complete railroad system,
covering the country with a closely woven network.
M. Freycinet prepared the outline of these great works,
which were to include not only railroads, but also canals,
harbor improvements, etc. This project was called after
the name of its originator, the Freycinet programme.
Altogether, the length of lines decided upon in 1875,
with those granted on the score of local utility, which were
made to pass into the class of lines of general utility, and
including the new lines, reached a total of very nearly
10,000 kilometers.
• The first estimate placed expenses at about 4,000,000,000 francs. But it was soon clear that this figure would
need to be increased by 3,000,000,000 or 4,000,000,000, for
the originators of the scheme had counted without the unexpected: they had made much too low an estimate of the
net cost, and had omitted to take into account that the
Chambers would enlarge the original plan to a degree




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bordering on lunacy. Political high bidding was rampant also in the Senate, where it was usual to see more
prudence than in the Chamber.
France soon became a great railroad workshop.
In order to meet the enormous expenses made necessary
by this enlarging of the economic " plant" of France,
L£on Say, Minister of Finance, created a new government
stock—redeemable stock—the capital of which, divided
into a series of 75 payments, was reimbursable by means
of drawing lots for a period of seventy-five years. The
original law was passed June 11, 1878. This stock,
quoted at a par value of 100 francs, was sold in reality only
in 15-franc fractions. It therefore resembled railroad
obligations.
Up to December, 1880, the State had borrowed by this
means:
Sum total of interest on government stock
Total nominal capital
Total actually borrowed capital

Francs.
52, 530, 360
1, 751,012, 000
1, 439, 845, 912

Ten years later, on December 24, 1890, the loans in the
form of redeemable government stock had risen to—
Sum total of interest on government stock
Total nominal capital
Total actually borrowed capital

Francs.
127, 624, 395
4, 254, 146, 500
3, 459, 359, 545

And here are the extraordinary expenses of the budget
for public works from 1878 to 1882:
Francs.
557,000, OOO
453, 000, 000
538,000, 000
735,000,000
663,000, 000

1878
1879
1880
1881
1882
Total




2, 946, 000, 000
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The normal loans on the one hand, treasury loans on
the other, swelled our funded debt and our floating debt,
the latter to enormous proportions. The State had undertaken the construction of a large number of scattered
and unconnected railroads. Those which were in operation were bound to give poor results. In fact, some of
them were administered by the State itself, others had
been put into the hands of a trustee responsible to the
State, and still others were farmed out to companies at
rather burdensome rates.
Everything indicated that before long the State would
be reduced to making terms with the great railroad companies, in order to escape from a troublesome burden,
and to avoid also involving further the national finances.
Such were the causes of the agreement of 1883.
Our purpose here is not to describe what happened on
that occasion, but to show to what extent the public
authorities were responsible for the speculative fever that
seized upon France at that moment.
There were, too, other elements involved. Since 1876
certain banks which belonged rather to the category of
speculative and investment banks, such as the Union
Generate^ the Credit General Frangais, the Banque de Lyon
et de la Loire, etc., had begun to float stocks on the market, which they issued with a bonus. The movement
spread. The public nibbled at the issues as if they were
forbidden fruit. Times were prosperous, which of course
helped greatly. The issues reached their highest point
after 1879 especially. They were made in competition
with the state loans. In spite of this avalanche, the




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average level of all stock quotations steadily rose. As
may be seen by the table given below, the total sum of
issues made from 1876 to 1882, when the crash came,
rose to more than 9,000,000,000 francs.
1876
1877
1878
1879
1880
1881
1882

Francs.
266, 000, OOO
1, 716, 000, 000
605,000, 000
3,053,000,000
1,568,000,000
I, 223, 500,000
624, 000, 000

*

Total

9, 055, 500, 000

These heavy issues, far from cooling public ardor,
simply excited it. In 1881 the rise in stocks assumed
proportions which were disquieting to all business men
who kept their heads and were not carried away by the
current. The Union Gen£rale, which was the most
active in promoting the bull market, pushed its shares
so successfully, aided by the nameless complicity of the
general infatuation, that from being quoted at 1,000
francs, at which its shares were held in January, 1881,
they rose to nearly 2,900 francs at the end of the year.
The Suez Company followed the same movement. The
rise in stocks continued in spite of its exaggeration like
an irresistible nervous impulse. The speculators seemed
victims of a sort of St. Vitus's dance, inexplicable to
anyone who is not familiar with the psychology of
crowds. The first days of 1882 opened with shares
of the Union Generale quoted at more than 3,000 francs
and Suez at 3,440 francs. However, the speculators wrere
beginning to be out of breath. There were no more




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and

Banks

purchasers for these securities, at least at this price. Then
all of a sudden came the crash. By the end of January
Union Generate fell to 950 francs; a few days later the
company was declared insolvent. Suez, which represented a prosperous undertaking, did not go to pieces in
this way, but the stock dropped 500 francs in a very
short time.
With these facts as a starting point, we will now see
what part was played by the Bank of France under these
circumstances.
Let us give first the statement of the principal accounts
of the Bank of France from 1876 to 1882:
[Million francs.]
Average reserve. Average
notes
in

Year.
Gold.

Silver.

circulation.

Rate of discount.
Total
discounts.

Maximum.

Minimum.

Collateral
loans.

Running
accounts,
average
balance

Per cent. Percent.
1876
1877
1878
1879
1880
1881
1882
1883
1884

1,987.3
2,196. 0
2,072.7

2,484.0

2,115.0

i,974-o
604.5 1,219.5
906. 6 i , 1 4 0 . 0
982. 7 1 , 0 4 5 . 0

3-o

290. 0

360.6

2,489 7

7,396. 7
7,569.0

3

0

2

0

376.0

473-8

2,339

0

7,603.4

3

0

2

0

409. 0

411. 0

2, 199

0

7, 2 6 1 . 0

3

0

2

0

402. 0

421. 0

2,305 4
2,576 4

8, 6 9 7 . 0

3 5

:2

5

325.8

11,374-0

4II-5
468. 2

2, 732 3
2, 926 1
1 , 0 2 0 . 9 1 , 0 0 4 . 0 2, 928 1

4.0

5

0

3 5

11, 322. 2

5

0

3 5

10,827.3
10,385. 2

3

5

3

0

3

0

3

0

1. 1 2 3 . 5 ,

884. 1
664.6
626. 5

493- 1
416. 0

387.O

A simple examination of the figures shows as early as
1880 and especially in 1881 the approach of the panic.
The reserve began to fall as soon as 1880 to 1,975,000,000
francs; in 1881 it was only 1,824,000,000 francs; these,
we must remember, are averages. But in 1881 the
gold reserve, which was 648,000,000 francs on June 30,
fell to 552,000,000 francs on December 31, showing a




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decrease of 96,000,000 francs. Because of this, the Bank
raised the discount rate to 5 per cent as early as October
20, which diminishd the drain upon the gold in its
coffers. In comparison, the discounts increased frdm
September to October; they rose from an average of
1,100,000,000 francs to a total of 1,320,000,000 francs.
Finally, another fact which shows plainly the intensity of
the speculative craze was that the total of loans on securities, which was 325^000,000 francs in 1880, rose in 1881
to 1,125,000,000 francs and after a decline was maintained
at 884,000,000 francs.
However, raising the discount rate to 5 per cent on
October 20 effectually checked the drain of gold from the
coffers of the Bank, and on December 31, 1881, the
reserve reached about 646,000,000 francs, or nearly the
figure of the preceding June.
The Bank of France, therefore, was protected, or at
least ready to withstand the shock of the panic in its
acute stage. When the storm burst in January, the
stockbrokers of Paris and Lyons, who had not paid
sufficieut attention to the consequences of this frantic
speculation, could not meet their engagements. The
Bank of France intervened at this moment and advanced
80^00,000 francs to the parquet of the Paris Bourse
and 100,000,000 to that of Lyons—all this being secured
by bills of exchange and collateral. These operations in
the last days of January raised the figure of the discounts, which on February 2 reached 1,646,000,000 francsIt is important to point out here that as a result ox
the elasticity of issue, the Bank could make discounts




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Banks

and loans with greater facility in proportion to the reserve; the maximum issue in 1881 was 2,825,000,000
francs, and in 1882, 2,953,000,000 francs.
It should be observed, too, that when the Bank, under
some accidental circumstance, such as a panic, for instance, -has been obliged to increase its issue, the figure
reached has almost always been maintained afterwards.
This was the case in 1883 and 1884. After a number
of small declines the average for 1890, rose above
3,000,000,000 francs. At the same time the gold reserve
tended to increase, showing that the bank note was accepted more and more as currency, replacing part of the
gold in circulation. This phenomenon, which is easy
enough to understand, began to be especially evident
after the crash of 1882.
Moreover, dividends increased, a thing that always
happens when the Bank intervenes in a panic to support
the credit of the money market. The dividends of 1881
and 1882 were respectively 250 and 290 francs. The
average of the preceding five years had been about 125
. francs.
THE COMPTOIR D'ESCOMPTE AND THE PANIC OF 1889.
We left the Comptoir d'Escompte on the eve of the
war. During the terrible ordeal of the invasion this
establishment had to cope with many needs, and it fulfilled its duties as a commercial bank most honorably at
this critical moment. It was at that time, next to the
Bank of France, the largest discount house in Paris. It
attempted to send for disposable funds from its foreign
1971—10




12

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offices, but they did not arrive before the blockade of
Paris. Notwithstanding, thanks to its resources, it was
able to reimburse depositors for rather large sums. In a
single week it repaid 40,000,000 francs. In addition to
this the Comptoir served as an intermediary between
the merchants, certain bankers of Paris, and the Bank
of France.
In presence of the terrible situation of the capital just
before the siege, the Comptoir had taken certain precautions, and likewise the Bank of France. The Comptoir
sent its provincial "portfolio" and some of its officials to
the Nantes agency. It transported to the London agency
its foreign "portfolio" and organized there a special service to keep up the relations it had established with the
credit houses of all foreign countries, and to maintain
communication with the agencies across the Atlantic. As
for the Nantes agency, it became really a provisional
center for France and the other French branch offices.
During the insurrection in Paris, known as the Commune, the Comptoir, after taking the precaution of sending
the greater part of its assets to Versailles, continued in
operation. The postal service being no longer carried on
by the regular public authorities, the Comptoir found a
way to send and receive mail by way of Versailles. So
the doors of the Comptoir remained open in Paris even
during the rioting.
In October, 1871, it joined with several other credit
companies in making an issue—authorized by the Government—of 5-franc notes. These notes were of great
service to commerce, accepted as they were with great




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favor. Their circulation extended to the whole of France.
This concern of course had an important share in the
municipal loan of Paris in 1871; it received subscriptions
on that occasion which amounted to the total of the loan.
Finally it collected for the national loan of 3,000,000,000
francs, which we have mentioned, bids of 15,000 subscribers that represented 60,000,000 francs interest, or
1,200,000,000 francs capital—more than one-third of the
loan. Like the great French banks, it helped the Government to effect the transportation or exchange of these
funds, which were applied to the payment of the German
war indemnity.
However, the Comptoir did not come through the terrible ordeal of the war without suffering its effects. At
the time Paris was invested, it ha.d been obliged to make
large reimbursements, paying out 40,000,000 francs or
more in a single week. Now, before the war it had
63,000,000 francs of deposits. It was a long time getting
back to this figure. In 1875 the deposits were still not
more than 54,000,000 francs.
It is true that the Comptoir ha,d been entirely reorganized in that interval. Then had come the fall in the
price of silver, which had alread}^ been foreseen, but
which actually happened very suddenly in 1875 a n < i 1876.
As the Comptoir had agencies in the Far East, it hastened
to decrease transactions in that part of the world. On
the other hand, the Comptoir commenced at that time
to take part in operations known as "high finance."
It transacted successfully all the business connected
with the unification of the Egyptian debt. In 1876




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Egypt was not able to meet its engagements. French
and English capital was in great jeopardy there, and it
was necessary to bring pressure on the Egyptian Government in order to straighten out its affairs and safeguard the interests of the holders of the debt. After an
agreement with the viceroy of Egypt, the Comptoir was
given charge in London and Paris of operations connected
with the settlement of the above debt. In this way it
operated conversions involving 3,800,000 certificates.
Nevertheless, the Comptoir continued to be a commercial bank of deposit and discount. Deposits came
in slowly after the war, but showed a rapid increase after
1876, when they rose to 72,000,000 francs. Two years
later this total exceeded 100,000,000 francs. Discounts
had increased from 1,200,000,000 francs in 1874 to
1,600,000,000 francs in 1878, the year of the World's
Fair in Paris, which was very successful.
About this time, this establishment, which saw its
business falling off in the Far East, because of the fluctuations in the price of silver, began to restrict its operations
in that part of the world. It founded agencies in Sydney
and Melbourne, Australia, which gave accommodation to
the woolen trade, for French industry obtains from that
country a large supply of raw material for its woolen
manufactures. An agency was opened also in San
Francisco, because of its commerce with the Far East,
and, also, because this port was the starting point for
a considerable export trade in wheat with France.
Meanwhile the Comptoir was considering two important
undertakings which were later carried out through its




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financial assistance: First, constructing the sea canal of
Corinth; second, building the Servian railroad. The
aim of the latter enterprise was to join the railroads of
Turkey with the European systems, and so open communication between Paris and Saloniki.
Beginning with 1881, the competition of the other
credit companies was felt by the Comptoir. These companies (the Credit Lyonnais and especially the Societe
Generale) were to increase and develop their commercial
banking operations more and more. So the discounts
of the Comptoir, which amounted to 1,900,000,000 francs
in 1881, began to decrease and fell in 1885 to 1,580,000,000
francs. However, three of its most important agencies,
under able and wise management, at Marseilles, Nantes,
and Lyons, were successful on a large scale.
The charter of the Comptoir Company, which established official relations between that company and the
Government, expired in 1887. After making inquiries,
and on the request of the Comptoir, the Government
decided to extend the charter of the company for twenty
years from March 18, 1887. In any case, these relations
with the State seemed rather useless, because the common
law of 1867 on joint stock companies would have been
quite sufficient for this concern. The government trademark did not protect it from disastrous errors, which were
destined to bring it to a tragic end a few years later.
The Comptoir, still acting as official banker, effected
the conversion of the old Tunis debt in 1884. Two years
later it concluded a loan of 15,000,000 francs with the
Madagascar government, organized the customs service to




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insure its payment, and founded agencies at Tamatave
and Tananarivo.
The year 1887 was a difficult one. Two events made
business slack. Frontier incidents, wantonly exaggerated,
provoked a tension between France and Germany. In
another direction, a political crisis, raging among the high
officials of the Government, made it necessary for President
Grevy to resign, after a scandalous law suit and violent
polemics.
The Comptoir, like all the other credit concerns, suffered
from this state of things. The great confidence that it inspired had attracted to its coffers, both as deposits and
as running credit accounts, 200,000,000 francs (total for
December 31, 1887). It was difficult to find a way of
using this capital profitably, a fact which was responsible
for a gigantic error, destined to be fatal to the Comptoir.
Among its clients at this time was the Metal Company.
The Comptoir consented to make loans to this company on
the merchandise it bought. There was nothing abnormal
in this, provided these loans were made for a limited sum
and after prudent calculation of the risks of depreciation.
However, these first transactions whetted the appetite
of the Metal Company. The purchases it effected with
the aid of the Comptoir made the price of copper rise.
This first speculative success led the Metal Company to
attempt to form a regular trust for the purpose of cornering copper. It negotiated with the principal companies
which engaged in copper mining, with a view to raising
the price by limiting production. To anyone who knew
the copper-mining business from the point of view of the




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and

Banks

producer this combination wa,s absurd. Both the directors of the Metal Company and those of the Comptoir,
though it had been claimed that they were informed of
the facts about the copper market, must have been blinded
by the chimerical hope of absorbing the copper product of
the whole world.
The president of the Comptoir, M. Denfert-Rochereau,
at first made loans to the Metal Company without consulting his administrative board. Later, after considerable
capital had become involved, M. Denfert-Rochereau disclosed the state of affairs to the administrative council.
It was alleged that at this moment it was difficult to cease
supporting the speculation of#the Metal Company. The
fact seems hardly admissible. The very absurdity of the
scheme should have produced a rupture, even though a
painful liquidation must have been the consequence.
The final scene in the drama was at hand. As might
easily have been foreseen in 1888, the copper mines, profiting by the wild contracts made with them by the Metal
Company, increased their output enormously. On the
other hand, the price of copper being forced up very high,
artificially, consumers in every country refused to buy.
To keep on buying and paying and never selling, to be
crushed under the piling up of a product that brings in
nothing, is a situation that can not last long. A sad and
unexpected incident gave the signal for the disaster. M.
Denfert-Rochereau committed suicide on March 5, 1889.
His death did not alter the catastrophe in any degree, nor,
any more than others of the same kind, could it serve as
an example.




