The Theory and History of Banking

T H E H EO RY A ND H IST O O F B A NK ING

CHARLES F . DUNBAR MRLY P E OF P LITICAL EC MY HARVARD U IVE ITY O ROF SSOR O ONO . N RS

W ITH CHAPTE RS ON FOREIGN E"CHANGE AND CENTRAL B ANKS B Y L VE AGUE O I R M. W . SPR P FE OF B K G AND F CE H V D U V E TY RO SSOR AN IN INAN . AR AR NI RSI

W ITH SU PPLEMENTARY CHAPTER PRESENTING RECORD OF THE FEDERAL RESERV E SYSTEM

B Y HENRY PARKE R WILLIS Pnon sso a op B ANKING COLUMB IA U NI VE RSI TY FORuE RLY EC E T Y FED E L E E a a S R AR RA RES RV li t 8 E 4

FOURTH E DITION

A ’ G . P . PUTN MS SONS NEW YORK AND LONDON Obe ﬁnichetboc ket p ress o ri h 1 8 1 C p y g t , 9 b y

e s n bar Ch arl F. Du

o ri h . 1 0 1 1 9 1 7 . by C p y g t 9 , ’

P . P n am s Son s G . ut

o ri h 1 2 2 b C p y g t , 9 , y '

P. Pu n am s Son s G . t

Fi rst P ublish ed { 8 91 con d sed Ed n 1 S e Revi i ti o 1 90 T rd R d E d i on 1 1 h i e vi se it 9 7 Four h R evi sed E di i on Oc ober 1 2 2 t t t . 9 Re ri n ed D ecember 1 2 2 p t . 9

Made i n th e Uni te d States of Ameri ca PREFACE TO THE FIRST EDITION

THE preparati on of the followi ng c hapters i s the result of the need of some c onveni ent statement of i i o a i o i ord nary bank ng per t ns , felt by the wr ter when lecturing upon banki ng to a large c lass of

s u i n i c om t dents the elements of pol ti cal e on y . To the chapters devoted to suc h Operati ons itwas found useful to add a series of hi stori c al c hapter s on c ertai n of the great ban ks and banldn s s " g y t for a i us ra i o of ems , partly the e sy ll t t n theory and partly to supply the want of any good manual

of a i i s or b nk ng h t y . Eight of the c hapters were printed i n 1 885 for the use of c ss i n a i si butw la es H rvard Un ver ty , ere not i u i T o n ow then g ven to the p bl c . these have been an i uc c a c a on c om added ntrod tory h pter , a h pter bin ed reserves or the system of Clearing House l c i c a on e on of oan ert ﬁ tes , and the Bank Amster i dam . The whole has been revi sed and the not c es of current hi story brought down to the present an d i s l i u date , the book now a d before st dents and readers wi th the hope that itmay ai d i n the sys temati c u of u c of i st dy a s bje t , the treatment wh ch by wri ters upon economi cs i s generally either too

u r f s mma y or too di fuse for ordi nary purposes . The wri ter has annotated hi s text wi th a freedom iii Prefac e to th e FirstEdition

i c r a ma m a o siri wh h pe h ps de nds so e p logy , de ng to mak e hi s n otes answer the double purpose of i n formi ng the reader as to the sourc es from whi ch

m s are ra an d of i vi i n him to state ent d wn , n t g ex plore the sourc es more deeply than was possible s s u i i o wi thi n the limit of the pre ent p bl cat n .

C . F . DUNBAR.

AN RY 18 1 J UA , 9 . CONTENTS CHAPTER I

CHAPTER II

D S U T P S T AND SSU I CO N , DE O I , I E

CHAPTER III BANKING OPERATIONS AND ACCOU NTS

CHAPTER IV TH E CHECK SYST EM

CHAPTER V

CHAPTER VI CENTRAL BANK S

W . S ra By Oli ver M. p gue

CHAPTER VII FO REIGN E"CHANGE v ' M W . ra By Oli a . Sp g v1 Con ten ts

CHAPTER IX PAGE THE FRENCH BANKING SYSTEM CHAPTER "

GERMAN BANKING SYSTEM

CHAPTER XI THE NATIONAL BANKS OF TH E UNITED STATES

CHAPTER XII FE DERAL RE SERVE BANKS By Hen ry Parker Wi lli s

INDE" AND HISTORY OF BANKING

THE THEORY AND HISTORY OF BANKING

CHAPTER I

INTRODUCTORY

THE o ra i o of a i as s h as pe t ns b nk ng , the sy tem

o i n a c uri s a a been devel ped the l st three ent e , ppe r at ﬁr st sight to be singularly c omplex an d difﬁc ult

m si i i n t r c o o . s o due o Of prehen n Th s , h weve , to r in ra io m but any myste y the ope t ns the selves , is the result of their multipli ci ty an d Of the vari ed co i ndi t ons under whi c h they tak e plac e . The a i c i s are of sim i n w nts wh h banks sat fy a ple k d , sur e to arise early i n the hi story of an y c ommerc i al or in dustrial c ommuni ty i n whi c h there i s mutual conﬁdenc e amon g me n ; an d the sati sfac tion of

i si i a i i n these wants s a bu ness eas ly est bl shed , what might well be regarded as an almost primitive

i i r a ion s i cond t on Of trade . The t ans c t by wh ch

a are a i are mor o r as sim these w nts s t sﬁed , e ve , ple

a s ms s an d are di r uc as the w nt the elve , spee ly ed ed

uc ou i to a am i i n to s h r t ne as le d Ad Sm th , a well 2 I n troduc tory

o as a to ra an i r s kn wn p s ge , te the b k ng t ade a one

fe w hi c i n h i s u c ou r Of the w h , j dgment , ld be b ought to suc h un iformity of method as to be safely c on

c oi - o du ted by a j nt stock c mpany . The leadi n g want s to be provided for by banks are rs oa u o a c o si ra sc a uir , ﬁ t , l ns p n n de ble le , req ed by indivi duals embarki n g i n enterpri ses beyond

i own an an d s c on m or the r me s ; , e d , the te p ary employmen t of money whi c h i s n otrequir ed by the o r for imm i a use or at as m wne ed te , le t the eans of

i n i t om a c for n safely keep g . S e gen y lendi g and some plac e of deposit are c alled for as soon as c omm rc i n s to mo i n a r u ar c ours e e beg ve eg l e . In some c ountries the task of simplifyi n g the c u n c of c o u i an d i i n itan rre y the mm n ty , Of g v g asc ai a u was orm r rus to a ert ned v l e , f e ly ent ted b nk in i n s i u i on s but i i s a s i c i c c an g t t t , th s erv e wh h man ifestly be more sati sfac torily performed by governmen t an d h as n ow everywhere bec ome

n l r n i n ra s rs of u o e of its regu a fu c t o s . T n fe f nds an d arran gements for making settlements between persons i n different plac es i n the same or i n dif

i i n i t r s i e . om s c or fe re n c ou . a d nt e , , d e t f e gn ex c a a a s an d i r mai an h nge , h ve alw y been w ll e n

n i n i i i rima impor tant ﬁeld of ba k g ac t v t es . The p ry

n i i s a un c i on to rovi for a d nd pens ble f t s be p ded ,

o r are os of n i n an d of r c i i on h weve , th e le d g e e v ng

osi an d iti s hi c a i i to dep t , these w h h ve g ven r se

rn n i mode ba k ng . s un c i o iti s c ar im n o c om The e f t ns , le , ply very

i r u c i o ra i o . u plex pe t ns They req e pr den e , nteg In troductory 3

ri i c but a ty , and pat en e , they h ve no mystery .

wh o n s or wh o n a to ~ The banker le d , e g ges sup ply c ash to hi s c ustomer as itmay be called for u o c , needs to be s re of the s lven y Of hi s borrower and of the goodness of the sec urity c i d us a i c of re e ve , and m t h ve the ev den e the trans

c i n i u i a its ms c ar a t o made nd b t ble , ter le ly ﬁxed ,

r r i c and the eco d of t omplete an d exac t . When he

i c as on osi or c o c for o rs c a rece ves h dep t , lle ts the sh whi c h i s due an d holds ituntil iti s wanted by the o mu in i ma sur a wners , he st l ke nner be e th t the evidenc e of every transac tion i s regular an d plac ed o ou an d its c or i s r c i s an bey nd d bt , that re d p e e d i An d as sio of h i s s a c . x s y tem t when , an e ten n

o i i r c o i system Of h ld ng depos ts , he e gn zes the right Of a depositor to transfer hi s deposit or an y

a of it o r r o i n or r to mak p rt to an the pe s n , de e a

a to o ra io of ra s p yment the latter , the pe t n t n fer must be c losely followed and the resulting c hanges ’ in the banker s ac counts must be made with ﬁdelity B uti n n o one of c a and minute ac c urac y . these ses does the actual transac ti on present any more difﬁ culty of c omprehension than the simple payment or r i of mo u s io of u c e ece pt ney . The q e t ns pr den uc o iti s a i a how m h and to wh m dv s ble to lend , u iti s s su and pon what terms , how far afe to as me si il u i u to that depo ts w l be left nd st rbed , and what extent iti s needful to be prepared for demands by — deposi tors r equire all the li ght that trained sa aci t i u as g y and exper ence can throw pon them , do th e questions relating to the conduct of business 4 I n troductory

i n other departmen ts; butthe essenc e of the

ra sac i on s ms s to i c u n t n t the elve , wh h the j dgme t of

i i i s im a r s a s . the b nke ppl ed , ple As a n atural c on sequenc e of the simpli c ity of the Operati on s i n volved i n len di n g an d i n rec eivi n g

osi s i ti s ro a a a n r dep t , p b ble th t they h ve been u de t aken an d c arried on i n every old c oun try by i n dividuals lon g i n advan c e of an y publi c establi sh m an d on or c ron i c rs of i s or ents , l g bef e the h le h t y thought itworth while to n oti c e phen omen a of

or r ri n r suc h a humble de . P vate le de s establi shed ban ki n g i n Ven i c e two c en turies before the Sen ate

o its s u i c an of osi i n 1 8 pened ﬁr t p bl b k dep t 5 7. B an ki n g was i n like mann er prac ti sed by i n di vi duals i n Amsterdam lon g befor e a spec i al c lass Of evils led the c ity to establi sh the famous B ank of r an i n Of - ﬁn Am ste dam . And b k g a well de e d mod ern type was i n troduc ed by the Lon don goldsmiths atleast a gen erati on before the open i n g of the B an k n a c of s of Engla d . Inst n es the ame sort c ould

asi mu i i n i to S ow a i n o r e ly be lt pl ed , te d ng h th t the c oun tries also ban king h as h ad i ts ori gi n i n the effort of i n dividuals to supply c ertai n rather primi

i an of an a a c i c ommu i an t ve w ts dv n ng n ty , d that the proc ess of sati sfac ti on was by mean s of a

w orou im r i o uc fe th ghly s ple Ope at ns . S h as these l a i o a i o r two or r c u i a o e d ng per t ns we e th ee ent r es g , they have c ontinued to be i n the midst of the c hanges and the enormous development of modern

times . Wherever banki ng h as reac hed an even moder I n troduc tory 5

of o m i i i u l ate measure devel p ent , the nd v d a wants whi c h i tundertakes to supply have c eased to be the n ra i exclusi ve Objec t of atte ti on . The gene l nﬂuenc e

ri o ff c of a i n o ra io s n ot an d ulte r e e ts b nk g pe t n ,

i a or s an d o a a i u orig n lly f e een l ng m tter of d sp te , have bec ome poten t fac tors in the diffusion Of banki n g an d i n the determinati on of the c har ac ter of the legi slati on to whi c h ithas been sub

te rs a rs ro a h ad i jec d. The ﬁ t b nke p b bly l ttle thought of affordi ng en c ouragement or applyi ng a stimulus to the industry of the c ommunity as a i o . an o r to wh le When they beg , h weve , lend the r money systemati cally to merc hants or the p ro duce rs of oo a to i c o a of g ds , they beg n g ve the mm nd

i al i n r ri r for i i cap t the ente p ses whe e , the t me be ng

itwas os c a for r s s m t lled an d p e umably mo t needed .

i c a i oan of i s o When they n re sed the r l s th s rt , by means of the funds left temporarily in their care by

on s si i i m a to i pers depo t ng w th the , they beg n g ve to industry the beneﬁt of c apital whi c h would

i a r m i i or to c u otherw se h ve e a ned dle , se re the more speedy appli c ati on of c apital slowly seeking o empl yment . The use of their own notes as the i u for a i i o i n med m m k ng the r l ans , a manner

ic a al o ou a i r o str tly n g s , g ve to the r bo r wers the c ommand of resourc es whi ch the ﬂuctuating

body of note h olders might forbear to demand . Agai n the prac tice of discounting the bills received by dealers from their customers tended to a rapid Or ni a io of i i i th e ga z t n cred t , and , by g v ng dealer the immedi ate use of that whi ch was due to h im 6 I n troductory

i in u u s o i at some t me the f t re , h rtened the per od “ ” required for turning h is money an d un dertak i n om r ri i s i ou a g s e fresh ente p se . It Obv s th t the bankers c reated n o new wealth by their lending an d i - o i butiti s ua ai a depos t h ld ng , eq lly pl n th t they di rec ted the exi sti n g c apital to the en terpri ses an d i u i o in of su an d a nd str es m st need pport , th t they qui c kened the suc c essi on of c ommerc i al

n i s ri o ra i o i am ou o a d ndu t al pe t ns . A g ven nt f c a i al was u ma mor f c i so a p t th s de e e fe t ve , th t the result of the introduc ti on of banki n g i n an y c om munity was the equivalen t Of a c onsiderable i n c r as Of c a i a a ou n oti i n an r a e e p t l , lth gh mply g y e l i n c r s i n rs i n a ea e the ﬁ t st n c e . The stimulus thus applied by bankin g to the gen eral c ommerc i al an d i n dustri al movement Of an c ommu i r ou or h as on y n ty , whethe y ng Old , l g

c ar s an d iti s i c of o ra i on been le ly een ; th s effe t pe t s , atﬁrst undertaken simply wi th referen c e to the man i i i ual c o i n c a n ow de ds Of nd v d nven e e , th t

i i o n c i s i r i chi eﬂy c la ms attent n a d ex te nte est . Th s

i n i si st mulus i s ot unattended by r sk . Depo t holdi n g an d the i ssue of notes are alike opera

i n o r i i c n i i o ir o f c . m as o of t s ed t They ply , d t ns the

i n c a c r ai o of mu ua c on c in ex ste e , e t n gr wth t l ﬁden e

c ommun i an d a c r ai r of om s i c any ty , e t n deg ee d e t

n c o i i o o rwi s i i a peac e ; a d under nd t ns the e s m l r ,

i o i iff r i n i sor tto suc o ra i on s nat ns w ll d e the r re h pe t , asthe nati onal temperament i smore or less sangui ne

i n i a r a wa an d as trad ti on a d hab t h ve p ep red the y, B utto a r n c i i s or the reverse . wh teve exte t red t I ntroduc tory 7

iti u l thus used , ntrod ces not on y the dangers of n c but c mi splaced co ﬁden e , the greater danger om i i in g fr om the sp r t of adventure . The tendenc y nuder the keen spur of a developed ban ki ng system to carry enterpri ses based upon credi t beyond i i f i i c om the po nt of safety , the n ect on of an ent re ul i ar e too a ili a munity by the fever of spec at on , f m r of n in i i for comment , and the errors ba kers a d ng and encouragi ng that whi ch they should have

i to r or i u str ven rep ess control , have at t mes bro ght ili i i l i i the ut ty of bank ng tse f nto quest on . o n ot i The modern w rld , however , does d scard any great agenc y merely because its use i s attended T o i i i by danger . secure a balance Of ga n by m n mi zin i s al i i i i g the r ks , ways recogn z ng the r ex st i ora - ence and the r depl ble character, has been the aim of most commercial communities in deali ng i i w th banki ng during at least four generat ons . i o ili i i s The gnorant h st ty to the system tself , n tead of its a u whi ch race s r b ses , of t were forme ly to be found in the constitutions of a few of the United h as l i wa i a re States , genera ly g ven y to a w ser pp ciation of the servi ces rendered by banks and in bankers the development of the country . The difﬁculty of properly weighing these advan tages an d risks was greatly increased by the reckless i ru i c u i mp dence w th whi ch banks in most o ntr es , especially duri ng the early stages in the develop i i i ment of the bank ng bus ness , have managed the r i su o . u i ou s es of n tes S ch ssues , alth gh not a nece ssary adj unct of the business of lending and of 8 I n troduc tory

osi - i are a u an d i n o i dep t hold ng , a n t ral , s me cond

i n i al o of oc a u u a u c . are t s s ety , s dj n t Where they

a i ssui n a or an r ato c c om m de , the g b nks b ke s n e be e responsible for an important part of the vi sible

i rc i i r i r mi s c ulat ng med um Of the c ount y . The tak es or wron gdoi n g may affec t a multitude of person s havi n g n o inten ti onal or c onsc ious share in or relati on to the c onc erns of an y bank ; an d may easily throw the affai rs of a c ommunity into c on

i s u as W e s a se e r a r usio . f n It tr e , h ll he e fte , that the steps by whi c h a bank i ssues its notes do not differ from those by whi c h i tassumes other less o s i a i i i an d a i ts i a i on s i n b erved l b l t es , th t Obl g t the

r i n i i two c a a e sam ss c . ses the e e en e St ll , the w de

iffusi on of an i u of o om a a r d ss e n tes , the s ewh t gre te Opportun ities for mi sman agement than of deposit c i an d or vi si an d o ori ou a u of red t , the m e ble n t s n t re the resulti n g evi ls make suc h issues the objec t of

r a ou an d a to i i ext eme je l sy , h ve Often led the nd s

i n n i c im a c o m a o of all a . ou r te de n t n b nks Alth gh ,

r or i s u of o i s n oton e of a the ef e , the s e n tes wh t we “ have c alled the primary an d indi spen sable func ” i on of a i iti s a u c io i c t s b nk ng , f n t n wh h ﬁlls a

l r s ac i n mo i c ussio a i o a ge p e st d s ns Of b nk ng the ry , as well as i n the history of the great banking n i n i s i o systems a d leg lat n . The starting -point i n the present expositi on of the subjec t then must be an examinati on of the

r sac i on s i n o i n n i si - o i t an t v lved le d ng , depo t h ld ng ,

n i or c i c u i a d note ssue r lat on .

1 0 sc oun t os tan d ssu Di , Dep i , I e

ut i a i money , b a certa n mount of purchas ng power in a i o or of a ma usu l va lable f rm , wh tever y be the a i d u of a m a r in of m . me m p yment , e su ed terms oney u o h im c u i If we s pp se to be a mer hant , b y ng and selling goods upon c redit i n the regular c ourse of hi s u i s i s li l atan i i to a in b s nes , he ke y y g ven t me h ve hi s a a l u of o n ot hands gre ter or ess n mber n tes , due i r o to o yet , s gned by the pe s ns wh m he has heretofore made sales ; and itmay be in the form of oa a u u i of on e a l n , m de pon the sec r ty or more of these notes and gi ving him immediate command Of the amount whi c h wi ll bec ome due upon them in u u a il u the f t re , th t he w l proc re what he needs from lo to the bank . Thi s an may be supposed take the of i s a i c u i n i c c a form what termed d s o nt ; wh h se , “ ” in exc hange for the note discounted the bor rower i s entitled to rec eive from the bank the

oun o i s i n i r on am t pr m ed the note , less the nte est that amount c omputed atan agreed rate for the i i c o i I s t me wh h the n te has st ll to run . The di

th ot s un rom s to a e . . e n e i co te i se has 8 If , g , d d p p y 7 h r h t a s to run an d te a ee rate i s 6 er c e n t. ten te i n teres d y , g d p , h to be de duc te d i s an d th e proc ee ds rec ei ved by th e bor rower are is roc ess w i c i s common use an d Th p , h h ly d “ is n own as an i sc oun t i ves a resu tsome w atdifieren t k b k d , g l h t f i scoun t h e t Stri c t from tha o d in th e stri c tsen se Of t erm. ly s e a i n i sc oun tc on si sts in n in tatsum w i c if utat p k g , d fi d g h h h , p fo o tto o i ntere st r 8 a s at6 er c en t. wi ten am un r 7 d y p , ll h , i n oter wor s in n i n th e resen twort of due un er h d , fi d g p h d h e n i ion s ta As tis resen twort is th e es t co d t s ted . h p h tablish ed practic e gi ves to th e ban k a slightprofitin addi ti on to afior e rue i scoun t See on ti s oin ri cultural that d d by t d . h p tAg

ank vs. i sse 12 ic . 8 . B B ll , P k 5 5 sc oun t ositan d ssu 1 1 Di , Dep , I e

om o r of counted note bec es the pr pe ty the bank , to whi ch the promi sor i s henceforward bound to make payment atmaturity ; and thi s payment when made obvi ously restores to the ban k th e c itin for o amount advan ed by exchange the n te , together wi th the interest whi ch was the induce

ment for maki ng the exchange . It i s n ow c lear that the operation whi c h we cri u of as l have des bed , altho gh spoken a oan by i s in c o hi the bank to a borrower , fa t s met ng more o o i vi th an a l an . The n te when g ven was e dence that its holder owned the right to rec eive at a ﬁxed c i sum of i i date a erta n money , and th s r ght the

- rr to i so called bo ower has ceded the bank . Pass ng over for the presen t all questi on as to what he has

i in c a hi s io of o r al rece ved ex h nge , cess n pr pe ty by s e i s as di stinc t and c omplete as if he h ad sold a bale c o o to o i s a of s i of tt n an ther merchant , n te d ell ng to hi s ri to i i n u u a bank ght rece ve money the f t re . It i s true that i n parting wi th the note he probably n it u u im ma e dorsed , and th s bo nd h self to ke good its amount i n c ase the promi sor should fail to do so ; buthe might equally bind hi mself by some war a i to u i r nty g ven the p rchaser , when sell ng any other c ri io of r h as c des pt n p operty . The note eased to be hi s an d n o i , w takes ts place among the investments or c u i i al u c u o ma l se r t es of the bank , tho gh st m y ead “ ” its l i i l to c ass ﬁcat on as a oan or di scoun t .

In an ac coun tof th e an of n an th e note su ose if B k E gl d , pp d , “ " ta en wou be c lassi e un er oter sec uri ties to eter k , ld ﬁ d d h , g h With on s or stoc s own e th e b d k d by Bank . 12 D scount os tan d ssu i , Dep i , I e

The operation whi c h we have here presented in i ts simplest form may easily c hange its shape

ac r i i c u s c . us i a o co d ng to c r m tan es Th , nste d f “ ” o f i n for i c ou of h i s c u o r f er g d s nt the notes st me s , our merc hant may oﬂe r hi s own note for the sum

i c i to o i a ac to it as wh h he w shes bta n , and tt h ,

s c u i for i ts a at a uri on e or e r ty p yment m t ty , more of the notes of hi s c ustomers . In thi s c ase the

ri c i a o h i s own c o s r p n p l n te , , be me the p operty of a i to c i ro it the b nk , the r ght re e ve f m h im at s maturi ty the sum promised i n i tbei n g the real c of al a ac o o i i ll obje t s e ; and the tt hed n tes , r g na y rec eived by hi m for merc handi se an d n ow pledged to the bank as c ollateral sec uri ty for the perform

c of h i s c o ac c o i n u to hi s ro an e ntr t , nt e be p perty , subjec t to the right of the bank to be indemniﬁed i So too rom in c a of h s ai ur . ma theref se f l e , , he y o f h i s own o s c uri n i t f er n te , e g by the pledge of

on s oc or o a ua ro r b ds , t ks , ther v l ble p pe ty , the

o r hi of i c o n ot a i il t wne s p wh h he d es p rt w th , wh e a the same time he sells as effec tually as i n the ﬁrst c ase the right to rec eive from hi m a c ert ain sum at

i o i n rac i c i a a . a o a ﬁxed d te F n lly , f ll w g p t e wh ch h as c om i c r asi c ommo i n r c n ar be e n e ngly n e e t ye s , the bank may di sc ount the unsec ured note of the

rr w s s c ur o s are a on bo o er . The e un e ed n te b sed the c harac ter an d ﬁnanc ial positi on of the business

of orro r an d are a i i to n ot the b we , gener lly l m ted more than half of h i s total worki ng c apital require

s a of o of a i c ments . In te d the n te h nd wh h we

su os to u om o i of have pp ed be sed , s e ther k nd scount os tan d ssu 1 Di , Dep i , I e 3

a for a i l of negotiable p per, as , ex mple , the b l ma r c al u a exchange , y be p eferred by lo s ge as the i i o i c o rci al o . a evi denc e of mme bl gat n St ll , wh t ever the form of the tran sac tion by whi c h a bank “ “ ” m c oa it i ou may ak e advan es or l ns , w ll be f nd that in every case a ri ght to demand and rec eive a c ertain sum of money h as been ac qui red by the

fo n si r i bank r a c o de at on . We n ow have to c onsider what i ti s that the bank gi ves in exc hange for the right to demand and re c ei ve mo ata u ur i ac ui itu ney f t e t me , q red by nder

r s 0 u to our an these c i c um tanc es . T ret rn ﬁrst d simplest case of so-c alled di sc ount ; the proc eeds of c ou n o or its o i a ou the di s nted te , n m n l am nt less the i for i for i c iti s to run are i n nterest the t me wh h , the

s i c a c i of orr ﬁr t nstan e pl ced to the red t the b ower, a out him ato c or at iff i to be dr wn by n e d erent t mes , i c or c i m i c u as c onven en e ne ess ty ay d tate . In th s i i h im i roc a i cred t ng w th the p eeds , the b nk pla nly gives to hi m simply the right to call upon itat a ur for a sum of m n hi ple s e th t o ey . Whether t s ri ght i s exerci sed atonc e by demanding an d re c eiv in mo or rc i of i ti s os g the ney, whether the exe se p t

as r a th e o or a ar of a ou poned eg rds wh le p t the m nt , “ in i r c a i to ma or ra e the se the r ght de nd , to d w , is the equivalent rec eived by the customer i n ex for i so him to a change the r ght , ld by the b nk , of i c i c ou was i c wh h the note d s nted the ev den e . sum i c i s u i c a for i s i The wh h he th s ent tled to ll sa d , so o it a hi s to i i n l ng as st nds to credi t , be depos ted a or i i i n hi a the b nk , to be a depos t stand ng s n me ; 1 sc ount ositan d ssu 4 Di , Dep , I e

a c i is to o in so th t the transa t on seen be , b th form in u c c i and s bstan e , an ex hange of r ghts . The same thi ng i s true also i n other c ases of so-called “ ” ” loans or disc ounts ; whatever form they take and whatever the c ollateral sec urity held by the

ma o a i o i s a ll s i bank y be , the per t n fter a e sent ally

c of i s r c an ex hange r ght , whe eby the bank a quires ri to r c i mo or a the ght e e ve ney , the leg l tender of the ou at o u u i an d i i c ntry , s me f t re t me , the nd vidual ac quires the ri ght to call for money or legal tender at u u i s to i to i pleas re . The res lt g ve h m that i mmedi ate c omman d of purc hasing power or of the u u m i u of a i c as i s al ed m p yment wh h , we have sa d , i s the real Objec t sought by h im ; butatthe outset thi s result i s usually secured an d the relati ons of “ ” a an d the b nk the borrower are settled , by the

of on e ri a an d i ou sale ght for nother, w th t the interventi on of money or any of its tangi ble u i u s bst t tes . B uta deposit may owe i ts origi n to a different

a i o ro i u a i oper t n f m that wh ch has j st been ex m ned . a r da a rc a a i It h ppens eve y y th t the me h nt , h v ng

s i n an r n otto o itin h i s o si o ca h h d , p efers h ld p sses n “ ” i i ti s r ui for use butto o i i t unt l eq red , dep s t with the bank where he usually transac ts hi s busi

u i use i t. i e ness , nt l he needs to In th s case , wh n

1 Th e less usual case of a loan made i n c as oes n otcreate a 1 h d e ositbuti s a case of i ssue if th e an i ves i ts own n otes to th e d p , b k g r ti s o e er th e sa e of a ri tfor a ri ti n ever orrowe . I w v b , h , l gh gh y c ase e c e tw e re th e oan i s ma e i n ac tua mon e w en it x p h l d l y, h be c omes th e sale of a rightfor c oin . sc oun tD os tan d ssu 1 Di , ep i I e 5

m es h i s i in h e mak depos t , the property the money or substitutes for money actually handed i n by h im s i i n p a ses to the bank, and he rece ves exchange the i c i ur a r ght to deman d and re e ve at pleas e , not th t i o I i i n but ui l am un t. wh ch he pa d , an eq va ent as in c i Here then , the former case , the transa t on in eﬂec t al l u use of i s a s e , a tho gh the the word “ ” deposi t seems at ﬁrst to suggest an entirely ff i its on e di erent dea of character . In the case of i l s of i i i u i vi mportant c as bank ng nst t t ons , sa ngs an d i r c om banks , the sav ngs depa tments of i l i are ue merc al banks as well , al the depos ts d to i u i u for the rece pt of money or s bst t tes money . Savi ngs banks do n otcreate deposits when they make loans ; they simply invest or lend an amount whi ch does not exceed their capital and surplus n i l ui a d the depos ts previous y acq red . Other l i banks do more than thi s . They end the r credit and are able to do so because they provi de substi tutes for coined money which are generally accept able for most purposes . i i The other lead ng operat ons of banks , when l l l i ana yzed , can a so be reso ved nto cases of the e a of i i i or of i xch nge r ghts aga nst r ghts , r ghts

‘ Itis true thatmoney may be leftas a special deposit with a an ustas ate e we s or oter valuaw ma be i n w i c b k, j pl , j l , h y , h h case th e i en ti ca mone e osite is to be re turne and th e , d l y d p d d , bank con se quen tly does notacquire the property in th e thi ng

e osi te butis mere en truste wit its tem orar custo . d p d , ly d h p y dy is owever is n ota an i n o eration an d th e e ositin tis Th , h , b k g p , d p h case is ma e wi t th e an not e cause i tis a an but ecause d h b k , b b k , b itowns t a strong vaul . 1 6 sc oun t os tan d ssu Di , Dep i , I e

f r a ai mon . o a g nst ey As , ex mple , when the bank, for c on n i c of its c us om r or osi the ve en e t e dep tor, undertakes to c ollec t a note due to h i m by some

ir a i n i c as amo n th d p rty , wh ch e the u t pai d to the bank in money by the promi sor i s p

c r i of ro i s as a osi the ed t the p m ee dep t . H bank h as rec eived money for the ac c oun t

osi or an d h as i to h im i n c a dep t , g ven ex h nge a to draw atpleasure for the amount or an y r o ro i n mo ac the e f , the p perty the ney tually having passed absolutely to the bank i n

i r i n for r to a . a a the ght d w And g , when the bank

u rom a m rc a i of c a or b ys f e h nt a b ll ex h nge , when i tsells a bill of exc hange drawn by itself on some c o o n it ff an c a rresp nde t , e ects ex h nge of money a ai a ri of i a ai mo g nst ght , or a r ght g nst ney , strong l i n os a c o si r y resembl g th e alre dy n de ed . And so too if i n an of c a su i , , y these ses any bst tute or

ui a for o i s us i s a o eq v lent m ney ed , n te d f money i s ran sac i o i s i an c an of ri t elf , the t t n st ll ex h ge a ght on the on e Side an d some mean s of payment on the o r a omi ro r of the , the l tter bec ng the p pe ty the bank .