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It precipitated a panic which led to an irresistible run
on the Comptoir by depositors and holders of running
credit accounts. In two days they drew out 70,000,000
francs.
We were on the eve of opening the exposition of 1889,
called the Centenary of the French Revolution. A disorganization of the Paris market at that time would have
been fatal to this international festival of commerce and
industry. At that juncture the Bank of France came
forward and loaned the Comptoir 140,000,000 francs on its
commercial paper or securities. The Bank was not
obliged to take this amount from the reserve, as the loan
was made almost entirely in bank notes. The circulation, which on March 7, 1889, was 2,741,000,000 francs,
rose by degrees to 2,888,000,000 francs on April 4. The
discount rate was not and could not be changed. The
Bank had then, by the law of June 30, 1884, the right to
issue notes up to 3,500,000,000 francs; so there was still a
margin of 760,000,000 francs before reaching the extreme
limit of the privilege. Besides, every time the need has
been felt, the maximum figure of the issue has been
increased without question by Parliament, so that this
maximum may always be considered as provisional. It
would even be simpler not to fix the maximum issue at all.
The Bank of France, then, helped by these operations
the liquidation of the Comptoir. It should be noted that
the latter was not exclusively a speculative bank. It
was, indeed, as the result of a very unusual combination
of circumstances that it made the mistake of supporting




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and

Banks

the speculations of the Metal Company. It was much
more a bank of commerce, holding a good line of commercial paper; its main business, in short, was making
discounts. To be sure, the total of discounts had decreased latterly. After being i ,900,000,000 francs in 1881,
it had fallen to 1,385,000,000 francs in 1887, and had weakened still more in 1888 and 1889 a s a result of the competition with the other credit societies, which were extending their commercial banking operations. The
Bank of France had, therefore, in the line of commercial
paper of the Comptoir, guaranties which induced it to
make a transaction that was not without risk, of course,
but permitted this establishment to use its right of issue.
The liquidation of the Comptoir was made by friendly
agreement and was ably managed. The assets were
sufficient to settle in full all liabilities, including the loan
made by the Bank of France. After balancing accounts,
even the capital stock was found to be nearly intact.
These facts, which were anticipated from the beginning
of the liquidation, were such as to make it seem desirable
to found a credit establishment which could resume the
name and the traditions (such as were good) of the old
Comptoir. A group of financiers, at the head of which
was M. Denormandie, a former governor of the Bank of
France, who was much esteemed in the business world,
undertook to reorganize the Comptoir.
M. Denormandie, then, made terms with the liquidators
of the old company to obtain the cession of the title and
the clientele of the former Comptoir, as well as its buildings and furniture.




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It is not our purpose here to dwell on the details of this
reconstruction, except to say that the new capital stock
was fixed at 40,000,000 francs. The issue of 80,000
shares at 500 francs took place May 15, 1889, and these
shares were bought by the shareholders of the former
Comptoir, who were given the preference. Additional
bids were made by other people who wished to subscribe;
these bids made a total of 85,000 shares, and had to be
refused.
It was with 20,000,000 francs, the quarter of the capital
paid in, that the new Comptoir began operations in June,
1889.
The offices of the old Comptoir had not been closed
during liquidation, so that business went right on, as far
as the public was concerned.




186

III.—The panic of 1890-91—Intervention of the
Bank of France in behalf of the Bank of England—The
Societe des Depots et Comptes Courants—The local crisis
caused by it.

CHAPTER

Two other examples of panics.—These examples may have had an influence on
the evolution of credit companies.—The Baring failure.—The Bank of England
is asked for assistance.—The reduction of the reserve and especially the lack of
freedom of issue hinder the Bank of England from playing its proper part.

The question of the extension of the credit companies,
which is the heart of this whole discussion, we shall leave
to the next chapter. Meanwhile, we must state briefly,
according to the plan we have adopted, the following
facts, which it is necessary to know in order to understand
the role of the Bank of France, in so far as it comes to the
rescue of credit during panics. And perhaps it will not
be without value to show that the same causes produce
the same effects, and that commercial banks always come
to grief when the rules of good management are disregarded. Just as the old Comptoir d'Escompte had committed itself to the grave error of'violating its statutes,
and at the same time the principles of good administration, so the Societe des Depots et Comptes Courants chose
to indulge in operations that no commercial bank has a
right to touch. It went under. Although in the financial
world examples of disasters, coupled with the most tragic
incidents, are not always heeded, it must be admitted
that the two successive failures of the Comptoir in 1889
and the Depots et Comptes Courants in 1891 were some-




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what enlightening to the clients of this sort of establishments, for a time at least. On the part of administrators
of banks or credit companies there is a growing opinion
that the regular operations of commercial banking are
sufficiently profitable, and they are tending to lessen risks,
even in the underwriting and marketing of securities,
where the companies are often nothing more than intermediaries selling on commission merchandise which it is
not well to accumulate in the warehouse.
I.
The crisis of 1890 was confined for the most part to the
London market, and was caused by the Baring failure.
This famous old concern, engaging in large operations in
loans, speculation, industrial financing, had opened far
too extensive credits at a time when it was involved in
big speculations. Being on the verge of suspending payments, it applied to the Bank of England, just as the
former Comptoir d'Escompte in France had applied to
the Bank of France. A syndicate of English bankers
went security for the request of Baring Brothers. But
the Bank of England has a constitution which does not
allow it the necessary elasticity of issue, in case of need.
In order to undertake the discounts of Baring Brothers
or the Syndicate, it was obliged to diminish its reserve,
which decreased its issue by just so much. It raised
the discount rate to 6 per cent, but though that was
enough to protect the metallic reserve, it did not enable the Bank to procure the necessary specie to come
to the aid of the London market. In order to guard




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and

Banks

itself against the rebound of the London crisis, the Imperial Bank of Germany had already raised the rate of
discount to $% per cent.
It was then that the Bank of England borrowed of
the Bank of France 75,000,000 francs in gold, with which
to relieve the stress of the English market. The Bank
of France was not affected at all by this exportation of
coin. The average reserve, in fact, in the year 1890 was
2,513,000,000 francs, composed almost equally of gold and
silver. In London, the reserve of the Bank of England
had fallen at the height of the crisis to a little less than
500,000,000 francs.
The comparative merits of the systems of the Bank of
England and the Bank of France have been a subject of
much discussion, and the principal element of this discussion has been the state of the reserve of the two establishments. This is a secondary side of the question, in
the face of a local crisis such as that produced by the
Baring failure. The real defect of the English system is in
the limiting of issue. It has been seen that the Bank of
France was able in 1889 to come to the aid of the Comptoir d'Escompte without drawing on its specie, thanks
to its margin of issue. Since the crisis was local, the
remedy was there, close at hand. If the Bank of England had been able to issue notes for 75,000,000 francs,
in order to meet the difficulties of the crisis, there would
not have been the slightest need of an appeal to the
credit of the Bank of France. For, since the Bank of
France was willing to give credit to this establishment, the
people of England would have done so equally by accepting its notes.




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II.
The second crisis which we must mention was confined
to Paris. It was caused by the failure of the Soci6t£ des
D£p6ts et Comptes Courants. Because of consenting
to run risks of a kind that no bank of deposit has a right
to incur, this company was forced into inevitable bankruptcy. It lost a lawsuit, a fact which attracted the
attention of its depositors, and soon aroused their suspicion. It experienced a panic, just as the Comptoir had
done, though a less serious one. This happened in the
beginning of March, 1891, almost exactly two years after
the run on the Comptoir d'Escompte. In four days the
deposits withdrawn amounted to more than 19,000,000
francs.
A syndicate of bankers was formed to go security to
the amount of 15,000,000 francs for the Depdts et Comptes
Courants. The Bank of France came to the rescue again,
just as it had done two years before in the case of the
Comptoir, and advanced 60,000,000 francs for the reimbursement of the depositors and creditors of the company. It received as security the " portfolio" of this
company, and other assets. We will not inquire here if
the Bank was entirely disinterested in this advance, arranged for at 3 per cent, but what is perfectly certain is
that on this occasion the total of its discounts was increased. It rose that year to more than 10,000,000,000
francs, a figure that it had not reached since 1884. At
one moment, even, in 1891, the discounts amounted to
1,361,000,000 francs. As for the reserve, it averaged
more than 2,553,000,000 francs, of which 1,279,000,000




190

Evolution

of Credit

and

Banks

were in gold. The following year the gold reserve went
beyond 1,547,000,000 francs. In this same year, 1891,
the discount rate was maintained at 3 per cent.
The sums needed for the liquidation of the Societe
des Depots et Comptes Courants were not so large as in
the crisis of the Metal Company and the Comptoir in 1889.
In that year the blow to credit had been much more
serious and far-reaching. However, it was by the same
procedure and with the same results that the Bank of
France intervened. In spite of their success, these
interventions have been criticised. Taking a general
point of view, it has been asked if the help supplied
so quickly by the Bank of France to insolvent credit
companies was not of a nature to diminish the prudence
of the administrators of these companies, and to give
the public the assurance that a tutelary establishment
would always come forward to protect the funds deposited
in these establishments.
The question is not unimportant. It seems to us that
the rule to be followed in such cases is perfectly simple.
The Bank should intervene only when its advances are
substantially secured. It acts then like a private individual who aids without risk a neighbor in distress.
And, as it has the privilege of issue, it may do it for a
comparatively moderate price. The side of the problem
most difficult to solve is to make the general public
understand the conditions of this intervention. The
public is in need of being better informed of banking
processes. Now, many prominent tradesmen and manufacturers are entirely ignorant of the role and mechanism




191

National

Monet ary

C otnmis sio n

of the various kinds of banks. It is a deep-rooted conviction with us that if this information were more widespread, it would form a tradition in the commercial and
economic world which would exercise a salutary influence
on the banks; for this education would teach people not
to demand miracles, and at the same time would make
them watchful of the mistakes banks may be guilty of.




192

IV.—The credit companies and their development—Extension of their operations—Their general
method—Their present situation.

CHAPTER

The bank note.—Circulation in France and England.—The bank check.—Conditions of its use.—Transfers of accounts.—Founding of the Society du Credit
Industriel et Commercial.—Founding of the Societe Generate pour Favoriser le
Developpement du Commerce et de l'lndustrie en France.—Founding of the Credit
Lyonnais Company (1863); of the Societe Lyonnaise de Depots and the Society
Marseillaise (1865).—Definition of check by French law, June 14-20, 1865.—
Transformation in bank methods.—The banker of the large credit companies no
longer waits for his customer behind his window—he goes to him.—The credit
companies found branches in the principal cities of France.—The Bank of France
increases the number of its branch offices.—Parallel development of branch
offices of the Bank of France and agencies of the credit companies.—The Bank
of France is the center of the system of the organization of the great credit companies in France and of the banks in general.—The foreign agencies of the great
credit companies.—Financial activity of France abroad.—Analogy between the
organization of the credit companies and the centralization of the French Government.—Advantages of centralization.—Ways of escaping the disadvantages of
centralization.—Service for the publication of financial reports.—Sight deposits
and running credit accounts grow sixfold in twenty-four years.—The time
deposits show little or no increase.—Why sight deposits are preferable here to
time deposits.—Causes of the increase of sight deposits.—Remarks on the
preceding table.—The availability of discounts. The role of the Bank of France.

We have already seen the use of bank notes become
general in France in proportion as the need made itself
felt. Little by little, the total issue of the Bank of France
increased. Every time the necessity arose the authorities extended the limit of issue. Here is a table
recording the successive stages of the increase of circulation of the Bank of France, and the dates of the laws
authorizing an increasingly large total of issue, especially after i860.
Francs.
8 4 , 6 0 0 , OOO
101, 200, 000
153, 800,000
223,600,000
a
223,400, OOO
485,600,000

1807
1810
182O
1830
184O
1850
a

Law of March 15, 1848, carrying the limit of issue to 350,000,000
francs. Law of December 22, 1849, carrying it to 525,000,000 francs. Law
of August 6, 1850, annulling the limitation of the law of December, 1849.
1971—10




13

193

National

Monetary

Commission
Francs.
749,600, 000
1, 544, 300, 000
2,305, 400, 000
&
3, 060, 400, 00c
4, 034, 100, 000
c
4, 800, 400, 000
4, 853, 400,000
a

i860
1870
1880
1890
1900
1907
1908 d

_
'

In 1908 the circulation reached a maximum of
5,116,000,000 francs. It is probable that the circulation
will be extended still more; nevertheless, the Bank has
at present a sufficient margin.
If the circulation of the Bank of France is compared with
that of the Bank of England, it is very evident that that
of the Bank of England is much smaller. It ranges without much variation between 700,000,000 and 800,000,000
francs—about one-seventh as large as that of the
Bank of France; and yet, England does an enormous
business. It is the most important place of exchange
in the whole world, a center of large financial operations.
It possesses, then, a substitute for the bank note, a tool
which takes its place; this substitue is the check, a kind
of bank money which plays an important part in England, and is a simple instrument for balancing payments,
ending in the clearing house. Here debts and credits
are balanced to the amount of hundreds of billions of
francs. The check has been used in England for a long
« Laws of August 12 and 14, 1870, of December 29, 1871, of July 15,
1870, carrying limit of issue successively to 1,800,000,000, 2,400,000,000,
2,800,000,000, 3,200,000,000 francs.
6
Law of June 30, 1884, limit of issue 3,500,000,000. Law of January
28, 1893, limit of issue 4,000,000,000 francs. Law of November 17, 1897,
limit of issue, 5,000,000,000 francs.
c Law of February 9, 1906, limit of issue 5,800,000,000 francs.
< The maximum circulation in 1908 was 5,116,000,000 francs.
*




194

Evolution

of

Credit

and

Banks

time. It presupposes a whole series of banks of deposits
in which a great number of capitalists, merchants, manufacturers, officials, etc., have deposits and accounts.
Furnished with check books, they draw on their bank,
and pay their creditors, tradesmen, etc., in this way.
The check saves coin; it is the complement of the mechanism of the joint stock banks; it explains how England
carries on such a large business with a very limited
metallic stock. It is certainly a rational economic organization. If the Bank of England had a less archaic and
more flexible machinery of issue, the system would be
perfect, and crises in the English market would be less
acute.
The Bank of France of course opened running accounts
with its clients at an early date; it gave them a chance to
make transfers from one account to another (pink order),
or to pay a third person from the account of the drawer
(white order). But it was not everyone who was allowed
formerly to open a running account at the Bank, and the
accounts were not yet sufficiently numerous toward
the end of the last century to permit making clearances
on a large scale. Moreover, one bank alone, or nearly
alone, practicing this kind of operations, scarcely gives
wide scope to the mechanism, which must be adopted by
a whole market in order to be completely effective.
The check has its bases, as we have seen, in a group of
banks of deposit organized after the plan of joint-stock
banks.
The example of England, as well as the forward movement of events, often more or less unconscious, led cer-




195

National

Monetary

Commission

tain financiers in France to undertake the creation of
deposit concerns. In 1859 a company called the Credit
Industriel et Commercial was founded to perform this
function. The aim was clearly stated to the public as
extending deposit accounts with the use of checks and
using these deposits for safe short-date investments, in
such a way as always to have available funds to meet
the withdrawals of clients. The president of this new
credit establishment declared in so many words, moreover, that the institution proposed to imitate the jointstock banks. To gather together scattered capital, which
is most often unproductive in the hands of its possessors,
to pay interest on it, and make it fruitful by using it in
safe short-date loans—such was the method adopted. Let
us remark here that the check had not yet been legally
naturalized in France. The law which sanctions it, in fact,
dates from June 14-20, 1865.
Several years later another company was founded in
Paris, called the Societe Generate pour Favoriser le Developpement du Commerce et de VIndustrie en France, By its
title one may see at once the tendency of this company.
It was a sort of off-shoot of the plan originated by the
Credit Mobilier of the Pereires. This concern for the
"advancement of commerce and industry" proposed to
make industrial loans and investments and to speculate.
But besides these special functions it intended to engage
in all the operations of joint-stock banks, receiving deposits, opening running accounts, etc. Mixing together operations of "credit mobilier11 with commercial banking was
to Unite risks of a very different nature and to court many




196

Evolution

of Credit

and

Banks

dangers. For how could the department which advanced
funds for silent partnerships in industrial enterprises (an
operation involving large risks) be kept separate from
the department of discount and running accounts, with its
deposits payable on demand? No air-tight compartment could keep them separated. This kind of bank is
a mixed type.
Other establishments were founded at this time in imitation of the Credit Industriel et Commercial: the Credit
Lyonnais in 1863 at Lyons; and two years later (1865),
in the same town, the Societe Lyonnaise de Depots, de Comptes C our ants et de Credit Industriel] at Marseilles, the same
year, the Societe Marseillaise de Credit Industriel et Commercial et de Depots. All these had for an object, if not a
sole object, at least a very definite one, to encourage in
these very important centers the use of running accounts
and check books. It was then between 1859 a n d ^ 6 5
that were founded the credit concerns which were later to
expand and become powerful, along with the Comptoir
d'Escompte created several years sooner, under circumstances that have already been described. But this latter
establishment had been organized after the old plan of
discount banks; it was not until afterwards that it followed
the lead of the new concerns and began to try to spread
the use of checks and running accounts.
As may be easily seen, all these companies were founded
either at a time when the existence and legal definition
of the check had not been settled, or very shortly after.
The law of June 14-20, 1865, defined a check as " a writing
which, in the form of an order for payment, allows the




197

National

Monetary

Commission

drawer to effect the withdrawal in favor of himself or of
a third person of the whole or a part of the disposable
funds which remain to his credit with the drawee.'' " I t
is signeji by the drawer, and bears the date of the day
when it is drawn. It can not be drawn except for sight
payment. It may be made out payable to bearer or to
a specified person, and can be signed 'payable to the
order of' and even transferred, by means of indorsement
in blank.''
The check is preeminently the instrument of credit
companies. It is well known that under the name of
"crossed check*' it plays an important part in England.
However, in order that the check, which is only a tool, a
practical means of payment, may be of service, there
must be many deposits and accounts in banks which are
engaging in these operations.
With the exception of the Comptoir d'Escompte, these
banks did not develop greatly before the war. Several
of these banks, even after the war, at the time of the loan
for the payment of the 5,000,000,000 francs indemnity to
Germany, also for the restoration of our military equipment, and later at the time of the loans for great public
works—several of them, we repeat, engaged in the sort of
operations known as "high finance" without the epithet
" high" being justified by the superiority of the operation.
Until 1881, especially, they made large issues; We give
the figures in the following table:
Francs.
45, 400, OOO
286, 600,000
35, 100,000
2, l68, 800, OOO
880, 400, 000
631, 000,000

1876
1877
1878
1879
1880
1881




198

Evolution

of

Credit

and

Banks

It is true they continued later to carry on operations in
disposing of loans, but from this moment forth they began
to widen their scope. Their mode of work was to be
modified little by little. They realized the advantage of
going to the public to solicit custom, to induce it to open
running accounts, and consequently to make deposits.
Afterwards they organized on a vast scale special services,
such as safety deposit, supervision of drawings, cashing of
coupons, loans on securities, etc.
And it was not only by printed circulars that the credit
societies informed the public of the advantages they
offered; they instructed employees in the business of
soliciting patronage and making overtures {demarches)]
hence the name of demarcheurs was given to these employees.
Struck by the very obvious fact that France is everywhere a land of economy, some of these societies, such as
the Societe Generate, the Credit Lyonnais, and the Comptoir d'Escompte, founded agencies or branch offices in Paris
and the provinces. Gradually the number of these agencies has increased and covered France with a close network. In this way, they gather capital everywhere;
everywhere they try to compete in certain transactions
with the local banks, which produces something of a crisis,
and brings about a slow transformation of some of the
local banks and the disappearance of others.
Side by side with the credit companies, the Bank of
France increased the number of its branch offices and
created auxiliary bureaus, increased very much the num-




199

National

Monetary

Commission

ber of affiliated towns, and so rendered the greater part of
commercial effects bankable—that is to say, capable of
being discounted by the Bank, which collects them at a
greater number of places.
It should be remarked that the parallel development of
branch offices and agencies of the Bank of France, and of
the agencies of the credit companies, greatly aided the
development of the latter. They have now near their
agencies a branch office or bureau of the Bank where they
can rediscount rapidly their commercial "portfolio" and
realize on negotiable securities in case of urgent need.
It is here that is seen the intimate connection that
exists in France in the organization of credit, such as
historical evolution has made it, between the Bank of
France and the credit companies. The first is powerful
because of its privilege of issue and its considerable metallic
reserve, which is due to two causes. First, the continuation
of favorable exchanges, resulting from our considerable
investments of capital abroad; second, the great credit
of the bank note. With these two advantages the Bank
of France becomes the pivot of the system; it permits the
credit companies to keep a very small metallic reserve; to
use constantly in making discounts the capital which is
confided to them. The commercial "portfolio," as we
shall see, ranks next to the metallic reserve among available resources, because it is easily rediscountable at the
Bank of France. It is obvious, then, that the parallel
development of the credit companies and the branch
offices and bureaus of the Bank of France is an interesting
study.




200

Evolution

of

Credit

and

Banks

Here are tables which sum up this development:
BANK OF FRANCE.
Number
of branch
offices.
1890
1897
1902

Number of auxiliarybureaus.

Affiliated
towns.

38

94
94
126

120
128
218

38
49

Provinces.

Suburbs,
284

1907

CREDIT LYONNAIS.
Number of agencies.
Year.
Paris.
i88o_
1900.
1907i9o8_

France.

33

28

33

135

S3

Foreign.

173
173

55

COMPTOIR D'ESCOMPTE.
1880i9oo>
19071908.

3
86

26
046

132
140

49

SOCI£T£ G£N£RALE.
57
88

250

1

1907-

&35o

2

X908.

97

°400

2

I9oo_

o Including branches in suburbs.




&Pcirmanent.

20I

c

T e m p o r ary.

National

M on et ary

Commission

The Credit Industriel et Commercial has no provincial
agency; it possesses 34 in Paris and 1 in London.
We may, then, sum up for the four great companies we
have just been discussing the extent of their means of
work, in contact with the public, by the number of their
agencies. (We do not count the occasional agencies of
the Societe Generate.)
Agencies in France in 1907:
Paris and suburbs
Provinces

235
713

Total for France

948

These 950 agencies, in round numbers, are like so many
branches springing from a central stem; but each of them
has a kind of separate existence, a special character,
which permits it usually to adapt itself to the environment where it happens to be.
In 1908, the total number of the foreign agencies of the
credit companies (some of which are very large) was 43.
All four of the companies which we are considering have
London agencies; the Comptoir d'Escompte has opened
branch offices, too, in Liverpool and Manchester. This
company and the Credit Lyonnais have established foreign
agencies in nearly every important commercial center in
the world. In Europe, the Credit Lyonnais has European
agencies at Brussels, St. Petersburg, Moscow, Odessa,
Constantinople, Geneva, Barcelona, Madrid, Valencia, Seville, and the Comptoir d'Escompte at Brussels, Monte
Carlo, and St. Sebastian.




202

Evolution

of

Credit

and

Banks

Outside of Europe the Credit Lyonnais has established
agencies in Egypt at Alexandria, Cairo, Port Said; also in
Smyrna, and Jerusalem and Jaffa in Palestine.
The Comptoir d'Escompte likewise has agencies in
Alexandria and Cairo, but it has founded others in India
(it maintained the one at Bombay), and finally, in Sydney
and Melbourne, Australia.
Moreover, this establishment, faithful to its traditions,
has opened a certain number of agencies in our colonies
and protectorates. In Madagascar and our Indian Ocean
possessions it has seven agencies, including those at
Tananarivo, Tamatave, Diego-Suarez, etc. In Tunis it
has four agencies—at Tunis, Bizerte, Sfax, and Sousse.
So the financial activity of France thus makes itself
felt in the most important centers of the world excepting
those of the United States of America. In 1892 the
Comptoir d'Escompte founded an agency in San Francisco
and a provisional one in Chicago; then in 1895 o n e m New
Orleans. But it closed the Chicago agency in 1900 and a
few years later those of San Francisco and New Orleans.
This is one of the advantages of the agency system; it
makes it possible to suppress very quickly the useless
branch which seemed to be called for, but which has not
been as successful as its founders hoped. The system of
affiliated banks is much less elastic. These have a sort of
independent existence—a personality—in which the large
establishments that helped to found them participate.
Their closing certainly involves more trouble, and the
moral effect is much greater, than when an agency is
abolished. We are alluding to the system of the great




203

National

Mon etary

Commission

German credit companies. This system has a historical
background which it is not our purpose to dwell upon here,
and corresponds to conditions different from those of
France.
In France, the organization of the credit companies, so
far as concerns their expansion, is modeled, one might say,
on the political organization, which is above all centralized.
It is in the central seat of the credit companies that the
final authority rests. From there issue suggestions and
sometimes orders. It is by the central offices that the
agencies are supervised and audited. Treasury questions,
the placing of loans, the general movement of business,
everything is an object of study there. The system of
accounting centralizes all operations and makes it possible for the head men to take in at a glance the general
business situation. These are the advantages of the system; one might fear its drawbacks, dread administrative
red tape, the tendency to reduce everything to rules,
delay in acting, the restriction of the initiative of managers
of agencies. Now, the companies have escaped almost
entirely these disadvantages; the heads of agencies act
with a certain liberty; their vigilance is stimulated, as well
as their activity, by the method of remuneration which
makes their earnings depend largely on their skill and
prudence. Those who are placed at the head of foreign
agencies, sometimes far from the central office of the company, even though they have general instructions which
they must follow, are chosen from the most energetic,
superior, and experienced employees, because they are
often obliged to make quick decisions.




204

Evolution

of Credit

and

Banks

The Credit Lyonnais and the Comptoir d'Escompte
have each organized a service for publishing financial
reports in which one can constantly follow the economic
facts that bear upon business: state credit and loans,
and their budgets; all kinds of industrial companies,
metallurgical, coal-mining, mechanical construction, spinning, and weaving companies; trade in foodstuffs and
agriculture. Numerous documents and detailed studies
permit the heads of these establishments to gain a rapid
knowledge of the main lines of the finances of a country,
the situation of industrial, commercial, or transportation
companies, and of the other banks. Engineers or employees who have technical or expert knowledge are sent
out besides to examine on the spot questions that need
clearing up.
What is more, other services are devoted to studying
the risks either in what concerns discounting commercial paper, or in ascertaining the value of transferable
securities.
However, it would be difficult to understand the workings of these great credit concerns without knowing in
outline both the automatic control that results from a
very clear system of accounting and the factors which
enable the responsible men of the management to make
rapid and timely decisions. Granting that a mere glance
is enough for a banker operating on a given market,
imagine what a knowledge of details and comprehensive
view of the whole situation is needed by the head of one
of these great houses, whose experience, like the horizon
that he sweeps, must be as broad as the whole world.




205

National

Monetary

Commission

THE EXTENSION OF OPERATIONS IN THE GREAT CREDIT
COMPANIES.

The credit companies, as we have said, commenced to
extend their line of discounts and to receive deposits of
increasing importance, beginning with 1885.
To show this progressive increase in deposits and discounting operations, loans and " carry-overs'' (contangos),
we can not do better than call attention to the table that
is given below. As may be seen, it includes the four great
companies that we are considering: The Credit Lyonnais,
the Comptoir d'Escompte, the Societe Generate, the Credit
Industriel et Commercial. Beside these appear the figures
for the Bank of France in what concerns deposits, discounts, and loans on securities.
From 1885 we have given the figures only for every
five years, judging it unnecessary to draw up a complete
table of every year, which would have been cumbersome
and more difficult to understand. These statements all
refer to the same period, which is a necessary condition
in making clear the course of this development.




206

Statement of December JI for the credit companies and the last balance sheet of the year for the Bank of France.
[Million francs.]
Credit Lyonnais,

Sight
Sight
deposits
deposits
and
Time
and
Time
running deposits. running deposits
credit
credit
accounts.
accounts.

Year.

1885
1890

320
611

1895

748
1, 121
1,562

1905
1908

1.745

1905
1908




40. 0

66.0
95o
56.0
34-5
40.5

Loans
on seDiscounts, curities,
1
'carryovers."

Year.

1885-1890
1895

Comptoir d'Escompte.

__

„__

227. 0
460. 0
522.0
759- 7
1,030.0
1, 187. 0

23-5
138.8
205.0
347-0
395-6
408.8

105.0
210. 0
285.0
451-5
841. 0
9150

Societe Generale.

Bank of
Total sight
France
deposits
sight
Total
Total
Sight
and
Sight
deposits
time
credit
deposits
running deposits. companies.
deposits
and
and
running
and
Time
credit
Time
running deposits. running deposits. accounts.
credit
credit
accounts.
credit
accounts.
accounts.
158.0
162. 0
301.0

79
63
60

Credit Industriel
et Commercial.