a u far for of si i c i We h ve th s , the sake mpl ty , “ ” spoken only of the rights to rec eive mon ey

ou a i n on e c a of c as an o b ght by the b nk l ss es , d s ld

o B ut r r i s by iti n an ther . whe e the e a right to

i on of c i r i s rr rec e ve the part a red tor, the e a co e sp on di n g duty to p ay on the part of the debtor ; n s i or c r i i rom a d the e r ghts ed ts , when v ewed f the

i r r or or i a i i i r a e . othe s de , , the ef e , debts l b l t es The

1 8 scoun t os tan d ssu Di , Dep i I e

o i or a i n i 1 dep s t p ys money and rece ves notes , or re c e ive s notes in sati sfac tion of a demand of any kin d i a i n c r o use aga nst the b nk , he , fa t , fo eg es the of the money itself and consents to receive i n i ts stead mi to a u c i a pro se p y pon demand , and to re e ve vi c of a ro i i n o of o the e den e th t p m se the f rm n tes .

u s i o i n i c or o h i s ri The q e t n , wh h f m he shall h ld ght of ma a i i s on e c i de nd ga nst the bank , to be de ded by the nature of h i s business or by h i s present c on ve n i en c e but ai i i of hi u i o In , pl nly the dec s on t s q est n no way alters the relation between himself or any ra r of h i s ri on on e a t nsfe ee ght , the h nd , and the on i u bank the other . The notes ss ed by a bank are thus a li abili ty di stinguishable i n form only om its i a i i for o i an d u i f fr l b l ty dep s ts , the f nct ons o i an d i u o of at o i of i depos t ss e , sp ken the pen ng th s c a r i a of i i i i s o h pte , nste d be ng d st nct , as ften assum are on e i n u a c ed , s bst n e . In the operati ons whi c h have n ow been c on sid ered the subjec t - matter involved i s i n every c ase

i mon or c o rac for a r e ther ey nt ts the p yment the eof . N 0 form of dealing i n merchandise or real property m ro r i i ro i c of a in c o es p pe ly w th n the p v n e b nk g . i asmuc as c o rac for a And , n h a nt t the p yment of mon ey may be vi ewed either as a c redit or as a c o i i ti s lo atro i debt , a c rd ng as oked f m the one s de or o a i i s om i c ri the ther, b nk ng s et mes des bed as the business of dealing i n c redits and sometimes as

In early Engli sh bankin g thi s was a c ommon practi ce an d no “ ou te ai n s th e rase ta e u mon e on teir n otes use d b xpl ph k p y h , d t 8 ti on e otL mbard Stree . . in e i s a . See a o l g l B g h , , p 9 scoun t os tan d ssu 1 Di , Dep i , I e 9

l For that of dea i ng in debts . the transac tion of i usi in r u th s b ness the modern wo ld both. of the f nc “ “ io i u si i i t ns d sco nt and depo t are nd spensable . a In order to be a b nk , at the present day , an estab li sh men tmust c arry on the purchase of rights to mo i n u u uri i de mand ney the f t re , or sec t es ; and unless iti s a savi ngs bank i tmust also lend its i u i in or its cred t , s ng some form other own engage s for a of ment the p yment money upon demand . i i l i ti s i i n If tpract ses the former on y , s mply an r its i a i i i vesto of own money, as any pr v te nd v dual if it i l l it i n may be ; pract ses the atter on y , may deed be said to be a bank of the Obsolete type of th e of butit l l Bank Amsterdam , then p ain y ceases to answer on e of the chief purposes of a vi z li i i i u l modern bank, . , that of enab ng nd v d a s to convert into immedi ate purchasing power u in u u such debts as may be d e to them the f t re . use i u i The of the th rd f nct on , however , that of ots i s i i l i issuing n e , not nd spensab e to the ex st n of w i u i s but e ce a bank , for , as has been sho n , ss e of i i e depos t , adopted for conven enc

' rd Str 2 2 mar tatth e s Lomba eet . 1 a re , p , k h r Th e are notban ke s. of a bank by th e internal-revenue actof th e Uni te d State s of 1 866 i nclu es ever erson ﬁrm or com an avi n s d y p , , p y h g place of busi n ess where credi ts are open ed by th e deposi tor collection of mon e or c urren c su ectto be ai or remitte y y , bj p d d u on ra tc ec or or er or w ere mon e is advan ce or loane p d f , h k , d , h y d d on stoc s on s ul i on i s of e c an e or romissor notes k , b d , b l , b ll x h g , p y , or w ere stoc s on s u i on ills of e c an e or romissor h k , b d , b ll , b x h g , p y " notes are recei ve for isc ountor sa e — I Statutes atLar e d d l . 4 g .

. I p I5 . 2 0 sc oun t os tan d ssu Di , Dep i , I e

i r r c and n otfrom nec ess ty . The e a e onditi ons under whi c h the li ability of the bank in the form

sir for use an d r are als of notes i s de ed , the e o c onditi on s under whi c h the li ability in the form of deposits better serves the c onven ien c e of i n divi du a a in als or of the c ommunity . M ny b nks every

n r r or c a on ir usi n s suc c cou t y , the ef e , rry the b e s ess

r fully without maki ng an y i ssue of notes whateve . In addi ti on to these essenti al banking Operati on s i nvolvi n g sales of rights to present payment t u u a m a i n on e rights o f t re p y ent , banks eng ge portant tran sac ti on whi c h involves n o immedi ate

m n ac c i of c ri ght of pay e t , They ept b lls ex hange uc i of drawn upon them bytheir c ustomers . S h b lls

c a o as ac c a c ex h nge , kn wn bank ept n es , can be more readily di sc ounted than trade bills ac c epted ’ a by the merc han t s own c ustomers . The b nk ac c eptanc e i s an indi spensable instrument i n for

i n ra er o i n to i an c e g t de , wh e , w g the d st e between

u r an d s r iff c i n a a an m b ye elle , d eren es leg l rr ge ents an d the c onstant ﬂuc tuations i n foreign exc hange

s iti s ar i c u ar n c a a c r ai rate , p t l ly e ess ry th t e t nty of

a m s a r rom all ou p y ent h ll be f ee f d bt , and that the obligati on shall be readily salable to dealers i i a in in fore gn exc hange . Unt l recently b nks the United States were n otpermi tted to ac c ept bills

c n a u o m i n i of ex ha ge dr wn p n the . Th s e t rely proper power was granted to the nati onal banks a s of 1 1 i a by the Feder l Re erve Act 9 3 , and leg sl ti on to the same effect h as also been passed in a f number o the States . scoun t os tand ssue 2 1 Di , Dep i , I

It must be added that incorporation by law i s not a nec essary c onditi on of the exi stenc e of a i n if n . i u an d a d o l r bank D sco nt depos t , lega p o hi bition i i u lso ma i ex sts , ss e a , y be carr ed on by indi viduals an d ﬁrms as well as by inc orporated in c u i o c ompanies . It is true that dis ss ns of banki ng iti s usual to gi ve almost exc lusive atten

i to i c ar u t on n orporated banks , p tly beca se they

u u l mor i o c o s i cu u are s al y e mp rtant and n p o s , and partly because their affai rs are in some degree open fﬁc i l i s c io so a u i to o a n pe t n , th t the nat re of the r busi i s n ot a il a ness e s y concealed , where s the trans actions of private banks are usually known only o c o i i s to the pers ns nc erned . Investment bank ng ill l in of i i st argely the hands pr vate bank ng ﬁrms , butin all c ountries c ommerci al banki ng i s tendi ng to be conduc ted almost exc lusively under th e CHAPTER III

BANKING OPERATIONS AND ACCOUNTS

HAVING thus taken a general view of the nature f i o r i o iti s n ow c a o bank ng pe at ns , ne essary th t we should enter upon the consideration of some of il their deta s . ll u i For a bank , as we as for any other b s ness , it i s requi site that a capital should be provi ded at o a o i o the outset . There can be no c nst nt pr port n be tween the amount of thi s capital and the exten t i it of the business whi c h may be bu lt up by s means . The larger the business that can be c arri ed on i i i c i a r ill w th safety w th a g ven ap t l , the large w be r i c ar the field f om wh h profits can be e ned , and the hi gher the proporti on which the profits will bear to the origi nal investment ; butthe point at whi c h the extension of the business passes

i of i i c i rc u a c of the l ne safety , var es w th the mst n es i c u i of u i s c a i the part lar bank , the k nd b s ne s rr ed on i i i tan c o i i by those deal ng w th , d the nd t on of i i i s t i the commun ty i n wh c h it es abl shed . The attempt has sometimes been made to limit by law for incorporated banks the proportion of trans 2 2 Ban ki ng Operations an d Ac counts 2 3

i of c i 1 acti ons for a g ven amount ap tal. Recent legislation in a few of the Western States limi ts the ac ceptan ce of deposits to ten times the paid i s in capital or capital and surplus . It plausibly argued that such provi si ons have no foundation o c u a too ou except a c nje t red aver ge , r gh to be of in an i i i ual a servi ce y nd v d case , and th t the j udg so i c i men t of the per ns most nterested , a t ng under of e - i i s r the law s lf preservat on , far mo e trust n i l i i i B uti n worthy than a y leg s at ve dec s on . the r i i s u United States , whe e bank ng cond cted by thousands of local banks many of whi c h are very a nal"and managed by men of limi ted business e i c i a i l uc of ir xper en e , these cons der t ons ose m h the c i l an d u lu i for e . The cap ta s rp s of a bank prov de a margin of safety against loss to those whose u it funds have been entr sted to . Those who man age or control the undertaki ng should have some

i at ak an d i ma r th ng st e , th s stake y very prope ly i i be enlarged w th the growth of the enterpr se . It is th erefore to be anti c ipated that an increasing number of States i n whi c h there are man y small banks will adopt the poli cy of requiring a c apital investment in some deﬁni te proporti on to the i depos ts acqui red . Th e i l i s cap ta to be provided at the outset , of c u i n c a i a c o i o rse , the ase of pr vate b nk , the ntr

bution in i . of the partners , as any other undertak ng

to . . th e law in Massa ite oans c usetts ormer im E g , h f ly l d l ou e th e amoun tof e i Statute s o 1 860 th ca tal . See General d bl p f , c~ 2 57. t5 . 2 4 Ban ki ng Operation s an d Ac c oun ts

In the c ase of an inc orporated bank the capital i s divi ded by law into equal shares or units of l w f amou as e . . un a o i ﬁxed nt ; g , der the the Un ted a a c a i a of i s i i i o St tes , p t l d v ded nt shares of $ 100 eac h ; an d these shares are c on tri bu

i i i ual a o r i n uc ro ted by the nd v d sh reh lde s , s h p law m as porti on as they please . The ay a matter of publi c poli c y limi t the proporti on of c apital

oc to o b an on e i i i u l or st k be wned y y nd v d a ﬁrm , and itmay also limi t the li ability of shareholders for due i n c a of i ts ai debts by the bank , se f lure ; buti n ra i n a c of ci l o i o gene l , the bsen e spe a pr vi s ns

to c o r o i an d i a i i i the nt ary , the p wers , r ghts , l b l t es of every shareholder are n ow usually determi n ed by the number of shares of the stoc k c ontributed or

i c i o o ir r n owned by h m . In the ele t n f d ecto s a d of offi c r for i i a a other e s , the mmed te man gement of u i r a i its o r to c a the b s ness , eve y sh re ent tles wne st on e vote ; the dividend of proﬁt i s allotted in the r i o of ar o an d c o i u i to m at sh es wned , ntr b t ons eet if r ui ll in losses , eq red by law , are ca ed for the same i o rat . The c apital subsc ribed by the intending share holders must nec essarily be paid in i n money or i n o i s n ot c ss the legal tender f the c ountry . It ne e ary o ou ai in u but that the wh le sh ld be p d at the o tset , the payment of the whole usually prec edes the full a i of u i in c a est bl shment the b s ness ; and , the se of i c o a law uir n rporated b nks , the often req es that

i r r i o . n o o e . o s me deﬁn te p po t n , as g , paid i n before the opening of

2 6 Ban king Operations an d Acc ounts

i i a ili for in i n di s meeting th s l b ty , or expla g the i of h as c i pos ti on made what been re e ved . As the bank requires banki ng-rooms and a cer tain supply of furniture and ﬁxtures for the con

ni e n tran ac io of i ts usi ma su ve t s t n b ness , we y ppose itto expen d of its cash in provi ding thi s

r i ui m . u oc u eq p ent The property th s pr ed , w th

r mai n i i n c wi l the e ng ash , l then be the aggregate resourc es by means of whi ch the c apital i s to be ac counted for,and the account will stand as follows :

Resources

Rea estate urn iture l , f t tures e c . a ita ﬁx , C p l Speci e

a c o The b nk , however, annot answer the purp ses its i c or o for i ts o of ex sten e , earn a pr ﬁt shareh lders , until its idle cash i s c onverted i nto some ki nd of i r - i c i s i u nte est bear ng se urity . Nor teno gh that a permanent investment of the ordinary ki nd Should ma as i c a of be de , by the s mple ex h nge the cash for o o ail a s u i i i s g vernment b nds or r w y ec r t es . It the c hief business of the bank to afford to pur a r a of u i i i ch sers and deale s the me ns s ng , by ant c ation u hi c i a m in p , f nds w h are rece v ble by the the

u ur n i i i urc as ri f t e , a d th s mpl es both the p h e of p “ vate securities or business paper to a c onsider

l al r u c an d l ab e extent , and so f eq ent hange renewa Ban ki ng Operation s an d Ac c oun ts 2 7

i i u . a i of p rchases Moreover , wh le the pr v te cap tal istﬁnds itadvantageous to mak e simple invest

s of a i ou i nl ment a perm nent sort , th s w ld pla y be ci n tfor o of insufi e the shareh lders a bank , who have to pay from its profits some seri ous expense s a o r of man gement , and need , theref re , a la ger field for earnings than the ordinary returns on their

u u ro o r c mpital alone . F nds sec red f m the sour es provi de the means for the bulk of the Operations s u in c as of a i of all banks . The e f nds the e s v ngs ban ks ar e ac quir ed entirely through the rec eipt of

rc i l k o r c i o i si . o a al depo ts C mme ban s s e e ve dep s ts , butthey ar e al so able to extend their operations by lending their c redi t both in the form of notes

i iff r and of depos ts. Another fundamental d e enc e between c ommerci al banks and savi ngs banks o al o o o i s o o sh uld s be n ted . M ney c mm nly l i s i p aced w th av ngs banks for long peri ods. De

i in c omm rc ial a i ori pos ts e banks , wh tever the r

in co s a i n u c uri of g , are n t ntly be g sed . Se ty the principal an d the rate of return are therefore the essential c onsiderati ons in the selec ti on of i n vest s i o c ia ment by sav ngs banks . C mmer l banks u in a i io m m st , dd t n , endeavor to keep the selves in i l i ui i i i a h gh y l q d cond t on atall t mes . Most of the c ondition s of the case are best “ ” answered by the discount of commerc ial paper as c i u above des r bed . The time for whi ch s ch obligations have to run varies with the custom of a i c i ri buti s i n the tr de wh h g ves se to them , most cases short enough to imply early repayment to the 2 8 Ban kin g Operation s an d Ac counts

u o i bank . And even where c st m g ves the paper im if a i s i s us o longer t e , the p per t elf ed nly as a s c u i n i c i c ollateral e r ty , the ote wh h s the ac tual objec t of negoti ation with the bank i s by prefer sua ma n ot c six o enc e u lly de to ex eed m nths . It mi ght seem easy then to arrange the purchases i r c to i of a of paper w th refe en e the t mes m turity, so as to provi de for a steady suc c essi on of pay

to a an d u ac i i r ments the b nk , th s f l tate the educ tion usi s if c ar or its ir c i of the b ne s , ne ess y , d e t on into c a as u c oo o i c ma new h nnels , pr den e or g d p l y y r i r r ai of rom a equ e . The ce t nty p pt p yment at m u i for i e n d i s r i at r ty , needed th s , p esented n a hi gh degree by the paper c reated i n the ordinary

f si n e ss I course o bu . Independently of the c ol

a ra s c uri hi c a ma o l te l e ty w h the b nk y h ld , the wri tten promi se of a merc hant or man ufac turer to pay on a ﬁxed day i s an en gagement whi c h involves the c redit of the promi sor so far that failure i s an ac tboth of legal insolvenc y an d of c ommercial

c i m n i s on or . u n c d h Sele ted w th j dg e t , the , su h paper i s n ot only the i n vestmen t whi c h most ’ c ompletely an swers the purposes of the bank s

1 Th e re ports of a large c ommerc ial agen c y Sh ow thatbetween 1 8 79 an d 1 916 th e n umber of failures i n th e Un ited States was a e r on e e r c e n tof th e w o e n um e r of ouses re orte little un d p . h l b h p d h i t er c en tof i ures rec or e usin ess T e es . a in an as in b . h gh p f l d d y ’ r c e n tin 1 8 See B radstreets an 8 1 n ar was e . . . 1 6 . o e ye p 93 , J , 9 For a c uri ous e stimate showi n g thatth e liabi liti es of fai led ﬁrms o ess tan on e our of on e r c of th e in 1 8 74 amoun te d t l h f th p e en t. tota c omme rc ia i a i iti e s of th e c oun tr for th e ear see Com l l l b l y y , merci al and Fi n an ci al Ch ron i cle e ruar 1 8 . 1 2 . , F b y , 75 , p 9 Ban ki ng Operations an d Ac coun ts 2 9

c uti s o a i existen e , b pr b bly as safe as any nvest ment whi c h could be found . asi a It may e ly h ppen , however, that the bank may ﬁnd itdesirable to invest a part of its re sour in m o o m i au o c om ces so e ther f r , e ther bec se g od mercial loan s cannot be proc ured in sufﬁcient i c hi c a it u or a ma . amo nt , as tter of pol y In t s se will purchase suc h other securi ties as offer n otonly of i m but ssi i i complete safety nvest ent , the po b l ty

2 of easy c onversion into c ash in case of need . i ou i a In th s c ntry Un ted St tes bonds , and many ri i of a u i ci al an d c ora i desc pt ons St te , m n p , orp t on

n i w r i r s oc ul bo ds m ght ans e th s pu po e . St ks wo d

o rar an it i m r i to m re ely swer , be ng o e l able the ﬂuctuations in pri c e c aused by mi sfortune or the i ci ssi i s o a of ord nary vi tudes of bus ne s . M rtg ges l o ul n ot dmi i rea estate , h wever , wo d be a ss ble ,

as a u i c o a ral to o except when held sec r ty , ll te s me o i c is o a i o i for ther wh h m re e s ly c nvert ble , even when the mortgaged property i s so ample and sta to i ur s o a ble as ns e the goodne s of the m rtg ge , the conversion of the mortgage into c ash by sale i s not l a i s c i iffi c u at o a w ys easy , and espe ally d lt th se times when the bank most needs to have all its

u c at m . a reso r es com and Indeed , the d nger to be

Th e li qui d ness of th e vari ous ki n ds of bank loans and other ssets is urter c on si a ere on . 8 2 f h d d p below. 3 Se e in th e re orts of th e Com tro er th e Curren c th e , p p ll Of y , " “ " Uni te States on s an d on s and oter se c urities e tc d b d b d h , , held by th e national ban ks an d amoun ting to in Ma 1 y, 19 6 . 30 Ban ki ng Operations an d Ac coun ts

o i n u of ou apprehended fr m the lock g p res rces , i n sec urities whi c h may be solid butare not easily

i s so r at a ith as i to realized , g e , th t been sa d be the ﬁrst duty of the banker to learn to distingui sh o a a h i s u i i between a n te and mortg ge , b s ness ly ng n i m f i wi th the former . As a nvest ent or sav ngs bank s an d for the deposits i n the savings depart

of omm i a a o - c ments c erc l b nks , h wever, well sele ted

r a are i l ui a an d ac r i i n mo tg ges ent re y s t ble , co d ngly 1 913 the national banki n g law was modiﬁed to permit the nati onal banks to invest a porti on of i im o i i n i wa l s a the r t e dep s ts th s y. Rea e t te , of u c a o r a a i c u i co rse , nn t be eg rded as a b nk ng se r ty, however desi rable itmay be as an investment for i i i ua for i ti s n oto u c to r a ﬂuc nd v d ls , nly s bje t g e t ti on s i n u buti s at im un a a tua val e , t es s l ble ; and the law of the United States therefore wi sely pro it i m n in it io h ib s nvest e ts by the nat nal banks , exc ept so far as i s nec essary for the ac c ommoda i sm ti on of the r bu ess. The results of th e proc ess of investment in c om merc i al paper an d in other sec urities are best understood when we trace the effec t in the ac c ount

i c c o n i of the bank . Tak ng then the a u t as tstood n a 2 6 us u o a a u o p ge , let s pp se th t the b nk b ys a r or s c uri i ro os i i itor p pe e t es f m th e deal ng w th , , “ i n c ommo ras o to i t s the n ph e , makes l ans s cu omers to am u of a t , the o nt the p per bei n g in many piec es an d having vari ous lengths

n u r i n of i to ru b ta a a ou r mo . t me , ve g g b t th ee nths Supposi n g the interest to be computed atsix per Banki ng Operations an d Ac c ounts 3 1

h u . u cent , we s o ld have the acco nt changed by the operation as follows :

Resources Capital Ree l estate urniture , f ,

tures etc . Un i vi e ro ts ﬁx , d d d p ﬁ Deposits

Here we have the sec uri ties whi c h c ertify the right of the bank to demand an d rec eive at a future date plac ed among the resourc es ; the oc s of s uri i a net pr eed the ec t es , or the ggregate of the sums whi c h the ban k holds itself liable to pay m on ma a a o ia i i i for the de nd , st nd m ng the l b l t es

si i uc in a as depo ts ; and the nterest ded ted dvance , or o o i i a the pr ﬁt on the perat on , wh ch the b nk must

o i ac c ou c at the pr per t me nt for to the sto kholders , l i i i i i s a so stands as a l ab l ty Th s , however, the condi tion of the ac c ount at the moment of maki ng i a ma its ur the nvestment , when the b nk has de p i i i i i chase Of securit es by merely creat ng a l ab l ty . i i i i i s l u me t As th s l ab l ty rea and m st be , so far as i r i to r itle t the depos to s at any t me see ﬁt p ess , us suppose that depositors c all for c ash to the amount of and we shall have a further change i n the account as follows :

As thi s profitis notrea li zed until th e disc oun te d paper is na ai th e interest e uc te in a vance ma be carri e to a fi lly p d , d d d d y d se arate ac c oun tfor th e time ein to be trans erre ate r to th e p b g , f d l un i vi r i s me to is n o uni versal owe ver and e o i ts. t d d d p f Th h d , h , i n th e prese n tdi scussion th e simpler state mentappears to be sufi i en c t. 32 Banking Operation s an d Ac c ounts

Resources

Loans Capital tate e tc Real es . . Un i vi e ro ts , d d d p ﬁ 8 0 000 D e posits

i s c a a u r It le r th t , nless the enfo c emen t of the li a bili ty for deposits and c onsequent withdrawal of

s c i o muc a a i s pe e g es h f rther th n th , the bank c an

a i n c as its oa or its u c as of c uri i s fely re e l ns p r h e se t es , although its method of doing so i s by the i n c rease

of its i a i i i . i su os i t r or to l b l t es We w ll pp e , the ef e , have expanded its affai rs un til ith as reac hed some thi ng like the average c on diti on of many of those

a i n n i a i c i n i n b nks the U ted St tes , wh h , be g c or

orate d un r a s of ra a e p de the l w the seve l St tes , ar ori to i u o i n otauth zed ss e n tes . It w ll then stand thus :

Resources

Loan s Capital Bon dsan d stocks Surplus Real estate Un di vi ded proﬁts Other asse ts Expen se s Cash i tems Spe ci e Legal-ten der n otes

Postponing for the present the consideration of for rs i it some terms whi c h here oc c ur the ﬁ t t me , appears from the above ac c ount that loans and

34 Banki n g Operati on s an d Ac c oun ts

or i n on e a to i bank , the banks pl ce , heav er occa u m s ma on o si o al de and , or y the ther hand make a i i s demands ste d er, than the case elsewhere ; and a c ity bank may be more subject to heavy osi r ou calls from dep to s than a c ntry bank . In

r l for i n its ac u gene a , then , every bank , pl e and nder i c a of im r i s o i the c r umst nces the t e , the e s me l ne i c its i i of a c a ll below wh h prov s on c sh nnot safely fa .

ro i i of i c in c u Thi s p v s on cash , wh h the ac o nt last i c u c i c i l given n l des the ash tems , spe e , and lega i s c ll s r an d n e c es tender notes , a ed the re e ve , the sity of mai ntaining a certain minimum rese rve ﬁxes a limit to the ability of the bank to increase its sec urities . For obviously any increase of u i i a i s of a or u i sec r t es , th t , lo ns bonds , m st ord n ril ff i i a i a y be e ected , e ther by an ncre se of depos ts n c i or by a a tual expend ture of cash . In the one c ase the proporti on of reserve to demand li abilities would be weakened by the inc rease of liabilities ; i n the other itwould be weakened by the dec rease

s r r l of c a . a h If, then , the reserve we e al e dy as ow u c ou o a as pr den e w ld all w , or were thre tened by

roac i o o i o app h ng heavy demands fr m dep s t rs , no inc rease of sec uri ties could be made without serious i r sk . What proportion the reserve should bear to the liabilities whi c h iti s to protec t i s a questi on whi ch law o i a to the has s met mes ttempted settle , by re i i i i i u a i it i n qu r ng a certa n m n m m , le v ng to every dividual bank to determine for itself how muc h may i n i be requi red addit on to thi s mi nimum . And this Banki ng Operations an d Ac c oun ts 35

u as al ul is no do bt as far any gener r e can go . As u ui h as already been s ggested , the req rements for safety of di fferent banks and i n difleren tplaces t ar so u ui mus v y , and m st the req rements of the ti s I a atdifiere n . a u s i same b nk t me In f ct , the q e t on as to the proper amount of reserve never depends simply on the absolute ratio of the reserve to the ili i butal a i u u i li ab t es , w ys nvolves f rther q est ons as to the probable recei pts of cash by the bank o a a u itin and pr b ble dem nds pon , the near future . It c an only be said that the reserve should be u l i u imm i large eno gh , not on y to ns re the ed ate an l i payment of y probab e demand from depos tors , butalso to secure the bank from being brought “ " down to the danger line by any such demand . In the management of its reserve the bank itself i l n i i necessar ly fee s a strong co fl ct of nterests . On it i ll i c its u i i th e one hand , is mpe ed to n rease sec r t es s as i l iti s it ri a far poss b e , for from them that de ves its r i of l r u p ofits , and the retent on a a ge amo nt of

i l i s l l . d e cash fe t as a oss On the other hand , the i r uffi i n ma ntenance of a rese ve s c ent , not only to e able the bank to c ontinue its payments butto inspi re the public with conﬁdence in its ability to c i u i its i ont n e them , is a necess ty of ex stence , even though a part of its resources do thus appear to be

k l i . n al e u ept permanent y dle As a atur cons q ence ,

Th e Ban k of England may be conten twi th a reserve amount i r tof ts de osi t as In Oc to 1 88 or itma n to e cen . i s er g 33 p p , b , 5 , y be uneasy with a reserve exceeding so per cen t" as in th e autumn of 1896 36 Ban ki n g Operation s an d Acc ounts th e actual settlement of the questi on i n favor of a large or of a small reserve i n an y particular case wi ll depend i n good measure on the temperament a i c of the managers . In every b nk ng ommuni ty “ ou o a i a c a i o may be f nd c nserv t ve b nks , the ut n of whose managers forbids them to take ri sks by extendi ng their business atthe expense of an ample reserve ; an d by their side may be seen the more ” c i a o a a i u a t ve b nks , wh se man gers h b t ally spread i ai an d o i for m l all poss ble s l , pr v de the stor on y when itc omes . It i s to be observed that the necessity of pro vi di n g a c ash reserve i s not met by the exc ellence f c u i i l a ou i o the se r t es he d by the b nk . Alth gh the r

r i a m atma u i a u ce t a nty of p y ent t r ty be bsol te , still the demands upon the bank are demands for a c ff c sh , and annot be answered by the o er of i o i or even the b est secur ties . If the dep s tor c redi tor does n otrec eive cash i n full for h i s demand i ti s ma h as i an d an a i when de , the bank fa led , y s t s fac ti on of hi s c lai m by the delivery of a security i s as it r on i ni of a i i i o of , we e , ly the beg n ng d v s n

ro of a a o its c r i the p perty the b nk m ng ed tors . ci r r or a i c i s u i u Spe e , the efo e , the p per wh h a s bst t te it al o al for as a leg tender for debt , f rms the re 1 f m . o n a banki ng reserve The reserve the ba k y, a s u i ci ou however , be gre tly trengthened by the j d s

s c ri i F r m if o i of u . o a i n selec t on e t es ex ple , , the a “ ” i an oc c ount above g ven , the bonds d st ks are , as

Bank reserves are further c on sidere d in Chapte rs VI an d

XXII . Ban ki n g Operation s an d Ac counts 37

ul ri i i they sho d be , of desc pt ons wh ch are readi ly la ff i n i ar i m a sa ble , they a ord ord n y t mes the e ns of i i in of replen sh ng the reserve case need , wi thout foregoing the enj oyment of an inc ome from thi s u amount of reso rces for the present . A more flexible method of securing the proper apporti onment of resourc es between securi ti es u di r c i cu s a c i s and reserve , nder or na y r m t n es , by i i or di i i s i loa or in o ncreas ng m n h ng the ns , , ther wo u c a c u i i a m rds , the p r h ses of se r t es m de fro day i f i to day n the regular course o bus ness . That part of the securiti es whi c h c onsi sts of the prom i ses of indivi duals or firms to p ay to the bank at a i s m u of ma uc i of fixed d tes , ade p ny s h p eces omm ci al a a u i if ro r c er p per, m t r ng , p pe ly mar

i r s ssi sh alled n o a a uc c o . a , t le bly te dy s e n The p y ment of on e of these engagements when i tbec omes due ma i i n mo or sur may be de e ther ney , by the render to the bank of an equal amount of its own i i i i i i a l n . l ab l t es , as w l be shown the next ch pter o a u i In the f rmer case , the p yment of the mat r ng paper to the bank i s in fac t the c onversion of a s uri i o i c s s i ec ty nt cash , and n rea e the reserve w th outc a i i a i i i i n a h nge n the l b l t es ; the l tter, the reduc tion of sec urities i s balanc ed by a reduc tion of li abi lities whi c h rai ses the proportion of reserve . “ ” n its i u its If , then , the ba k stops d sco nts or i t n i n u i i if it a nves me ts new sec r t es , or even sl ckens its u i i i u i m sual act v ty i n mak ng s ch nvest ents , the regular succ ession of maturi ng paper Will gradually strengthen its reserve ; if itincreases its activity i n 38 Ban ki ng Operation s an d Acc ounts i it ill its v nvestment , w lower or weaken reser e ; and if itadjusts the amount of its new investments to the regular stream of payments made by its

or it of its debt s, may keep the strength reserve u al r i c a i n c i i of n te ed , unt l some h nge the ond t on affai rs brings cash to itor takes cash away by some

r c othe pro ess . Thi s natural dependence of the reserve upon the more or less rapid reinvestment of its resources by the bank i s distinctly recognized by the law of the i a i c o i a Un ted St tes , wh h pr v des th t when the reserve of any national bank falls below the legal i i u uc an ll n oti its li a m n m m , s h b k sha ncrease ” biliti es i l or i c u by mak ng any new oans , d s o nts until its reserve has been restored to its requi red r i I s li c a i o of p op orton . By a les harsh app t n the a i c i l of o s me pr n p e, the Bank England perates upon its reserve by lowering or rai sing i ts rate of i sc ou an d u c ou a i or i c u i d nt , th s en r g ng d s o rag ng

i c i on itwas i a i appl at s for loans . And w th v ew of faci litating the repleni shment of the reserve by

cu ai of an a law of ui si a the rt lment lo s , th t the Lo na formerly provi ded that the banks i n New Orleans “ ” oul o r c ll i sh d h ld what we e a ed short b lls , or

a ma u i n i i i to m u p per t r g w th n n nety days , the a o nt of two i of i c a i a i i i so a th rds the r sh l b l t es , th t the c onstant stream of payments of suc h paper mi ght always insure to every bank the early command of of i ts s 2 a large part re ourc es .