482. 0
731- 5
i»117.5

90
94
99
115
126
168

25-5

1,087.0

87
130
181
193

11.3

1, 4 2 1 . 0

Loans
Loans
on seon seDisDiscurities, Discounts. curities, counts.
counts. '' carry''carryovers."
overs."
129. 0
140. 0
220.5
334.o
547-0
637.0

60. 5
132.6
1970
186.5

118.5
134.0
136.5
3170
433 0
751-5

660. 0

77
104

56.5
86.7

83.0

105. 0
123.0
201. 0
250.5

55-5

88.0
63.0
102. 3
131. 7

2,184.5
2,215.0

3,97o.5
Loans
on se# Total
curities, discounts.
"carryovers."
9-3
13-8
19.5
51-5
67. 0
52.5

557-0
822.0
9340
1,473-7
2, 112. 0
2, 707. 0

130. 0
185.0
205. 0
250. 0
223. 5
268.5

790.0
1, 272. 0
1, 6 2 6 . 0
2,434-5
2,438.5
4,239.0

37o.5
432.0
605.5
506. 7
623.5
575.5

Bank of France.
Total
loans.

89
239
39o
654
860
898

Discounts.

616.0
868.2
626. 0
847-0
905. 0
654. 0

Loans
on securities.
284.5
263.6
369.0
509.8
500. 0
520.5

(a

National

Monetary

Commission

In glancing at the columns of total sight deposits and
running credit accounts, one may see the ratio of the
increase; it was very nearly regular. From 660,000,000
francs the sight deposits and running credit accounts rose
to 3,970,500,000 francs in 1908; they grew sixfold in
twenty-four years. The increase is due, therefore, to
normal and deep-lying causes, since the upward course
of the deposits followed an even progression.
Consulting next the column of time deposits, an increase
is visible for the same period of time, but in proportion
it is not nearly so great, since the total of these deposits
was 130,000,000 francs in 1885 a n d is only 268,000,000
francs in 1908, so that this sort of deposit has merely
doubled. And, again, this doubling is due chiefly to the
Societe Generate, whose time deposits were 90,000,000
francs in 1885 and 168,000,000 francs in 1908, an increase
of 78,000,000 francs. On the other hand, the time deposits
of the Credit Lyonnais, after increasing until toward 1895,
show a tendency afterwards to decrease; in 1908 the total
of this kind of deposits was the same as in 1885, 40,000,000
francs, while the sight deposits and running credit accounts rose in one company from 320,000,000 francs in
1885 to 1,745,000,000 francs in 1908, or nearly half the
sight deposits and running credit accounts of the four
societies combined in 1908.
This tendency to prefer sight deposits to time deposits
proves that these credit companies generally use the
deposits for short-time operations such as discounts and
"carry-overs" (contangos). Moreover, they have observed that having clients in every class of the population,




208

Evolution

of

Credit

and

Banks

and in every part of the country, large, medium or small
manufacturers and tradesmen, people living on their
income, officials, etc., the deposits and withdrawals
balance each other in such a way as to maintain, not an
even level, of course, but an average level, which, in
making it possible to count on an average length of
time for retaining deposits, gives the companies full
security to engage in their various operations. Since
the interest allowed on sight deposits is less than on
time deposits (which latter is i, 2, or 3 per cent according
to the number of years), it has been possible to lower
very appreciably the discount rate.
Whence comes this increase in sight deposits? From
several different kinds of causes.
In the first place, the increasing number of agencies
gather capital through the whole of France by offering
accommodations to depositors and by soliciting tradesmen of every kind, large or small, to open running accounts. These various accommodations given to clients
come mostly from the very genuine competition of the
companies with one another. The small interest allowed
on sight deposits, even though it has been as low at
times as one-half per cent, is one of these advantages.
This rate, moreover, is not uniform for all clients, and
this is easy to understand in the case of those who
have opened running accounts. Here the agreement
made may change according to the state of the account,
which depends in turn on the kind of transactions the
tradesman or manufacturer engages in and the nature
of the service he asks of the credit company.
1971—10




14

209

National

Monetary

Commission

It is useless to insist on this point. Every bank in the
world has solved it in the same way. The various people
who have argued that a banker should sell his services
at a fixed price are in the wrong as to discounts, loans,
collections, etc. The client who brings large business,
easy to transact, yielding quick profits, may be given
terms such as would not be granted to another customer,
whose more limited operations demand "just as much
writing, offer more risks, etc.
Let us consider next the last column to the right of the
first part of our table; it relates to the Bank of France.
We see that the totals do not give the impression of very
great variation, and seem from 1895 on to remain stationary. In order to judge of these variations, let us
take the figures representing the average total of the
commercial discounts. We give every other year here
in order not to make the table needlessly long.
Annual average of discounts of the Bank of France (Table B).
1885
1887
1889
1891
1893
1895
1897
1899
1901
1903
1905
1907
1908

Francs.
784,300,OOO
577, 900, 000
713,800, 000
760, 700, 000
579,300,000
543,600,000
730> 4°°> ° ° °
828,300, 000
592,400, 000
688, 000, 000
640, 500, 000
1,125,700,000
897,000, 000

„

As may be seen, the tendency indicated by the last
balance sheet of each year showed very clearly a stagnation in the whole. The only large figure is the 1,125,700,000




210

Evolution

of

Credit

and

Banks

francs for the year 1907. This is due to the crisis which
had begun in 1906, and whose effects were still apparent in
1908 in the total of 897,000,000. This shows that even if
the commercial "portfolio" of the Bank of France has
risen slowly for thirty years, in comparison with that of
the credit companies, it increases distinctly during crises.
The bank is the place of refuge where the credit companies and other banks come to rediscount their commercial bills and turn them into ready resources.
In order to see this clearly, it will be enough to call to
mind the average figures of the commercial discounts
of the Bank of France during the serious crises that we
have experienced in France since the war.
Francs.
I, 164,000, OOO
2, 089, 400,000
2, 299, 4OO, OOO
1,760, 600, 000
1,305, 200, 000
906,000,000
1, 166, 700,000
1, 151, 100,000
1, 027, 700,000
996,700, 000

1871
1872
1873
1874
1875
1876
1881
1882
1883
1884

The crisis of 1891 is marked by a slight increase which
is always shown in this way by the average total of discounts.
1890
1891
1892

_
—

Francs.
669, OOO, OOO
760, 700, 000
550, 400,000

Although there is something like a regular increase in
the discounts of the Bank after 1897 (see Table B), there
are nevertheless very marked fluctuations up or down.




211

National

Monetary

Commission

In reality the Bank of France follows a different plan
from the credit companies and private banks in general
in the matter of discounts. Its rate is uniform, for the
most part, and is modified as little as possible. The
Bank can do this, thanks to a sufficient margin of issue
and an imposing reserve. But this state of affairs does
not give it the flexibility of the other credit establishments, which are quite right in not maintaining a fixed
discount rate. This is even a leading distinction between
the companies and the large department stores, to which
they are often compared.
Moreover, the credit companies, as we have said, solicit
patronage. They offer interest on deposits, and if the
client is an important house and furnishes good paper
for large sums, they make special prices in his favor.
Finally, we will call to mind once more that the network
of their agencies, both in Paris and all of France and
abroad, extends the boundaries of their activity.
What is more, they keep in stock, one might say, a full
line of banking articles; they take foreign paper, deliver
letters of credit for all countries, make collections on all
markets, etc. Their agencies are so arranged as to give
the quotations on the different bourses as fast as they
are made. One may enter freely into these agencies,
which are not so awe inspiring as the old banking houses.
Thanks to numerous deposits, coming from an economical country like France, they have also been able to
make discounts at rather reduced rates. Here is a table
which gives the average yearly rate of the discounts in
France and the principal foreign countries.




212

Evolution

of

Credit

and

Banks

Average discount rates.
France.
England.

Year.

Outside
rate.

_

1904
1905
1906
1907
1908

THE

Austria

Belgium.

2. 70

1892
1895
1898
1901

Germany.

Bank of
France.

METHODS

1.38
2. 06
2. 46
2. 02
2.03
2.58
3.30
2. 14

WHICH

2. 52

2. 20

4. 02

2. 70

2.10
2. 20
3-00
3-00
3-00
3- 00
3-45
3-05

2. 00

3-10

2. 60

3- 26

4.28

3.72
3-29
3-oi
4.27
4.92
3- 00

4.10

4.30
4.16
4.08
3-So
3.70
4-33
4-89
4.25

GREAT

CREDIT

THE

4. 22

3.82
5-IS
6.03
4-75

3-04
3.28
3-00
3- 17
3.84

4-94
3-So

COMPANIES

USUAIvIvY F O L L O W — T H E I R P R E S E N T SITUATION.

We have seen on what the credit companies of France
base their operations. They derive their resources:
First, from third parties—depositors, holders of running credit accounts.
Second, from their own capital and reserve.
We have noticed that the sight deposits and running
credit accounts had increased greatly with them, and
that on December 3,1908, they were nearly 4,000,000,000
francs for the four following societies: Credit Lyonnais,
Comptoir d'Escompte, Societe Generate, Credit Industriel
et Commercial.
We have also called attention to the tendency of several
of them not to increase their time deposits. If the total
of sight deposits and running credit accounts rose from
660,000,000 francs in 1885 to 3,970,500,000 francs on
December 31,1908, it was because of the increase of these
deposits at the Societe Generate.




213

National

Monetary

Commission

To make clear how these societies employ their different
resources, it is not necessary to write at length. The
arrangement of the accompanying table will give a better
idea of the workings of these societies than long explanations. Some explanations should be given perhaps as to
the arrangement of the table itself. It is a balance sheet
in fact, or at least a group of balance sheets of these four
companies on December 31, 1908. The assets are made
up after the usual fashion; the liabilities are divided
into two parts—one of them is called " Resources coming,
from third parties, ,, and the other, the "Companies' own
resources/' For, although the companies owe their capital and reserve, in the last analysis, to their stockholders, this capital and reserve are primarily to protect
clients, those third parties who have intrusted their funds
to the companies. It was necessary to distinguish this
part of the liabilities from the other, since, with regard to
clients, it may be termed assets.
As may be seen, the total metallic reserve of these four
companies is 401,500,000 francs. Compared with the
sight deposits and running credit accounts, payable at
any time, which amount together to 3,970,500,000 francs,
this reserve is found to represent about 10 per cent of
the debt of the companies payable at sight.
It will be noticed, too, that the collateral loans and
"carry-overs/' which come to a total of a little over
898,000,000 francs, compared to the total of the companies' own resources, which are 789,500,000 francs, shows
only a relatively small difference—that is, 898,000,000 —
789,500,000=108,500,000, or one-eighth. Now, in these
898,000,000 francs are included " carry-overs " for an impor-




214

Balance sheets for December 31, 1908, of the principal French credit

companies.

[In thousand francs.]
Assets.

Liabilities.
Resources furnished by third parties.

Name of firm.

Loans on
collaterals
and
"carryovers."

Reserve
and cash
on hand.

Discounts.

153,7io
101,847
119,615
26,389

1,187,835
637,204
75i.6i8
131,776

408,793
186,514
250,564
52,437

401,561

2,708,433

898,308

Comptoir National d'Escompte
Societe G£n£rale_ _ _
Credit Industriel et Commercial

1971—10.




(To face page 21 4.)

Government securities,
shares,
bonds.

Miscellaneous
movable
and immovable
property.

549,600
331,045
324,677
34,395

8,594
17,874
H3,546
10,696

83,814
56,456

1,239,717

150,710

Running
debit accounts.

Total.

Sight
deposits.

Running
credit
accounts

Acceptances and
sundries.

Bills of
fixed maturities.

Total of
liabilities
with
regard to
third
parties.

Companies' own resources.

Firm.

Various
reserves.

Profit and
loss (net
balance).

Total of
companies'
own resources.

756,328
571, 734
389,606
94,3io

988,785
343,248
728,070
98,913

231,723
185,034
107,979
21,851

4 0 , 5 1 0 2,017,346
60,356 1,160,372
168,066 i,393,721
215,074

250,000
150,000
150,000
25,000

125,000

32,091
4,942

2,392,346
1,330,940
r, 592, i n
260,635

16,000

10,618
4,561

375,ooo
170,568
198,390
45,56i

17 7 , 3 0 3

5,576,032

1,811,978

2,159,016

546,587

268,932 4,786,513

575,ooo

i99,34o

15.179

789,519

20,568
37,772

Evolution

of

Credit

and

Banks

tant sum, at least one-third. These loans on securities,
which are not so easily realized on as the commercial discounts, would then be amply covered by the private resources of the credit companies (the capital and reserve).
The Credit L,yonnais even, which has nearly 409,000,000
francs in collateral loans and "carry-overs" (contangos),
can set off 375,000,000 francs against these less available
funds. The same proportion exists for the Comptoir
d'Escompte, and likewise the Credit Industriel et Commercial. As for securities held by these companies, they do not
amount in round numbers to more than 151,000,000 francs,
in which the Societe Generate figures for 113,500,000 francs.
This proves that these companies are not banks for investments involving risks, and speculating on negotiable securities. The Credit Lyonnais, holds securities only to the
amount of 10,500,000 francs; the Comptoir d'Escompte
for 17,800,000 francs; the Credit Industriel et Commercial
for 10,500,000 francs. These figures represent the total
amount of securities on deposit of the concerns we have just
mentioned. It is the natural course of the business of their
clients in operations on negotiable securities.
The commercial discounts are next in availability to the
metallic reserve, which, of course, is always available. If
the latter is the standing army of capital for these companies, the commercial discounts are the auxiliary corps of
the army which may be most quickly put in the field.
These discounts for the four great companies amount to
2,708,000,000 francs, of which 1,187,000,000 francs are
for the Credit Lyonnais alone. Now, in France, thanks to
the Bank of France and its margin of issue, in panic times




215

National

Monetary

Commission

these companies can rediscount at this establishment a
part of their "portfolio." Although the English jointstock banks take great precautions in their plan of procedure, they have not in the Bank of England the same
resource, for it is just at the moment when it ought to
increase its issue—that is to say, in panic times—that it
is bound by the act of 1844. Every system of bank issue
must, then, tend to give either to a single bank (if the
monopoly is established) or to the banks of issue (if a
number of banks have been decided on) the greatest possible elasticity of issue, in order to cope with crises. What,
in fact, is needed at these difficult moments? More currency than in normal times. Who can supply it? A
bank issuing bills against reliable securities, such as commercial effects. It is these effects that must be coined into
money and made to circulate, until calmer days arrive.
It must be added that in France the "portfolios" of
commercial bills of the credit companies are composed of
good paper, giving very few losses. This is evidently
also one of the necessary conditions if the Bank of France
is to fulfil its r61e without risk and maintain its credit—
the credit of the bank note.
It may be easily seen that the Bank of France is the
center of the credit organization of France. It is its
special constitution such as a historical evolution has made
it which has in some sort determined the development
of the credit companies and of banks in France. If to
this is joined the peculiarly prudent and economical character of the French, their fondness for saving, it will be
easy to understand the influence of surroundings on the
workings and methods of the credit companies.




216

CHAPTER

V.—The credit companies and the local banks.

The numerous agencies of the credit companies compete with the local banks.—
The Paris banks are little affected.—It is hard to estimate the exact number of the
local banks and the importance of their affairs.—First grouping.—Advantages the
local banks claim to offer.—Unjust criticism.—The real crisis of the local banks.—
Solutions of the problem.—A central bank is established in Paris.—Sale of securities.—District banks.—The present moment is a period of transition for the local
banks.

The development of the credit companies, of their
agencies and operations, was not accomplished without
creating a sort of latent crisis among the local banks. It
is a question here of the banks of provincial cities with
which the credit companies came to compete on their own
ground. The Paris banks, having been long established,
were not particularly affected by the extension of the
agencies of the credit companies in the capital. Some
carry on transactions known as "high finance"—participation in state loans, issues of industrial securities, etc.;
others are banks of commerce, having each its own
patrons, answering needs and rendering services to which
they are adapted. In the first group may be mentioned
the Mallet Bank, which was founded in the first half of
the eighteenth century, the Hottinguer Bank, etc.
Among the second are the bank of Offron, Ginard & Co.,
founded in 1817; the one under the firm name of Henrotte
& Muller, created in 1823; the Lehideux Bank, which
goes back to 1835; the Claude, Lafontaine, and Fouchet
banks, etc.
It is, then, the provincial banks which have really suffered
from competition with the credit companies. These owed




217

National

Monetary

Commission

the depression they experienced to other concomitant
causes also, and to the necessity of making changes in
their mode of work. Improved means of communication,
the extension of the railroad system, the telegraph and
telephone, have contributed to make more effective, even
in the most remote towns, the regulating and leveling
action of the law of supply and demand in the matter of
capital.
What is the number of these provincial banks? It is
rather difficult to tell. The only way of approximating
it is by the licence tax they pay. But here again one must
make distinctions—the tax is greater or less according as
they are bankers or discounters. The number of discounters is probably greater. It may be estimated at
about 1,200; the number of private bankers is doubtless
slightly less—perhaps 1,000 or 1,100. The counting
houses and loan agencies may be estimated at something
like a hundred. Finally, other establishments make a
specialty of placing transferable securities. They seem
to have increased in number, and may be roughly estimated at 400. There are, then, from 2,700 to 2,800 local
banks of varying importance, ranging from the little discount bank of a small town to the large city banks with
big capital.
A certain number of these banks have formed a syndicate or union to protect their interests. They find themselves in competition, in fact, in two operations, one of
which has been much extended; the agencies of the
credit companies make collections at a much lower price
than that formerly charged by most of the local banks,




218

Evolution

of

Credit

and

Banks

especially the ones situated in third-class towns; thanks
to the central office in Paris, the credit companies are
better informed and better situated for all transactions
on the Bourse. The result is that the operations involving the most risk fall to the local banks—that is to say,
advancing funds for a silent partnership in industrial
enterprises (commandite). As for discount, the rate
charged by the agents of the credit companies has tended
to make it lower.
For the rest, we are summing up the grievances of the
local banks as expressed in the publications on the subject, and the reasons put forward in their favor by their
representatives:
The local banker belongs to the neighborhood; his
family, property, and interests are there. He cooperates in aiding local commercial or industrial undertakings.
He receives as time deposits the funds of the landowners, who are the local capitalists, and pays them good
interest. This capital he can again use as a silent
partner (commandite) in local enterprises, which the
credit companies are not willing to do.
Knowing the local credit better than the manager of
an agency, who is often a stranger in the place, the local
banker can give personal credit.
In a local bank the management is permanent; the
son generally succeeds the father, or, if not, the son-in-law
or some other member of the family.
These local banks claim that they are able to save
expense for clients in the business they do with them,




219

National

Mon etary

Commission

because their profits consist of the difference between the
interest they pay depositors or clients who are their
creditors, and the interest they receive on discounts,
loans, etc. (This argument does not quite agree with
the facts, because in the case of many operations the
credit companies have brought rates down.)
In the terms relating to accounts they claim to offer
more stability than would be possible for the manager
of an agency, who receives instructions from the central
office of his company.
The credit companies centralize capital at Paris in order
to use it for "carry-overs" (contangos), etc. In this way
speculation in negotiable securities receives more encouragement than commerce and industry.
The local banks divide the risks; one of them may go
under or suspend payments without affecting anything
but the local market, while if a credit company should
fail, it would involve as many markets as it has agencies.
Finally, certain aggressive writers have accused the
credit companies of investing French capital in foreign
securities. Now, we have seen that this exodus was
made necessary by the large amount of unemployed
capital; this use of French capital is besides of the greatest
economic and financial aid to our country. The income
on the thirty-odd billion francs that we hold in foreign
investments establishes a balance of exchange very
favorable to France. This makes it possible for the Bank
of France to possess and maintain, even in crises, a large
gold reserve—at this moment more than 3,500,000,000
francs—and, in short, it facilitates commercial relations,




220

Evolution

of

Credit

and

Banks

extends French influence, and sometimes paves the way
for political understandings.
Nevertheless the crisis existed, and after criticisms
and recriminations came investigations of ways to meet
the difficulties. Naturally, too, by reason of the evolution of the organization of credit in France, certain solutions were suggested by the facts. We shall state them
briefly.
In the beginning, a great number of local and provincial bankers came together and formed a union for
the purpose of considering means of defense. The first
aim was to bind together the various members of this
union in common business relations and to establish in
Paris a credit concern which was to centralize provincial
operations on the capital at moderate rates, and was
also to try to procure its share in the great issues of securities, in order to give its provincial correspondents the
benefit of them and allot to each one his share of securities
to dispose of.
This solution resulted in practice in the founding at
Paris of the Societe Centrale du Syndicat des Banques
de Province, which now goes under the name of the
Societe Centrale des Banques de Province. It dates from
1905, and has a capital of 1,185,000 francs. Its provincial correspondents are the members of the syndicate of
provincial banks, from 320 to 330 in number. Together
with the branch offices of certain of these banks, they
represent about 368 agencies open for issuing and marketing transferable securities. Among the operations in
which it engages, this one seems to be the most important.




221

National

Monetary

Commission

It has a safety-deposit service and transacts other banking operations, but is apparently for the most part an
investment bank. Will it persist in this course to the
point of entering as a silent partner into industrial
enterprises {commandite) ? Will it be an organ for transforming or aiding the medium-sized or small local industries? It is difficult to give an opinion on this point,
because the association dates only from 1905. This last
function, relating to local industries, has been and still
is one of the data of the problems raised by the local or
provincial bankers.
A movement entirely different from this one has been
started in certain parts of the country. Several very
important local banks, which enjoy the confidence of the
region where they operate, have extended their radius of
activity and formed veritable district credit companies.
They, too, have agencies and branch offices and solicit
patronage. As the bankers or managers of these societies
live in the locality and are deeply rooted in it, they are
well acquainted with the geography of credit, the progress
of industries, and the trend of local business. During the
crisis which raged in the Lyons silk market in 1907-8 the
Lyons bankers were of great assistance to the merchants,
and saved many failures. Lyons, we should add, counts
many experienced bankers of the first order.
But it is especially in the north that the widening out
of local banks into district banks or agencies has taken
place. Among these should be named the bank of Verley
Decroix & Co., with headquarters at Lille, which possesses
27 branch offices in the Departments of Nord and Pas-de-




222

Evolution

of

Credit

and

Banks

Calais; the Devilder bank, which has 9 branches and
is also located at I411e; the Varin-Bernier Bank at Bar-leDuc, which has 10 agencies. In these regions of the north
and east are grouped the metallurgic industries and
factories. In the southwest, too, at Bordeaux, must be
mentioned the Bank of Bordeaux, which has 7 agencies
in the region (Angouleme, Bergerac, Blaye, Libourne,
Royan, Ste. Foy la Grande, and Sarlat). Moreover, it
has an agency in Paris, 3 district offices in Bordeaux, and
18 auxiliary offices in the surrounding region.
The local or provincial banks in France are, then, in a
transition state. The most important of them will
probably develop into district banks; other still smaller
ones will gravitate around the Societe centrale des
Banques de Province; others still, licensed as discounters,
will continue in a limited radius to discount paper for the
small trade, and rediscount it at the Bank of France if it
is " bankable/'




223

VI.—The Bank of France—Renewal of its privilege—Present situation—Its role in the crisis of igo6.

CHAPTER

Renewal of the privilege, law of November 17, 1897.—New duration of the privilege.—The agricultural syndicates and discount.—Incompatibility of the duties of
governor and deputy governor with all legislative authority.—Operations for the
benefit of the Treasury.—Extension of the number of branch offices.—Profits above
5 per cent shared with the State.—The maximum of issue is extended.—Falling off
in the commercial discounts of the Bank of France from 1880 to 1896.—The extension
of business in 1899-1900 and the demand for gold.—The Bank of France discounts
English commercial paper.—Necessity for a bank of issue to have the right to discount foreign paper.—The solidarity between banks of issue of various countries
is established naturally by the action of the law of supply and demand, and by the
course of international business affairs.—State royalties.—Royalties paid by the
Bank to the State.—Taxes on bank notes.—Remarks on the revenue of the Bank
of France.—The revenue from discounts is encumbered with heavy expenses.—
Advantages of revenue on loans.—Royalties and taxes compared to the total expenses.

We left the Bank of France, above, at the moment when
it intervened in 1891 in the matter of the suspension of the
Societe des Depdts et Comptes Courants. From this time
on, until the renewing of its charter in 1897, nothing happened particularly worthy of note. It may be observed,
however, that the gold reserve had a tendency to increase,
and likewise the circulation of notes, as may be seen by the
following table, which gives the average totals of the commercial discounts and the loans:
[Million francs.]
Reserve.
Year.
Gold.
1891
1892
1893
1894
1895
1896
1897-

-

-




_
-

Silver.

1, 279.1
1,547-4
1,684.8
1, 821. o
2,047.9
1, 978.0
1,962.7

1,254. 7
1,279. 1
1, 271. 2
1,262.7
1,243-7
1, 244-4
1,222.o

224

Total.
553-8
826.5
956.0
083.7
291. 6
222. 4
184.7

Circulation of
bank
notes.
084.6
151.3
445-5
476.5
526.6
607. o
687.0

Loans
Discounts. on securities.

760.7
550.4
579-3
564.6
543-6
693-4
730.4

298.4
296. 9
302.8
290.8
312.0
363.7
358.o

Evolution

of Credit

and

Banks

The rate of discount bears witness to the calm of this
period, and the cheapness of capital. The following table
shows this clearly:
Discount rate.
Maximum.

Minimum.

Per cent.

Year.

Per cenf.
35
5
5

1891

3-0

1892

3-o
S
5
5

1893
1894
189s
1896
1897

Average.
Per cent.
3- 00
2. 70
2.50
2.55
2. 10
2. 00
2. 00

The law of June 9, 1857, had renewed the privilege of
the Bank for thirty years, until December 31, 1897. This
law had been made more than ten years before the lapsing
of the privilege, which, by the law of June 30, 1840, had
been prolonged until 1867. This time they waited much
later, since the law renewing the privilege again was promulgated on November 17, 1897, not a month and a half
before the old privilege expired.
We will note here nothing but the special new points of
this law, the official text of which is, besides, a current
document. For this we will follow the order of its articles.
The privilege is prolonged for twenty-three years, ending December 31, 1920; however, a law passed by both
Chambers may bring the privilege to an end on December
31, 1912.

The agricultural syndicates, whose legal existence dates
from the law of 1884, will be able henceforth to discount at
1971—10




15

225

National

Monetary

Commission

the Bank paper at a maximum maturity of three months,
bearing the signatures of their representatives.
The duties of governor and deputy governor of the Bank
were becoming incompatible with a seat in the legislature.
Senator Magnan had to resign. He was replaced by
M. Georges Pallain, who had been one of the most eminent collaborators of Leon Say in the Ministry of Finance,
and left the post of Inspector-General of Customs to assume
the governorship of the Bank, which he still holds.
A change which was new in its tendency was that the
Bank from 1897 to 1920, inclusive, must hand over to the
State twice each year a royalty equal to the proceeds
of one-eighth of the discount rate multiplied by the total
productive circulation, without its ever being less than
2,000,000 francs.
The state loans granted by the Bank in those previous
agreements, one of 60,000,000 francs at 3 per cent, the
other of 80,000,000 francs at 1 per cent, or 140,000,000 in
all, ceased to pay interest to the Bank. Henceforth, these
140,000,000 francs advanced to the State cost the Treasury
nothing.
Moreover, the Bank engaged to put at the disposal of
the State, still without interest, and during the whole
continuance of the privilege, an additional 40,000,000
francs.
The Bank was compelled to make gratuitously a certain
number of transactions for the benefit of the Treasury:
Payments of coupons, issues of French government
securities, collections of drafts drawn on the Treasury,
etc.




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This law provided, besides, that branch offices should
be opened in all the departmental capitals not yet supplied with them, and auxiliary bureaus were also to be
created.
In case the rate of discount rose above 5 per cent, the
resulting proceeds must be deducted from the sums to be
divided annually among the shareholders: A quarter is
added to the capital of the company; the rest reverts to
the State. This case has not arisen even in the crisis of
1906-7, the effects of which made themselves felt from
the United States upon England, and from England upon
France.
The limit of issues of the Bank, which the law of
January 28 had fixed at 4,000,000,000 francs, was carried
to 5,000,000,000 francs.
Finally, the Bank is bound to weigh in the reserves of its
branch offices and auxiliary agencies and to transport at
its own expense to the mint the light-weight gold pieces
that the Minister of Finance has ordered to be recoined.
Under the prudent and skilful direction of M. Georges
Pallain, the Bank has prospered since the renewal of its
privilege; it has performed with unfailing efficiency the
functions for which it has been fitted by historical events.
This is clearly proved by the following facts:
DISCOUNTS.

After 1885 the commercial discounts of the Bank had
decreased. In 1894 the total discounts of the Bank had
fallen off 40 per cent in comparison with those of 1880.
The extension of discounting operations by the great




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credit societies has certainly exerted an influence on
this decrease, which was mentioned, besides, in the official
report of the operations of the Bank for 1894. But since
1896, as we have already seen by the table given at the
beginning of this chapter, the average discounts increased
in 1896-97. But there was a drop in 1901-2; then a
recovery in 1903, reaching in the panic years 1907 and
1908 the respective sums of 13,900,000,000 and 15,700,000,000 francs.
We give in the following table the sum total of annual
discounts, and their average total, beginning with 1897,
as well as the maximum, minimum, and average rate of
discount:
[Million francs.]
R a t e of discount.
Year.

Sum total
discounts.

Average
discounts.

364.8

730.4
797-8
828.3
875-2
592.4
546.3
688.0
699. 6
640. 6
897.7
.125.7
897.2

Maximum.
Per ct.

1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908

032. 1

746.0
2476
9, 936.3
9. SSS.9
11. 685.0
10, 834.3
10, 967.6
13. 980.9
IS. 769.0
800.6

Minimum.

Average.
Per ct.
2. 00
2. 20

3-06
325
3.00
3- 00
300
3.00
3.00
3.00
3-45
304

The modifications of the rate of discount after 1898
may be seen more in detail in the following table. Added
to it are the rates on loans.




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Discount*

Date.