vi s d a u s he i d 1 1 Re e Sttte of t Un te States, § 5 9 . 2 Se e some remarks on th e e xc ellen teffec ts of th e Loui siana Ban kin g Operations an d Ac c ounts 39

The reduc tion in li abiliti es and increase in cash through the payment of maturing loan s will n ot be secured unless the bank refrai ns from making oan ui al i s c new l s to an eq v ent extent , and th ourse ac i o i s u wi i ou a of t n freq ently beset th ser s obst cles . If a ban k i s to c ontinue as a going concern e n

in a u i it i r gaged a profit ble b s ness , cannot ent ely s r i t di sc ontinue it lending ope at ons . It holds i s busi ness deposi tors largely through its readiness at all times to furni sh them a reasonable amount m a i o in im f o . o u of acc m od t n Moreover , t es ac te financi al strai n general loan contraction h as i n u i o si are vari ably been fo nd to be mp s ble . These matters whi ch will receive more detai led consi der i i n u u n a at on s bseq e t ch pters . u i n c u i to i To ret rn , oncl s on , the account g ven on 2 a i a i i i i p . 3 ; we h ve there among the l b l t es certa n “ “ sums classified as surplus and as undivi ded ” u profits . Taken together these s ms represent the i ma but i profits wh ch have been de , not d vi ded

o c o i c are t r am ng the sto kh lders , and wh h he efore ou for to be acc nted by the bank . The surplus i s that porti on of these proﬁts whi c h as a matter of poli cy ithas been determined n otto divi de

a o r tto ai and p y over to the stockh lde s, bu ret n in u i i n a al u i n a the b s ness , as f ct , tho gh not n me , an i i to i l i i a . a i o add t on the c p ta The rem n ng p rt on ,

u i i o i s rom i the nd v ded pr ﬁts , the fund f wh ch ,

' s stem Samue Hoo e r Theor and E ec ts o Laws Re ulati n y by l p , y ﬂ f g g S e i ank l Ac o c e i n B s 18 60 . For th e aw i tse ts the F teenth p , lf, f if i Le s ture o Loui siana 1 . la 8 2 . g f , 4 , p 34 40 Ban king Operations an d Ac c ounts after payment of current expenses an d of an y w i c ma o u i i losses h h y cc r , the next d v dend to the stockholders will be made . The current exp enses are for the present entered on the other side of the

c c oun as ai u a t , they represent a cert n amo nt of c ash whi c h h as di sappeared ; butatthe peri odi cal settlement of ac c ounts they must be deducted from the undi vi ded proﬁts and wi ll thus drop outfrom “

s a . a r o the t tement Other ssets , he e set d wn as i m ma u o c o an o an nvest ent , y be s pp sed to ver y f rm of property held by the bank and not otherwi se as i but s i ou ul c u i i cl s ﬁed , e pec ally the d btf se r t es , or uc r r n ot o r a i n s h p ope ty , pr pe ly de lt by a bank , as itmay have been necessar y to take an d to hold m a i for u o of u i m te por r ly , the p rp se sec r ng so e debt

s c o r l r m wi a . Fo a not other e re ve b e ex ple , although c u n ot o i in a the bank o ld pr perly nvest a mortg ge, itmi ght be wi se for itto ac c ept a mortgage in set tl men twi an m a as an e th e b rr sed debtor, d in thi s “ case the mortgage would stand among th e other ” ” a c as i m i . c u uc assets And , ﬁn lly , h te s n l de s h demands on indivi duals or other banks as are c ol lec tible i n c ash an d c an therefore fai rly be deemed f s the equi valent o c a h i n hand . In the absenc e of any legal provi si on limiting the c lassiﬁc ation of ma as ma a such de nds reserve , they y be reg rded as a of i c i n vi rtually a p rt the reserve , wh h the case before us may therefore be treated as made up ci an d - of cash items , spe e, legal tender notes. T o illustrate what h as been said i n thi s c hapter u o n i i ts aff i we wi ll now s pp se the ba k , w th a rs stand

42 Ban ki ng Operatio n s an d Ac c oun ts

a loss of $500 ; to mak e a semi -annual di vi dend of

ou c n of i i s c i f r per e t . , wh ch one half red ted to

c o r wh o a i r l sto kh lde s h ppen to be dep os to s a so , and on e half i s paid i n cash ; to sell of bonds at a c o profit of fifteen per c ent . ; and to arry f its r t u a c ou o undivi ded p ofits o surpl s . The c nt w uld then stand atthe beginni ng of the new half-year as follows

Resources Loan s Capital Bonds an d stock s Surplus Real estate Un di vided proﬁts Other assets Deposits Reserve

NOTE Itwill be observed thatin th e presen tc h apter th e term re " serve i s used stri c tly as den otin g th e provi sion of cash whi ch a an ee s atc omman to mee ti ts eman i a i i ti es —tese b k k p d d d l b l , h ei n its ia i i t for e osits in th e case n ow un er c on si e ration b g l b l y d p d d , n for n otes i n case s to be ta e u atr alan c es wi t ote r a d k n p l e . B h h an s i n arti c u ar tose wi t c en tra an i n in stitutions are b k , p l h h l b k g , lso c ommon re ar e as a artof th e reserve of a an Itis a ly g d d p b k . i n thi s sen se thatth e te rm i s n ow gene rally used in th e di scussi on of banki n g questi on s i n thi s c oun try and i n En glan d an d in th e ti ona an e i ti on of th e Unite tates h e term i s use na s a S . T l b k l g l d d , owev e r wit a i fe ren ta i cati on on th e Con ti n en tof uro e h , h d f ppl E p , an d oc casi ona ev en in n i s -s ea in un tri es In th e lly E gl h p k g co . Fren c h an d Ge rman l egi slati on i ti s used con stan tly in th e sen se of ” sur us as in th e ac ts c on ce rn in th e an of ran c e an d th e pl , g B k F Rei c s an an d so a so in tose c on c ern i n ta ian an d ustrian h b k , l h g I l A an s Iti s a so o iona s th e r e . c cas u e as in ase rese rv b k l lly d , ph ca ital to en ote th e un ai ca ital w i c s are o ers in p , d p d p h h h h ld many Engli sh j oi n t-stock banks are boun d to contribute in case of n e ai n e tth e e i nn in of tis te r In th e resen t e as e a c a . d , xpl d b g g h h p p di scussion th e term i s used solely in th e restri cted sen se noted a ove b . CHAPTER IV

THE CHECK SYSTEM

IN the precedin g chapter referenc e has been made more than once to the transfer of deposits o o i c by one h lder to an ther, and to the r onsequent

rr i s use as cu ency . It now necessar y to examine more c losely the si mple mac hi nery by whi c h thi s i s si r s f . o tran fer ef ected The depo tor, the creditor of a k a a bank , who has to ma e p yment to some hi s i other person , has cho ce between two methods i ma ma of maki ng t. He y de nd money from the in ci hi s i di bank , the exer se of r ght as a cre tor, i i m i and del ver th s oney ; or, w th the assent of the a person to whom he has to make p yment , he may give to this person an order on the bank for the i s nl all a money , or what commo y c ed check . If he

adopts the latter method , a payment for goods or of a debt i s effected by the simple transfer of a right to demand money from the bank ; and so too if the recipient of the check gives it in payment to

s i o an d u . ome th rd pers n , he to a fo rth , and so on To this extent the check i s plainly made a substitute l re~ for the sum of money for which itcal s . It u n presents no particular money or gro p of coi s , for i i s li l , as we have seen , the depos t ke y to have 43 44 The Chec k System been created by the bank in exchange for some u i ou it i s o a a sec r ty b ght by , and , theref re , n ked i an d ai to i ul r ght to demand , not a cl m any part c ar c ash ; and even if the deposit originated in the lo i of m osi ith as i n hi dg ng oney by the dep tor, t s case also bec ome a naked right to demand and does n otimply any claim to the money ac tually

i B ut of i ri depos ted . the transfer th s naked ght , i n c a u o i s the se s pp sed , made by the agreement of the parties to serve the same purpose as the tran sfer of mo an d th e i u o u i u ney , r ght th s bec mes a s bst t te for mo ney . f i of i u i u i o The ef ect veness th s s bst t t n , however, i s increased and the use of the deposit greatly l iti s a i a pro onged , where the pr ct ce for the tr ns i to i c c i a feree h mself depos t the he k , nste d of de a i its a m or i hi s m nd ng p y ent by the bank, seek ng opportuni ty to use itin some payment of hi s

own . If we suppose all the parties concerned to keep i a c ou i i u the r c nts w th a s ngle bank , and s ppose a check for to have been drawn by A against hi s deposit i n the bank and given by h im to B i n n for oo s ma o i i c c h i s payme t g d , B y dep s t th s he k to own c i mo an red t as he would ney . The b k then s i n its ac c ou makes the nec e sary changes nts , canc els its li ability for to A and rec ognizes li i i i an d u a ab l ty for a l ke amount to B , th s the

i i s a c om . transfer of the r ght . by A to B m de plete i o a i or c a of c r i ors to w i c Th s n v t on , h nge ed t , h h the s i a a h as n oton c u bank h a made tself p rty , ly se red The Chec k System 45

’ B agai nst the possi bi li ty of ﬁndi ng A s deposi t in the bank exhausted by other chec ks drawn by u ul or i butit A fra d ently by m stake , has also made ’ B s right of demand agai nst the bank di vi si ble

asur i c i i of i at ple e , s n e th s, nstead a r ght to de a i sum mand determ nate , has now become a right to draw hi s own c heck or checks to an amount c i all i wa not ex eed ng in . In th s y checks become the instruments by whi ch rights to demand money may be transferred from one indivi dual to t i n uc am u i ano her , s h o nts as the transact ons be tween them may require ; and when we consi der the great security and conveni ence of tran sfer by suc h means as compar ed with actual payment in i s i of ur money , there l ttle need f ther explana ti on of the astoni shi ng exten t to whi ch checks u i l in li - k i are now sed , espec al y Eng sh spea ng com

If we u a i , now, s ppose the p rt es concerned to keep their accounts wi th different banks in the s i al ul ame c ty , we sh l have res ts somewhat more l ﬁ i comp ex butnot di eren tin kind . In th s case we may suppose the check drawn by A upon

. 1 si i 2 . Bank NO to be depo ted by B n Bank No . io l n If the transact n stands a one , the latter ba k ll ll an d co ects the money ca ed for by the check , h oldsitse lf li able to make payment to B on demand in u ui hi s u i s ms to s t pleas re . Th s makes a change

i butof rs not only of cred tors , debto , and yet at the l e a m n h as com c os , after the p y e t by A to B been leted a i n i ili th e p , we h ve ex stence a bank liab ty of 46 The Check System

same amount as that with whi c h we started . o in c ommu i r Probably , h wever, a n ty where the e al sac i u n ot were sever banks , the tran t on wo ld ’ a u i r stand alone . At the end of a d y s b s ness eve y bank would be likely to have rec eived i n deposi t c u o r an d r a s all of o hecks p n seve al , pe h p , the thers ; eac h would then have c hecks to meet as well as c hec ks to c ollec t ; an d eac h would naturally mak e its m i o n ot i settle ent w th every ther, by mak ng u ual ma u ual a m but m t de nds and m t p y ents , by the offsetting of demands and the payment only of suc h balance as mi ght then remai n due from on e r if t of a nk o o . u a d the ther Th s , the end the y Ba h ad r c i i si c c u o n No . I e e ved n depo t he ks p n Ba k to a o of an d 2 No 2 u . the m nt Bank No , i in i ma n c c s u . I a u l ke n er, he k pon Bank No mo nt ng to the ac c ount as between the banks would be settled easily by the p ayment of k 1 2 n . . ul by Bank No . to Ba No And the res t i s the same if the operati on here trac ed i s multi pli ed by the number of banks c arryi n g on business i wi th eac h other i n a great c ty . The settlement of c c oun i ac o o a ts by the banks w th e h ther , h wever , still leaves the banks c ollec tively under the same i a ili for a m on ma as or li a l b ty p y ent de nd bef e . The ilit r s u on itma i n i ff r b y e ts p the banks , y be , d e ent o or i on an d i s i i u pr p t s , d fferently di str b ted among the c reditors : butso long as p ayments are made by c c an d c c i i to ma he ks he ks depos ted , the r ght de nd from a ban k whi c h i s called a deposit c on tinues to ’ is i n om o o ssi o an d i s as w ll ex t s eb dy s p sse n , e Th e Chec k System 47

ﬁtted to di sc har ge the omoe of money as when it

was ﬁrst created . Thi s medi um of payment acquires great pertee ti on wherever the Clearing House system i s i r i s adopted . Under th s system the e a daily meeti ng of c lerks representing all the banks car ry u i atan c in g on b s ness y ommon center . Every bank ther e turns in ata central offi c e all the checks and c ash demands whi ch itholds agai nst i s c di i i s al c ar others and re ted therew th , and so h ged wi th all c hec ks an d demands brought agai nst iti n an d m li ke manner by others . The checks de ands whi c h have thus been credi ted to and c har ged c u u agai nst ea h bank are then s mmed p , and the c ou to o or due k balan e f nd be wed by to each ban , c as ma it a or i as the e y be , then p ys to rece ves r i n i a from the cent al ofﬁce money . By th s me ns a as of a i hi c ul great m s tr nsact ons , w h wo d other wi se require a seri es of demands by each bank u i n ac pon every other the same pl e , are settled at r i of ar u in once , and the t ansportat on l ge s ms cash from on e bank to another i s to a great extent

3 dispensed with .

statemen tof th e wor i n of th e c ec s stem un e r c i r A k g h k y , d cumstan c es of i feren t e ree s of com e i t i s i ve n evon s d f d g pl x y , g by J , one and M —2 the ec n i sm o xc ha n e 2 2 M ha . . y f E g , pp 5 57 For a urter n otic e of th e C earin House s stem see n ote f h l g y , on tran s r tion f re e to in h e te tis . Th e o ta o cas rre t p 57. p h f d x N eed to i ts min imum by th e prac tice some times adopted of “ ” using Clea ring House ce rtiﬁcates in stead of money or legal e er ese r re tmone or notes de~ b nd notes. Th c e ti ﬁcates presen y osite wi t th e C ea ri n House or wit some an w ic i s p d h l g , h b k h h its re resen tati ve for ti s ur ose and are a a le on eman p h p p , p y b d d ; 48 The Chec k System

i n a a i i s u e Where , as Engl nd , b nk ng cond ct d by instituti ons wi th head ofﬁc es i n large cities operat

um u a c ou ou c ou r in g n ero s br n hes thr gh t the nt y , all c hec ks c an be handled wi thout di fﬁc ulty thr ough us c on o a i Clearing Ho es . Che ks ther b nks depos ted

' ata branc h ar e forwar de d to the head ofﬁc e or to branc hes i n the more import an t c ities an d are

i n c us omar w si r then c leared the t y ay. A de f om the maili n g expense an d the nec essary en tri es on the books of the vari ous branc hes the proc edure i s simil ar i n all respec ts to that followed when a c hec k i s rec eived drawn on a bank in the same a pl ce . i a wh r i i s c o uc In the Un ted St tes , e e bank ng nd ted ou a of oc a a c o l i of by th s nds l l b nks , the l ect on c hecks drawn on a bank i n on e plac e an d de posited i n a bank i n another plac e involves greater

i i n i r c t c ompl c at o s . To send d e tly o all other banks the c hecks drawn on them would require a

be in g made i n c on ve ni en tden omin ati on s the y are used i n p ay me n ts between th e banks an d for th e purposes of reserve are rec ognized by th e law of th e Un i ted States as th e equivalen tof th e cas w i c te re resen t ese c e rti cates mustbe h h h h y p . Th ﬁ di sti ngui shed from Cleari n g House loan c ertiﬁ cates descri bed

e ow Ch . . b l , XI In Lon don ban ks an d banke rs keep large c ash balan c es atth e B ank of Englan d and settle with eac h other by tran sfe rs made te re si mi ar met o t th e an of ston h . A l hod was ad p ed by b ks B o u on th e eni n of th e e e an of oston 1 1 p Op g F deral Rese rv B k B in 9 4. Banks in othe r ci ti es i n whi ch there are Federal Reserve banks will p robably make settlemen ts i n thi s way when all members of t h e vari ous cleari ng houses bec ome members of th e Federal Rese rve an s b k .

50 The Chec k System

ma i u the nager of the Clear ng Ho se . Banks in a fe w other c ities have adopted simi lar arrange s buti n mo of c ou ment , st parts the ntry the keen competiti on of c ity banks for balanc es of country

h as r i u r b anks p oved an ns pe able obstacle . In additi on to interest at the c ustomary rate of wo c c i a f ri ou t per ent . ty b nks o fer va s servi c es

r ur for a a c mos im a in et n b nk bal n es . The t port nt of these servi c es h as lon g been the c ollec tion of

s i n a a a of m i i c hec k . Tak g dv nt ge the co pet t on a a c c u r a i n ma a of for b l n es , o nt y b nks ny p rts the country have made exc essive exc hange deduc ti ons i n remitting to banks elsewhere i n settlement of i own c c uc i o the r he ks . Often these ded t ns have far i n c of c of i i c u c been ex ess the ost sh pp ng rren y ,

hi c i itma a iti s om e c s w h ndeed , y be dded , seld n e

ci a a a or sary to send . The ty b nks h ve bs bed these exc han ge c harges butto rec oup themsel ves have requi red the mai ntenance of c ompen sati n g balanc es far larger than itwould have been n ec essary for

oun i ai n for o r u os c try banks to ma nt the p rp es .

am time wasteful im - c o sumiu m o At the s e , t e n g eth ds of routi n g c hec ks have been resorted to by the

c i a k i n or to r uc to a mi n imu ty b n s , der ed e m the

c an c r or i ex h ge ha ges whi c h they were abs b ng . Un der the operati on of the Federal Reserve a of c c c o l c i o i s i b nks, the system he k l e t ns be ng i i c rap dly un ﬁed an d improved . Ea h reserve b ank c ollec ts for its members an d also for non member banks within its di stri c t c hecks drawn on all banks throughout the c ountry whi c h will remi t T h e Chec k System 5 1

ar ar i s to any reserve bank at p . A ch ge imposed c os of i but r u to cover the t the serv ce , , th o gh the reduc ti on of balances wi th other banks an d of cleri c al expense an d postage made possible by c r i usi ll c io con ent at ng the b ness of check co e t n , the system i s li k ely to prove in the long run of s i c advantage to mo t banks , even to those wh h have been reaping proﬁts thr ough exchange

r c ha ges . i c i ula of The bank depos t , rc ted by means checks , i s the most c onveni ent medi um of p ayment yet f s t devi sed . A stroke o the pen tran fers i in what u i s for l c i o ever amo nt needed the argest transa t n , and thi s transfer instantly becomes the basis for o a i o i u i ai fresh per t ns , w th as complete sec r ty ag nst i o c i a i ic ac c dental l ss as an be m g ned . In the str t economi c sense thi s medium no doubt has rapi dity of i ula i in i il in c rc t on a h gh degree , wh e the sense of actual activi ty of movement in a given time it u ri m h s ll far o tst ps oney or notes , and a been we sai d to be the most volatile of all the mediums of i i a i i u exchange . Of the ent re c rcul t ng med m of i u it i m ar a th s co ntry forms nco p ably the gre test , al u i ar i tho gh the least cons dered , p t . Depend ng for its fﬁ i l l u i it e c ency so e y pon convent on , for the most part eludes the regulations whi ch legislatures so industriously enforce upon the other c on stitu cuts u te of the c rrency . Indeed , beyond the qui remen tof a minimum reserve made by the law i a and l of the Un ted St tes , of most of the severa a u i s uc States , we may say th t the s bject not to hed 52 The Ch ec k System

i i in i r e a c u o . by leg sl t on , th s o ntry lsewhere The nec essity for p ayment i n spec ie or legal -tender u a c i af uar of alu paper pon dem nd , the h ef s eg d v e, i s the result of general provi si ons for the p ayment of of an i c i su c debts y k nd . And the h ef as ran e against exc essive expansi on on the par t of any single bank or banker i s given by the c ert ai n ma om an d r u l m de nd for pr pt f eq ent sett e ent , occasi oned by the voluntary establi shment of the

ari n ou or a i of ommu i c le g h se , by the h b ts the c n ty butn ot law by . What natural li mit i s to be found then to the conti nued c irc ulati on of a li ability for d eposit; when onc e iti s c reated an d set i n moti on by th e “ ” proc ess of di sc ount " ai if atan s a o of a c in Pl nly , y t ge the h lder che k , a of osi i it ma i ts a m in ste d dep t ng , de nds p y ent on whi c iti s raw money by the bank h d n , the pay i i i i i i s to ur n n u a . me t ext g shes the l b l ty It , be s e , ui ossi a m a r a ri ci rc u q te p ble th t the oney , fte b ef

a i o ma its wa ac i n r s o i l t n , y ﬁnd y b k , f e h dep s ts of c as ma on e mor i i i u an d so h de by or e nd v d als , a new li ability similar to the old on e may c ome into

xi n c but n rt s ma ai r sa e ste e ; , eve hele s , we y f ly y that the use of the original deposit as a substitute for money came to a natural c lose with the p ay of c o i n c s ment the check . Ex ept , h wever , the ase r o i s m i u o whe e m ney required for so e spec al p rp se , as to be sent abroad or to some other part of the

un r i c of s oc in th e co t y , or for the n rease the t k a s of u li c i li i c i c ula i h nd the p b , th s m t to the r t on of Th e Chec k System 53

i i i s not . depos ts of great mportance For, as the wi thdrawal of speci e under ordi nary circumstan ces is merely the exc hange of on e medi um of payment an wi a al on r c al ul for another , y thdr w a la ge s e wo d imply suc h a change i n the habits an d preferenc es i c i s i l of the publ as not often or eas y made .

or i limi i s u o in A m e mportant t fo nd , h wever, the use of deposits for the payment of debts due to a i th e bank . Th t the depos tor can , to the extent hi s i due o i l of depos t , pay a debt fr m h mse f to ’ the bank by the relinqui shment of the bank s i o hi m d a . rac i debt to , nee s no explan t n In p t ce he draws hi s own check in favor of the bank and exchanges itfor the obligati on held against him

i u ual i for by the bank , th s m t release be ng each si de as effectual a di scharge of liability as a p ay n in ul u a me t money co d have been . S ch a p yment due i i u l of the debt by the depos tor, and prev o s y standing among the securi ties or loans of the al l i a i i a u l bank , ﬁn ly cance s a l b l ty of the b nk eq a in amount to that whi c h was created when the l x a i oan was made . It m tters l ttle by what pro i ri a u cess the depos t , or ght of dem nd , ﬁnally sed by the depositor i n payment came into hi s posses si i s c l on . If he a mer hant , he has probably co lecte d u i r due him smaller s ms wh ch we e to , for the u of hi s p rpose payment to the bank , and these smaller sums are likely to have come to hi s hands in a of c w i to a great extent the sh pe hecks , h ch , as i u i we have seen , were the nstr ments for transferr ng

Com are th e statemen tof acc oun tfor eration b on . 1 . p Op , p 4 54 The Chec k Syste

to h im the rights of demand whi c h others held orro against the bank . If he b wed the means of a i n ro a i i i p yment , he all p b b l ty rece ved the

c Nor i s c iff r amount in a che k . the ase d e ent

r ra a an d o i o when the e are seve l b nks , the dep s t r h as rec eived h i s c ollec ti ons i n chec ks drawn upon i wn was other banks than h s o . As seen whe n we were c onsideri n g thi s method of payment on osi of c c s to h is i page , 45 the dep t these he k cred t effec ts a transfer of the li ability from the other ban ks to hi s own ; and here also thi s li ability i s ﬁnally extingui shed when he uses itin payment of a hi s debt to the b nk . i s o i i a a n u It p ss ble , ndeed , th t the p yme t sho ld a o to a i n mo be m de by the debt r the b nk ney , or by

c c ra ai r si of mo a he k d wn ag nst a f esh depo t ney , and i n thi s c ase either there i s n o extingui shment of i a i i a m o li bank l b l ty by the p y ent , or nly the new a

ili t r r s o i i s i n ui b y c eated by the f e h dep s t ext g shed . B uti n a c ommuni ty where banki ng i s ﬁrmly an d

i s a i s ar a m n of c om w dely e t bl hed , the l ge p y e ts merc e an d of general busi n ess are c ertain to be

ma for os a i n i um i c i s de , the m t p rt , the med wh h most ac c essible an d most conven ient for use i n

ar sum an d i m iu i s un ou a l ge s , th s ed m d btedly th t

i s n i I whi c h c ommonly termed ba k dep os ts.

A seri es of i nve stigati on s made by th e Comptroller of th e o tatmore t e t er en tof th e ati on a Curren cy sh w h han nin y p c . N l n e osi ts c on si stof c e s and simi ar i n strume n ts Th e Ba k d p h ck l . followin g table pre se n ts th e relativ e pe rc e n tage of mon ey an d c reditsubstitutes for mon ey in th e deposits of th e Nati onal B anks on partic ular days i n th e years 1 8 96 an d 1909 Th e Ch ec k System 55

It appears then that deposits are created by the of a s are i c a the bank , when lo n n re sed , and that

r i s The e , rough correspondenc e between the i i c o of loans and of depos ts . Th s r respondenc e may be weakened by the actual ﬂow o or ro b ti n i of m ney to f m the bank, u the ord nary m of u i i ti s l l move ents b s ness tolerab y c ose , and where itfails the apparent exception wi ll be found to be explained by some speci al c ondi tion of the 2 i l u in l i case . It w l be fo nd genera that , at t mes

an are i c i i o ra i i when b ks n reas ng the r pe t ons , the r i an d a are ac i depos ts swell , th t when they contr t ng,

J ul I 1 8 Ma c 1 y , 96 r h 1 6, 909 Mon ey 7-5 4-7

C ec s e tc . - h k , 95 3 inle The Use o CreditInstruments or a ments i n the K y , f f P y

Un ited State s . 2 18 . , pp 9, 4 ’ For some stri i n remar s on ti s su ec t see Hamilton s k g k h bj , ' r tiona an on 12 r on a a Works Lo e e iti iii . 8 e o t s . p N l B k , ( dg d ) , , See a rl J ournal o E onom s a so u rte c i c i . 0 l " y f , , 4 3 . Th e wee l statemen ts of th e New or an s for ovem er k y Y k b k N b , 18 0 are a oo i ustrati on of th e movemen tof oan s an d 9 , g d ll l de osi ts ata eri o of reat nan cial i stur an c e w e n tere p , p d g ﬁ d b , h h was a heavy c on trac tion of loan s and some seri ous wi thdrawals of Th a re tes state i n mi lion s are as ollow : cas . e a s h gg g , d l , f

Loans Deposi ts November 1 8 ss u 95 5 IS 393-3 386-6 95-8 2 2 387-3 38 17 2 9 95 . For th e Spec ial con di tions aﬁecti ng th e banks during these wee s see the Com Fi na m k , mercial and nc i al Chron i cle , passi . 56 Th e Chec k System

u o i o their deposits fall. The tr e c nnect n between

s o m i s or o but its the e m ve ents often f g tten , nature c annot be mi staken by an ybody wh o wi ll observe the steps by whi c h an ordi n ary “ ” di scoun t i s plac ed at the c ommand of the

borrower . It h as already been suggested that the use of c hec ks i s most highly developed among the En gli sh

ri c a or n i s n speaki ng peoples . The Ame n E gl hma wh o i s in the habit of rec eivi n g an d maki ng fre quent paymen ts avoids the keepi n g of cash i n

n o i h i s r c i an d a c ha d , dep s ts e e pts , p ys all ex ept

a um c c . a c o u c the sm llest s s by he ks As nseq en e , the establi shmen t of a bank i s an early symptom of the growth of trade i n a small c ommunity of

on i n rac i c of Engli sh blood . On the C t ne t the p t e osi i i a a o or o an dep t ng w th b nk devel ped m e sl wly , d even n ow when thi s habit has bec ome general de posits are n otmade available for paymen t by the oi o n c ommon use of the chec k . C ned m ney a d bank notes are used for most payments an d c on se quently the banks are unable to extend credit i i i very far i n the form of deposits . The mpos t on of stamp taxes and the failure to surround the chec k wi th simple and effective legal safeguards suffi ciently ac c ount for the c omparatively slight i i i i s u use of th s mportant cred t n tr ment . Its utility h as i n rec ent years come to be very gen

e rall r c o i an d in i ou uro u y e gn zed , var s E pean co n tri es payments by means of chec ks are being urged n i i by banks a d publ c authorit es .

58 The Chec k System

t t o 2 i s c ar e wit an r ha N . h g d h d c edi ted an d so for th e ote rs an d te re ore tat h . , h f , h , o I owe s a a an c e of N . b l No 2 i s owed .

o o e N . 3 w s o owes N . 4

i s owed NO . 5

No. 6 i s owed

t n th e e tor an s os 1 an d a i n to th e N . e C earin If, h , d b b k , 3 , 4, p y l g House th e sums due from them amoun tin g to an d th e rin H ouse a s outto th e redi tor n s Nos 2 n ea c a . a d 6 Cl g p y b k , , 5 , , th e sums due to tem of i e amoun tth e resultwi be tatever h , l k , ll h y an wi i n effec t ave c o ec te a men tof all th e c ec s w i c b k ll , , h ll d p y h k h h ith ad rec ei ve an d will ave ma e a mentof all th e c ec s d , h d p y h k rawn a ai n stit is settemen tof c ec s amountin i n all to d g . Th l h k g will have be en made by th e paymen tof an d tran sac ti on s a aren t i nvo vi n ti rt se arate eman s e ac pp ly l g h y p d d , h an ein th e c re itor of ﬁve oters wi ave een sette a b k b g d h , ll h b l d by seri es of a i tion s ma e ata c en tra omoe o owe tree dd d l , f ll d by h a men ts to an tree a men ts rom a ommon un p y d h p y f c f d . In 1 1 th e New or C eari n House on e of th e two ar esti n 9 5 Y k l g , l g e i sten c e sette th e al an c es of si t-two an s an d trustcom x , l d b x y b k an i e s an of th e ssi stant reas re r f th e Uni te tate s d u o S . p , A T d

Duri n th e ear en e Se t. 0 1 1 th e avera e ai e x g y d d p 3 , 9 5 , g d ly c han ge s were an d these exc han ges were se ttled by th e paymen t of balan c es averagin g daily only Sin c e th e oun ati on of th e esta i s men ti n 1 8 th e a an c es f d bl h 53 , b l ac tua ai av e amoun te on th e avera e to onl er cen t lly p d h d g y p . of th e e c an e s eff ec te For urter e tai s re ar in C earin x h g d . f h d l g d g l g House ac tiv iti e s i n ti s an d in ote r c oun tri e s se e G Cann on h h J . . , ous f u i ti on s of th e ationa Mon r Cleari n H es on e o th e ca eta g , p bl N l y mi ssi on Com . CHAPTER V

BANK-NOTES

IT has already been sai d that the notes of a bank

i a i i i s i ui s a in m butn otin are a l b l ty d t ng h ble for ,

r i si or of u c o ts . c i s bstan e , f m depo ts The red t a bank of issue has hi s choi c e between taki n g the evi dence of h i s right in the form of a note an d a i i ti n oo For t k ng the form of an entry in a b k . hi s use on e form may be preferable to the other ; if i k a i n ll su s he des res to ma e p yments sma m , as

r if i s for wages , he may p efer to take notes ; he to a or c li a in make large p yments , expe ts a ttle del y use of hi s u i ui i the f nds , he s q te certa n to prefer

i c B r hi i i i . ut s be ng red ted w th a depos t , whateve i li ili of a cho ce , the ab ty the bank to make p yment in ma i s iti s u money on de nd the same , and nder the same necessity of provi di ng itself with a

ufﬁ i n to ic reserve , s c e t meet any demand wh h ri a l i u r expe ence shows to be prob b e . To ll st ate thi s part of the subject we will take the ac count i a 2 u si g ven on p ge 4 , and s ppose the depo tors to have drawn on e third of their deposits i n notes of i u r i the bank , wh ch have th s been th own nto i i c rculat on . 60 Ban k-Notes

Capital Bon ds and stoc ks Surplus Real estate Un divi ded proﬁts Other assets Notes Rese rve Dep osi ts

It i s obvi ous from i nspection that if any demand u o a a its r r itm s n o p n the b nk we kens ese ve , ake differenc e whether the demand i s from depositors or note holders ; the funds available to meet subse quent demands for payment are reduc ed to the am i n i as an d a s e degree e ther c e , the s me pre cautionary measures for repleni shment will have to i r s oa are ma a . so f be t ken And , f e h l ns de , the

a i o of r s to m i a i i i i s a r rel t n e erve de and l b l t es lte ed , whether the loan s are effec ted by an i nc rease of i law a a depos ts or of notes . The does not lw ys rec ogn ize thi s close similarity of the two ki nds of

i a i i h as s i s uir s for l b l ty . It omet me req ed a re erve ro c i o of o alon un r a ar n the p te t n n tes e , de the pp e t impression that this must sec ure the solvenc y of the an an d it om im ma a o i i o a b k , s et es kes pr v s n for

r of i r n m f r n o s as in rese ve d ffe e t a ount o the te , the

i o a - an s m of n i a a i nat n l b k sy te the U ted St tes , h v ng i n vi ew the different degrees of the probable deman d for payment of notes an d of deposits

c i 1 ar o r ro c o si a respe t vely . Ap t , h weve , f m n der

Th e ation a an s are now re ui re th e Ac tof 1 8 to N l B k q d , by 74, ave a rese rv e of on ﬁve e r c en tfor th e rote c ti on of tei r h ly p . p h n otes w i c i s e th e re asur as th e c en tra re eemin , h h h ld by T y l d g Ban k- Notes 6 1

i i s two o of li i i to t ons l ke the la t , the f rms ab l ty seem i i lf stand upon the same foot ng . The bank tse on e as in o ﬁn ds the same advantage in the the ther . Its proﬁt i s made from the sec urities whi c h it

o s it ak o h ld , and whatever proﬁt m es bey nd the mere interest on the investment of its c apital results from the holding of securi ties purchased by mean s of its c r edi t an d of the funds deposited wi th it; butthe rate of thi s proﬁt i s i n no way dependent upon the proc ess by whi c h that c redi t

1 i s transferred from on e c redi tor to another.

a i n s or i s i r si i n ro The b nk , h t , nte ested mply p vi di n g that form of c redi t whi c h i s most c onvenient on i c it for the use of the c ommuni ty wh h depends , for iti s by that means that itc an do the greatest amount of business an d hold the greatest amount

t to a enc . 18 Statute s atLar e 1 2 . Th e on s e osi e g y g , 3 b d d p d secure th e ci rcu ation a ain stin so ven c i ti s to be n oti c e are l g l y , d , i n n o sen se a rese rve an d are n otso escri b e th e law. , d d by MLeod The or and rac ti ce o Of th e wri ters on an in c b k g , , y P f B anki n has ma e th e mostca re ul anal si s of th e e c an e g, d f y x h g o ration otwi tstan in whi ch un derli es eve ry ban ki ng pe . N h d g ecc en tri ci ties of me to and stle h i s e osition of th e rea h d y , xp l " meani ng of loan s and th e ambigui ti es in ciden tto our use of that term th e ori i n and ur ortof an ia i i ti es and th e su stan tial , g p p b k l b l , b i en tit of th e ia i i ti es for e osits an d notes i s c ear and d y l b l d p , l im ortan t and mi tbe ci te in c on rmation atman oi n ts p , gh d ﬁ y p in tese a es Re eren ce ma also be made wi t advanta e to h p g . f y h g ' M o n n c Le od s sma er wor ments B a i le k . ll k, E f g mon ear i er i scussions atten tion i s s ec iall c al e to a A g l d , p y l d ' stri i n etter ames en ni n ton in oo e s Histor o rices k g l by J P g , T k y f P , t e tween th e e osit ii. 6 w i th e s ro ana . in c n o , p 3 9, h h g l gy b d p tes of th e ac coun ts of th e London pri vate banke rs an d th e no r c oun ty bankers is forcibly state d and explained . 62 Ban k- Notes

of u i i o i r rr sec r t es . The dep s t , t ansfe ed by check , i s more c onvenient for large transac ti ons than the

i o di i ou s o f . n te , be ng m re expe t s and a er The safety of the deposit i s due to the fac t that the “ ” c c i usu l r he k, be ng al y payable to orde , ci ll ou i s o i a espe a y when the am nt c ns der ble , cannot be drawn or credited to its holder unless

or a . os or s or end sed by the p yee If l t tolen , theref e , i tc annot be paid unless the bank i s dec eived by a

or n or m i n hi c c a o a f ged e d se ent , w h se the l ss f lls

n i - i u o a . a r p n the b k tself B nk notes , howeve , be ng payable to bearer are nearly as diffi cult to trace

n as mo ey. It i s i n the cities that transac tion s oc c ur on the ar a as i n ar s u l gest sc le , well as the l ge t n mber ; an d i ti s i n c i i s or a ro s the t e , theref e , th t the st nge t need i s felt of the medi um of exc hange best adapted for r s r f s i i n i i a o a u . s c the t n fe gre t s m It the t es , or o r a c o i i o of c o i c c m e ve , th t the nd t n nven ent a ess to an s for ul o m of b k , needed the f l devel p ent the osi an d c c m i s a i i n i dep t he k syste , s t sﬁed the h ghest

r i n . a r o on o deg ee C ty b ks , the ef re , the wh le , use their right of c i rc ulating n otes butsparingly as c om ar i c oun r a k s an d om i p ed w th t y b n , s et mes

r r to o o its use a o r i ir p efe f reg lt gethe , wh le the de posits attain an enormous expan si on . Country a on o a a i ma b nks , the ther h nd , de l ng on a s ller sc ale and i n c ommunities whi ch have more need of a medium tran sferable without rec ourse to the

a ﬁn d an si o of i osi s som b nk , the exp n the r dep t e what restri c ted i n c ompari son wi th the c i rc ulati on Ban k- Notes 63

i s s ir o . a o a of the n tes It for the me reas n th t , as

on a i i or a c time goes , the rel t ve mp t n e of the bank- note tends generally to dimini sh i n compari i i son wi th that of depos ts . The sw ft development of modern c ommerc e and means of c ommun i c ati on i s expandi ng i n high proporti on the ﬁeld for the i an d ffi c i ium i most c onven ent e ent med , wh le the transac tions i n whi ch notes ﬁnd their use are

in s a i c o r growi ng lower r t o . It be mes mo e and

u i of r or to more the b s ness banks , the ef e , extend

use of i c i in o of osi the the r red t the f rm dep ts , the i n i i s u of o s i i n inc rease the r s e n te be ng , the most

si c o u i i n o o progres ve mm n t es , l nger a matter of

ll great c onc ern . That govern ments have so frequently felt i ttheir duty to take measures for the protec ti on of the holders of bank-notes against the i n solvenc y of the but a so i s a for bank , h ve seldom leg l ted the pro tc tion of si i s due to r l r e depo tors , seve a easons . Legi slators have gen erally failed to perc eive the imila i of two i s of i a i i s r ty the k nd l b l ty, and the c l i for ua on si ra io i c c an a a m eq l c de t n wh h be m de ,

i o o of r aso a of osi r w th s me sh w e n , on beh lf dep to s .

r o r a ri a a ur s for ro Mo e ve , the pprop te me s e the p tec tion of the n ote -holders are more obvious and of easier appli cation ; an d iti s doubtless true

a o i or as a ar i also th t dep s t s , a cl ss , e better nformed

Compare th e c ondi tion of th e State banks from 18 34 to 1863 ' wi t tatof th n an i om troller s h h e Natio al B ks n recen tyears. C p Re ort1 8 See l th r e eve o men tf 6 . . es ecia e emar a o p , 7 , p 94 p ly k bl d l p th e New 102 t bid. . or an s uri n h e orme r e ri o . I . Y k b k d g f p d , p 64 Ban k- Notes

i o c s so and can more eas ly pr te t them elves , and have less c laim upon the sympathy an d guardi an ll i i r . a ro o shi p of the legi slatu e At events , p v s n for the safety of notes i s not infrequently made by

w n w ma i s a tto c on i s i of la , a d hen de p s t e ther the easily un derstood requi rement of a c ert ai n reserve

f r a o or of a of c ash o the p yment of the n tes , pre t s m o i o of as ll ferred c lai m o o e p rt n the sets , a owed to the holders of notes i n case a bank bec omes insolvent . The effec t of provi sions for givi ng holders of s a r rr c ai ma i u ra il note p efe ed l m y be ll st ted eas y , if ak a m c c ou a i we t e the st te ent of a nt l st g ven , an d wi ou an c a of i a i i i u , th t y h nge l b l t es , s ppose the bank to h ave been led to mak e a c hange of invest ments an d to dimi ni sh its other assets and its r u i its aff i rese ve , nt l a rs stand as follows

Resources Li abili ti es

Bon ds an d stoc ks Real estate proﬁts Oth er asse ts

Rese rve

The li abili ties of the bank are plainly of two c s : i a i i to i las es the l b l ty stockholders for c ap tal ,

u u an d u i i ro i i i s rpl s , nd v ded p ﬁts , and the l ab l ty to

l c r i or si an genera ed t s for depo ts d notes . If the

f i of a u u r o af a rs the b nk were to be wo nd p , by eas n o or an o i i s i n of l sses , for y ther reason , t clear that ,

66 Ban k- Notes

s c i a i i r i i ma u s pe l leg slat ve p ov s on . We y now s ppo e a i s a ur for ro c i o r th t the leg l t e , the p te t on of the h lde s of o h as i m i to i in u n tes , g ven the a r ght be pa d f ll i n r c o c i ors if of a p eferen e to ther red t , the assets

i n i ui a i o s oul sh ortI o hi bank l q d t n h d fall . Up n t s

u i i o rom l r ourc ou i s ppos t n , f the tota es es am nt ng to we should ﬁrst have the notes pai d in u ou i n to an d n ai f ll , am nt g the the rem n i n g would be di vi ded among the deposi r i i a i i of i o to s , g v ng them d v dend a l ttle m re than

8 er c 3 p ent . ro i si o f l w i i o r of A p v n o a , then , g v ng the h lde s notes a preferred c laim to the assets of the bank would be a natural and easy method of insuri ng thi s c a of c r i o c i n c a of a a i u l ss ed t rs , ex ept se very l rge ss e or a bad ai u But ma u os very f l re . we y s pp e the leg i slature to wi sh to go farther than thi s an d to give

n o - o r a r c aim i n the te h lde s , not gene al l preference to o r buta c ai c i c ro of the s , l m to spe ﬁ p perty the bank supposed to be of solid value an d suffi cient to i sur a m f s i n an c n o o a . u n e p y e t the n te y se Th s , to r ur to ac c ou on a 6 ita a et n the nt p ge 4, ppe rs that the bank holds bon ds an d stocks to the amoun of s o its curi i t a a part f se t es.

u os n a law ui S pp e , the , th t the req res the bank to hold these bonds an d stoc ks pledged to secure ima f its of the ult te p ayment o notes . uc an a m c u i i ou Under s h rrange ent , the se r t es w ld n otc a to ro r of a e se be the p pe ty the b nk , and the

1 m s i re Com i led Statutes o 1 8 h 1 8 E se e New H c . . . a g , p h p f 53 , 4 , ’ m l s Re ort1 8 8 iii c s 0 For o j e c tion s see Co tro ler . l e 3 . b p p , 9 , p x . qq. Ban k- Notes 67

e i s of cu i i wou m i as arn ng the se r t es ld re a n , before , ro f a part of the p fits o the bank . The pledged o woul o su c pr perty d be enj yed , however, bje t to ro i si o a i n ilu f the p v n th t , case of the fa re o the roc of s uri i bank , the p eeds the ec t es should be applied fir st to the payment of the outstanding law s ul notes . If the ho d go farther an d provi de th at only c ertai n approved classes of securities u u for hi u a sho ld be sed t s p rpose, and th t the securi ties pledged should be lodged for safe -keeping i n th e of om u i c ffi c u a c hands s e p bl o er, the s bst n e of a i ou ill u c a the tr nsact on w ld st be n h nged . It would still remai n a simple c ase of the specific appropri ation of a cert ai n par t of the property of the bank to the payment of a parti c ular class of its ili i i n i c i c li ab t es a g ven ont ngen y . The essenti al struc ture of the bank would be unc hanged an d the sources of its profits would be neither more nor fewer than they were in the absence of thi s pledge of securiti es . i 1n i u c The method descr bed th s s pposed ase , of protecting the 1ssue of notes by a deposit of securi i in a u li ffic i s t es the h nds of some p b c o er, that whi c h was adopted by the State of New York in

‘ “ ” 1838 an d was long known as the free-banki ng 3 l o a l system. Many other States fo l wed the ex mp e

For an accoun tof th e New York system and its adoption - ter tates see Dun ar con omi c ssa s 1 2 . o S . by h , b , E E y , pp 3 7 3 9 “ " Th e te rm free banki ng was appli ed to this syste m because e 1 w th e rst en e ra an i n law in Ne w or th law of 838 as ﬁ g l b k g Y k . Previously a speci al c harte r was nec essary i n th e case of each 68 Ban k- Notes

of r an d 1 8 6 New Yo k , ﬁnally in 3 the New York plan was adopted by Congress as the basi s for the 1 a i - i s n t onal bank ng ystem .

n ow i i f r If, , we vary the above suppos t on so a as to imagi ne the property pledged for the protec ti on of o to o si s n ot o of c u i i the n tes c n t , wh lly se r t es , butof securities to a c ertai n amount an d of speci e

all n o i s u in c s r o we s ll a in for tes s ed ex e s the e f , ha h ve substanc e the provi si on made by law i n 1 844 for the ro c i o of o of a of a p te t n the n tes the B nk Engl nd . si o a o l a a r to for Be des ther re s ns, a re dy dve ted , s i i s a i ro c i o for a - eek ng leg l t ve p te t n b nk notes , the beli ef has been c ommon that banks are under a speci al an d dangerous temptati on to overi ssue o u c ausi i r ci a i o wi l n tes , th s ng the r dep e t n th oss t ubli o h ow o c . a a the p It has lre dy been sh wn , r a u i o o all eve , th t the q est n whether n tes sh be i ssued or n oti s on e whi c h i n modern banking i s n ot s f a i an buti s ettled a ﬁrm t vely by the b k , s c r di o wh o rmi s for ims l ettled by the e t r, dete ne h e f and wi th an eye to h i s own c onveni enc e whether

hi s ri as a ai s an i n to hold ght , g n t the b k , the form

si r al ri ou of a n ote or of a depo t . The e ly se s questi on would be whether the bank c an extend

use of its c r i osi as as the ed t , by dep ts well by notes i i s as muc as to w th e i n exc ess . Th s h ask hether t r i u c a f c i bank c an go oo fa n the p r h se o se urit es,

r i n o s c an u u imu a o other w rd , nd ly st l te borrowers, the making of loans being the purpose for whi c h the

s it r i B ut i u s i c o bank extend s c ed t . th s q e t on ann t

I - Se e D un ar E con omi c E ssa s . 1 2 . b , y , pp 3 7 3 9 Ban k- Notes 69

u u i i be an swered wi tho t q al ﬁcat on . If we observe i of r s ll s any per od ten yea s , we ha ﬁnd some year in whi c h banks have found the publi c depressed

iri to uc a i r and sp tless , s h a degree th t , w th eve y i for i c i i r usi i th as mot ve n reas ng the b ness, been impossible to ﬁnd soun d commerci al paper in u ﬁ i ou So ro i a s f c ent am nt . far f m be ng ble to

ir c i i n s at u extend the red t exces , banks have s ch times ofte n reduc ed their c apital because employ

f r it ul t ment o c o d n o be found . Other years we shall ﬁnd i n whi c h the publi c spirit was buoyant an d a u ou an d i n i a dvent r s , wh ch the banks h ve fostered an d i n creased the general tendency to c ula i ili wi i c a spe t on , by the fac ty th wh h they h ve

s of r i s given the u e their c edi t . It true then that banks cannot extend thei r li abili ties of either sort except i n response to a demand from the publi c ; iti s also true that i n c ertain states of business thi s demand may be unduly stimulated by i i an d a i u i n s o to an the r act on , th t ss es made re p nse unhealthy demand ar e in excess of the proper

of c o u i an such ri o of needs the mm n ty. In y pe d l a i an i o genera exp ns on of b k cred t , h wever, bank l i r notes play the east mpo tant part . In the absence of speci al restri c tions there i s greater danger of excessive c redit expansion i n the form of bank -notes than i n the form of deposits by p articul ar bank s if the number of banks i ssuing i s a h as m i n a notes l rge . Reference been ade

r i n m w i i n p eced g ch apter to the syste by h ch , most banking centers of any import ance at the 70 Ban k- Notes

i k s o i c c a present t me , ban h ld ng he ks dr wn upon ac o i a c ou m a of e h ther settle the r c nts by e ns a. i ou c a Clear ng H se , where checks are ex h nged an d r ul i a c ai i c s the es t ng bal n es are p d n a h . A mo ’ ment s c onsideration will show that thi s method of systemati c and early presentation of demands must ac tas a strong an d salutary restrai nt upon the un due expansion of deposits by any parti cular i r i u i bank . Aga nst a gene al mpr dent expans on u i i u by the banks of a comm n ty , act ng nder the impulse of some wave of overc onﬁden c e or of cu a i a f ua spe l t on , there ppears to be no sa eg rd exc ept that whi c h may be found i n the relati ons of mmu i i n i the co n ty quest on with others . The larger volume of c hecks whi c h a bank presents at the Cleari ng House will be offset by the larger volume of c hecks drawn upon itwhi c h other banks a r c i c i c di a i o o h ve e e ved . Ex ess ve re t exp ns n n the p art of the banks generally c an only be avoided a o i r i l by the d pt on of a conse vat ve a poli cy . “ o n B utif a i a or ou of s im u s ngle b nk , a gr p bank , pr d n tl a its oa use of its c r di e y exp nds l ns by the e t , itmust soon begin to fac e the effec t i n the demands for settlement made upon itthrough the Clearing s m m on Hou e . It ay be able to reckon with so e c ﬁden c e on the omi ssi on of some depositors to draw om for ou due but pr ptly the am nts to them , whatever c hecks are drawn itmust be prepared to m i ou a c c an c on eet w th t del y , for few he ks for y siderable ou a am nt , when they h ve once left the a ra ill i to i h nds of the d wer , w fa l make the r way Ban k- Notes 71 qui ckly i nto the deposi ts of some ban k and to appear at the Clearing House on the followi ng

It must be added that the operati on by whi ch demands are presented through the Clearing House i s on e in whi ch the banks presentin g the ca c olu demands are s r ely v ntary agents . They are aware that th ey must meet c hecks drawn upon

are i in l - themselves , and mpelled se f defense to present by way of offset all clai ms that they can brin g forward against others . Deman ds whi ch they mi ght conc ei vably delay under a looser or r s i s ul i iti s i system , p es w th le s reg ar ty , for the r interest to bring forward at onc e as a part of their own provi sions for the inevi table daily call to be m l i made upon the se ves . Even the poss ble di s i i or c i c i pos t on to f bearan e , wh h a cred tor bank ma l i n i c ul u y fee a part ar case , m st be weakened by the c onsi deration that others will n otfail to re ui a h ue to q re any p yments t at may be d them , and that by forbearan c e the bank only consents to

r i the preferenc e of their claims ove ts own . The prompt presentation of chec ks for payment i s o a i c ic i i n o theref re the est bl shed pra t e , mply ng lou s i i u ici o on of jea sy , ho t l ty , or s sp n the part the i o - i in u l i si cred t r bank , be ng fact the nat ra d spo tion to be made of an instrument of credi t intended

- to be butshort lived . The differenc es of situation among banks are so great and con venience of intercourse varies so u n in li i i i law m ch eve any m ted d str ct , that the 72 Ban k- Notes would have found itdifﬁcult to c reate and enforce an y suc h effec tive system of c ompulsory daily redemption of obli gati ons as the banks of c ities have developed an d set in operati on of thei r own

c c or o s c i mor a . s o to d The b erved tenden y , e ver ,

a ' o of ri i out enl rge the sc pe the system , b ng ng lyi n g ban ks more an d more within its reac h an d qui c kening the c ourse of business between different

n i n c r i o un a ba k g ente s . Th s v l t ry development of a system so searc hing an d restri c tive i s n uques ti on ably due to two c harac teri sti c s of the c heck . i c i n i ts on i u c i rc u a i its wh h h der c t n ed l t on . In ordinary form the c hec k c arries n o guaranty or other rec ogn iti on of obligati on by the bank on i c i ti s raw so a u n c c al s for i ts wh h d n , th t pr de e l c o c i o u o r i s i i to speedy lle t n , nless the h lde w ll ng depen d upon the signature of the drawer and

ors m c m a suc h end e ents as the c he k ay be r . More o r as amoun for i c c c i s a ve , the t wh h the he k dr wn i s determined by the transac ti on i n whi c h i th ad i ts ori i iti s i i to c n i for s g n , l ttle l kely be onve ent u e i n ma i an ur r a s an d its i i i k ng y f the p yment , d v s on or merger i n any larger amount i s n otreadily i i it f effec ted exc ept by depos t ng . The nature o the instrument then h as led inevi tably to the o of ac i c hi c c a o i s devel pment a pr t e w h on e d pted , recognized as on e of the rriostimportant of exi st i n g safeguards against the abuse of ban k c redi t r of a by a single bank or a small numbe b nks . Bank-notes have no similar tendenc y to speedy u o i a i o r s return . Altho gh the bl g t n exp es ed by

74 Bank- Notes

a c - u a st n es a bank note c rrency , once set aﬂo t i n exc ess or bec ome excessive by a c hange in the c o i io of u i ma i n c o i to nd t n b s ness , y be slow m ng ma to i c if r ll i it u the rk wh h , ea y convert ble , m st

ua s i l event lly adju t tse f .

s s ma i c uc i of a - o The y te t red t on b nk n tes , as an i u a c ai i r o si i s r or ns r n e ag nst the p s ble excess , the ef e developed with muc h less ease and c ertainty than the c orresponding restraint upon the use of credi t — in o of o i u the f rm dep s ts . The end to be so ght a wholesome restraint of a kind of credit whi c h i s i — i s li i i a a u . u e s ly b sed the same Indeed , p b c op n on an d the law generally proceed upon the assump tion that the use of the right of note i ssue i s practi ll u e a for o i o ca y open to ab s , and th t , the pr tect n of u i i i a ra the p bl c , spec al and somet mes el bo te c au i i s c a ill i m i a pre t on ne ess ry . St the m ed te c o i o - o nven ence of the h lder of bank n tes , for the a o i i s a re s ns g ven above , stronger th n the more mo u li i so a m o m of re te p b c nterest , th t so e f r pressure i s usually needed for the development of an effec tive system of redemption among any m large nu ber of banks . u f of The S f olk bank system New England , the most effec tive note-redemption system which i s i n i a u has ex ted the Un ted St tes , was forced pon the banks of that section by the concerted action o i hi c u i of a few str ng c ty banks, w h fo nd the r natural ﬁeld of circulation in Boston seriously i 1 u u i nvaded by country ssues . The press re th s

tn e i stor o he u ol B an k W i H t S k . h y , y f ﬁ Ban k- Notes 75

e stabli shed was finally made deci sive by a legi sla i i c i n u o a t ve act wh h , Massach setts , f rb de an y a out o its an bank to p y any n tes except own , d thus compelled every bank either to send i n for redempti on any notes of other banks rec eived i n or on i or o payment depos t , to h ld them as dead n u i o c cash . The agreeme t nder wh ch the few Sc t h banks have for more than a century returned eac h ’ other s notes through a c learing house 1 i s a striki ng c ase of competiti on by few competitors in a i i so too i s i c w i c l m ted field , and , , the pract e by h h the somewhat lar ger number of banks i n Canada 2 sen d i n for redemption the notes of their c ompeti c of c u tors . In ea h these ases the str ggle for a l i i i r c om i i n arrow fie d , ntens fied by the d ect pet t on ri i al of a c s i car ed on by r v networks br n he , br ngs motives into play an d creates a possibili ty of common action for mutual conven ienc e which have no existenc e where the number of banks i s i i i i s large an d the r d str but on greatly cattered . To take for illustration the 7600 nati onal banks of — the Uni ted States no single bank can feel that its own power of circulation would be appreci ably afiec ted if itwere to present for payment suc h notes of its 7699 competitors as itmight c hanc e to

i i i l i n i receive . The nﬁn tes ma gai n th s respect could not be counted i n compari son wi th the

N i G m The One ound ote xv xv . ra a c hs. . and h , P , In Sc otland the re are only ten banks whi c h are authorized to issue notes; i n Cana a te re are twen t-two butun i e Scotan d h y , , l k l d , ne w v banks enjoyi ng th e pri ilege of note issue may be established . 6 Bank- Notes

inc onvenience and delay to whi c h itwould have to u mi a u al c ou s mus for ac t s b t . The n t r r e t be e h o extend its own circ ulati on wherever the opportu

mi i s un for oi so i ro an d rou ty fo d d ng w th p ﬁt , to t ble itself as little as possible with respec t to the

c i f r cir ulat on o othe s . Systems of regular redempti on c annot prevent the overi ssue of notes by banks generally or loss to note-holders through the fai lure of p arti cu lar a do limi i l uc b nks . They t these ev s to s h manageable proporti ons that they c an be almost en ti rely eliminated by means of legi slative safe guards whi c h do n ottak e away the right of issue from the banks i n general an d do n otdeprive the f f note o i ts value as an instrument o credit . In

an ada for am o - o r are a ua rC , ex ple , n te h lde s deq tely protec ted an d exc essive i ssui n g h as been avoided under laws whi c h limit the ci rc ul ati on of each a to its c a i al an d a o i o of its su us b nk p t prop rt n rpl , give the note holder a pri or lien on the assets of ai a k an d r i for a uara un to f led b n s , p ov de g nty f d whi c h eac h bank c ontributes an amount equal to

c of i ts u a i o . ﬁve per ent . o tst nd ng n tes On the o r an in c u i r r n o the h d , o ntr es whe e the e has been system of regular redempti on the evils of exc essive i ssues of notes an d frequent loss to note - holders have requi red drasti c remedies whi c h have funda mentally c hanged the c harac ter an d utility of the

- b ank note . Two di sti nc t an d radically unlike poli c ies have found expression i n the legi slati on design ed to Ban k- Notes 77

i i - u prov de a sat sfactory bank note c rrency . In the vari ous States of the United States before the i i ar a l i to i u C v l W , b nks genera ly were perm tted ss e notes butsubjec t to inc reasingly stri ngent c ondi i i a i o i u c a i l of ti on s . The l m t t n of ss e to the p ta eac h bank an d a pri or li en on all assets were found

to saf uar o o rs to be inadequate eg d n te h lde . In on e State after an other during the years immedi ately prec edi ng the Civi l War the requirement i o of of a i c u c u i i was mp sed the pledge p rt lar se r t es, o l o of i hi c omm n y the b nds the var ous States . T s method of safeguardi ng ban k - notes was subse quently adopted in the N ati onal B anki ng Law of 1 863 wi th the further restri c tion that only United States bonds c ould serve as security of the notes x f a i o l a o the N t na B nks. Under thi s method of note i ssue a perfec tly af i um of a m i s u but s s e med p y ent sec red , note secured by bonds are fun damentally unli ke notes i u al a i ou r ri c i ss ed gener ly by the b nks w th t est t on , or those i ssued under restri c ti ons such as are u i n a a i a i aw fo nd the C n d n Bank ng L . In the