Per ct.
3.0

1898—December 2 _.
1899—December 7 _ December 21 _
1900—January 11
January 25
May 25
1907—January 17
March 21
November 7 _.
1908-- J a n u a r y 9
January 2 3 . . .
May 29

It will be noticed that in 1899 the discount rate rose
to 3.5 per cent, then to 4.5 per cent, and the rate of loans
to 4 per cent and 5 per cent; the 4 per cent discount rate
and that of 4.5 per cent for loans—which were still above
normal—were maintained until January 11, 1900. Now,
at the end of 1899, the discount rate was 7 per cent at
the Imperial Bank of Germany, and 6 per cent at the
Bank of England. Business had extended greatly since
1898. French capital was in demand abroad. The Bank
of France, in the presence of this increasing demand,
raised the discount rate to 4 ^ per cent, a rate that had
not been charged since 1888-89 a t the time of the failure
of the first Comptoir d'Escompte.
The increase in the discount rate in March, and again in
November, 1907, was brought about by a crisis caused
by the tightness of money, originating in the New York
market. This crisis was first felt in 1906 in the United
States. A latent crisis, not very serious however, was
already making itself felt in the markets of Europe. That




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of the United States rendered it much more acute.
The London market, being in constant relations with
that of New York, was first affected by the situation.
The discount rate in London was raised to 6 per cent.
But this barrier was not enough to check the flow of gold
to places where it was needed, and greatly needed.
To defend its reserve the Bank of France could use
the normal expedient of raising the discount rate; it did
not do this in 1906, but had recourse to another equally
normal expedient which the situation clearly demanded;
it discounted English paper, and so made it possible for
the London market to procure the capital necessary to
alleviate its current crisis. This is, in fact, a proceeding
which is much more economic, in the high sense of the
word, than the rather archaic one practiced formerly of
making discreet loans of gold to the Bank of England.
In the following year, 1907, the crisis grew worse. Discount at the Bank of France went up again to 3 ^ per
cent and then to 4 per cent. The Bank of France intervened a second time, discounting English paper. The report of the operations of the Bank for 1907 states that in
this way a ready capital of more than 80,000,000 francs in
American gold was furnished to the London market. In
another direction, the Bank of France opposed no obstacle
to the shipments of French gold to New York, which
were furthered by the Bank's making its normal commercial discounts. Finally, the discount rate remained
3 per cent lower in France than in England or Germany.
In this way, the action of the Bank made itself felt,
not only on the French market but also on the inter-




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national, and particularly the English market. Making
discounts on foreign paper must be considered, to-day,
a very normal means of establishing useful relations
between the different markets, and of applying the law
of supply and demand of capital in an intelligent and
profitable manner for the country which furnishes its
capital. Not making foreign discounts is a deficiency
which the Bank of England adds to its lack of elasticity
of issue. The Reichsbank has a foreign " portfolio"
which has increased in importance from year to year.
The Bank of France has the right to discount foreign
paper, and has used it very ably, thanks to the enlightened
direction of its governor, M. Georges Pallain.
This proves that the alliance of all the banks of issue
of Europe, which a former Italian minister proposed to
establish some time ago, an alliance prepared by the
Governments with the idea of ending in a final consortium
of these banks, is not only useless but dangerous. There
is no need of official intervention, of contracts with binding clauses, to create a solidarity between these establishments. This solidarity is established when necessary,
either directly, if the banks of issue have the privilege
of discounting foreign commercial paper, or indirectly,
by the credit companies or the intermediary banks.
The intervention of one or another of the banks of issue
in favor of a foreign market is therefore free, and so
much the more useful on that account, because this
action is performed in response to a solidarity dictated
by the positive interest that the bank has in intervening,
since it derives profit from so doing. But it can not be




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repeated too often—the right of making foreign commercial discounts is to-day undeniably useful for a bank
of issue.
According to the law of November 17, 1897, renewing
the privilege of the Bank of France, this establishment
owed a royalty to the State equal to the proceeds of oneeighth of the discount rate multiplied by the total of the
productive circulation, the payment not to amount to less
than 2,000,000 francs. The average of productive circulation is calculated by the decree of June 24, 1878. In making this estimate a statement is made out for each working
day, for Paris as well as the branches, of the debit balance under the following heads: Discounts; loans on
securities, on gold and silver bullion; notes payable to
order, and in circulation. This statement is added up
and then divided by the number of working days, thus
obtaining the average productive circulation of the Bank
for the year. Here is the table of royalties paid by the
Bank to the State since the law of 1897:
Francs.
2, 742,000
3, 343, OOO
4, 857, OOO
5> 6 55>ooo
4, 107,000
3,777,000
•--- 4,314,000
4,521,000
4,225,000
5,333,000
7,357,000
5,538,000

1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
X907
1908

The Bank pays the State, in addition to this, a stamp
tax on the circulation of its notes. For the assessment




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of this tax a distinction is made between the productive
and unproductive circulation. The first is subject to a
tax of 0.50 franc per 1,000, the second to a tax of 0.20
franc per 1,000.
This stamp tax, paid by installments, was 1,404,632
francs in 1908. The unproductive circulation of the
Bank is very high. About two-thirds of this circulation
represents metallic reserves of gold and silver. If to the
stamp tax on the notes are added printing and bookkeeping expenses for these notes, the total probably
exceeds 2,000,000 francs a year.
The Bank of France has three great sources of revenue:
(1) Revenue from discounts; (2) revenue from loans
on securities; (3) accrued interest on securities held by
the Bank.
In addition, certain other minor revenues are given under
the heading "miscellaneous " in the following table:
Revenue.

1906.

Francs.
Discounts
Loans on securities
Accrued interest
Miscellaneous
Total

_ __ _
__

-_

1907.

Francs.

27,998,000
_ _ _ 18,256,000
10,302,000
4,188,000

39,523.000
23,320,000
10,436,000
3,904,000

60,744,000

77,183,000

__

1908.

Francs.
27.935.ooo
20,677,000
10,646,000
4, 242, 000
63,500,000

The importance of revenue from loans on securities
will be noticed here. This revenue entails much less
expense than the revenue from discount. Discount
requires a whole army of collecting clerks, in Paris as
well as in the branch offices and bureaus. In order to
collect bills the debtor has to be visited at his place of




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business or residence. In the case of loans on securities
it is the debtor who brings what he owes to the windows
of the bank. If to the revenue of loans on securities are
added the accrued interest {arrerages) it will be seen
that these two represent very nearly half the revenue of
the Bank, and certainly more than half the profits, inasmuch as the accrued interest costs nothing but the safekeeping of these securities, and the expenses of loans on
securities are much less than on discounts.
Here is the comparison of the expenses of the Bank
of France and the royalties and taxes paid to the State.
The taxes in the total given here include not only the
stamp tax on the bank notes, but also the stamp tax on
shares, and the 4 per cent tax on the interest on loans to
the companies, plus the direct taxes.
1906.

1908.

Francs.

Francs.

8,721,000
26,574,000

Royalties and taxes paid to S t a t e Total expenses

11,082,000
30,998,000

Francs.
9,121,000
28,604,000

It is therefore about a third of the expenses that are
represented by the payments turned over to the profit of
the State by the Bank.




234

GENERAL

CONCLUSIONS.

First period: The slow and difficult conquest of its complete privilege by the Bank
of France.—Second period: Period of transition. The beginnings of the credit
system.—The development of the credit companies and their increasing importance. Rapid adaptation to surroundings.—Rdle of the Bank. It is the mainstay of
the credit organization of France.

The conclusions arising from this account, in which we
have tried to present the principal facts of the evolution
of the banks and credit in France since 1800, may be
summed up as follows:
In the first period, of which our first part treats, we see
the Bank of France modest, at its beginnings, in spite of
the determination of Napoleon I to make it a state bank,
gradually freeing itself from this compromising function.
The escape from this danger was due: First, to its regents,
who were experienced bankers or merchants; second, to
the wisdom of two of Napoleon's ministers, Mollien and
Gaudin. The Bank became in this way the bankers'
bank, the bank of rediscount which it has since remained.
It profited by the tendencies of its founder, Napoleon, to
obtain the exclusive privilege of issuing bank notes in
Paris. It passed successfully through formidable political
crises; saw several changes of government. Little by
little new inventions, the steam engine especially, revolutionized industry. Other banks of issue, called departmental banks, were founded. They lived and prospered in
spite of defective corporation laws; they performed local
services in the places where they were established. Then
came the crisis of 1848. The Bank of France, which




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understood the usefulness of founding provincial comptoirs, and already had several, desired to extend its
activity. The Revolution of 1848 made it possible to
realize this plan as a result of a series of rather unforeseen
circumstances. An unprecedented panic at Paris gave
the Bank an opportunity to make energetic and wise
decisions. The departmental banks disappeared shortly
after, much more as a result of this political accident than
of a concerted plan. A sole bank of issue was produced in
France as a result of a revolution whose programme was
to suppress privilege.
Until then the Bank of France had been especially a
local bank, the bank of issue for Paris. It owes to the
wise and prudent banking traditions of the Paris bankers,
its regents, the fact that it has remained a bank of rediscount. All around it, industry, progressing rapidly,
brought into existence banks of speculation and investment. The Bank of France, however, joined in the general movement in this direction only with prudence.
The second period, to which our second part is devoted,
was a time of transition. The Bank had won the exclusive
privilege of issue for the whole country; it was only from
this moment that it was properly called the "Bank of
France.'' It became the center and mainstay of the
credit system of France. The crises that it experienced
were less severe than in the first period. It grew because
wealth in general was increasing, because the railroads
encouraged the creation of capital, especially in a country
so gifted with the spirit of economy. It shared the ideas
of prudence which in all that relates to saving are a part
of the French character.




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However, in these ten or twelve years, years of incubation, legislation on corporations became more liberal; the
laws of 1863 and 1867 gave better facilities for founding
great industrial and commercial credit companies. The
concentration of capital must be made to correspond to the
concentration of industries that results from new inventions. This is a mathematical function of an economic
movement. Then new credit companies were founded,
which felt their way for a while, at a time when one of
them, the Comptoir d'Escompte, produced by the events
of 1848, had in its origin the form of the credit companies
of the future. Founded for the purpose of acting as an
intermediary between merchants, manufacturers, etc., and
the Bank of France, it was the first bank which achieved
the aim of the Bank for the public. The war of 1871 turned
aside this development for a time, or at any rate, precipitated it. The terrible events which took place—the
defeat of France, the payment of the war indemnity, the
great loans, the great works for the extension of the economic plant of the country—produced still more credit
companies, which did not reach over a wide area, banks
which, although they engaged in operations of commercial
banking, also took part in loan operations, made investments, etc., and that extensively.
Finally, in the third period, the methods of the credit
companies became more clearly defined. They gradually
extended their activity in France by means of numerous
branch offices or agencies. The Bank of France followed
the same movement, either of its own accord or by
reason of conditions imposed by the Government. The




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present organization of credit began to take shape; the
r61e of the credit companies grew in importance; they
adapted themselves to the temper of the country and of
their depositors; they engaged preferably in discounting, in
short-date operations; they made every effort to render
available by means of suitable investments the capital
entrusted to them, which they received at sight in much
greater amounts than on time. Finally, they took root on
foreign soil and helped to invest French capital (which
would be idle in France) in foreign securities. France,
always economical, invested abroad in this way savings to
the amount of some thirty-odd billions. This situation
made France a creditor of many nations and gave it almost
constantly a favorable exchange rate. It made it possible
for the Bank of France, thanks to the prudent monetary
policy inaugurated by Leon Say, to accumulate a formidable gold reserve. The Bank of France thus became
a center of supply, not only for the credit of France, but
for the important neighboring market of London.
Financial methods, too, had gradually been perfected.
The Bank no longer had recourse to the premium on gold;
although it lent the Bank of England directly a few
years ago a large sum in gold, it was able recently to come
to its aid economically by discounting English paper.
So, as we have often said in this study, in reality, the
organization of the credit system of a country always
adapts itself more or less to surrounding conditions. In
France this adaptation has been taking place, especially
in recent times, more rapidly than would have seemed
possible thirty years ago.




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However, there are still several gaps in the organization of credit in France, and they are due precisely to
certain of these surrounding conditions. Initiative in
founding industries and boldness in planning new enterprises and new outlets for capital are not adequate to the
needs of the productive power of the country. So, our
special banks for advancing funds for silent partnerships in industrial enterprises (commandites) are few in
number. There is, to be sure, one great concern, the
Banque de Paris et des Pays-Bas, which is working in this
field, conforming to the principle of the division of labor and
of risks, exploiting its own capital and, unlike the credit
companies, not accepting deposits, which latter could not
properly be employed by this company for the operations
in which it engages. It does business on a large scale only,
and is organized for that purpose. So, it seems to us,
that the very thing we lack in France are institutions of
this same kind, which, working on a smaller scale, could
perhaps give efficient aid to the transformation or creation
of middle-sized industries.




239




APPENDIXES.

APPENDIX

I.—Note on the Credit Fonder de France.

Two systems of organizing land credit.—Historical sketch.—The Banque Hypothecate, 1818-1846.—Bad mortgage laws in France until 1852.—Founding of several
companies after this decree of February 28,1852.—The Credit Fonder de Paris.—
The decree of December 10,1852. It extends the privilege of the Credit Foncier,
and authorizes fusion of this institution with the others.—Influences of the Crimean
war, 1854-55, bad harvests, and issues of other securities.—Administration.—Principle and system of land loans.—Securities with prizes.—Regular automatic amortizement by the periodic drawing of a certain number of obligations.—Simple mechanism of the Credit Foncier.—Should a land credit company be centralized?—The
Credit Foncier is authorized to make loans to towns, etc.—Founding of the Credit
Agricole by the Credit Foncier, 1861.—Bad operations of the Credit Agricole. It
was merged in the Credit Foncier in 1876.—Capital.—The Banque Hypothecate
is merged with the Credit Foncier.—Lowering of the rate of interest. The Credit
Foncier is obliged to submit to conversions. It makes conversions on its own
account.—Loans to private individuals.—Town loans.—Statistics of mortgage
loans.—Issues of loans. Rate and amortizement.

I.
The organization of credit on real estate, the introduction of deeds on landed property into the general system
of paper currency, the prompt and easy negotiation of
these deeds, the suppression of obstacles, the lightening
of the burdens which encumber landed possessions, are
some of the questions which have most occupied the public
mind for sixty years back, and given rise to the most
various projects and schemes.
Two different systems came under consideration at
the start: Was it advisable to follow the German plan
of forming companies of borrowers, that is to say, syndicates of landowners who issued certificates of liens
and left to those of their number who desired credit the
1971—io




16

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task of placing these securities and realizing on them?
Or, was it better to form companies of lenders who should
borrow on their own credit and lend to the private individuals who applied to them? The latter plan was preferred. Lastly, should there be a single company for the
whole of France? Or, rather, was decentralization useful,
and was it better to found a certain number of societies
in the jurisdiction of various courts of appeal? After
a short trial of the latter plan, the system of a single
society was adopted.
This development was rapid. The Bank of France was
fifty years in gaining its exclusive privilege for the whole
of France; the establishing of the land bank monopoly
was a matter of something less than two years. Centralization has always been the rule in France; it belongs to
the system of political organization which concentrates
everything in the Capitol.
Let us sum up briefly the evolution in France of the
Credit Foncier.
The first mortgage bank in France was founded in 1818
under the form of a commandite with the firm name of
Deleuze, Briot & Co. It became a joint-stock company
in 1820. It made loans for twenty years at 4 per cent
plus the amortizement. It turned over to the borrower
obligations which bore a fixed interest and were redeemable one-twentieth each year. It collapsed in 1848. Its
failure was the result, first, of bad operations; second, of
inadequate mortgage laws. The defects of these laws
were (a) the absence of outer forms for the purpose of
making the transfer of property rights with regard to a




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third person; (6) defective registration of encumbrances,
such as charges for water rights, right of way, life rent,
use, etc.; (c) defective information as to privileges and
legal mortgages.
To Volowski is due the credit of bringing about the
reform of this legislation.
An important decree, issued February 28, 1852, provided:
1. The option of discharging a debt by annual payments.
2. Each land credit association must have territorial
limits.
3. These associations have the right to issue obligations
or certificates of liens.
4. They can make loans only on first mortgages.
5. The loan must not exceed half the value of the
property.
Expenses.—Maximum interest, 5 per cent; amortizement, 2 per cent or 1 per cent of the total of the loan;
administration expenses, according to schedules established by the statutes.
Summary procedure in favor of land credit concerns.—
Courts can not grant extension of time for the payment
of annuities. Payments of annuities are not subject to
attachment. The land credit companies may foreclose
on the property by filing a petition with the presiding
judge of the civil court, within fifteen days, at the expense
of the debtor. During sequestration the land credit companies may collect any profits produced. The extensions
of time for foreclosure are shortened.