Th e un satisfac tory c ondi tion of th e ban k-note c urren c y i n th e United Sta tes before th e Civil War c ould nothave been w o c orrec te un er re em tion arran emen Th e usin ess h lly d d d p g ts. b of th e coun tr main in th e ionee r sta e of a ri c ultura eve o y , ly p g g l d l p mentdid not rovi e th e an s wi t oan s avi n a i e ree , p d b k h l h g h gh d g of ui ness ri Means n i we re im li and se cu t of commu icaton q d y . perfec tand c onse quen tly ev en th e notes of th e strongestban ks were ata di scoun twhen ata di stan ce from th e locality of th e issui n an ina owi n to th e a of un i ormi t i h esi n . c g b k F lly , g l k f y d g , numerous coun ter ei tnotes were a source of unive rsa i rritation f l , as well as of frequen tloss to unfortunate i ndividuals. 78 Bank- Notes c ase of bond- secured notes all other considerations are ac i c i n ai a u af s r ﬁ ed order to g n bsol te s ety . uc o a i i um S h n tes are not cred t nstr ent , expand in g an d c ontrac ting with the vari ati ons of activity of trade an d in response to c hanges i n the volume of i n bank loans . The amount of notes c irc ulation i s primari ly determi ned by the pri c e of the bonds r ui r as c u i uc o eq ed se r ty . At the best , s h n tes are li ttle more than a safe and ec onomi c al substitute for c i i i r o ned money . They have l ttle d ec t i nﬂu en c e upon the other operation s of the banks by i i c are u . ac uc o are wh h they ss ed In f t , s h n tes more an alogous to c onvertible government paper mon ey than to bank-notes whi c h are i ssued as a

o m f c r i f r o ed t . In En gland and i n some of the other European c ou ri un a i s ac o ri c i n u nt es , s t f t ry expe en e w th restri c ted i ssues of notes by n umerous banks in the absenc e of arrangemen ts for regul ar re demp ti on led to the adopti on of the drasti c remedy of the gran t of a more or less complete monopoly i n i a a of i ssue to a s gle bank . By th s me ns safe c urren c y was sec ured wi thout depri vi n g the bank n i s o note of its c harac ter as a n trument f c redit . hi s m o of c o ro i i s u of o T eth d nt ll ng the s e n tes had ,

ow r i r u o s o s u of h eve , ent ely nf re een c n eq ences a

r-r ac i a u r an d hi i s most fa e h ng n t re . Whe ever , t s everywhere i n the early stages of the development

an i a - o was ri c i al i n stru of b k ng , the b nk n te the p n p

n o an c r i all o r a s r ac me t f b k ed t , the b nk we e pl ed i n a positi on of c onstant depen denc e upon the Ban k- Notes 79 institution to whi ch the monopoly of i ssue was i granted . At the same t me these banks became inevi tably responsible for the satisfac tory workin g of the entire credit struc ture of the countries in

i hi r s i whi c h they were establ shed . T s e pons bility was n otc learly recognized at ﬁrst by the manage

s a butaf muc o un ment of the e b nks , ter h ften sati s factory experienc e the speci al functi on and duties of these central institutions were clearly per c a ll i cei ved. It be me genera y recogn zed that a bankin g system i s greatly strengthened by the presenc e of a central institution whi c h accepts responsibili ty for safeguardi ng the credit structure and consequently maintai ns itself in a condi tion of l great strength at a l times . Bank -notes i ssued by a single bank are in many ways unli ke bank-notes i ssued by a large i i u number of inst tut ons . When n merous banks ri of i u o i enjoy the ght ss e , the n tes never acqu re that prestige whi c h the note of a si n gle institution in i - o possesses ts own country . The bank n te in suc h countri es as France an d Germany occupies a posi tion midway between gold an d the ordinary

- i a c r c i c bank note . It w ll be c epted for p a t ally

r u c for or i eve y p rpose ex ept f e gn payments . The power to i ssue an instrument whi c h h as thi s speci al sort of prestige i s of very gr eat value i n emer

e n i n i i su l g c e s. It enables the central i st tut on to pp y an almost indeﬁni tely large demand for currency for domesti c purposes wi thout involving itself in any appreci able danger of loss of gold through th e 8 0 Ban k- Notes

r s a i o of o for r i th e p e ent t n the n tes edempt on . On an if o are i u man a in other h d , n tes ss ed by y b nks , a seri ous emergenc y i tmay happen that the publi c loses c onﬁden c e i n the notes and manifests a

f r o - o i s preferenc e o g ld . Bank n tes sued by a

i n s i i a a r r r single t tut on h ve , then , ve y g eat p ac ti c al

n a a u i i c or i adva t ge , they h ve a q al ty wh h the d nary

- o o n ot o s at a i n a c ou bank n te d es p s ess , le st ntry i n whi c h thousan ds of banks are permitted to i ssue

i c o si ra i o h as an im o notes . Th s n de t n been p rtant fac tor in shapi n g legi slati on regardi n g bank -notes

n ri ral a a i n ma y c ount es . Cent b nks h ve been a i as i n c r est bl shed , the ase of the Fede al Reserve i n n i a i n or r to c u banks the U ted St tes , de se re the improvemen ts rn banki ng mac hi n ery and prac ti c e si s i i i o whi c h they make pos ble . The e nst tut ns have then been gran ted a more or less c omplete

o o o of i s u n ot c aus itwas i ossi m n p ly s e , be e mp ble to sec ure a sati sfac tory c urrenc y i ssued by the banks generally buti n order to enable the c entral banks to perform their speci al functions more f i e fec t vely .

8 2 Cen tral Banks

i i o i s f poss ble endeavor t sat fy . A well managed bank wi th diversified loans an d investments will ordinari ly experienc e no diffic ulty i n meeti n g a i i n i l si tuati on of th s k d . It w l reduc e or entirely li quidate loan s to borrowers wh o are n otits own depositors; i tmay sell sec uri ties ; and finally it may use its own loans as a basis for borrowing from other banks . f c i of a u i ti s The ef e t veness these me s res , to be

s u o a i i of o r ob erved , depends p n the b l ty the banks i i on c c o o i o m to extend add t al a mm dat n . The arket for sec uri ties bec omes at onc e restri c ted when would-be purc hasers are unable by means of

a oan to s c u ar of urc a ri c b nk l s e re a p t the p h se p e . Call loan s agai n st sec uri ties listed on stoc k ex c han ges c an n ot be li quidated to an y apprec i able extent if the brokers to whom suc h loans are

i a re u o o r c h eﬂy m de a nable to b rr w elsewhe e . The paymen t of c ommerc i al loans as they mature i s also largely dependen t upon the c on tinuanc e of the proc esses of produc ti on an d marketing of goods an d of the payment for them by purc hasers

ma as i o i i rr rs i n n or . of o o o l f h n Ab l ty b we , h wever, to meet these obligations i s at onc e weakened if those to whom they regularly sell c ommodities experi en c e difﬁc ulty in sec uring the usual amount mmo i o a of ac c o dat n from the banks . P yments for goods already sold are delayed an d new pur

r c u ail i i u i o in o al c hases a e rt ed . A d m n t n the t t amount of c ommerc ial loans wi ll ac c ompany a

a i n ri c s an d a c i i n c i i f ll p e , de l ne the a t v ty of Ce n tral Ban ks 8 3

but a o r trade , for the b nks to attempt to c nt act such loan s qui c kly an d in large amount subjec ts business to intolerable strain and if persisted in occasi ons fai lures so numerous an d wi despread as speedi ly to threaten even the solvenc y of i ms l . o u can the banks the e ves In sh rt , b s ness not suddenly be deprived of the volume of credi t to whi ch ithas become adjusted wi thout disastrous consequences both to lenders and bor rowers . For the sati sfactory conduct of the business of bankin g somethi ng more then i s needed than reserves of cash sufici en tfor ordinary require ments together with loans and other investments whi ch can be readi ly liqui dated when one or only a few ban ks find itnecessary to strengthen them l in i se ves . Somewhere every bank ng system a reserve of cash and of lending power i s needed to meet occasions when the banks find themselves confronted wi th unusual demands both for money i i u c io and for loan s . Prov s on for s ch o cas ns may be made through the maintenance by all banks l ul ui of arger reserves than they reg arly req re , i l a . Wh by a few banks or by a s ng e b nk ere , as in a i i s u n Can da , bank ng cond cted by a few ba ks of large size this re quiremen thas been recognized B u and adequately met by the several banks . t i n coun tries in whi ch banking has been conducted by numerous banks large and small the responsi bility has been so widely difiused that thi s nee d has not been fully realized and conse quently 4 Cen tral Banks provi sion for periods of financi al strai n has

ra n n i r i u gene lly bee e t ely nadeq ate . In an endeavor to remedy thi s defec t whi c h was repeatedly di sc losed i n the ban ki n g experien c e of i a or i i War the Un ted St tes bef e the C v l , the banks were subjec ted to legal reserve requi re ments c on siderably higher than the reserves

i n im B uti n ri o of ﬁn n needed normal t es . pe ds a c i al strain the mere possessi on of reserves i s n ot i mus u r sufﬁc ent . They t be sed . Whe e banks are numerous wi th no rec ognized leaders or

on c om i n a i o o i n an s str g b t n am ng them , y harp c ri si s some of the ban k managers may dec ide to take c are of themselves by reduc i n g their loans

i n u i r s an d a it r and ﬁll g p the re erves , le ve to othe s to take c are of the gen eral welfare by enlargi n g di sc oun ts an d sati sfying demands of depositors

n Kn o a om ma ur u for mo ey . wledge th t s e y p s e a selﬁsh c ourse weaken s the di spositi on an d also

o r of o rs to a mor i ra c ou the p we the t ke a e l be l rse , an d thi s may lead all the ban ks to pursue a poli c y of c on trac ti on whi c h i s c on demn ed by the j udg

f a ori ment o the m j ty . Thi s diffi c ulty of sec uring united ac ti on among man y ban ks i n emergen c ies was striki n gly e vi den tin suc c essive c ri ses i n the Un ited States after the establi shment of the nati on al ban ki n g system

1 6 ou c a r of a i n 8 3 . Alth gh the sh eserves the b nks were far i n exc ess of what was needed for ordi

uir m n a s i n ac c ri i rom nary req e e ts , the b nk e h s s f 1 8 73 to 1907 invari ably endeavored to c ontrac t Cen tral Banks 8 5

l r i u oans and in the mo e ser o s of these cri se s , os of 1 8 18 1 0 ar i ll th e 73 , 93 , and 9 7, p t a y suspended cash payments . The unh appy c onsequences to the communi ty generally of the inabili ty of the banks to cope suc cessfully wi th emergenci es ﬁnally le d to the establi shment of the Federal Reserve banks i n

1 i r u i 19 4. Th s g o p of banks s patterned after th e central banks whi ch are found in most Euro pean countries as well as in Japan and thank s to whi c h peri ods of ﬁnanci al strain had been handled i ac i or a o i n i a . far m e s t sf t r ly than the , Un ted St tes In the analysi s of banki ng operations i n pre ceding chapters itwas assumed that each bank

n o si ila u i e j yed m r powers , and conseq ently as de from differenc es of size was equally responsible for the mai ntenanc e of the mechani sm of c redit o i i o in o i i n a sound c nd t n and efiec ti ve perat on . The prese nce of a central bank relieves the other i i ili banks of some port on of thi s respons b ty . It introduces important modifications both in the n in i power s of these banks a d banking pract ce . In later c hapters the hi story of the three most i a c i ai mport nt entral banks , those of Great Br t n , a c an d i be i butfor Fr n e , Germany, w ll cons dered , th e understanding of the significance of those li i n i chapters a pre m ary analys s of the powers , u c i an d li i of l ill f n t ons , po c es centra banks w be l helpfu . The spec ial functions of central banks may be

For some ac f t r see Ch e ow. counto hese c i ses . XI b l 8 6 Central Banks grouped under three heads : they serve as ﬁscal agents of government ; they have lar ge powers of c ontrol over the curren cy through the more or l om o o o i u ll ess c plete m n poly of n te ss e ; and , ﬁna y, since they hold a large part of the reserve of the

i r c s i other banks , they are d e tly re pons ble for the

i o i r uc u of c r i foundat n of the ent e str t re ed t . Thi s last i s by far the most important func ti on of

i n r l t ra a . a bu cent l b nks Indeed , gene a very

u r l a ma ai to a but tr e sense , cent a b nks y be s d h ve i i un c i o — i u ai c th s s ngle f t n , to ns re the m ntenan e

s oo o i n of of r i and m th w rk g the systems c ed t , of i c o im orta ou wh h they are the m st p nt , th gh not i i c s ar os a r . ne e s ly the m t , cons der ble membe s It i s a duty whi c h rests upon c entral banks because i c o a i or the other banks , wh h h ld l ttle no cash

s r u o i si at l re erves , ely p n the r depo ts the centra ban k an d upon the expec tati on of being able to

orrow rom i t r ou r i c ou or c b f th gh ed s nts di re t loans . The c entralizati on of bank reserves was not on e of the objec ts i n view when the ﬁrst c entral

a r a i s i s i c i i . or a t s o b nks we e est bl hed H t lly , pr b able that itc ame about i n large measure as an uni n ten ded result of the monopoly of note i ssue an d of o u i dl the g vernment b s ness han ed by them . Suc h i s qui te c ertainly the case with the Bank of n a a i c al i E gl nd , the e rl est entr bank n date and

1 Th e Lon don banks do n otordi narily borrow di rectly from th e an of n an e wi t ra mo B k E gl d . Th y hd w n e y len tto bill ro e rs wh o i n turn are o i e to orrow rom th e an Th e b k , bl g d b f B k . ifferen c e i s on e of orm rater tan of su stan c e d f h h b . Ce n tral Ban ks 8 7

o of it th e model for all thers s ki nd . Through i ts government business other banks were inevi tably u i o ai c o c i it bro ght nt d ly nta t w th , and the c on veni e n c e of an ac c ount upon its books became

i i mo o i a a . l o read ly pp rent Aga n , the part a n p ly of

ri of o i u i n ri i th e ght n te ss e , a pe od when bank ng u o a a a methods were ndevel ped , was an dv nt ge i c alo i its u i wh h , ng w th government b s ness , gave the Bank of England a position of unquesti oned i i in i in i o super or ty , both s ze and prest ge . Fr m keeping a balanc e to keeping thei r entire reserve in the c entral ban k required no essential change in the every- day methods of business of the other i s a h ad c i n an banks . Th s t ge been rea hed Engl d c l of i c u before the ose the e ghteenth ent ry , and for generati ons Engli sh bankers have held i n their own vaults only such amounts of money as are ui -da u o — i o req red for every y p rp ses , t ll m ney , i t i as the Engl sh are wont to designate i . Th s c u i u i n 1 8 stom was st ll f rther strengthened 54, a was a o i n of when the pl n d pted , the settlement

l i c s i r r u c ear ng balan e , of s mple t ansfe s pon the

of al i s i i c u books the centr n t tut on . In other o n

ri i u i ua io h as r a . t es , v rt ally the same s t t n been e ched Although the other banks may hold slightly u a a c greater amo nts of cash , they carry b l n es , l or al i c ral arger sm ler, w th the ent bank , and are quite as dependent upon itto meet e xtraordi n r r ui m a y eq re ents . In the exerci se of their functi on i n relation to the reserve the possession of government balanc es 8 8 Cen tral Banks

i s of m c a a an d i il u h dvant ge , the pr v ege of note i i ri i i s o r ssue s i n most c ount es nd pensable . G ve n ment balanc es are indeed attimes so small as to of i i c an d i n c a of a of be l ttle serv e , the se the B nk England the ri ght of i ssue i s of little prac ti c al importanc e sinc e the Bank of England note i s

i r o i virtually noth ng mo e than a g ld c ert ﬁcate . In Con ti n e n tal c oun tri e s where there i s slight use of c hec ks the right of issue by a c en tral bank would seem to be i n di spensable and iti s a power whi c h i n an y c ountry adds greatly to the strength f c n r i r l o a e t al bank . Ow ng to the gene a prefer c of o for a s of en e pe ple p per money , as the tock gold i n a c ountry i ncreases much of i twill be sec ured by a c en tral bank i n exc hange for its of a of notes . The great strength the B nk France i o i of i s ma nly a result f th s process . The stock money i n c irc ulati on has inc reased and thi s gold instead of going direc tly into circ ul ati on h as been taken to the Bank of France to be exchanged for bank notes . The ac tivities of a central bank i n normal times are of a c omparatively simple an d even

ou i a ur n ot diﬁere n ro o of r t ne n t e , very tf m th se o a ou it o c ou ri on the ther b nks ab t . In s me nt es ac c ou of a u ui an d i n all nt st t tory req rements , ou i o i of oun o i c l c ntr es from m t ves s d p l y , the oans and other investments of central banks are con ﬁned to those whi c h are deemed of the hi ghest u i c i c i i q al ty , a de ded preferen e be ng g ven the i o r l i trade b ll ve the c ollateral oan . The h gh

90 Cen tral Banks

rl u c s hi ue . me y tho ght ne e sary . T s seems to be d

to a mor c ar r c o i i o of i s o si i i i e le e gn t n the r re p n b l t es , and bec ause these respon sibilities have increased wi th the growth of other banks an d the more i n timate relati ons between the money markets of

r r ari c ri i i n 1 8 0 i the wo ld . Afte the B ng s s 9 twas generally felt that the reserve of the Bank of

n s to m ro or i o Engla d wa o s all . The p p t n to de osi i a i i i hi c i n o ma i h ad p t l b l t es w h , n r l t mes , been i i n 0 . was the ne ghborhood of 4 per cent , therefore i c r as to a o c n e ed r ther m re than 45 per ent . The B an k of German y holds about the same propor ti on of reserve to demand liabili ties as does the an of la a B k Eng nd , and the reserve of the B nk

of ra c for a F n e , many ye rs , has been notably r o g eater than that of any ther country . In securing business central banks experience no difficulty when the available funds of other banks are regul arly insuffic ient to meet the de l i to mand for oans . Th s seems have been the normal con diti on of affairs i n England during the i an d ua of i e ghteenth , the first q rter the n neteenth

o i la r i n o u c entury . It c nt nued even te ther co n ri an d i n u i a a are i l t es , R ss a and J pan b nks st l c onstant borrowers at the central banks of those ou ri a c nt es . Elsewhere , the dem nd of banks for loans at the c entral banks during peri ods of de pressi on an d of moderate trade ac tivi ty i s slight n i a c ou i or even e t rely bsent . In some ntr es ,

o i n a c a ar u of l i n tably Fr n e , l ge n mber smal b lls of exc hange are regularly redisc ounted atthe Cen tral Ban ks 9 1 central banks in order to take advantage of the extensi ve c ollec ti on facili ties whi c h they have i r i . r c u ar on c coun of c ir p ov ded Pa t l banks , a t c umstan ce s c u i a l i r pe l r to themse ves, w ll equir e

i o c c o i o r i occ as nal a mmodat n . The e w ll also be a more gen eral demand from many banks in c on n ec ti on wi th the vari ous settlements an d p ay i c c om at of ac mon ments wh h e the end e h th , and

i at of c l a i s c a . e pe ally the end ea h h f ye r F nally , in the northern hemi sphere there i s the seasonal demand whi c h c omes every autumn i n c onnec ti on wi th the harvesti n g an d marketing of the great

i B ou r ui agr cultural staples . utthese vari s eq re ments do n otprovi de that steady volume of busi ness whi c h will keep a c entral bank i n c on stant touc h wi th the mon ey market an d atthe same time provi de earnings for nec essary expenses

i i n ral a r a o a . and re s n ble d v de ds Cent b nks , the e

or i t c ss to c m i o f e , ﬁnd ne e ary o pete w th the ther banks enteri n g the open market as len ders to i i i ua o r i c i io h ow nd v d l borr we s . In th s ompet t n , are ata a i a a a an d a ever , they gre t d s dv nt ge , h ve been able to sec ure on ly a diminishing proporti on of the total volume of banking busi n ess of all

i r i s i s due l i i c r k nds . In pa t th to a re at ve n ease in ki nds of loans whi c h central banks are unwill in c c w of u i g to a ept . The gro th p rely domest c business in most c ountries has not been aec om pani ed by a corresponding growth i n the volume of commerc i al paper in the form of bills of exc hange -the variety of paper whi ch central banks are 92 Central Ban ks

o are t m st ready to take . They a a further di s advantage owi ng to the lac k of ﬂexibility i n the terms upon whi c h they are ac c ustomed to aec om mo o fi c i date borrowers . There are two f al rates — at o c ral a ra i c u an m st ent b nks the te of d s o nt , d a som w a i a for c o a ra oa e h t h gher r te ll te l l ns . The ma a a i s of o a rket r tes , th t the rates ther b nks and

ro r hi i c e o i b ke s , are ghly ﬂex ble , orr sp nd ng to every slight variati on i n the c haracter of the

c uri ur i o o c i i o se ty , the d at n , and ther ond t ons f

o s a i s r o o i the l an . The be t p per the ef re rd nari ly n ot a o o c ral a t ken by b rr wers to the ent b nk . c o i i i si ua i o a of Re gn z ng th s t t n , the B nk England for many years h as followed the market rates i n

i n i r l r i c deal g w th egu ar custome s . The Re hs bank adopted the same poli c y for a number of

ar but i o i u iti n 1 8 6 lar ye s , d sc nt n ed 9 gely on

n r ri ac c ou t of ag a an protest . During peri ods of intense trade an d speculative ac tivity the demand of banks for ac c ommoda ti on atc entral banks bec omes more frequen t an d a sum s ar ro r i o ou i tma i s e l ger p po t ns , th gh y st ll

i i r osi i ac io c ont nue to be h ghly i regular . P t ve t n must then be taken by a c entral bank if iti s to

i i i s i n i i o a u ma nta n t elf a strong pos t n . Me s res

si n to r i o of its de g ed p event the deplet n reserve , n i o si to i i u a a d f c a t . p s ble n re se , m st be t ken The c en tral bank n o longer leaves the money market free to follow its own course butendeavors to subjec t itto some measure of c ontrol and to c onﬁne the expansion of credit within safe limits .

94 Ce n tral Ban ks years h as reli ed as the on e c ertain and immediate im f m r c resourc e i n t es o e e gen y . a i ou i c i c io of These v r s dev es , w th the ex ept n the premium poli c y of the B ank of Franc e to be c onsidered later in connec ti on wi th the hi story of a i i u i o are all of c o a i o a th t nst t t n , se nd ry mp rt nce , serving only temporarily and to a slight extent either to enlarge the reserve or to obstruc t its i o do n ot a a c al deplet n . They en ble entr bank to c c uc l r u c i he k , m h ess p event , f rther red t ex p an sion which i s i nvari ably the fun damental c ause of the difﬁc ulties wi th whi c h the c entral

i n bank s c o fronted . r r ai for c n si a i o The e em ns o der t n , however, one i c s i i c of i c ou i c i dev e , the l d ng s ale d s nt , wh h s made use of by all c entral banks and whi c h i s of

r - mi n i o t i s i c o e a c . u i n p e ne t mp r n e Th dev e , th gh ar i i n iff r c ir u s c i s v y ng degree d e ent c m tan es , a mean s both of safeguardi n g the reserve and of moderating the inﬂuenc es tending toward exc e s

i c r i i o s ve ed t expans n . Two spec iﬁc objects are i n vi ew when the rate — of di sc ount i s advanc ed the diminution of the domesti c demand for loans and a modiﬁ c ation in forei gn exc hange rates so that gold exports may be c hec ked and gold imports perhaps be stimu B ut a i n a of i ou lated . an adv nc e the r te d sc nt by a c en tral bank i s of little servi ce unless market

r T o ri i ou rates follow the bank ate . b ng th s ab t i s the most difﬁc ult problem with whi c h a central

r i u o bank i s c onfronted . When the st a n p n the Cen tral Ban ks 95 rese rve i s merely anti ci pated or of moderate pro

r i o s i ti s u diﬁc ultto a po t n , freq ently m ke the o mar ket f llow the bank . If the other banks have abundant funds and if the nec essity of cau i o i s n oto i ou i i a f c o t n bv s , the mmed te ef e t f the advanc e of the bank rate upon the market

ma i r i al a rate y be mpe cept ble . The centr b nk

i s c u i usi c ou ri w ll then e re l ttle new b ness . In nt es where its proporti on of the lendi n g business i s lar iti s ru a i c r a ma fo ge , t e th t the n e sed de nd r loans at the other banks wi ll soon forc e up the B ut u i s of l market rate . , as the b s ne s centra banks i s small i n proportion to the total credit

u i i n m ou ri s it r u a b s ness ost c nt e , f eq ently h ppens that the outside market i s able to shoulder the entire lending business wi thout advanc ing rates

r to the point desired by the c ent al banks . In recent years both the Bank of England and the B ank of Germany have foun d itnecessary with inc reasing frequen c y to depri ve the market of i i c i s i n its surplus funds . Th s s a compl hed Eng l of o r n s u i i s and by the sale g ve nme t ec r t e , and in

r i s i of su i Germany by the ed count ng Trea ry b lls . Thi s devi c e h as answered its purpose to a strikin g

f i i s i r c o u degree . Its ef ect veness a d e t c nseq ence of the narrow foundati on of balan c es with the

ra a u o ic s as i a i i i cent l b nk , p n wh h re t the v t l b l t es f o a . o for the other b nks In Lond n , example , ' iti s supposed that bankers balanc es may amount to o i s of f a half the dep s t the Bank o Engl nd , say If these balances are reduced even 96 Cen tral Ban ks by a milli on pounds through the sale of govern m n s c uri i s a of n a ’ e t e t e by the B nk E gl nd , the other banks are obliged to c ontrac t their loans an d uc ir osi m n im a ou red e the dep ts by a y t es th t am nt , in order to preserve the c ustomary proporti on of

r i i i i i balanc es to their c ed t l ab l t es . The c redi t struc ture i s so deli c ately poised upon its foun da ti on of B an k of E n gland balances that iti s sensi i i n tive to very sl ght nﬂue c es . The effec tiven ess of thi s devi c e of withdrawing

n rom mar iti s i o a to o fu ds f the ket , mp rt nt n te , i s i n large measure limited to peri ods when the resourc es of the other banks are already well employed an d n o additi on al resourc es are be c om i i iti s of uc u i i in in g ava lable . Wh le m h t l ty preparati on for a peri od of ﬁn anc ial strain whi ch i s i n i mi ros c itc an n o u to i m nent p pe t , t be sed g ve i i i s a n ro o r c r u o . c on t nt c o t l ve the ed t s t at n When ,

r a c u o i a s fo ex mple , the o rse of f re gn p yments i suc h as to bri n g large supplies of gold i n to a c oun

c n ra an i s o r s to r th try , a e t l b k p we le s p event e rapid expan si on of c redit on the part of other ou uc an si o ma re banks , even th gh s h exp n y be

1 Th e balan c es of th e other banks would almostc ertai n ly be re duc e d by thi s ste p un less th e se c uri tie s were sold to indi vi dual h e an of n an th e sec uri ti e s were ur depositors of t B k E gl d . If p c ase th e oter an s or teir c ustomers c ec s in h d by h b k by h , h k paymen twould swell th e c learin g-house e xc han ge s of th e Bank te were so t i ro ers or teir c ustomers of n an . o E gl d If h y ld b ll b k h , th e resultwou be th e same tou tere woul be on e or ld , h gh h d r to c m e more additi onal tran sfe s of cre di tre qui red o plete th op erati on .

98 Ce n tral Banks

opportunities for rapid development in a new

ou i ar un o a ura r sou c c ntry w th l ge devel ped n t l e r es. m i c i n a ar h as i n Ger any , wh h l te ye s been manu

ur c o r vi u ll a c ou fact es and mme ce rt a y new ntry ,

ri c i c ula i m has expe en ed h ghly spe t ve move ents , whi c h the Rei c hsbank h asbeen seemingly powerless

c o ro c an c an do i to nt l . After all , a entral b k l ttle

r an us a its own r sou c for r mo e th h b nd e r es the futu e , ata time when the other banks have abundant fun ds an d a spiri t of general over- c onﬁde n c e u i c o u i pervades the b s ness mm n ty . It i s sign iﬁc an t that the exportati on of gold or the movement of the foreign exc hanges toward the gold export point i s the most frequent occ asi on of an advanc e i n the rate of disc ount by central

n o or are n ot n ba ks . G ld exp ts by a y means always an i n di c ati on of an unsound c onditi on of affair s an d the approac h of a peri od of ﬁnanc ial

rai n buti n ri o of a ra ac i i an st , pe ds gre t t de t v ty d of rapid c redi t expansion they are c ommonly an i ndi c ati on that prec auti onary measures may well i n ri i n n . r a r c a are be take O d ly , the fo e g ex h nges di sti n c tly more sensitive to an advanc e i n di s

ou ra a o i c ma for a c nt tes th n the d mest de nd lo ns . There i s a lar ge volume of business of vari ous ki n ds whi c h c an be ﬁnanced by borrowers in the

n of m on c ou r i mo ey markets ore than e nt y . B lls of exc hange ac c epted by leading banks an d bank ers ari sing outof foreign trade or based on sec u riti e s as c ollateral furni sh the bulk of the material

i n rn a i on o i for these te t al l ans . These b lls are Ce n tral Ban ks 99 offered for di scount i n the market i n whi ch th e For lowest rates c an be sec ured . an understand ing of the somewhat c ompli c ated proc esses of international borrowing some knowledge of foreign

o ra i i s ui i s i s s exchange pe t ons req red . Th a ubjec t i l i in c a whi c h w l be cons dered the next h pter . Here iti s sufﬁci ent to note that an advanc e i n discount rates in any money market tends to induce foreign borrowers to ﬁnanc e their requi rements more largely either at home or i n the money

ri i r i markets of other count es . Fore gn c ed tors also may be i nduced to employ money in the market i n whi ch rates have advanc ed instead of drawi ng ithome as they mi ght have done if rates i i had rema ned stat onary . The foreign trade and ﬁnanci al operations of the leading European countries are of enormous i u o lu l r a i th magn t de , b th abso te y and el t ve to e i i f total bus ness of those countr es . Many o the great cri ses during the nineteenth century were i i e an d l i n u prec p tat d , at east part ca sed , by events occurring i n other parts of the world wi th lo i l i T whi ch Europe has c se ﬁnanc a relat ons . h e purely domestic economi c ac tivi ties of old c ountries i l a l l i i are comparat ve y st b e , and se dom g ve occas on

r i i i a ul . to no d n te spec at on Any arrangement , i u i n i therefore , wh ch s cceeds both strengthen ng the ce ntral bank and also i n placing a restraining i n ﬂuen c e i l i i is upon fore gn specu at ve operat ons , one which affords protection against the most seri ous i l l weaknessthreateni ng the E uropean ﬁnanc a wor d . 1 00 Cen tral Ban ks

In times of severe ﬁnanc ial strain the central i ro o i ban k plays an ac tive dominat ng le . Up n t rests the responsibili ty for mai ntai n ing speci e an d a s i n m a ur for c on payments , l o large e s e the ti n uan c e of len di n g fac ilities to the business c om i r s o si i i was n ot c ar muni ty . Th s e p n b l ty le ly

n i n i c i c s ou foln recog zed , a d the pol y wh h h ld be lowed in suc h situati ons was n otc learly under stood in the latter part of the eighteen th c entury of i n c u an d the early years the n eteenth ent ry . In

i n s a c loa r r i c i di some t n es , ns we e estr ted , w th s astrous c onsequenc es n oton ly to business butto

n i n ra a as . the ce t l b ks well In other nstances ,

o w r ran r but i u c on l ans e e g ted f eely , w tho t that comitan t advan c e i n the rate of disc ount required to inﬂuenc e foreign exchange rates and to drive orro r o r n o e n I away b we s wh se needs we e turg t. For the last forty years at least the poli c y whi ch s ou o o h as c ar un r o h ld be f ll wed been le ly de st od , ’ largely owing to B ageh ots reiterated expositi ons i n E conomi st a m o i i n mo the , ﬁn lly e b d ed re per man n o i n hi s Lombard tet e t f rm S re . The poli c y of liberal loans though at high rates and the payment of money or notes to all who for any reason whatever may demand cash are now everywhere rec ognized as the guiding princ iples of c i o i n m r i ri i a c . c n a t n e e gen es . Expe en e m ny c ri ses show that alarm c an be allayed an d that the

' Mac leod s Theory and P racti ce of B an ki ng c on tai n s th e best acco n tof n i s an i n 6 u E gl h b k g e xperi en c e duri n g cri se s before 18 0 .

See C a ters . . an d h p IX , XI , XII .

1 02 Cen tral Ban ks th e c entral bank i s i n position to insi st that each bank shall use them if iti s to secure such ac com

i r ui modaton as itmay eq re . From the prec eding pages the reasons wi ll be evi dent for the general widespread adoption of a c entral bank as an essenti al part of a well - ordered

ou uc i i u i o r banki n g system . Thr gh s h nst t t ns the e i s gai n ed a high degree of certainty that a reserve of c ash an d lending power avai lable for emergen

i use of r u c ies wi ll be ma ntained . The these eso rces i n an effec tive manner and without hesitation oc c i o r ui i s l u when as n eq res a so ass red . The community atlarge i s relieved from the danger of attempts atwholesale loan contrac tion and c onﬁden c e i n the ability of the banks to maintain i payments atall times i s establ shed . CHAPTER VII

FORE IGN E"CHANGE

FOREIGN E"CHANGE i s the business which i s conc erned with buyi ng and selling in on e country of rights to the payment of money in other coun i i i ia or in tr es e ther mmed tely the near future . Payments and collecti ons between di fferent parts of i u i i of a s ngle co ntr es , espec ally those l rge area , gi ve rise to dealings whi ch in some respects are similar to those which appear in the conduct of i i . u in the fore gn exchanges Th s , the Un ted States domestic exchange rates rise and fall wi thi n lim its set by the c osts of shipping currenc y between u a cur different parts of the co ntry . Ch rges on ren ey shi pmen ts of are taken as the basi s i i uo a . t for q t t ons If, therefore , costs ﬁfty cents i c u i i ic to sh p rrency between two c t es , domest ex change rates between them will range from a premium of ﬁfty c ents to a discount of a similar amount . Demand rates of foreign exc hange similarly fluctuate between limits set by the costs of ship i u b ut . i p ng , not c rrency, gold S nce , for example , itcosts i n the neighborhood of four dollars to shi p in ur gold between New York an dLondon , fo

103 1 04 Foreign Exchange doll ars sets the limits to the normal vari ation in the rate of sight exc hange between England an d i i i the Un ted States . "uotat ons m ght be ex pressed as i n domesti c exc hange dealings butin

a i c a iff r n m o i s us a pr ct e d e e t eth d ed . Ch nges in foreign exc han ge rates are quoted in slight frac ti onal or c i al i a i on rom a of c de m var t s f the p rs ex hange . Between most c ountries the p ar of exchange it i a of i n u i n m n a self , nste d be g q oted a large o et ry u i as i n Arn eri can o i c c a i s ss n t d mest ex h nge , expre ed by taking the spec ie value of the gold or silver coin c ommonly used as a measure of value in eac h ou i n s c ntry a imilar coin in other countries . u ar of e Th s, the p exchange betwe n England and the United States i s the exact amount of dollars whi c h c an be coined from the gold i n i of hi the pound sterl ng . As the cost s pment of gold between the two c ountries i s in the neighbor o of u c a ma h od two cents per po nd , ex h nge rates y

o ma ri s t ou o o oi n r lly e o ab t the g ld exp rt p nt , and fall to about the gold import poi n t . Exc hange between the United States an d Ger a i a i a i s u i n m ny, l ke th t w th Engl nd , q oted the of i a buti of u i money the Un ted St tes , nstead s ng a ou ma a a i of the m rk , f r rks are m de the b s s i o i n ou a h as a the quotat on . The g ld f r m rks lu of 11 c c o u n ma va e 95 1 6 ents , nseq e tly Ger n ex change may ri se above an d fall below thi s point i by the amount that i tcosts to send gold to Berl n . In the c ase of Franc e the quotati on i s n otex — pressed i n United States money buti n francs i n

106 Foreign Exc hange from abrasion than i n the case of shipments of i co n . The great European central banks have a li i al of a o u i a s d ng sc e r tes for g ld, b y ng b rs and foreign c oin at coin age value as a maximum pri ce an d atthat price less the loss of interest during i ui oi a a i i u i the per od req red for c n ge as m n m m pr ce . In selling gold they impose rates whi ch offset in varying degree the advantage of shi pping bars or forei gn c oin rather than more or less worn domestic i a i of coin . By these means the mport t on gold i s i s i u a or its i u at t mes t m l ted , exportat on obstr cted , i i butthe inﬂuence s sl ght and temporary . In the long run they have no appreciable inﬂuence upon the di stribution of the precious metal throughout the world . Another element of expense in gold shi pments a i s i i is time . If a f st express steamer sa l ng the speci e points are somewhat nearer par than dur ing a week when only the slower boats are avail able It should also be noted that foreign central banks frequently allow immediate credit i in i i i o a . c ou for g ld wh le tr ns t Th s , of rse , br ngs the import point still nearer the p ar of ex o i un ic change . Impr vements n means of c omm a tion have reduc ed the normal range of demand

u i or i a exchange ﬂ ctuat ons . Twenty th rty ye rs ago the export point to London was above It i s n ow normally in the neighborhood of The import point was then i n the vicin ity of It i s now normally above Foreign Exchan ge 1 07

B utfrom what has been sai d itwill be seen that the exac t point at whi c h iti s possible to export or import gold at a profit i s subjec t to much variation even wi thi n short periods of time . The cable transfer rate i s always above the i u demand rate . It g ves the p rchaser the amount hi s u i i a i n of p rchase mmed ately, where s the case of demand exchan ge the proceeds will not be plac ed to hi s credi t until the steamer arrives on the other side si x to ten days later . The seller of cable transfers loses interest on the amount of hi s l at i h i s ala in i sa es once , s nce b nces the fore gn i un i l i are ato banks, wh ch form y draw nterest , nce a reduced . The interest r te on these balances is c i s r not , however, onstant . There , therefo e , a varyin g spread between the cable transfer rate i a i a . and the demand r te If, for nstance , fore gn exchange dealer i s getting I%% upon hi s balance in o aton e i at i L ndon t me , and another t me is getting he will naturally charge more for a cable tran sfer in the second c ase than he would in i u of fluc tua the first . There are al so spec al ca ses i tion in cable transfers . It somet mes happens that many persons defer mak ing nec essary re mittan ces in expectation that rates will go down i at the last moment . They must meet the r en a emen ts i g g on the other s de , and the demand at such times for cable transfers may cause the rate to move abnormally far from the demand rate . A glance ata newspaper wi ll show that in addi ti on to cable transfer and deman d rates there 108 F oreign Exc hange

— are a variety of other rates generally quoted r ’ banker s bills and various ki n ds of c ommerci al ill a for i io i b s dr wn vary ng per ds of t me . Rates for these bills are always lower than demand n o rates . If the demand rate o Lond n was ’ th e rate on bankers 60- day bills might be and itmight be found that the rate on a certain c lass of c ommerc i al bills was an d on an other kind The quotations on time bills are less than those for demand exchange by the amount of the varying costs of discounti n g them in or i u on i are ra the f e gn co ntry wh ch they d wn , an d by the stable costs of commissions an d stamp

r u - taxes . If the ate of disc o nt on a 60 day bank ’ i i s in uo a i er s b ll 3% London , then the q t t on for a bill of similar kind i n New York will be the sight rate of exc hange less the di scount an d other n ill u i s charges o the b in London . Sho ld the d count rate in London advance on that particul ar i of ill u a i ill o om k nd b , then the q ot t on w m ve s e what farther away from the sight rate The reason for the di fferent prices or quotati ons for the vari ous ki nds of time bills i s that there i s a scale of di sc ount rates i n the London market dependent u c a ac of ill o a pon the h r ter the b , the l west r te being on bills drawn for acceptance on a London or a c a c ou bank c ept n e h se . ill i ou oc u l ill B s w th t d ments , known as c ean b s, can be marketed by drawers of well - known and a i c di but r i ra i s est bl shed re t , most fo e gn t de g ve ri se to doc umentary bills of exc han ge . The seller

1 10 Foreign Exc hange

Documentary ac c eptanc e bills are of two kinds those whi c h are drawn for acceptance on a a o hi c are n on a merch nt , and th se w h draw bank or c c an u u a ept c e ho se . Doc mentary acceptanc e bills on merchants are regul arly disc ounted at a i hi r a in o an d c o u l sl ghtly ghe r te Lond n , nseq ent y the pri c e of suc h a bill in thi s country will be slightly lower than documentary bill s on London

i Fo hi r an . r a o an in b ks and bankers t s e s n , to creasing extent the bank ac ceptanc e i s di splacing the c ommerci al bill i n foreign trade throughout

. i l cu the world The mporter, for examp e , se res an acc eptance credi t for some deﬁnite amount wi th a well - known bank in hi s own or some other i ou r . i u h s or c nt y He then nstr cts agent , those r o u a o to a ill f om wh m he p rch ses go ds , dr w b s accompanied by shipping documents upon the ac c epting bank . Similarly the exporter may draw bills on banks in h i s own or in some other c ountry wi th whi ch h i s customers have established c a a c ept nc e c redits . n i a i a i The U ted St tes , l ke other r p dly developing c ou ri h as n oti n as a c an a re ci nt es , the p t ﬁn n ed y pp a amou of its r i ra i of o ble nt fo e gn t de , e ther exp rts or of imports . Demands for capital within the country have been so great that rates for loans have regul arly been above those i n Eu

ro e an mon c n r an d c i a i n . p ey e te s , espe lly London o an d am n o u o a Lond n , to the s e exte t ther E r pe n mo ma s a o a c ney rket , h ve , theref re , ﬁn n ed not only the trade between Europe an d the rest of Foreign Exch ang 1 1 1

butal - u o the world, so trade between non E r pean

c ountries . Le tus k a i ta e , for ex mple , the case of an mporta i o of w i a m u t n ool to the Un ted St tes fro A strali a . The most common way of arrangin g payment has been through the commerci al letter of credi t

on a London bank . Le tus suppose that a Boston u i s a u u a o wool ho se bo t to p rchase a c rgo of wo l . It will secure through some foreign exc hange banker in th i s c ountry an acceptance credit wi th a

. m of i i London bank Under the ter s th s cred t , the agent in Australia of the Boston wool house will be empowered to draw documentary ac c ept ance bills up to a certain amount on the London o u i bank . Up n the p rchase of the wool a b ll on o i s i i i the L ndon bank drawn , and w th sh pp ng documents attached i s sold to some Australi an u un i i ban k . Th s the f ds are provi ded w th wh ch i to pay for the wool. The Austral an bank sends the bill with the documents to its London cor s i in il ill re pondent , and at the same t me ord ar y w sell an equivalen t amount of sight exc hange agai n st the credit which itwill secure i n Lon don through i No in the discount of the documentary b ll . one Australia h as an y further connection with thi s of u li transacti on . The correspondent the A stra an bank in London takes the bill with its documents to the London bank on which iti s drawn for i o acceptance . Hav ng been accepted by the L ndon n i i i u ba k, wh ch takes the sh pp ng doc ments , the bill i s discounted in the open market by the 1 1 2 Foreign Exchan ge

o of u ali a i L ndon agent the A str n bank . Th s provi des fun ds to meet the sight exc hange whi c h us i the A tral an bank h ad sold . The London bank whi c h ac c epted the bill then sends the documents to thi s c ountry to the foreign exc han ge ban ker through whom the arrangement was made or

s i i ro o perhaps to a h pp ng b ker . The wo l house c ann ot get possessi on of the wool until itc an get the

i l of a i n an d c a a n ot b l l d g , the ex h nge b nker need give up thi s doc ument until he i s provi ded with fun ds to purc hase the sight exchange on London nec essary to meet the payment of the bill

c o an u o a c epted by the Lond n b k . Th s every ne i s s c u at ac a in ran ac i o in e red e h st ge the t s t n , so far as the wool itself may be regarded as u sec rity .

T o i u ra a ci of or ma ll st te the ﬁn n ng exp ts , we y take the c ase of a shi pment of goods from the c i United States to South Ameri c a . The ﬁnan ng i s a i n a um of i r n a but h ndled n ber d ffe e t w ys , one f of them will serve or illustrative purposes . A c ommi ssi on house exporting goods to South Ameri c a will c ommonly be paid i n 90 - day drafts on om o on a r a ou A ri s e L nd b nk, d wn by the S th me c ommi i o c an purc haser of the goods . If the ss n

ou ai u il i l a u it ill a h se w ts nt these b l s m t re , w be — lon g time outof its money the time that the

o are i n a i ou i c a i go ds tr ns t to S th Amer , the t me that i s required i n sendin g the bill of exchange to i o o i a r a . o L nd n , and n nety d ys the e fter S meth ng like six months will elapse before the maturity of

1 14 Foreign Exchange

rc a i i m i c i t ure me h nd se sh p ents , wh h can sec either from New York or direc t atthe rate at whi c h these bills on receipt will be di sc ounted in

n o r i c u i Lo d n or elsewhere . It the efore n rs no r sk from ﬂuc tuati ons i n foreign rates of discount ﬂuc tuati on s whi ch the Ameri c an banker would hardly be i n position to forec ast . Having pur chased time bills ata rate whi c h i s less than the deman d rate of exc hange by the amount of the di sc oun on a ri l a tax an d c ommi io t r va , st mp , ss n, ill ma c n on for i u the b s y be at on e se t d sco nt , and atthe same time the foreign exc han ge depart ment may sell an equivalent amount of demand i c a . c ur if or a ex h nge Of o se , the f e gn exch nge a a r c a to a u ri s m n ge res ss me the k, he need not sell demand exc hange equivalent to h i s purc hases of time bills ; butif he h as not very muc h capital

or i an d i to a oi rac i c all all to w k w th , w shes v d p t y ri s rom uc ua io i n c a a iti s k f ﬂ t t ns ex h nge r tes, ’ r i n aril ssible to o d y ,po do so . The many banks sc attered all over the country whi c h have foreign exc hange departmen ts do n ot di rec tly have anything to do with the de termi i nati on of the s ght rates of exc hange . They are determi n ed by the operati ons of a c omparatively small number of dealers i n exchange i n New York

o of are i a a i n rm an d City . S me them pr v te b nk g ﬁ s , others are the managers of foreign exchange de n i p artmen ts of b anks a d trust compan es . These instituti on s an d ﬁrms nec essarily inc ur a c ertain amount of ri sk in c onnec ti on with foreign ex Foreign Exc h ange 1 1 5

bu an d c hange dealings . They y sell a more or less i a u of si c a indeﬁn tely l rge amo nt ght ex h nge . If it i s believed by on e of them that rates are going

o i i ff - i d wn , he w ll be l kely to o er a good s zed block

i c a if a o si of s ght ex h nge , and nother takes the ppo te i a vi ew he w ll be prep red to buy. Dealings be tween the large foreign exc hange houses are re flecte d i n c onstant slight vari ations i n demand i rates of exchange . Somet mes the exchange market ui butat i iti s in i o i io is . q et , t mes a fever sh c nd t n Those who are engaged i n the foreign exc hange business i n New York must take ac count of every i nfluence wh i c h may i ncrease or diminish the i i h amount of fore gn exchange mater al . W at may be called the foreign exc hange materi al con si sts in the first plac e of all sorts of time bills drawn against or resultin g from exports and All of i l imports of merchandi se . the commerc a ill a i i i b s dr wn aga nst cotton sh pments , gra n , ui u al a c ro u s i . pet le m h pments , etc , b ld p b n es on th e other si de against whi ch exchange may be s l a i i c a u o d . Interest p yments sh pp ng h rges , to r ist n i 1n u i i i u of expe ses , deal ngs sec r t es , ss es American securities marketed abroad or resold to i u all i i c a th s co ntry, prov de fore gn ex h nge

io ll i a In addi t n to a these exchange creat ng f ctors , there are temporary loans made by one foreign i n i market another fore gn market , by means of e l in ﬁnance bills . Thes oans may be made a variety of different ways . The foreign exchange 1 1 6 Fore ign Exc h ang e

u in o n o i oo c r i ma ho se New Y rk e j y ng g d ed t y, for am a i u o o o o s o ex ple, dr w b lls p n a L nd n c rre p ndent a in i r mo . on c c p yable th ee nths These b lls , a ept a o o c s o ma r i nce by the L nd n orre p ndent , y be ead ly di c ou u i i ri ca c s nted , th s g v ng the Ame n ex hange ou e a a a c to u of i an d h s b l n e the amo nt the b lls , enabling itto sell an equivalent amount of sight

an i n i i s exc h ge New York . Th s what ordi narily a n s i n a o i h ppe the c se f fore gn borrowing . N 0 ac tual mon ey c ommonly moves between the two

i n mar . i i ar o o a a kets S m l ly, b rr w g may be rr nged by an exc hange dealer for on e of h i s clients who ma o i c o y dep s t llateral as sec urity . Proﬁt on these foreign loans i s largely determined by the c ours f i for o c a a . u e the s ght ex h nge r te S ppose ,

am a i ra of c a i s ex ple , th t the s ght te ex h nge and that a long bill i s drawn an d sold at a

i f r d f e enc e reﬂecting the disc ount rate on London . lo i l u o o u When the ng b l mat res , the b rr wer m st i purc hase s ght exc hange wi th which to take itup . If the sight exc hange rate i s then still at$41 86 he will have pai d only four cents on eac h pound But for the use of the money during the period . in the even t that the sight rate has gone up to

h i s oa i s mor c os as i a i l n e tly, he w ll be p y ng

c for ac ou ﬁve ents e h p nd . Foreign short - time loans do n ot ordinarily occasion movements of money into the borrowing

u but u c c o . co ntry , they freq ently he k g ld exports They are seldom made except when rates for loans are relatively low in the lendi ng market an d

1 1 8 Foreign Exchan ge

i hi a limi rro i W t n moder te ts , bo w ng by means ’ of a r i ill v a u u u b nke s t me b s ser es sef l p rpose , i f a tendi ng to steady the s ght rate o exc h nge . In the absenc e of these bills a comparatively slight exc ess i n the demand for or supply of exchange would c ause rates to move vi olently between the a export an d import points . When dr wn for the purpose of steadyi n g the exchanges they are sometimes spoken of as anti c ipatory bills . Bank ’ ers i for am are ul a a b lls, ex ple , reg rly dr wn by New

or in ar u u iti s Y k the e ly s mmer months , beca se known that i n the autumn a great quantity of commerci al bills will come into the market in c i o of an i conne t n with exports cotton d gra n . Anticipatory bills are in no sense different from ’ i i s im a hi other bankers b lls . It s ply th t wit n limits an d atcertain times they really are anticipa rm i i s m im u tory . The te ﬁnance b lls so et es sed in a ro a if omm c i a i de g tory sense , as c er l b lls were the only perfec tly reputable variety of bills of ’ i l c a . a r are o l ex h nge B nke s b l s , h wever, essentia for smoo or i of c a the th w k ng the ex h nges, and the danger that they may be drawn to an exc essive exten t an d c on tribute to the c reati on of an un soun d situati on i s n otpec uliar to this method of

o borr wing . From the foregoing disc ussi on itmay have been observed that there are two more or less di stin c t — groups of foreign exc hange markets borrowing

n d n i n o ro i markets a le d g markets . The b r w ng

a are um r u i l i ma m rkets n e o s, wh le the end ng rkets Foreign Exchan ge 1 19

are i a i few, w th a strong tendency for s ngle market ir to acqui re nearly the ent e business . In many ways iti s advantageous to have one ci ty in the world whi ch serves as a center for international payments . London became the central money or a i all a a a market of the w ld , re p ng the dv nt ges of i i u it to a o that pos t on , beca se has been able bs rb wh atever amount of foreign bills might be sent i thither for di scount . Th s i s an essential condi ti on for the normal workin g of the exchanges un der a system of settlements largely concentrated in a single market . The market on whi c h bills of exchange are drawn must be prepared to disc ount

i ri them . In order to avo d the sk of loss from u u i i n an k u c asin ﬂ ct at ons exchange , b ers p r h g time bills drawn on another country must be able to i c u at in d s o nt them once that market , so that they may be able to sell demand exchan ge against the proceeds . Exchan ge bankers in New York and i n all other x a da an d o if ra e change m rkets each y, ftener tes i an d o ar i u a change , rece ve spot f rw d del very q ot u tions from London correspondents . Spot q ota

io a i i are i c u ra t ns , as the n me mpl es , d s o nt tes on il o a i u a b ls already in London . F rw rd del very q ot tions are the rates at whi ch London bankers and di scount houses agree to take bills arrivi ng in the next mail from the market to whi ch they are u a q oted . These arrival rates enable exch nge bankers in New York and elsewhere to purchase time bills without running any risk from changes 1 2 0 Foreign Exchange in London di scount rates while the bills are in o a c i in transit . When d wnw rd tenden es London i ou a m o a a ma d sc nt r tes see pr b ble , the b nker y not take advantage of the arrival rate ; just as in the belief that exc hange rates are to advan c e he may il dec ide to hold the b ls to maturity . In fact the advantages and uses of forward delivery quotations are in every way analogous to those ari sing from i sc ou i ill s hi c a a r a i d nt ng b w h h ve l e dy been del vered. In on e c ase the arrangement eliminates risk during

ra si ri o i n o u in i the t n t pe d, the ther d r g the ent re life of the bill after itreac hes the country on whi ch i its drawn . It i s evi dent therefore that if time bills of exc hange are to be handled with a minimum of ri sk itmust always be possible to di sc ount them i n the c ountry on whi c h they are drawn . Thi s has a s os i in o an d alw y been p s ble L ndon , at rates whi c h have averaged somewhat below those pre ~

i i i i r a va l ng n other money markets . For th s e son and bec ause itfac ilitates settlements an d makes

s i a roa c a a i n all c ou i po s ble b d ex h nge m rket ntr es , foreign bills of exc hange throughout the world for many years prec edi n g the European War had ri c i a i been p n p lly drawn on London . Pers stent ffo i ill on o r a e rts to g ve b s other m ney cente s , not r i a i i ill bly Be l n , the st nd ng of the sterl ng b , have u c not s c eeded . In addi tion to its readiness to absorb the indeﬁnitely large volume of foreign i i eﬂe c tivel b lls , London also has exerc sed most y — another essential function that of accepting

1 2 2 Foreign Exchange

i ili l i a . poss b ty, became a arm ngly prob ble On Mon day demand exc han ge open ed at an d the foreign exc hange market was completely di sor

i ze hi c i in wa u i r gan d. T s ondit on was no y pec l a to or r i a a i New Y k . Fo e gn exch nge de l ngs between all of the money markets of the world were in i u i a sim lar abnormal state . In no other b s ness was the eﬂe c tof the approac h of the war felt so

i m i a all . m ed tely, gener y, and severely The com pli c ated an d delicately balan c ed mechanism of the i c a o u i fore gn ex h nges , devel ped d r ng long years of ac u i r u ik a u pe ef l nte co rse , collapsed l e ho se of cards . Two operations essential for the working of the foreign exc hanges h ad been instantly interrupted i a i l i i u u i and , ndeed , pr ct cal y d scont n ed , the b s ness of acc epting an d that of di scounting foreign bills of a in a exch nge London . When London ce sed to r o m two u c i m c i of pe f r these f n t ons , the e han sm the foreign exc hanges throughout the world in evita bly an d atonce bec ame c ompletely disorgani zed . Ac c eptors i n London were under heavy obligations on bill s of exch ange drawn by banks and mer

h u ou r in u r chants t ro gh t the wo ld , who t rn we e under obligation to remit funds to them before

uri o i n ill the mat ty f the b lls . Amo g these b s ao c epte d in the ordinary course of business were a um a u i in a to large n ber, mo nt ng the aggreg te many i i of u m ll ons po nds , for banks and merchants in the c ountries whi c h wer e rapidly drifting toward

r mi c s ou c o wa . Re ttan e c ld n otbe expe ted fr m Foreign Exc h ange 1 2 3

hostile c ountries until after the restoration of

peac e . It was also c ertai n that remi ttanc es would be delayed in many instances in the case of bills ac cep ted for clients in allied and also in neutral

u i o i di s u a o asi co ntr es , w ng to the t rb nces cc oned

u r ak f by the o tb e o the war . In these circumstances ac c eptors i n London were in n o position to mak e c a an d v lu of ac c a c new ac ept nces , the a e the ept n e i was i u tself mpaired . It sho ld further be noted that exchange bank s in New York and in all other markets were under heavy c ontingent lia bilities on ac c ount of endorsemen ts of bills drawn n o Lo ndon ac ceptors . In the event of the failure of o o a c i ou oul L nd n c ept ng h ses , these bankers w d have to supply funds to tak e up the bills an d in th e disturbed condi tions prevailing mi ght incur seri ous l u ilu of r oss thro gh the fa re drawe s , to whom ul a i they wo d h ve recourse . Uncerta nty regarding the value of the London acceptance completely tran sformed the charac ter of the business of u i c ial i l u i b y ng commer b l s of exchange . A b s ness whic h normally i s hi ghly secure an d even routine in character was in a moment c hanged to on e surrounded with uncertainties of a most un ili an i c ul l fam ar d ncal ab e nature . At the same i i i a r u i as t me sh pp ng h za ds, and ncerta nty to c o di i in i u i market n t ons fore gn co ntr es , were taking away muc h of the value of the security whi c h the bill of ladi ng ordi narily gives in the il r a ai case of b ls d wn ag nst exports . Both exporters and those wh o might pur ch ase their bills would 1 2 4 Foreign Exchange ther efore be embarkin g upon venturesome trans

c i u r ac i i l o a t ons, tte ly l k ng the h gh y devel ped safeguards whi ch normally protec t international ali in o i i an d in i of de ngs , both c mmod t es b lls ex chan ge . The consequenc e s of the uncertain position in whi c h London ac c eptors were plac ed by the ap proac h of the war do n otseem to have been at i onc e fully realized even in fore gn exc hange cir cles . They were perhaps overshadowed by the presence of a o i or a i i i u ull c n ther d s g n z ng nﬂ ence , the f for e of whi ch was immedi ate an d obvi ous . From u 2 th i of u u Monday, J ly 7 , to the m ddle A g st , the business of di scounting foreign bills in London i i a was almost ent rely suspended . W th the p proac h of the war itmight well have been presumed that London would decline to quote forward delivery rates before the di scounting of bills i i already i n London was d sc ontinued . As t a n o o o a i u h ppe ed, b th sp t and f rw rd del very q ota i o r i c o i u at a i t ns we e d s nt n ed the s me t me , on

o a ul 2 th i i i n c of a M nd y, J y 7 , str k ng ev de e the gre t change for the worse whi ch affair s h ad taken over u a S nd y . Thi s di scontinuance of discount quotations by London was the most important single fac tor in the exchange market i n New York and elsewhere

u u r on o a ul 2 th . thro gho t the wo ld M nd y , J y 7 It i o c om a o a i o n ot nv lved a plete tr nsf rm t n , only of usi of rc i i but the b ness buying c omme al b lls , also of c ondi ti ons i n the demand exchange market

1 2 6 Foreign Exchange to adjust supply and demand in the exchan ge

a . i i i o a ul th m rket Beg nn ng w th M nd y, J y 2 7 , rates merely reflec ted the urgent an d even franti c i ul efiorts of part c ar purc hasers to secure exchange . uc ua d i but c i Rates fl t te w dely, as ea h transact on stood by itself they h ad n o general market signifi canc e . Through the assistance of the British Govern o was a u ment , Lond n ble to res me , toward the end of u u 1 1 c i an d i u A g st , 9 4, both the a cept ng d sco nt B ut mo i n g of bills . a few nths later a new cause i i i of fficul l . c d ty presented tse f Sterl ng ex hange , whi ch throughout the world h ad ruled far above

ar o im r u ak of p for s me t e afte the o tbre the war, ra u a c i g d ally beg n to de l ne , at ﬁrst slowly, then a i l u i itwas far o more r p d y, nt l bel w the gold

or oi o o . u u 1 1 exp t p nt fr m L ndon By A g st , 9 5 , sterling exc hange in New York h ad dropped to an d ﬂuc tuated wi dely over short periods

of im . o o a hi t e In ther w rds , the b se rate from w ch rates on all time bill s are calculated no lon ge r fluc tuated withi n narrow and definite limits between the export an d import points . It con sequen tly bec ame an unsati sfactory medi um in whi c h to enter into contrac ts for payment ata i i i i future date . Th s unsat sfactory pos t on of the sterling rate was due to the enorm ous irn portati on s of supplies to Great Britain on ac count of the war . Toward the end of 1 91 5 arrangements were finally made for fin ancin g these purc hases largely through the negoti ati on of loans in the United States ; and F oreign Exchange 1 2 7 thereafter the sterling rate was pegged at about The establi shment of a stationary base in i i c i al m ul i th s art fi anner co d not however, g ve that confidenc e in sterling whi ch rtenj oyed when subject only to slight changes due to normal trade in and c redit fluenc es . u a War it i l u The E rope n , w l th s be seen , created condi tions favorable to the development of the business of drawing bills of exc hange on other

a o in a i ula on markets th n Lond n , and p rt c r New

o i a l u si York , the m st mportant ﬁn ncia center o t de of i i a i i i the zone m l tary ct v t es . Fortunately the power to acc ept bills of exc h ange h ad been granted to the national banks by the Federal Reserve Act of 1913 and also to state banks i and trust compan es m a number of the States . i u o ca i Moreover, after the d st rbance c s oned by the u war m i c u o tbreak of the had been overco e , d s o nt rates in New York fell to a level di stinctly below

ra c ir that i n London . Under these favo ble c umstan c es American bankers entered the foreign

an as a or but exch ge ﬁeld ccept s and lenders , whether thi s busi n ess will be retai ned an d en larged im is u r i . i s a u nce ta n It advant geo s , both to r an d a ill a po ters exporters , to h ve b s dr wn on a

i l ra r a a a on c i i s ng e cent l wo ld m rket , r ther th n t es in each of the countries wi th which they are di n tra g . There h as been a broad market every i ill u l a where for sterl ng b s , beca se not on y tr de with E n gland butwith all countri es h as been handled by means of bills drawn on London . If a 1 2 8 Foreign Exchange prolonged period of peace i s to be anticipated at

o r war u r ma the cl se of the p esent , the s p e cy of th e L on don foreign exc hange market will probably i u if n a i o a i cont n e . On the other hand t n l enmi t es are to be continued an d strife i s merely trans ro a ar la ferred f m the b ttleﬁeld to the m ketp ce , the c onvenienc e of a central money market will presumably not be sufﬁc ient to warrant the risk

in e of u u . the vent f rther o tbreaks Moreover, if un a i i a i al i s o , h pp ly, ntern t on trade to be devel ped a i on l a i i i i for a i o a by n t a org n zat ons , pr mar ly n t n l o c a a for i i i ual r i t i bje ts , r ther th n nd v d p oﬁt , w ll be nec essary for eac h important c oun try to organi ze the ﬁnanc i al mac hi n ery needed for handling its

wn r o t ade . A c reditor position in the international loan market i s of great advantage in peri ods of ﬁn anci al strain with the possible excepti on of those occ a i n u f s o e d by the o tbreak o great wars . The contrae tion of loans to borrowers entirely dependent on l l of a u o as the oca banks co ntry cann t , we have al a i far i ou ri u re dy seen , be carr ed very w th t se o s

i n s i a f o d sturba c es . In the ca e of fore gn lo ns ar m re considerable contraction can be c arried through i o l without di fﬁculty . Loans of an internat na c a ac l h r ter can be placed e sewhere , both by foreign borrowers and those belonging to the country whi ch i s seekin g to strengthen its position .