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Several land credit companies were founded after this
decree, but not without difficulty. They had as opponents the notaries who were then in the habit of making
all mortgage loans.
A great association was founded at that time in Paris,
with a capital of 25,000,000 francs; it got together by subscription 10,000,000 francs. Its statutes were approved
by the act of August 3, 1852. It took the name of
Banque Fonciere de Paris, or Societe de Credit Fonder,
The principal bankers of Paris were its stockholders.
Other associations of the same kind were founded at
. Marseilles and Nevers. Two others, at Lyons and Toulouse, were on the point of obtaining licenses when the
decree of December 10, 1852, was issued. This decree
extended the privilege of the Credit Foncier to all the departments where institutions of this kind had not yet been
founded, and authorized it to take over the land credit
companies of Marseilles and Nevers. The Credit Foncier
de Paris then changed its name to the Credit Foncier de
France. In reality the obligations or certificates of liens of
the land credit companies of Marseilles and Nevers had not
been placed to advantage. They were new securities of
a special kind, and the public was not well informed about
them. The same thing was true, besides, of the Credit
Foncier de Paris.
This concern received from the State a subsidy of
10,000,000 francs. Its guaranty fund was placed at
60,000,000 francs, half of which was to be subscribed at
once. It undertook to make mortgage loans to the amount
of 200,000,000 francs, including interest, sinking fund,




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administration expenses, so as to wipe out the debt in
fifty years.
But rigid regulations were established, based on mistaken theories; the State, or at least the ministers, thought
that they and the Credit Poncier together were strong
enough to fix at will the interest on capital—a false notion,
as future events proved. An issue of a loan of 200,000,000
francs did not succeed entirely. Another decree was
passed (December 21, 1853) modifying the 5 per cent
rate by setting up a movable scale, based on the average
market price of government 3 per cents.
Operations were more successful after this. In April,
1854, the total of loans realized on amounted to about
50,000,000 francs. But the organization was not as yet
paying the Government, and in reality the period from
1852 to 1854 had not been at all favorable. Bad
harvests, the war, numerous issues of securities, among
others railroad obligations, had increased the rate of
interest and made the placing of the Credit Foncier
obligations very difficult. The annuity was increased
successively from 5 francs to 5.44 francs, 5.65 francs,
5.95 francs, and 6.06 francs.
In order to remedy a situation which was due only to
chance circumstances, a system of monopoly with state
control was instituted, and on July 6, 1854, a decree
bestowed on the Credit Foncier de France an organization similar to the one of the Bank of France. At the
head of this establishment were placed a governor and
two deputy governors, named by the Emperor. The
maximum rates imposed on the rates of the annuity by




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the preceding decrees were suppressed. The fact was at
last recognized that the rate of interest is not a thing to
be fixed by decree. This institution was placed in reality
under the department of the Minister of Finance, and
controlled by his representatives.
This regime has not been changed in its fundamental
points.
The governor is named by the President of the Republic, likewise the two deputy governors.
The board of directors, composed of 20 members, is
named by the general assembly of the stockholders.
The censors, three in number, are also named by the
general assembly.
It is this combined authority—state inspection and
the supervision of the general assembly of stockholders—
that directs the operations of the Credit Foncier.
II.
The principle on which land loans are based is that
capital of this kind can be reimbursed but slowly. It is
necessary, therefore, to make loans for a long term, and
tie up capital for a certain time, and assure its partial
return each year by a regular sinking fund. It is also
important to have new capital available when it is needed,
since the annuities collected each year must be devoted
in part to a special use. The Credit Foncier, in order to
procure this capital, issues obligations on which it pays a
rather small interest, for the reason that these obligations
are issued with prizes. The bearers of obligations have the
chance of winning prizes. This attracts purchasers, and
the obligations are easily placed. The Credit Foncier uses




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as an amortizement for its borrowings the annuities that it
receives from its debtors. This amortizement is so planned
that there is a rotation between the amortizement, the payment of annuities, and fresh borrowings. Capital here
changes hands more slowly than in an ordinary bank, but
it circulates, one might say, automatically. There is,
then, according to the needs, a demand for capital, and in
proportion to the size of the sums borrowed by the Credit
Foncier, an amortizement of this capital. Finally, a thing
that we must bear in mind is that the obligation of the
land credit, which in reality represents a lien on " immovable " property, becomes "movable" property which
may be transferred and sold like all securities of this
kind.
The mechanism is ingenious and simple; it acts automatically and regularly. But if the tool is fitted to the
work it has to do, it must be added that the difficulty of
the case in point is not to find capital and a scheme for
its amortizement, but to know how to lend this capital
wisely, and to debtors who will be able to keep their
engagements; then it is important not to loan on real
estate that is likely to depreciate to any great extent,
and to measure the loan by the property that secures it.
Here is the chief difficulty, and it is in this connection
that the question arises: Should a land credit company
be centralized, especially when it is in a country with
diverse and varying regions as to land, cultivation, industry, and density of population? Is it possible by sending
agents from a distant central point to make sure of the
approximate value of real estate? The Credit Foncier de




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Commission

France seems to have succeeded in doing so, in the main
because the loans are principally on city buildings and
town lots. But in countries of wide area where the
regions are unlike and where it needs an intimate knowledge of the locality in order to make investments with
as little risk as possible, centralization is certainly not a
method to be recommended.
There is furthermore another field into which the Credit
Foncier de France branches out. It has, in fact, been authorized (by the decrees of July 6, i860, and February
28, 1862) to make loans to communes, departments,
syndical associations, etc., with or without landed security.
In the matter of communal loans, especially, the company
is almost sure to be paid regularly and its pledge consists
of the additional communal tax, the extra centimes
voted by the town council to secure the loan. Properly
speaking, then, this is not a question of land credit.
These loans are made on special issues of communal obligations, whereas the issues for ordinary mortgage loans
consist of land obligations.
Other decrees enlarged the scope of its activity. The
act of January 11, i860, had already extended its privileges to Algeria, and the same year the law of May 19
had substituted it for the Comptoir d'Escompte in the
operations of this establishment with the Sous-comptoir
des Entrepreneurs, an institution which made loans on
building lots or on houses in process of construction.
Then the Credit Foncier created a joint-stock company
which was legally independent, but was in fact affiliated
with the parent concern, and dependent upon it, since




248

Evolution

of

Credit

and

Banks

it was under the same management. This association was
called the Credit Agricole. It was chartered by the decree
of February 16, 1861, and began operations April 1 of the
same year.
The aims of this society were as follows: To procure
capital or credit for agriculture and the industries connected with it, by making or facilitating by its guaranty
the discount or negotiation of effects payable at the latest
in ninety days; to open credits or loans for a longer period,
but without exceeding three years, on pledge (nantissement) or any other special security; to receive deposits
with or without interest, not exceeding twice the capital
in cash or represented by securities placed in the company's safe; to open running accounts, make collections,
to carry on, with government sanction, all other operations which aim at helping the clearing and improving
of the soil, etc., and the development of agriculture.
But the Credit Agricole, whose object was supposedly to
help French agriculture, thought proper to loan a large
sum—168,000,000 francs—to the Khedive of Egypt. This
unfortunate speculation was on the point of bankrupting
the company in 1876 when the Credit Foncier absorbed
the concern and straightened out its business as best it
could, not, however, without losses to the amount of
something like 9,000,000 francs.
As a result of uniting with the establishments we have
mentioned, the Credit Foncier had increased its capital
successively to 60,000,000 francs, and at the end of 1869 to
90,000,000 francs. But this was only a nominal figure,
since the 500-franc shares had been sold for only 250 francs.




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Monet ary

Commission

When it took over the Banque Hypothecaire—a joint-stock
company founded in 1879, but without the privileges of
the larger concern—-its capital was increased to 155,000,000
francs. It is today 200,000,000 francs.
III.
The Credit Foncier had from the beginning seen its
rate of interest on loans regulated by the public authorities. The stupidity of this measure was soon perceived.
It became free to follow the law of supply and demand
for capital in this direction, that is to say, for capital
to be used in land investments. It made loans, then,
at 5 per cent and over. But the lowering of the interest
rate on capital in general was especially evident after
the war of 1870-71. The Credit Foncier was not long
in feeling the effects of this. Its debtors had, according
to contract, the right to anticipate the payments of their
loans, and they took advantage of this right on a large
scale beginning with 1875. The city of Paris was its
debtor for the sum of 283,000,000 francs, redeemable in
28 annuities. Seeing the state of the money market, the
city could lessen its expense and find money at a cheaper
rate. It had, therefore, the easy alternative of reimbursing the Credit Foncier. This establishment did not
allow other debtors to operate conversions in this way,
but proceeded to make them on its own account.
A loan of 500,000,000 francs in communal obligations was
issued by the Credit Foncier on August 5, 1879. Shortly
after, in September, 1879, another loan of 900,000,000
francs in land obligations was subscribed for with equal
success. The Credit Foncier, which had been loaning its




250

Evolution

of

Credit

and

Banks

funds to the city of Paris at 5.15 per cent before this
conversion, now charged slightly less than 4 per cent or
fully 1 per cent less.
The rate of interest was also lowered for ordinary mortgage loans made to private individuals. Besides, the two
kinds of operations of the Credit Foncier have special
funds that have been borrowed for the loans of each of
these branches separately; money borrowed on municipal
obligations is applied to making loans to towns, syndicates, etc., and money raised on land securities is used for
land loans to private individuals.
The lowering of the rate of interest increased the operations of this establishment. Beginning with 1882 it loaned
to private individuals and towns 394,000,000 francs. In
1883 the total was nearly 300,000,000.
It makes loans of two descriptions:
1. Mortgage loans for long periods with amortizement;
the period may be from ten to seventy-five years, according
to the plan chosen. The borrower may clear himself by
advance payments. The interest on these loans is 4.30
per cent at the present moment, without commission.
2. Loans on mortgages for a short date without amortizement; these are for periods of from one to nine years.
The interest is 4.30 per cent, without commission; the
borrower can not make advance payments.
The Credit Foncier loans to the amount of half the
value of the property, if it is a question of houses or arable
lands, etc., and up to a third of the value if the loan is
on woods and vineyards. This is easily explained. The
woods may be cut down or destroyed by fire, the vines




251

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Mon etary

Commission

ravaged by phyloxera, mildew, etc. As for buildings of
factories or mills, they are appraised only for their value
taken apart from their industrial use.
The Credit Foncier loans to communes, departments,
and public establishments with or without amortizement.
The rate of interest is 3.85 per cent for towns and departments, and 4.10 per cent for public establishments.
Here are the statistics for loans on mortgages since
the founding of the Credit Foncier, taken in ten-year
periods except for the last, which comprises the years
1905 to 1907, or three years.

1843-1854
1855-1874
1875-1884
1885-1894
1895-1904
1905-1907

Number
of loans.

Total of loans.

8, 861
12,571
33,262
36,914
44,019
12,898

Period.

Francs.
546,300, 000
648,900,000
i»555»ooo.ooo
1,194,800,000
1,244,700,000
388,300,000

The total of these loans from the time of the founding
of the Credit Foncier amounts to 5,577,000,000 francs,
out of which 2,073,000,000 francs are still due.
The following are the statistics of the communal loans
authorized by the law of July 6, i860.
Period.

1860-1870

Number
of loans.

1, 266

1871-1880

998

1881-1890

14,313

1891-1900

9,95i
9,832

1901-1907




Total of loans.

Francs.
693,000,000
505,000,000
770,000,000
1,040,000,000
678, 700,000

Evolution

of

Credit

and

Banks

The total of communal loans since the decree of i860
is 3,687,000,000 francs. The Credit Foncier has collected 1,895,000,000 francs, and there are still due it
1,792,000,000 francs.
The Credit Foncier has borrowed money, and still
borrows, according to its needs, by means of issues of
obligations with prizes. These are land obligations if
they are issued for mortgage loans, and communal obligations if they are issued for town or department loans.
These issues of the Credit Foncier for land loans (land
obligations) have a rather slow amortizement.
Thus the loan of 1879 (3 per cent land obligations) is
payable at the latest in sixty years; issue of loan of 1883
(land obligations), 3 per cent, in ninety-eight years; of
1885 (land obligations), 2.6 per cent, in ninety-five years;
of 1895 (land obligations), 2.8 per cent, in seventy-five
years; of 1903 (land obligations), 3 per cent, in seventyfive years; of 1909 (land obligations), 3 per cent, in seventy
years.
For the last ten years or so it is seen that the time of
reimbursement tends to decrease. As for the rate, it is
seen that after issues made below 3 per cent from 1885 to
1895, the last two loans (land obligations) have been at 3
per cent.
For communal loans the rates and duration of amortizements are as follows: Loan of 1879 (municipal obligat i o n s ) ^ ^ per cent, payable in sixty years; of 1880 (municipal obligations), 3 per cent, payable in sixty years; of
1891 (municipal obligations), 3 per cent, payable in seventyfive years; of 1892 (municipal obligations), 2.6 per cent,




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Monetary

Commission

payable in seventy-five years; of 1899 (municipal obligations), 2.6 per cent, payable in seventy-five years; of 1906
(municipal obligations), 3 per cent, payable in ninety years.
The obligations of the Credit Foncier are very popular
with the public.
The establishment is wisely administered and answers
certain well-defined needs in the country. It has greatly
helped, both by its land loans and its communal loans, in
the improvement of towns, because of the aid it gives
private individuals in their building operations, as well
as by making it possible for towns to undertake public
works and improve surrounding conditions.
Here are, in addition, the dividends distributed in the
last few fiscal years:
Francs.
27
27
28
28
30

1903
1904
1905
1906
1907

Let us add that the Credit Foncier uses its free funds in
discounting commercial paper and making collateral loans.
On December 31, 1907, the various bills and securities
figured in its balance sheet for 182,000,000 francs, and its
collateral loans for more than 37,000,000 francs.
Its debtors owed the Company on December 31, 1907—
Mortgage loans
Communal loans

Francs.
2, 103, 800,000
1, 788, 500, 000
3, 892, 300,000

It had in circulation a t this date—
Land obligations
Communal obligations




2,021, 000, 000
1,612, 900, 000
3> 633, 900,000
254

APPENDIX

II.—Note on the Credit Agricole Mutuel.

Societies of the Rayneri-Rostand type.—Durand banks.—Law of November 5,
1894. Creation of local banks of agricultural credit.—Causes of their lack of success.—Law of March 31,1899. Founding of district banks.—Condition of the local
and district banks.—Liability of the members.—Rates on loans.