or i n si i i ui d i M eover, the event that po t ve l q at on c m c i c iti s a o i be o es ne essary, s n e spre d ver a w de

r a it ill c au far i u c a e , w se less d st rban e than a

1 30 F oreign Exc hange of cash in order to give stability and strength to i i h as also the Engl sh cred t struc ture . It been a comparatively easy matter to main tain in London

r o a an d i ou i i a reh en a f ee g ld m rket , w th t exc t ng pp i in u i s c ommu i ou a s ons the b s ne s n ty , even th gh t times there might be large quantities of gold tak en for export . The foreign short - time loans of the other credi tor a uc as ari an d am a m rkets , s h P s Amsterd , h ve been i i ri u a o of less w dely d st b ted th n th se London , and c onsequently the possibilities of c ontraction som a have been somewhat less . A ewh t larger gold reserve atthe B ank of Franc e than atthe

an of n a oul r o s B k E gl nd w d , the ef re , eem to be nec essary to gi ve the same degree of strength to the c redi t struc tures of the two c ountries . In fac t the reserve of the B ank of Franc e has been many times greater than that of the Bank of n a an d n o ffo h as ma to i E gl nd , e rt been de establ sh a free gold market i n Paris . Frenc h economi c and ﬁn anc i al ac tivities woul d n othave subjected the c ountry to dan ger of depleti on of its gold

u i if n o r i h ad ac s ppl es, even rest a nt been pl ed on o mo m but o i c of a of g ld ve ents , the p l y the B nk Franc e i n thi s matter h as been determ ined by c o si a io i c i ill other n der t ns , to wh h attent on w be i i n a a c a ma g ven l ter h pter . It y, however, be a in a c an d i i n observed th t Fr n e, ndeed most other

u ri u u i c a c co nt es , nd e mportan e has been tta hed to the outﬂow of gold with a c on sequent un willingness to allow time an d opportun ity for un Foreign Exchan ge 1 3 1 derlyin g econ omi c forces to bring back exchange rates from the gold export point to a normal position . For markets in a debtor position in the inter national loan market iti s necessary to possess a large gold reserve in order to be able to meet all i i a contingenc es . Cred tor m rkets can compel p ay o a u u u ment . Debt r m rkets m st rely pon the m ch less certain resourc e of being able to retain foreign balances an d perhaps attrac t addi tional funds from mu other markets . They st possess suﬁci en t funds to meet foreign payments in case foreign balances are withdrawn . The smaller debtor

ar e c cu c i ra markets a stomed to rely, to a ons de ble u i i i s ‘ s ci all extent , pon hold ngs of fore gn b ll , e pe y

t on . u a our i s hose drawn London S ch res ce , i a u a u ri u however, n deq ate for l rge co nt es , s ch as i Germany and the Un ted States . The c entral in uc u i i ul if l banks , s h co ntr es , part c arly free go d a i i u u u m rkets are to be ma nta ned , m st acc m late large reserves of gold in normal times an d be prepared to supply from these reserves whatever amounts of gold may be needed for export or in ri n l i other purposes pe ods of ﬁ ancia stra n . CHAPTER VIII

TH E ENGLI SH BANKING SYSTEM

THE B ank of England owes its origin to the ﬁnanc ial straits to whi c h the government of Willi am an d Mary found itself reduc ed in carrying war i ui u on the w th Lo s the Fo rteenth . The u of i u i reven es the k ngdom were small , the p bl c i i of a cred t weak , and the very t tle the dyn sty

r unsettled . The g owing wealth and business of the c ountry had caused private banking houses to i i u spr ng up . The paper g ven by these ho ses to i c i o h ad ui i ul i o li i the r red t rs acq red a c rc at n , m ted i but uffi c i o o its i c ’ ndeed , s ent t sh w conven en e , and projects for the establishment of a public i i u i o on if n oton of nst t t n the scale , the model , the great c ontinental banks h ad been discussed for M c o The r an d i B a k n rints tce n i . 0 3 Le d o rac o i . 2 1 , y P f g, , p , p ’ " o m t s note w i c is sti re s at 16 An d see s i erve e 8 . g ld h h h ll p d , d d 4 ' Mac aula s Hi stor u ou m e tof 1 6 6 P vii . 1 . c ri s a y y, , p . 34 A p phl 7 ( ) on th e introduc ti on of pri vate ban ki ng i n Lon don i s gi ven i n fac M ’ M T as rt rt n s s si mi le by a i n i he Gr h opper (hi story of a in Co . an Lon on 1 8 2 2 n was a so r rin te in th e . 8 a d e b k) , d , 9 , p 5 , l p d

terl urnal o E c n omi cs an u r 1 8 8 8 An d e i bi d. uar J o o a . s e " y f , J y , , 8 2 for t m f r tion an u 1 8 8 8 . n o es of sc e es o a n a a J ly, , p 4 , h l b k, a tv r ous t h n n tur bro c hed a a i da es i n te seven tee th ce y .

1 34 The English Ban ki ng System form the c harter of the Bank gave little promi se of

its u u i or c . r a a o f t re mp tan e Th ee ye rs l ter , h wever, the nec essities of the government an d the em barrassme n ts of i c h ad i the Bank , wh h been obl ged

su a m i n 1 6 6 a r i to spend p y ent 9 , led to evi s on of c a in i c ou i of the h rter, wh h the tl nes the great i i su struc ture beg n to appear . The s e of notes

a a a on ma was au o i p y ble to be rer de nd th r zed , thus laying the foun dation for a true bank-note

‘ circ ulati on ; the monopoly of c orporate organi za

i was ra r i i a u i t on g nted by p ov d ng th t , d r ng the c i ua of a a or c ont n nce the ch rter, no other b nk or p orati on in the nature of a bank shoul d be allowed i n i om an d on a the k ngd ; , the other h nd , the capital was doubled by a fresh advan c e from the

oc o r to o i st kh lde s the g vernment , and the nterest a a s u to six p y ble by the latter wa red ced per cent . From thi s poi n t the growth of the B ank and the i increase of its inﬂuenc e were rap d . The c orpora ti on bec ame the c hief depository of the publi c

o an d a of r u in a m ney, the gent the T eas ry m ny n i i 0 i i n ﬁna c al operat ons . In 1 72 tcarr ed o a mad struggle with the South Sea Company for the con trol of the business of refunding the nati onal an d ma a l ou i iffi c u to debt , n ged , a th gh w th d lty, save its own credi t in the crisi s whi c h destroyed its

1 Th e n otes i ssue d un der th e ac tof 1 694 appear to have born e i n tere stan d ei n ma e to or e r c ou ave h ad buta imite , , b g d d , ld h l d rc ton o n otes of e ss tan £2 0 were i ssue un ti i n 1 ci ula i . N l h d l 759 ’ s u r 1 an 1 n erson s th e Ban k be gan th e i s e of n ote s fo £ 5 d £ 0 . A d

m rc ii . . 1 Ori i n o Com e e . g f , , p 4 3 The English Ban kin g System 1 35

ur an to rival . F ther lo s the government and addi tions to the capi tal of the B an k were made in i 2 i i quick success on . In 1 72 ts cap tal stood at l i e ill it al a near y n n m ions, and was so ble to estab li sh from its profits the surplus fund now called “ R an d u its i i r the est , th s to save d v dends f om i 1 i serious fluctuat on . In 782 the cap tal had ri sen l l i lf i to more than e even mi l ons and a ha , and n 18 16 ith ad ri sen to at whi ch figure l ith as stood ever since . Of the oans to the hi c i ar government , w h had r sen in ne ly the same i o i l u ai proport n as the cap ta , one fo rth was rep d in 1 8 u i al £ 1 hi c is its 34, red c ng the tot to w h pre sent amount . By the year 1 750 the govern ment had succeeded in reduci ng the interest on f i s an o t . most debt to the B k to three per cent , and ithas since used the opportunity afforded by the i i l i al per od ca necess ty for a renew of the charter, l ill u of its i to essen st more the b rden nterest , by requiring from the Bank an annual bonus and uni ar i i n i i of th e other pec y concess ons , cons derat on exten sion of its monopoly . i a i u ai Th s monopoly, d t ng , as has j st been s d, ac t 16 ac tof from the of 97, and confirmed by the ‘ 1 0 was u ac t 1 2 th e 7 7, f rther defined by the of 74 as “ f lu i i u i be right o exc s ve bank ng , the tr e ntent is l in l ing , as dec ared the atter year , that

No o a s a l c es a i s or al ther B nk h l be ere ted , t bl hed . lowe a iam an d a its notbe aw u d by P rl ent , th t hall l f l

n ch . 2 2 1 Geor e II. c h 1 . 6 A ne , ; 5 g , . 3 The English Ban ki ng System

for an o o i i c or or ora w a so r r c yB dy P l t k C p te h t eve , e e ted or to c or for an o r rson s w a so r be ere ted , y the Pe h t eve , uni or to un i in o n an s or ar n rs i ted be ted , C ve t P t e h p, c di n num r of six rson s "i n a a of ex ee g the be Pe , th t P rt r a tB ri tai n c a E n lan d to orrow owe or a G e { lled g , b , , t ke r ms of Mon on ir il u an Sum o u s or p , y S ey the B l o s a a at man or atan s im a N te , p y ble De d , y le s T e th n M r m orrowi n r o uri n ix on s o s th f the b g the e f, d g the Con tin uan c e of suc h said Privilege to the said Gov an cruor an d Comp y .

It i s c lear from thi s language that Parli ament “ ” understood by banking only the issue of

an d a u i ri i of notes , th t the excl s ve p v lege the B ank di d n otprevent the i ssue of such notes

ar rs i a i o six or by p tne h ps h v ng nly partners less , n or the performance of the other banking func tions by c ompan i es or partnershi ps of a greater i number of partners . Notes cont nued to be i ssu o i a i u ed by the Lond n pr v te bank ng ho ses , some of whi c h were of longer standin g than the of n a i l an d c u a Bank E gl nd tse f, by o ntry b nkers , of whom the number inc reased rapidly in the c on a of i c u se d h lf the e ghteenth ent ry . The iti s u a n otfar London bankers , tr e , beg n from the a 1 2 to i c o i u i u of o ye r 77 d s nt n e the ss e n tes , ﬁnding the c heck system i dentical in its advantages and more convenient in practi c e ; buttheir right of i u was l in a u i it l ss e mere y beyance, nt l was form a ly in ak a a 1 8 . c ou t en w y 44 The ntry bankers , o i a i ci s i u of o u h wever , w th m ny v s t des f rt ne, have c o i u i u of to i da u c to nt n ed the ss e notes th s y, s bje t

1 38 The English Ban king System

wi i di u i -ﬁve il vi th n the ra s of s xty m es , pro ded I they should issue n o circul ating notes . This legi slati on was followed by a great exten

- sion of j oint stock banki ng . The ‘ London and ' i oi - c i on e th e Westm nster J nt Sto k Bank, st ll of l a i of i in a e d ng banks depos t Engl nd, was estab 2 li sh e d a a of i u the next ye r, and many b nks ss e began business outside of the geographi cal limit . si o o too a i The exten n , h wever, was r p d to be sound ; the di sturbed condition of business affai r s for a large par t of the next decade stimulated agitation ; and publi c opinion was disposed to ﬁnd i n a vi cious note circulation the cause of the m f repeated c ommercial cri ses . The ter s o the act ren ewi ng the charter of the Bank of England gave to the government of Sir Robert Peel in 1 844 o o u i o i i r i i an pp rt n ty , b th for rev s ng the o gan zat on of a an d for u i i the B nk , p tt ng an end to the ncrease of i s u of oi - c the s es the j nt sto k banks , and the result was the passage of the measure known as “ ’ the B ank Charter Ac t of or Peel s ' Act i n i c are i a i , wh h embod ed the le d ng pro visi on s by whi c h the bank note circulation of

England an d Wales i s now regul ated . By hi i a u to ak t s act , Parl ment ndertook m e the o of of l cu n tes the Bank Eng and se re , and to

x h m h Geor e I V. c . 6 an d Wi lli a IV. c . 8 . 7 g , 4 :3 4 , 9 2 Th e Lon don an d Westmi nste r was for man y years un der th e mana m n tof ames Gi rt autor of severa wor s on e e W. a g J lb , h l k st h i s sa aci t For a an i n an d owes its e i en ce ar e to . b k g , x l g ly g y s ortac coun tof its ear stru es see Gi art ri nci les and h ly ggl , lb , P p ti c B anki n ed o 62 P rac f . . e of g ( . p 4 The English Ban kin g System 1 39

limi t the i ssue of bank-notes of all other ki nds a an i n Engl nd d Wal es . To ac c omplish the ﬁrst of these objects the ac t provi ded for the di vi si on of the Bank into two r m u m depa t ents , the Iss e Depart ent an d the

Banki ng Department . The former was c har ged exclusively wi th the i ssue and redemption of notes ; the latter was char ged wi th the other func tions of i i lu i di n r bank ng, nc d ng the or a y business of di scount and deposit ; and in all deali ngs wi th each other the two departments were made as independent as if they belonged to di stinct corpora For all i u i ti on s . notes ss ed by tthe Issue Depart ment was requi red to hold either government se uri i or oi or u i an d am u c t es , c n b ll on ; the o nt of securities whi ch itcould hold being limi ted by the original provi sion to itfollowed that for all notes outstanding in exc ess of that amoun t it in i u must have an equivalent the prec o s metals . As experience h ad shown that the ordinary uses of the country never failed to requir e an amount of notes hi gher than thi s provi si on insured the presenc e of coin or bullion for the redemption of all notes whose presentation for

' Th e ac tprovides thatof th e coin and bulli on he ld by th e Issue De r en on e ma be silver For th e reason for tis pa tm t ﬁfth y . h ' ro on ow a d s Debates Ma 2 0 1 8 . 1 . Th e visi se e H r p , y , 44 , p 334 an cease to o silver for tis ur ose i n Se tem er 18 B k d h ld h p p p b , 53, buttempora rily e xc hanged of gold for silver wi th the

an mi st ov 2 1 860 . Th e con i c n N . of ran e in 1 860 . co o B k F E , 4, d ti ons on whi c h silve r mightagai n be held we re state d by th e

i r Mé ai r I i nak ii . . 1 . an in 188 1 Con m on t e mmato B k . f , , p 39 English Banki ng System

a men t~ c ould ll o i an d p y be deemed mora y p ss ble , a itu c i i i u m de nne essary to ﬁx any l m t to the ss e . The ordinary business of the Issue Department

‘ was thus reduced to the automatic func ti on of i i out o i or c oi for n ote s I g v ng n tes for co n , n , to whatever extent and from whatever quarter such i ui exc hange m ght be req red . Under thi s arrangement the Banking Depart ment carri es on its business of buying securities u i i ts c r i in o o i u and s ng ed t the f rm of dep s t acco nts , on the same general princ iples on whi c h an y bank o i n i i s c o uc i s o of dep s t a d d scount nd ted . It b und m its n li a i i i in c to eet all dema d b l t es ash , and for hi u os it a i u ai n i s t s p rp e h b t ally m ta n a reserve , consisting either of specie or of notes i ssued by the u a m i c c i i Iss e Dep rt ent , wh h are onvert ble nto i i s ou to its a spec e . It b nd make p yments in o if so uir i o buti t g ld , req ed , l ke ther banks ; may make payment i n notes with the c onsent of the if for c o i c of its u o payee ; and , the nven en e c st mers , itﬁnds oc c asion to pay outa greater amount of o a it i i n a a to it n tes th n rece ves p yments m de , or i n osi it u o u uc o dep ts , m st pr c re s h n tes , as any an or ri a o us a i other b k any p v te pers n m t , by t k ng an equivalent amount of gold to the Issue Depart

Th e Issue Departmenti s also made an in terme diary be tween M r e u all o th e u i c an d th e int ein e uir to b o u i n p bl , b g q d y g ld b ll er stan r oun c e Th e oun c e i s c oin e into r d. a . offe e d at773 . 9 p d d d I th e i ffe ren ce e i n th e estimate e ui va en tfor a 5 . o d. 77 % , d b g d q l oss of in terestcause th e e la i n c i en tto th e ac tua c oin in l , d by d y d l g

M Han e On B an ki n . 8 . atthe in t. 9 k y , g, _ p

142 The English Ban king System

c irc l i ac t u inl l k s from u at on . The th s pla y oo forward to the ultimate wi thdrawal of all other o of n tes than those of the Bank England , and to i of a ac la r in the ﬁll ng the v cant pl e by the tte , a I r o i i mi ce tai n measure . N new ssues be ng per tted , r a u ou i i i eve y ch nge , however bro ght ab t , d m n shes

of c ou a - o l in use the amount ntry b nk n tes eft . The progress towards extinc ti on has been slower ill i c 1 8 u o i than was expec ted . St s n e 44 the a th r zed u a i u u i co ntry b nk ss e has been red ced , by the w nd i n u of u of i g p banks or by the s rrender the r ght , om to in a 1 1 is ue fr M rch , 9 7, s d i a h as a by n ne b nks and the Bank of England dded , u au o i ac t its i s u nder the th r ty of the , to own s es r c u i i u i i i i cove ed by se r t es only , nt l the l m t has r sen to B utiti s plainly n otthe poli c y of this legislati on that there should ever be a large i ula i o - ll i s c rc t n of bank notes . The sma est note u l ull s ed by the Bank , indeed the smallest awf y i u i 1 82 i s £ de ss ed by any bank s nce 9, for 5 , a nomination too large to make its way far from c i i and o of butli i use t es large t wns , and m ted i n 2 i u i o of even those places . A large c rc lat n

t For some comme n ts on th e in tention of th e actof 1 844 in this res ectsee c on omi st1 8 8 0 6 Some in tirn ati on s of p , E , 9, pp . 5 5 , 97. m ur for n in h u un a ere en Mr eas es e te iss e c o tr n s w i v d g by y b k g by . ’ s h i u e ansa d s De ates Go c en in s ts eec ril 1 1 8 8 . H r b h b dg p h , Ap 5 , 9 ,

P» 535 2 ti 1 ran cis Th e an i ssue n o n otes so sma as £ un . B k d ll 5 l 795 F , I 1 1 a ter Hi st B an k o En land mer . 0 . In or o the . y f f g (A p 797, f th e sus en sion itwas autori e to i ssue n otes of £ 1 butwit p , h z d , h r w em a ter th e return to s eci e Itma e a tem orar d e th f p . d p y Th e English Banki ng System 143

i i li i sovere gns , afford ng a so d bas s of specie i n th e of i l hands the people , w th a smal amount of c on vertible notes for convenient use i n the larger i i s i l i cash transact ons , the dea condit on towards whi ch the uniform current of Engli sh law h as been for di rected nearly ﬁfty years . In this matter l i its i on e - u Scot and w th conven ent po nd note , i l af i u wh ch has so ong been s ely ss ed , presents a tri i s k ng contrast , and Scotch example has been frequently appealed to by those wh o have urged i u u of l the ss e of s ch notes by the Bank Eng and . The substitution of on e -pound notes for soverei gns on any large scale would c hange materially th e practical condi tions under whi c h the Bank of l l i u its i ul i i Eng and has ong ss ed c rc at on . Leg sla tion for that purpose in the near future may be adopted to take the plac e of the one- pound and ten- shi lling currency notes issued by the Bri ti sh u u Government d ring the E ropean War . To illustrate more clearly the operation of th e act we will take the account of the Bank as itstood 1 8 i ou i September 7, 44 , be ng the acc nt on wh ch the i i act ﬁrst took effect . The s tuat on of the Bank at that date ‘ was as follows

imna of tem urin th e crisis at‘ th e end of 1 8 2 and in 1 8 2 6 but h d g 5 , tese also were wi th drawmbefore 18 2 in conformi t wi t an act h 9, y h asse i 1 8 2 Th e issue of £ 1 note coun r an ers w p d n 6. s by ty b k as

or i en as ear as 1 butwas ermi tte rom 1 to 18 2 . f b dd ly 777, p d f 797 9 In th e f n an statem i th e lanc e of an o t . c a ents Res . B k E gl d , ( , b the accoun t) mean s th e netproﬁts on hand ; Other De posits c ompri se in di vi dual de posits an d deposi ts by ban ks ; Seven-day i ls are ost-notes sti issue to a small amountGovernmen t B l p , ll d ; 144 The En glish Banki ng System

Resources

’ Go ernm n t e t 1 1 m v e d b £ . ns Capital se curi ti es Rest ti Other se curi es Publi c de posits Coi n an d bulli on Other Seven -day bills Notes

As no attempt was made by law to protect by c an c i al c a of i a i i i o preferen e y spe l ss l b l t es , bef re the ’ a a of l Ac tit oll a u c p ss ge Pee s , f ows th t the reso r es set down i n thi s statement were held equally for n otes and deposits ; and i ti s atleast conceivable that there mi ght be so strong a demand for c oin by d o i - or au ep s tors or note holders , both , as to exh st the i a i u of o was i o reserve , wh le a l rge ss e n tes st ll ut i i n i c a of stand ng , wh h case p yment the notes must u i n i be suspended . Th s the extreme pan c of c 1 8 2 c i ul i of a De ember , 5 , the o n and b l on the B nk was reduc ed to and suspension was i i i i l ou i mm nent , wh le notes were st l tstand ng , to the amount of Suc h a possi bility bec ame still more serious after the act of 1 833 c of o de lared that the notes the Bank , so l ng as c i u to i they ont n ed be redeemed on presentat on , should be a legal tender i n England and Wales i i n all payments except those atthe B ank tself . o i o c i n i It was , theref re , an mportant bje t , separat ng

De ti s th e oan ma e th e an to th e overnmen ti n or er b l d by B k g , d to se c ure i ts c harter ; an d Other Se curiti es in c lude loan s an d c to stomers u on se uri advan es cu p c ty .

146 The English Ban king System

The thoroughness of the provi si on here made for the sec uri ty of the bank- note i s attested by the ac a si c a a of c f t , th t n e the p ss ge the a tthere has never been a moment when the convertibili ty of o the n te h as been open to doubt . The lowest point to whi c h the notes in ac tual c irc ulati on out side of the Bank have ever been reduc ed was a i o £ 1 000 ooo i n c 1 8 8 l ttle bel w 7, , De ember , 4 , and thi s left i n the vaults of the Issue Department i n i i n o nearly spec e , w th demand i ton of i a u . for the p rt the p bl c Indeed , the a of a u ac t 1 8 B nk Engl nd note , nder the of 44, h as bec ome little more than a warrant entitling the holder to so muc h gold actually lyi ng in the au an d u u i as Bank v lts , th s the whole q est on to the solvenc y of the paper currenc y h as been removed

o of it a i a fr m the ﬁeld debate , where had been g t ted for o ma u ai s ny years . The Iss e Department g ns

o i n ro n i of c i c ula i o n th g f m a ncrease the r t n , and c an o o i i i i o l se n th ng by ts dim nut on . The wh le problem as to the bank- note i s reduc ed to a mere i n quiry as to the preferenc e of the publi c for coin or for c r i c a c li for i a e t ﬁ te al ng co n . It i s evi dent also that to the Banking Depart i ti s u a ment of no conseq ence , except as reg rds c i c r itu or o in its onven en e , whethe ses notes g ld

i it r l ith as l bus ness . If p efers go d on y to send i n for redemption suc h notes as itholds or rec eives c oun ts th e ban ki n g reserve was million s of n otes an d . 8 mi i on of coi n an d ot th e n otes an d th e c oi n an d u i on in th e ll , b h b ll

mi ion s. ac coun tof th e Issue De partmen twere rai sed by ll The English Ban ki n g System 147 i n the cour se of its busi ne ss ; if itprefers notes it o i n i ts has nly to send gold for exchange . Its reserve i s in fac t composed like that of an y other of or i for l bank , gold of notes wh ch are good go d , of i it u ur or both ; and th s reserve m st proc e , must ai n ai u i m t n , and in case of need m st replen sh , as u any other bank m st , by properly adjusting its purchases of securi ties . Its proﬁts would obvi ously be the same as now if i tdiscontinued th e of l so it use notes a together , except far as s busi ness mi ght be aﬁe c ted by the mere difference of c onven i i n ce ts u . l e to c stomers Indeed , near y the whole i of a l i l ncome the B nk of Eng and , beyond the s mp e u i of its a i l i s i ret rn on the nvestment c p ta , der ved from the use of its credi t in the form of deposits in f the Banki ng Department . So ar as concerns th e l i u of i n Issue Department , the on y poss ble so rce come Open to i tunder the act of 1 844 is limi ted to the interest recei ved on the government debt and s u i i it u i e ec r t es held by now amo nt ng , as has b en i to i i is f sa d , Th s nterest of set , how a h ever, by p yments to the government and by ot er u e u i h as charges , to s ch an ext nt that the q est on

ri u l it ul been rai sed se o s y , whether wo d not be for the advantage of the stockholders if the Bank were relieved from all connection wi th the issue of notes . Complete as i s the se paration between the de r ll pa tme n ts in theory , and genera y even in fact , i l i s u thas neverthe ess happened several t me , nder is the exceptional condi tions of a ﬁnancial cri s , that the embarrassments of the Banking Depart 148 Th e English Ban king System

ff c i u of o in a ment have a e ted the ss e n tes , manner not originally c on templated by the framers of the c ou o si o ith as ou c a t. On f r cca ns been f nd ne essary to di sregard that provi si on whi c h limits the securi

i u a or t es held by the Iss e Dep rtment , and m e than onc e besides thi s extreme measure h as been

I or to u n escaped wi th diffi c ulty. In der ndersta d a i i c of c u c iti s n e the re l s gn ﬁcan e these o c rren es , c es sary to take into c onsiderati on the c irc umstanc es under whi ch the B ank of England holds i ts banking reserve . The most striki ng fact i n the situati on of the B ank of England i s that the B ank i s the c enter of a

r a m of i - c i a g e t syste jo nt sto k and pr v te banks , whose aggregate business and li abilities are many

r a i ts own an d a to i times g e ter than , th t th s system of banks are c onﬁded the ﬁnan c i al affairs of the c ity whi c h may almost be said to be the Clearing

o or i s House f the w ld . It at all events true that many of the largest trades i n the world make their ' m i n o a c i a settle ent Lond n , and th t espe lly the ’ world s supply of gold there ﬁnds its natural i o i s ri i i i o f u o . u p nt d t b t n From th s two ld follow , even if Englan d were n otherself a great len der of a i a a a of i o s of i c p t l , th t m ny the operat n lend ng and paying undertaken i n other c ountri es must be

1 Th e limitin c ause of th e actof 1 8 was isre ar e or as is g l 44 d g d d , , “ ” c ommonl sai sus en e Oc to er 2 1 8 ovem er 1 2 y d , p d d , b 5 , 47, N b , 1 Ma 12 1 8 66 an d u 1 1 n ruar 1 86 1 an d 8 1 I e 57, y , , J ly 3 , 9 4. F b y , , M m e r 8 n i as cr ti c in a an d Se te 1 6 th e c o i ti on of th n s w i a ; y p b , 4, d g l an d in ovem e r 1 8 th e sus en sion of th e ac ta eare for N b , 73 , p pp d m a s n tim ro a e so e d y o p b bl .