On the outskirts, so to speak, of the general organization of banks and credit in France, a more specialized
and less ambitious business than that we have studied in
this treatise is carried on in the so-called Credit Agricole Mutuel banks. We must not confound them with the
Societe du Credit Agricole, related to the Credit Foncier,
the workings and the ill luck of which have been set
forth in Appendix I. The object of the one and the
others is indeed to make loans to agriculture; but while
the Credit Agricole (related to the Credit Foncier) made
loans at very long terms of payment, to be used on land
improvements the outcome of which was more or less
in the distant future, the banks of the Credit Agricole
Mutuel grant much smaller loans, with much shorter
terms of maturity, and in order to meet immediate expenses. The transformation of capital arising from this
last form of loans must in principle be much quicker, and
the repayment, for the same reason, likewise quicker.
The characteristic of the Credit Agricole Mutuel is to
give a mutual basis to credit; to offer as security to the
lender the joint responsibility of a company of people.
Its existence and development are closely bound up with




255

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Monetary

Commission

the laws sanctioning groups of individuals and with the
progress of the spirit of association and solidarity. This
explains the rather late appearance in France of a form
of credit institution which had already been working in
Germany since the middle of the nineteenth century—
we mean the Raiffaisen and Schulze Delitzsch banks.
It is only after the law of March 21, 1884, organizing
professional syndicates, was put into effect that we see
the beginnings of the organization of the Credit Mutuel.
After various gropings about and a few setbacks—without serious material detriment, since it was all experimental—we see a whole series of banks taking shape,
which we can class under three chief types: (1) The
Soci6t£ Cooperative de Credit Mutuel de V Arrondissement
dePoligny (Jura); (2) the societies of the Rayneri-Rostand
type; (3) the Durand banks.
Soci£te Cooperative de Credit Mutuel de l'Arrondissement de Poligny was founded in 1885 with a capital
of 20,000 francs divided into 500-franc shares. It was
regulated by the law of July 24, 1867, on societies with
variable capital. It lent only to its members; the maximum of credit for each member was limited to 600 francs;
the loan was made for three months with privilege of
renewal up to a year; the borrower had to furnish surety.
He signed a note to the order of the society; the surety
gave his indorsement on this note; the society added its
signature and, bearing these three signatures, the note
was presented for discount at the branch office of the
Bank of France at Lons-le-Saulnier. The interest rate
on the loan was higher by 1 per cent than the discount




256

Evolution

of

Credit

and

Banks

rate of the Bank. The Poligny Bank was imitated by
five or six other banks started about the same time. Its
statutes are models of prudence.
Societies of the Rayneri-Rostand type are rather more
numerous; there are about 60 of them. They meet a
demand for a more complete and widespread organization than do societies like the Poligny cooperative banks.
They are under the influenc of the "Federative Center of
Popular Credit" {Centre Federatif du Credit Populaire), an
organ of propaganda, having headquarters at Marseilles
and founded on the initiative of MM. Rayneri and Rostand.
This federative center continues the work begun by the
"Society for the promoting of popular credit,'' started by
Father Ludovic de Besse. Hence its origins, if not its
tendencies, are ecclesiastical. It must be said that the
banks of Rayneri and Rostand try—even if they do not
always succeed—to observe absolute neutrality in regard
to religion as well as politics.
The "Centre Federatif" plays the part of adviser to
the banks. These latter are perfectly free in their choice
of method in realizing credit, and they follow their own
interest, which is to adapt themselves to the special conditions of the environment in which they operate. They
are encouraged by the State, and they organize and
govern themselves as they please. Most of them act
in concert with the agricultural syndicates. The Centre
Federatif has tried to get the savings banks to use for
the advantage of local and regional federated banks the
privilege given them by the law of July 20, 1895, °f loaning part of their money to credit companies.
I97I

TO




17

257

National

Monetary

Commission

Finally, the Durand banks have a very clearly defined
ecclesiastical character; most of them are administered
by the Catholic clergy. Their founder, M. Durand, a
lawyer of Lyons, adopted in their entirety the principles
of the Raffaisen banks of Germany, which are also purely
ecclesiastical. They are based on the united and unlimited responsibility of all their members; they have no
capital stock and borrow only the funds strictly necessary
for loans and in proportion as loans are made. They
lend to the members alone and for a maximum term of
five years. Their resources come either from savings
deposits to a small extent or from donations or legacies
inspired by a feeling of beneficence and philanthropy.
There are about a thousand Durand banks. The
average amount they loan is 370 francs, which shows
that their clientele is especially made up of small farmers.
On this organization of popular credit, due to private
initiative, has been grafted an official organization, following the law of November 5, 1894. The aim of the
lawmaker was to coordinate all these efforts, to extend
them by combining them with the effort of syndicate
organization, and to develop these two institutions, one
through the other, by making them strictly and jointly
liable.
So, then, the law of November 5, 1894, sanctions the
union of credit banks and agricultural syndicates. A
priori this union might be fruitful; each member of a
syndicate being in principle a cooperator, it is easier to
make him go in for mutual credit. On the other hand,
one of the chief functions of agricultural syndicates is to




258

Evolution

of

Credit

and

Banks

furnish their members with fertilizers, seeds, machines,
utensils, etc., sometimes even with the live stock needed
for farming. Consequently the loan from the Credit
Agricole will most often be used in paying for these purchases. So there will be the certainty that the funds
loaned will be well employed to productive ends, which
increases the guaranty of repayment. Finally, the fact
that the borrower belongs to an agricultural syndicate is
a guaranty that it is really a farmer who is being benefited by the credit accommodation that people have
tried to provide.
The law of 1894 minimizes the formalities and expenses
necessitated by the creation of a bank of agricultural
credit. It can be started with or without capital. In the
latter case, it must stipulate the unlimited liability of its
members, whether it operate under a firm name or as a
joint-stock company. If there is a capital, all of it must
be subscribed and at least a quarter of it paid in. With
certain reservations, the societies have perfect freedom
in drawing up their statutes; they may lend only to
agricultural enterprises—they do not distribute any
dividends; the personal shares receive a fixed interest.
However, at the end of the year they may pay back to
their clients a quarter, at most, of the profits, prorated
according to the business their clients have done with
the company. The other three-quarters are paid into a
reserve fund.
Except for these restrictions the framers of the statutes are perfectly free in organizing, administering, and
determining the conditions of dissolving the company,




259

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Monetary

Commission

of widening its field of action, or limiting the responsibility of its partners.
Such as it is, the law of November 5,1894, lends itself to
the introduction into France of the various kinds of agricultural credit societies. Its terms are very broad. As
we said in the beginning, it brought no innovations; it
aimed merely to give an official and regular cast to the
movement already started by private initiative, which had
overstepped a little the bounds set by the lawmaker of
1884 to the activity of professional syndicates. In spite
of this patronage the success was not remarkable. Five
years after, in 1899, the companies founded under the
provisions of the law of 1894 numbered only 83, according
to statistics; a hundred of the same kind had been created but had not registered their statutes. Alongside
of these, a thousand banks of the Durand type, or the
Rayneri type, and a few autonomous societies were continuing to do business with their old constitutions.
Why were these agricultural credit banks so slow to
develop? Because their private capital and their deposits were insufficient. It is not enough to wish to extend credit; means to do so must be provided at the same
time. Without doubt the joint guaranty of the members and all the other kinds of guaranties which we have
enumerated above were of such a nature as to facilitate
the borrowings of local banks. But borrowing from
whom? There are involved here loans of long and very
uncertain maturities, according to the district. The risk
is greater and of a different kind from that on the discount of ordinary commercial paper. The commercial




260

Evolution

of

Credit

and

Banks

bill represents a value already created, and you only
have to wait to realize on it; the note of the credit bank
represents a value still to be created; that is to say, a
value subject to all the uncertainties of production and
sale—uncertainties especially numerous where it is a
question of agricultural products. So means had to
be found to facilitate the discount of the paper of local
banks if the movement was to progress at all; a second
story had to be added to the building, hence the law
of March 31, 1899.
We have said in our general study that the State had
demanded from the Bank of France, as the price for renewing its privilege in 1897, a gratuitous loan of 40,000,000
francs and an annual royalty equal to the proceeds of oneeighth of the discount rate multiplied by the figure of the
productive circulation, the payment not to amount to less
than 2,000,000 francs. These two sources of income are
going to be used for establishing discount funds for the
credit banks.
To this end the law provided for the establishment of
district banks patterned on local banks, but with functions
more clearly defined. The district bank, like the bank
of the first degree, rests on the principle of mutuality;
money-making is not its aim nor dividing of profits,
except among its clients in proportion to their dealings
with it. It receives gratuitous and temporary loans from
the State, the conferring of which is made every year by
a distributing committee composed of senators, deputies,
bank representatives, the governor of the Bank of France,
etc. These loans must not, as a matter of principle,




261

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Monetary

Commission

exceed a fourth of the capital paid in by the stockholders
of the district bank; they are made for a term of five
years, with the possibility of renewal. The district bank
is authorized to receive deposits in the form of running
accounts, and to issue notes, the total of which may not
exceed three-fourths of the sum total of its discounts.
This limitation is very open to criticism; the total of the
discounts being essentially variable, it is very difficult to
keep to this clause; the most one can do is to accept it as
prudent advice to bear in mind.
Finally another resource not mentioned in the law,
which nevertheless is one of the principal elements of the
work carried on by the district banks, is the rediscount
of bills indorsed by the local banks. Besides discounting
these bills, they can make direct loans to the local banks
for the formation of their working capital. These are the
only two operations allowed them. The district banks do
not lend directly to the farmers; they have relations only
with their affiliated local banks. Borrowers go to the
local banks.
A special department, " department of mutual agricultural credit and cooperation," established by the
Government Board of Agriculture undertakes to watch
over the workings of this organization of credit of the
second degree. It makes a report every year to the
President of the Republic on the condition of the district
and local banks. We give below a few items taken from
the last report^




262

Statistics of the district banks subsidized by the State and of the affiliated local banks.
[Thousand francs.]
1906.

Number of district banks of rediscount
Capital subscribed on December 31
Capital paid in
Gratuitous state loans
Loans of these banks to local banks at from 1 to 4 per
cent
Rediscount of these banks for local banks (operations
for the year)
Reserves on December 31
General expenses
'
Sum total of deposits of funds for one year
Loans allowed
Loans in force at end of year on unexpired bills
Number of affiliated local banks
Number of associates (individuals; cooperative syndicates of productions, dairies, etc.)
Subscribed capital
Paid-in capital
Value of loans during the year
Reserve funds on December 31
Local banks with limited liability
Local banks with unlimited liability
Loans not repaid at the end of the year




37

41

54

66

74

(a)

2,927

3.419

S,o73

7,086

8,261

(a)

2, 6 1 2

3, 0 6 6

4, 601

6, 446

7,408

9,075

2, 6ll

6,879

8,737

14,175

22,985

28,628

(a)

1,295

(a)

8,772

14,782

24,821

44,337

62,474

79,888

(a)

73

195

362

651

1, 0 2 6

1, 481

(a)

45

56

84

121

155

194

(a)

3,363

6, 721

6,825

(a)

19,479

1,887

2,434

(a)

(a)

(a)

(a)

(a)

(a)

(a)

(a)

(a)

(a)

42,066

55,428

68,869

n,950

18,185

23,877

28, 3 2 1

309

456

616

963

1,355

1,638

2, 168

7,998

22,476

28,204

42,783

61,874

76,188

96, 192

(a)

2, 0 2 9

2, 255

4, 0 1 2

5,90i

7,091

(a)

1. 413

I, 466

2,405

3, 626

4,355
56,789

8,929
5,654
70,708

14,302

22,451

30,235

44,162

113

149

228

35i

512

619

5. 170

956

i,i77

(a)

739
1,630

344

a Unknown.

399

461

538

12,702

19,856

25,409

30,452

3

National

Monetary

Commission

The number of district banks increased from 21 in 1901
to 88 in 1907; their paid-in capital from 2,927,000 francs
to 9,015,000 francs; the state loans reached 28,628,000
francs in 1907; loans to local banks, 1,827,000francs; discounting operations,including renewals, 79,888,000 francs;
their reserves, 1,481,000 francs; general expenses, 194,000
francs, or 0.28 per cent of the sum total of transactions.
In 1907 they received 6,825,000 francs in deposits with
an average balance of 600,000 to 800,000 francs.
But the progress made by the local banks is more interesting because, they distribute credit. Their number increased from 309 in 1901 to 2,168 in 1907; their members
from 7,998 to 96,122; the paid-in capital was 5,654,000
francs in 1907; the loans accepted in the same year
70,708,000 francs, of which 10,000,000 francs went to
cooperative production companies, especially dairies, and
to agricultural syndicates; the reserve reached 739,000
francs, and the current loans on December 31, 1907, were
30,452,000 francs.
The law of 1894 rightly allowed the founders every
liberty in regard to the liability of the members; in threefourths of the banks this liability is limited either to the
shares subscribed, or to a multiple, or to the value of the
harvest of each member, or to his capacity for credit; each
district has adopted the system best suited to it. In the
south especially most of the banks have adopted the principle of unlimited liability of all the co-members of the same
local bank; this obtains particularly for almost all the local
banks afl&liated with the district bank of the south, which
has its headquarters at Montpellier. Efforts are being




264

Evolution

of Credit

and

Banks

made to generalize this principle which procures a wide
credit for the companies which adopt it.
The tendency at the beginning, in local as well as district banks, was to allow loans at an interest rate lower
than the ordinary market rate. It was a serious economic
mistake which resulted in placing these banks and their
borrowers in an abnormal and hence a dangerous situation. \t ought to have been foreseen that when the gratuitous loans of the State could no longer be continued, the
whole system would have to be changed at the risk of
compromising the prosperity of these institutions. In the
mind of the lawmaker, the object of the credit banks was
especially to act as intermediary between the farmer and
the Bank of France, to educate him in commercial practices,
and to teach him to use credit. Now, in lowering the
interest on money below the market rate, the borrower was
deceived as to his real position and as to the terms which
he has a right to obtain; it was made impossible to extend
operations and render more kinds of service, since the banks
could not discount their paper at the Bank of France without loss.
This situation was pointed out in the report to the President of the Republic for the year 1903. Here is the passage from this report in which the credit banks are advised
to correct their methods:
"The Banks must face the possibility of the total or
partial cutting off of the State loans, and anticipating
this event, they must establish large reserve funds so if the
case demanded they could increase their resources and
consequently their credit and their power of discount with




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the Bank of France and other large institutions. An example will illustrate more clearly the situation of banks
which discount below the normal rate. One of the banks
which does the largest business, making very large loans,
has been able to place in reserve after running three years
only 30,000 francs or so, because it discounts at 2 per cent
paper which it could not pass over to the Bank of France
without losing 1 per cent. Other banks in similar circumstances lose from 1% to 2 per cent when they are
forced to procure funds by having opened for themselves
a collateral loan account. Consequently, the more business
they do beyond a certain figure, the more their profits
diminish. It is the opposite of what happens in every wellregulated business, where the relative rate of general
expenses diminishes in proportion as business increases."
A few banks have paid attention to these observations
and changed their method of business in the way pointed
out to them by the inspectors of the Ministry of Agriculture. Many have continued to give rates on loans lower
than the normal interest rate.
To sum up, the Credit Agricole was organized with a
real privilege. The Bank of France furnishes capital to
the State gratuitously, which loans it in the same way
without interest to district organizations of rural credit.
These latter can at their own pleasure lower the interest
rate and compete with the bankers who would like to engage in these operations. It is an indirect means of protection. Has it brought about the expected results? That
is, does this credit, deliberately made cheap by capital
which does not pay any interest, really profit the small




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farmers whom it was meant to help? In some localities
this end has been attained, at least in part, as in the departments of the south where property is divided because
of viticulture. Besides, the crisis which has been severe for
several years past in these regions, has led the vine growers to deal with agricultural credit banks. But very often,
too, the cheapness of agricultural credit has helped the
larger farmers, those who, better equipped, better informed on questions of credit, have really no need for this
protection. They benefit by a reduction in rate of interest for which the Bank of France in the last analysis bears
all the burden, since this reduction is only made possible
by the gratuitous loan of 40,000,000 francs which the
State exacted from the Bank of France when it renewed
its privilege in 1897.




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