1 50 The English Ban ki n g System

o i i a The p s t on of the Bank of Engl nd , then , i s not si mply that of a bank whose deposits are liable to sudden fluc tuations of a peculiar nature ; i ti s al so a o position f great responsibili ty . The Bank holds in its charge that on whi ch the solvenc y of th e in l of ban ks genera , the safety the commerci al li c of li pub , and the credit England a ke depend . Its managers have sometimes professed to regard itas simply a bank carried on for the profit of its own stoc kholders ; butso long as itholds the banking deposits ithas in its hands the financial safety of the whole community and the real leader hi of - c its s p the money market , and cannot es ape ac c ountabili ty for the manner in which i tper u i of its o i i o a forms the d t es p s t n . As reg rds the i ssue of notes its duties are too plai n and even mechani cal to throw upon itany serious burden i i ut i of th s k nd , b as the depos tory of the other banks iti s i n effect charged with the duty of i in provid ng large measure for the safety of all.

ourc of o i a Its s es pr ﬁt be ng the s me , however, os of o of as th e ther banks , the Bank England its i r do i n c i ﬁnds nte est , as they , the onvers on of idle c ash into loans and interest -beari ng c u i i an d i n i a se r t es , hold ng , therefore , no l rger i c i cash reserve than s requi red for safety . A t ng on thi s reserve by rai sing or lowering its rate of di s itma l i i u i o its count , y defer too ong the d m n t n of i i i ma u business by the ra s ng of ts rate , and y th s n o it keep i tself weak, dow to the m ment when i a needs to be strong . And tmay h ppen , moreover , The English Banking System

th e in u that reserve , be g s ddenly reduced by causes o r i not to be f reseen , cannot be a sed by the slow i of of i un i n i to act on the rate d sco t , t me escape all of mi sfort e I the consequences such un . In every case of remarkable pressure whi ch has oc c urred i ar i of n s nce the sep at on the two departments , a d n of hi o i most those w ch happened bef re , the real diﬁculty presented will be found to have been that of meeting liabilities for deposits with a i i n s ci e n t i reserve wh ch had become uﬁi , e ther from i u li o t cont n ed neg gence in the past , or fr m h e i ili a sudden poss b ty of demands on a gre t scale . Of these cases we will take as an illustrati on of the o i c i l i of present t p , the crit ca situat on the Bank

r l 1 8 in the g eat commercia panic of November, 57, a c ase whi c h may fairly be regarded as typical. There i s no doubt that in England the materi als i i for a cri si s h ad been long i n preparat on . Rap d comme rcial expansi on and a great extensi on of credi t had brought the usual results in the form un usi of ul i of unso d b ness , spec at ve prices , and of i i u extreme sensi tiveness to any threaten ng nﬂ ence . If no unusual pressure had occurred all might have passed 03 in a mere subsidence of activi ty and in general depression ; butth e sudden occurrence of a i i i disastrous revulsion i n the Un ted States , br ng ng i all ruin to some and carrying apprehens on to , developed a crisis whi ch took the whole community u u e of Great B ri tai n by surprise . In A g st the stat

‘ atthe an ma lea butcannotcon trol th e mark et Th B k y d , , by ’ c an es of rate see Ba eh ots Lombard Strut . 1 1 . h g , g , p 4 1 52 Th e English Ban ki ng System

of i n u i c th gs was reported to be not nsat sfa tory , an d n o fear seems to have been felt until th e i of ilu m ddle September , when heavy fa res in i i i of hi i New York , beg nn ng w th that the O o L fe Insuranc e and Trust Company on the 2 4th of i n i u u o . u A g st , became kn wn London St ll , altho gh a l a i an gold beg n to eave Engl nd for the cont nent , d the pressure i n New York had caused the c essation c i a i o of spe e exports to Engl nd , the d rect rs of the Bank of England seem not to have thought th e was u i c o 8 ifﬁ u i ou . d c lty ser s It not nt l O t ber th , when the news of the general suspension of pay ments i n Philadelphi a and Baltimore proved that something more than an ordinary embarrassment a i i i exi sted , th t they determ ned to ra se the r rate of r i i c it discount , f om the po nt at wh h had stood u 1 6 six i i since J ly th , to per cent . At th s po nt the i i cond t on of the Bank was disqui eting . In the course of three weeks ith ad materi ally increased its loa butwas lo i ri u its r ns , s ng se o sly from rese ve , so that the proportion of reserve to liabili ties had c uc for i hanged m h the worse , at a t me when general uneasiness was begi nni ng to make the commerci al publi c more than ever anxious to bor as u o i io i i row , a pr dent pr v s n for the uncerta nt es of i i u i i the mmed ate f ture . It may fa rly be sa d i i ul i of then , we bel eve , that a s ng ar tard ness ac tion on the part of the Bank was the immediate u of uc ca se m h that ensued . Without followin g the steps by whi ch the crisis r i i was i o i i f om th s po nt converted nt pan c , we w ll

1 54 The English Ban ki ng System of loans to the amount of three milli ons and a f o l . or o ha f Bef e the end the week , h wever , the f l state o affairs h ad become desperate . The genera alarm h ad deepened with the rapid suc c essi on of failures i n the c ommerc i al world and the suspen i of a of c a an d s on the gre t Western Bank S otl nd , the moderate increase of loans by the B ank of England i i i i had done noth ng toward qu et ng the publ c . Some sales of securi ties h ad been effected by the but ai u its r as ll Bank, the dr n pon eserve we as the ’ a i n i a i i o i o inc re s g l b l ty for bankers dep s ts c ntinued. The rate of disc ount was rai sed on the 9th to ten

il oi - per c ent . butwithout ava . The j nt stock ban ks an d private bankers had ﬁnally ceased di s u i so a th co nt ng , that from Mond y , the 9 , the whole demand for loans was thrown upon the Bank of

a r 1 1th h ad Engl nd , whose eserve by the fallen to “ " li or of its i ttle m e than one tenth other depos ts . On that day c ame the suspension of the City of l o a c au l G asg w B nk , sed by the genera alarm created by the failure of the Western Bank ; oth e r banks c alled for assistance ; an d a great di scounting i n i ﬁrm the c ty failed on the same day . In four a i i i th a a d ys , beg nn ng w th the 9 , the B nk dvanced u i illi o i to the p bl c over ﬁve m ns sterl ng , but without the effect of subduing the panic or stopping ai its i the dr n of reserve . On the even ng of the 1 2 th itfoun d itself with a li ability for deposi ts u i to hi illio an d a of amo nt ng t rteen m ns , reserve cash i n its B anki ng Department of only

Of ti s on was i n Lon on th e remain er ein h ly d , d b g The En glish Ban kin g System 1 55 an amount whi ch more than on e depositor could i c hi exhaust by hi s s ngle heck . T s feeble reserve i i l m ght be expected to d sappear before the c ose . of the next day. In all thi s there had been nothing resembling a

r run upon the Issue Department . Gold equired for export or for the interi or was indeed drawn ulti o ar for it o i mately fr m that dep tment , was pr v ded by those who were directly or indirec tly c redi tors of

ank i r r r ro the B ng Department , who d ew the efo e f m the bankin g reserve and thus caused notes held in that reserve to be presented to the Issue Depart

r m i B ut o n o ment for ede pt on . the g ld was t obtained by the presentation of notes hitherto in io h u i of a for ci rculat n or eld o ts de the B nk , from

l oth of c r to 1 1 of o m the O tobe the th N ve ber , the amount of notes thus i n the hands of the publi c i s shown by the ac c ount to have been almost wi thout h ad c u was a i change . What o c rred th t the Bank ng u i i of Department had been ca ght , at the beg nn ng u i an i ufﬁ i i a severe press re , w th ns c ent bank ng reserve and had been slow in taki ng measures for o i io c esc ape . The p s t n of the Bank was su h as th at of the London and Westmi nster B an k mi ght its run il have been , had reserve of cash down wh e i i i a l t ts liab l ty was large , except th t the at er had no chai n of dependent ban ks . It was a case of near of ilu i in its i approach fa re , as s mple essent als as that of an y private banker who i s unable to meet

e e h n ta D u ts th ranc es of te a . See arliamen r oc men h ld by b h B k P y , l 8 ‘ 8 57 5 . V a Do 55 1 56 The English Ban ki ng System

i s i or i h depos tors , any ncorporated bank whi ch i s not a bank of i ssue and meets wi th si milar mi s fortune . u on 1 2 th of Th s the Bank , the November , o i ll i reac hed the end f ts tether . Fo ow ng the

r c of a 1 8 or p e edent the ye r 47, theref e , the man agemen tinformed the "government of the criti i i o in i c r cal cond t n wh h they stood , and eceived in return a virtual authority for the i ssue by the Issue Department of a further amount of notes i ‘ sec ured by government securi t es . Thus em i powered , the Bank ng Department transferred to the Issue Department sec uri ties to the amount of i i o i n a i two m ll ns , and exch nge therefor rece ved

i c c i n r notes wh h were pla ed the rese ve . The operati on was i n effec t a sale of securi ties to the u a t in aul of u c a Iss e Dep r ment , def t other p r h sers , c i of a in a and the re e pt p yment notes , redeem ble on i c on presentat on . The effe t the Issue Department was to inc rease the absolute amount as well as the proporti on of notes i ssued by i tupon securi ties a of c oi or u i o i n inste d n b ll n , butthe notes d d ot

i Thi s prac ti cal se ttin g aside of an actof Parliamen twas in th e orm of an assuran c e tatif th e an oun itn ec essar to ta e f h , B k f d y k th e ste ro ose th e mini str wou ask ar i amen tto i n em p p p d , y ld P l d n ify th e Govern or and Company for an y con se que n ces of suc h n esi es th e i cation of th e e n tir corr s on i llegal ac tio . B d publ e e p d en ce in th e ar i amen tar ocume nts w i c h as e e n ma e on P l y d , h h b d “ e ver oc casion of th e sus en sion of th e an Ac tth e overn y p B k , g men tetter i s i ve n th e Econ omi stof ovem e r 1 1 8 and l g by N b 4, 57, all th e corres on en ce for 1866 in th e An nual Re i ster of tat ear p d g h y , P 305

1 58 The English Ban ki ng System

i u if u on of u nterr pted , do bt the part b yers pre sal a a m vents es , or emb rr ss ent of lenders pre or i i i a of vents d m n shes lo ns , the fears debtors to Whom the failure to make their payments punctu m a u ui i ally e ns bankr ptcy and r n , become at t mes man i s l u ungovernable . No any onger s re of any thi ng except hi s own indebtedness an d its near

i s a u i r l r o o maturi ty ; there n ve sa p essure to b rr w , o al of o even bey nd the re needs the m ment , lest borrowing should presently bec ome impossible ; and there i s a universal tightening of the grasp on all ready means by such as are so fortunate as to m sauce ni entof c have the . The g p mer hants ,

are s i a m who de perate as to the r me ns of pay ent , is as mutually destruc tive and as fatal to their of c a i s c u of a i - i c hopes es pe , as the r sh pan c str ken i c in i o ui i u c u i . a d en e , blo k g the ex t fr m a b rn ng b ld ng To a c ommunity thus dominated by universal or a of l n a l h terr , the B nk Eng a d was b e to say t at its potenti al reserve was now so enlarged as to ﬁx n o limit to its abili ty to extend its loans and all c o u i i i i f c i meet nseq ent l ab l t es . The ef e t of th s u a c in ass r n e allaying the panic was instantaneous . Men c eased to press for what might n otbe needed all o in i lo after , and the ther banks the c ty , no nger r a i i o o i re d e d ng demands from the r wn dep s tors , u i io c i s med the r operat ns . Conﬁden e had ndeed suffered too severe a shock to recover wi thout that proc ess of li quidation which i s c alled a revulsion of u i but i ui a i o i a of i im b s ness ; the l q d t n , nste d be ng

i a c oul r ua ou to a med te , d now be g ad l en gh en ble The English Ban ki ng System 1 59 debtors to c ollect and reali ze upon their resources li a i wi th some de ber t on . It was not then so much the four mi lli ons whi ch the B ank felt safe in adding to its securities in a us i of ac tof 1 8 week after the s pens on the 44, as the i i to u i i i u moral rel ef g ven the p bl c , wh ch const t ted l hi c ri i th e rea remedy by w ch the s s was ended . As for the c hange in the amount of the note issues i in i l ith a of the Bank , we may fa rly deny that tse f d i u c a ri i its u any nfl en e wh tever , so t fl ng was amo nt . o i su in c of u o li i The n tes s ed ex ess the stat t ry m t , c u in of u i c oo and a t ally the hands the p bl , st d at i i oi 2 0th of the r h ghest p nt on the November , when they amounted to and by the end of the month the Issue Department h ad returned i i ‘ iff to its normal cond t on . Indeed the d erence between the mi nimum and maximum of the out standi ng notes for the month was only The c ondi tions on whi ch this singular abandon ment of the terms of the B ank c harter has bee n allowed are jealously guarded . The B ank has been requir ed to pay over to the government all profits made by itfrom any increase of issues above ’ a u or i i i n 1 8 18 66 i the st t t y l m t , and both 57 and t

is o ini on tatth e re lie iven th e sus ensi on of th e Th p , h f g by p limi tfixe d by th e actis a moral reli e f and is notto be foun d in th e actua issue of n otes is c on rme th e actthatn eiter in l , Mfi d by f h Octo er 18 nor in a 1866 was th e issue of notes u on b , 47, y, , p — sec uri ties increase atall th e mere an nouncemen ttatsuc d , h h issue woul be ma e if n ee e for th e rese rve ein suficien t d d , d d , b g to ue th e ani q ll p c . Th e profiton th e increase of issues above th e limi tin 18 57 was 1 60 The English Ban kin g System was required to maintain its rate of di scount at r i o i e c . so o t u use i ten p ent , l ng as sh ld the perm ss on

i i i r o i a i g ven to t. As th s ate w uld dr ve aw y u “b s ness from the B ank as soon as the rate i n the gen r m h ou i c i i i su e al arket s ld fall , th s ond t on n res as spe edy a return to the legal limi t of the i ssue as i s ra i c a p ct ble . c i i o Whatever the ond t ns , however, the repeated resort to this extra-legal measure i s a remarkable departure from an elaborate sc heme of legi slati on in a or u i o n ot a i f v of a cr de exped ent , and d es e s ly i i i ts a a in i a ra i o . ﬁnd p r llel , even Engl sh dm n st t n

u i rai i And the q est on has been sed , w th good a o al al a i i i re s n , as to the re v ue of a leg l l m t , wh ch everybody believes will be set aside when it i i of a beg ns to press . No such m stakes man ge ment could now occur as marked the whole c ourse of the hi story of the B ank i n the ﬁrst half of the a was n ot ui c a last century . The B nk q k to le rn the real ri sks of its positi on and its responsibilities ; but i l ith as n ow ua i ts st l learned them , and g rds

i i i c a r ri a m a reserve w th v g lan e , by pp op te e ns , and

i r a oo r w th gene al suc c ess . It takes the al rm s ne a o m r it its u oma i of su th n f r e ly , sets c st ry l ne p o a i an d u i n a c ri i p sed s fety h gher , th s , the gre t s s of 1 8 it c a i i c iti n 73 , es ped the d saster wh h befell

1 8 57 i n a c onditi on of affairs not more dangerous . Upon the outbreak of the European War in 1 914 the ac twas again suspended by an Order-in ca cu ate on for 1 a s atth e rate of two per cen t., l l d 4 d y _ a D m s - 2 1 2 P rli amentar ocu ent 1 8 8 iii . . y , 57 5 , xxx , 7 , 75

162 The English Banking System

u i o u o it law an d l d t es thr wn p n , partly by part y orc of c irc um a c s i m ita hi l by f e st n e , wh ch ake gh y im a m m of o i i c i port nt e ber the body p l t , and yet t i s i n form a c orporati on intended to earn divi dends

r r o i s o For ma a fo the owne s f t st ck . ny ye rs after i ts foundati on itwas even forbidden by law

n to o m o a c i to le d the g vern ent , bey nd erta n

ow imi i ou a c i o of narr l t , w th t the express s n t n

Parli ame n tI an d a ou i th as n ow for o , lth gh a l ng

i a rus a an d h as at im c om t me been t ted gent , t es promi sed its own safety by i ts ﬁnanc i al support of

c u ith as r ai i n i ts ali the Ex heq er , neve f led de ngs wi th the authori ties to assert its own essenti al independenc e . c u i ri i of i i i i c om The pe l a t es th s pos t on , wh h s e i a to an o u c si c ati o of t mes le d err neo s las ﬁ n the .

a of an as a o r a B nk Engl d g ve nment bank , h ve been muc h emphasized by the manner i n whi c h the other c onstituents of the English banki n g system

o i n r i a have devel ped ec ent years . The pr v te

’ a i ou h ave ste adil c i i n u b nk ng h ses y de l ned n mber . The advantages of j oi n t - stoc k organ izati on and limited li ability have led i n many c ases to their absorption or c onversi on i nto c ompanies of larger

i a an d a i r o i of c ap t l , h ve h nde ed the pen ng new

ri a a if a li of u p v te b nks , even est b shments s ch a dec aying type c ould an y longer c ommand the credit on c e given to them i n the English ﬁnanci al oi n - oc d or . o r a an w ld On the the h nd , the j t st k limited c ompan ies have grown rapidly i n the last

1 h e e r 1 Thi s prohi biti on c on tin ued un til t y a 793 . T h e English Ban ki n g System

io in l i two generat ns , both re at ve and in absolute

’ n importanc e . They have felt the stro g modern tendenc y to c oncentration and by consolidations a imi i s i u but i have gre tly d n hed the r n mber , w th a i c r a nl of i i i u butof a vast n e se , not o y nd v d al , g i re ate i or . s g g mp tance At the ame t me , by the establi shment of branches they have everywhere brought themselves into c lose contact wi th the e l c o c i l li of ou so g nera mmer a fe the c ntry , that most of the ban ki ng of Engli sh trade and com is n ow ar i on i c merce c r ed by the r agen y . of l on o The Bank Eng and , the ther hand , having

li h r a 1 8 0 estab s ed eleven bran ches befo e the ye r 3 , n o in o 2 h as gone farther that di recti n . It enters into li ttle c ompetition wi th i ts younger neighbors for the business whi ch i s offered by the growi ng i u l io buti s i nd stry and wea th of the nat n , sat sfied wi th the scope whi ch its posi tion as the head of the banki ng hi erarchy affords for employing i i it a s its cap tal and the energ es of s man ger . Its long- exi sting prestige and prescriptive leader sh ip have enabled itto maintain relati ons and acquire an influence whose importance i s not measured by the magni tude of its banki ng opera i i it i s due . u tions Th s nfluence , m st be added ,

Ma were 10 o n t- an s in n an In 18 0 tere i stoc y, 9 , h 4 j k b k E gl d w Ma 1 1 t s and Wa es wi t ne ar t o ou an ran c es. In l , h ly h d b h y, 9 7, tere were on oin t~ stoc k an s butwit more tan six h ly 35 j b k , h h tousan ran c e For n lis an in statistics en era h d b h s. E g h b k g g lly, Ma see th e Banki ng Suppleme n tpublished by th e Economi stin y and Oc tober .

Th e locati on of its branc hes has un dergone some c hanges. 164 The English Banki ng System only indirectly and i n a small degree to any con n e c ti on a an d o between the B nk the g vernment . The fac t that the Bank i s the depository of the publi c moneys an d performs for a c onsi derati on o r u i c u c i o n ot i it some the p bl f n t ons , d es g ve in any spec i al way the protec ti on or support of the

o n n or ac iti n an wa u g vernme t , pl e y y nder the c o o or di c i o of an u i c offi c ntr l re t n y p bl er . Its present positi on an d power over the London money market i s a development from a lon g train of c auses whi c h have ﬁnally imposed upon the B ank some of the responsibilities of a publi c s i i o i o in t tut n . It s nly by degrees and reluctantly that i ts management have been led to rec ognize the fac t that the Bank i s under obligati ons essen ti ally different i n kind an d i n range from those

i n of i i r rest ng upon a y ts ne ghbo s . Perhaps the most striki ng illustrati on of an extra legal obligati on rec ogni zed an d ac ted upon by the B ank i s the ac ti on taken by i ti n the emergency c reated by the suspensi on of the great ﬁrm of Bar i n ro rs o n 8 0 C i m 1 . g B the . Nove ber, 9 The Bank

u r oo i a u an d r then nde t k , w th gre t j dgment ene gy , to s u i c ro i i a ou a i ave the p bl f m a poss bly d s str s p n c .

T o do i itn ot n l r i ts r th s , o y st engthened eserve by borrowi n g from the B ank of France r u si a o m and f om the R s n g vern ent , u itu o i aid o r an b t nderto k, w th the of the b ks and

r ua a a at u i banke s , to g r ntee the p yment mat r ty i i o of ai i ou an d of all obl gat ns the f l ng h se , to look for repayment to the gradual collec ti on of its

166 The English Banki ng System by usage a part of the board i s changed every year ; butthe changes take place among the younger members , so that after some years of possibly i mi i i ’ u nter ttent serv ce , the d rector s ten re of hi s position i s practically for life . After many years he usually bec omes deputy governor for two years i n due a i an d i rot t on , then governor for the l ke term , ‘ after whi ch and for the remainder of hi s oﬂi ci al life he i s a member of an executive council of

r mi of directo s known as the com ttee treasury . i o u fi The d rect r enters pon of ce , therefore , at an l i i of i e ar y age , and reaches the pos t ons most act ve responsibility only after a long training in the c i ul Ban k i tself . Su h an organizat on wo d hardly if butitis be proposed the case were new , , no ou i i of d bt , well ﬁtted , to preserve the trad t ons poli cy and of management which sec ure the Bank o i c a fr m rap d h nge .

h otLombard Str On te governmen tof th e Bank, see Bageh , eet, CHAPTER ‘ I"

THE FRENCH BANKING SYSTEM

ROM1 l f 1 6 i F 793 to the atter part o 79 , bank ng l i a i i n can hard y be sa d to h ve ex sted France . The government tolerated n o i ssue of paper exc ept its ’ ai d E sc om te i for own ; the C sse p , wh ch many u li years before had been the only p b c bank , had u i i u been s ppressed , and the t mes were too d st rbed ri i i for p vate bank ng to ﬂouri sh . W th the dis r r c i u i o assi nats appea ance f om rc lat n of the g , i u dats terri tori au and of the r s ccessors , the man x, the i ssue of notes appears to have become a matter of i to common r ght , be undertaken by anybody who could gain the conﬁdence of the public ; and accordingly a bank of issue called the Cai sse des Comptes Courants was organized i n Pari s in l l 1 6 its the ast ha f of 79 , and began opera io i ai T o t ns w th f r success . w others of some i a i 1 800 mportance were est bl shed by the year , besides some smaller ones of which little i s now kn own ; and in Rouen a bank of dis count and i ssue was in active business as early as 1 i l 8 . s i u 79 It clear that , w th the ret rn of order y v n e governme nt and the re ival of cre dit , the e d of s bank be gan to press. 168 The Fren c h Banking System"

Under these circumstances the Bank of France was l i in i in 1 800 i a so establ shed Par s , w th the encouragement of the government an d even with ir o ul of its oc o r but the F st C ns as one st kh lde s , still upon a footing n otessenti ally different from

of it i or c a i l of that s ne ghb s . Its p ta

ra la ro o an fﬁ f ncs was the rgest yet p p sed , d the di c ulty for raising itled to a fusion wi th the Cai sse des

m o r tn o o o c r a u a bu . Co ptes C nts , mon p ly was e ted u i c u au o i a ou of One p bl b re , h ld ng a l rge am nt u was ui to i i n a of th e f nds , req red nvest them sh res a an d a o i a i n it new b nk , l rge dep s ts were m de by il al ou a o the government ; st l , th gh f v red , the Bank of Franc e stood legally upon an equality wi th the I an o i or So far it i i rest d n th ng m e . m ght be sa d that the ﬁeld was open i n France for a wi de an d iffu i o a i acili i free d s n of b nk ng f t es , and that by the new establi shment the government pointed out i i the way for ts c it zens . 1 80 o a o u c In 3 , h wever , N p leon anno n ed a com lete a of o i c an d a of c p ch nge p l y , the B nk Fran e was endowed wi th the exc lusive pri vilege of issue i n i 2 u il 2 1 8 1 8 its i l Par s nt Sep tember 4, , and cap ta

— ourtois Hi stoi re dos B an nes en France . 108 1 12 . Th e C , q , pp arti c es of associ ati on c on tai ni n th e statutes of th e an l , g B k, r M r a o te th e s are o ers atth e starta e i n th e onitou d p d by h h ld , , 5

Pluv . V . 2 an uar III ( 5 J y , 2 t Ban ks of i ssue c ould be forme d outsi de Pari s with th e con sen of th e overnment butn on e were esta i s e unti a ter th e g , bl h d l f es a on For evi e n c e of th e ac ti ve osti it of a o eon R tor ti . d h l y N p l towar s oter an s of i ssue see ource e -Sen euil Trai té dos d h b k , C ll ,

O erati ons de B an ue . 2 16. p q , p

1 70 The Fren c h Banki ng System was now bec oming involved in the bold operations o r i i f the F enc h Treasury . Compl cat ons thus i i r u in in l ar s ng ed c ed the c ash the Bank , the atter a of 1 8 0 so far a it u p rt 5 , th t was fo nd necessary to limit the redemption of notes to francs i u i uc i c i ul c l da ly , nt l s h t me as spe e co d be o lected in uffi c i ua i om u io s ent q nt ty for c plete res mpt n . u hi i i a The res lt of t s cr s s , however, was not to sep o but o rate the Bank fr m the government , to c nnect them still more closely ; and in the spring of 1 8 06 a measure was therefore adopted whi c h definitely settled the charac ter of the Bank as a publi c i n stituti on but i ou a i i n es , w th t any alter t on the n tial i c i its i se pr n ples of organi zat on as a bank . By the doubling of its capital and the extensi on of I its ri i to 1 8 l its e i in p v lege 43 , not on y pre m nence c i l aff i butits u the finan a a rs . of France , absol te i o in u u so mp rtance the E ropean world , was ass red , l i s a i o i far as depended on eg l t n . At the same t me ir c i o of i o to the d e t n the Bank, h thert confided a oar of r c o was b d egents h sen by the stockholders ,

ra rr to a su - o t nsfe ed governor and two b govern rs , i i to be nom nated by the c h ef of the state . Under a government n ot incli ned to use power for its i i of c i i v own ends , th s spec es ontrol m ght eas ly ha e become a mere trusteeship on the part of the state ; under an emperor like Napoleon itmade the bank an i a — ri a o o i eng ne of the st te , a p v te c rp rat on , i as r a o i of its o ndeed , eg rds the legal wnersh p pr p

In 1 8 0 th e ri vi e e was exte n de to 1 86 i n 1 8 to 1 8 4 p l g d 7, 57 97, an 1 to th n d of 1 2 0 d in 897 e e 9 . Th e Fre n c h Ban kin g System 1 71

e rt buta u i omc e ar c l y, p bl c as reg ds the a tua u i employment of the property . S ccess ve govern ments in France have used thi s opportuni ty in different ways as the case has seemed to require ; u u as a l i n ur u c b ts ch N po eon made the Bank , p s an e 1 8 06 it ai i of the law of , has rem ned ever s nce , i i u i u o ah nst t t on s bject to the control , and ften i of ava lable for the needs , of the government the

1 day . In the closing years of the Empire thi s subjecti on of the Bank to the government caused a great i c of r ac io i r a ur i c n rease t ans t ns w th the T e s y , wh h became more and more compromi sing an d ﬁnally far exceeded in amount the advanc es made to the i i rc al u . o c comme p bl c When , theref re , Fran e was alli i n i 1 8 1 - 1 invaded by the es the w nter of 3 4, a o - o us i ti s o run by the n te h lders began , ca ed , pr b i a a able , ch eﬂy by the fact that the B nk ppeared n o i i c of i ts own to have ndependent ex sten e , and itagai n bec ame nec essary for thr ee months to li mit the amount of the daily redemption of notes

r u l a was u to f anc s . F l p yment res med in i 1 8 1 but ff i Apr l , 4, the settlement of the a a rs was u i u i i ts of the Bank p shed on both s des , nt l loans were reduced to less than francs

Th e statutes of th e an un er th e law of ri l 2 2 1806 B k , d Ap , , were es ta h e m ror an r 1 e Wo ow is e t e ua 6 1808 . S e bl h d by E p , J y , l ski as a ov B ulleti n dcs an Mon n uar 18 1808 e Loi s d i teur a . b , , , J y , ’ ' In Bloc k s Di cti on nai re dc l Admi ni strati on is a detai le d accoun t of th or ani aton f h an l Di ctionnai r d e i o te . See a so Sa a c: g z B k y, ' 1 72 The Fre n c h Banking System and its circulation had fallen from x i c 1 00 000 . l fran s to 5 ,7 , The enlarged cap ta of the a h ad oun i n o B nk been f d , even the latter years f ’ a i ul N poleon s re gn , to be greater than co d be used i o an d n o as as w th pr ﬁt , the Ba k had theref re , early 1 8 12 a a u of its , m de l rge p rchases own stoc k .

r o i u i n 1 8 16 u il i These we e c nt n ed , nt the cap tal uc to i i it was red ed francs , at wh ch po nt i i 1 8 8 rema ned unt l 4 . By the dec ree of 1 8 08 the Bank had been author ’ i zed to i com toi rs d escom te establ sh branches ( p p ) , u c to a o al lai s bje t ppr v by the government , p nly wi th the design of c entralizing the ban ki ng interests of the Empire under the lead of the great Bank i n i i c a i of Par s . Under th s de ree the est bl shment

r i n i was u t b anc hes Lyons and L lle nder aken , ou i i uc on e i n alth gh w th l ttle s cess , and was set i u u operat on at Ro en . The Bo rbon government i n 1 8 1 7 an d 1 8 1 8 c losed these branches an d estab li sh e i u a s d ndependent banks at Ro en , N nte ,

or au i i to i of i i o and B de x , g v ng them the r ght em ss n ,

r i i o o and thus reve s ng the pol c y f Napole n . The of u ol i i i a u for government J ly, f low ng a s m l r co rse a i a i s i n n at o t me , est bl hed dependent ba ks Ly ns , a i ill a ou ous l M rse lles , L e , H vre , T l e , and Or eans , and also authorized the Bank of France to ope n

1 Moni ur for an r 1 1 8 1 contains a re ort Th e te ua J y 3 , 5 , p by La tte ten rovi siona ove rn or of th e an i vi n in some ﬁ , h p l g B k, g g n s r h r 1 8 1 For ta es i vi n th e detail th e Operatio fo te yea 4. bl g g e a i n ures of th e ac c oun ts of th e an rom 1 8 00 to 1 8 see l d g ﬁg B k f 79,

Courtois Hi stoi re . 60 . , , pp 344, 3

1 74 The Fre nch Banking System

was thus rai sed to francs . At the same time the issue of notes of 100 francs was auth or ized and the total i ssue of the Bank was i li i lim ted to francs . Po t cal and soci ali st agitation had destroyed all commerci al conﬁdenc e an d a rapid liquidation went on ; the i c u of n off i in d s o nts the Ba k fell , spec e ﬂowed , and i n June spec ie payment was practically re l- i i mi sumed , and the lega tender prov s on ght

r a pe h ps have been abrogated with safety , had the i r l . u Bank been left to tse f The T eas ry , however , m a s nk o o u i i was e b rras ed , the Ba saw few pp rt n t es of u i its ou a an d a c s ng res rces proﬁt bly , adv n es to a considerable amount were therefore made by itto u c of the government . Partly as a conseq en e these advanc es the limi t of the note c irculation was i in 1 8 ra sed December, 49, to francs ; and the suspension of specie payment was not ended an d the legal -tender power of the notes il ro u u u 6 1 8 0 . dest yed , nt A g st , 5 By these means , i its own u c a ded by great pr den e , the Bank not only passed thr ough the gloomy years from 1848 1 8 2 i ou ri u o ut i u to 5 w th t se o s l ss , b cont n ed when affai rs were atthei r worst to earn a modest proﬁt it oc r i s o . o ts o for st kh lde s M reover, monop ly of note i ssue h ad been reestabli shed in prac tic ally

' the form i n whi c h i th ad been projec ted by Napo o an d all u u l i a io h as le n , s bseq ent eg sl t n tended to i i strengthen the ex st ng system . A great expansi on of the business of the B ank ’ 2 tat i a i n 1 8 . can d é c o e beg n 5 The " , wh h p ned the The Fren c h Ban king System 1 75

for s o i of i i l way a re t rat on mper a government , o i i al u c i at all events rem ved pol t c n erta nty . Com erci al c u i m conﬁden e there pon rev ved , and the di scoun ts and advances made by the Bank rapidly in 1 8 u i i inc reased , and 53 to ched a h gher po nt than was ever before known . In vi ew of th e general expansion i ti s n otsurpri sing that i n 1 8 57 the government determined to double the c apital ai si it a at of the Bank , r ng to fr ncs , i n ow u i o whi ch t stands . In ret rn for the extens on f its charter to 1 897 the Bank was required to make of a permanent th ree per cent . loan c m ir ou fran s to the govern ent , the ent e am nt derived from the i ssue of new stock whi c h was

s o mi u Pe r taken by the hareh lders at a pre m . haps the most important of the new featur es of the charter was the provi si on made as to the rate of di s its i count . For the greater part of ex stence the Bank h ad striven to maintain the uniform rate of s u of 18 08 h ad x at four per c ent . The tat tes ﬁ ed three months the maximum length of the paper to ‘ a i to i ou buti n ri of diﬂi c ult be dm tted d sc nt , pe ods y the Bank h ad sometimes lowered thi s limi t to

-ﬁ i -ﬁv ve e a . seventy , s xty , and even forty d ys In

1 8 o af it ri 54, h wever, and for some years ter , t ed at i l r of i u but ou i l var ab e ate d sco nt , then f nd tse f in 1 80 i c hampered by a law passed 7, wh h made i s x li i l l l i r . per cent . the m t of egal y char geab e nte est The charter of 1 857 freed the Bank by special

i o r i i i llo i itto exempt n f om th s restr ct on , a w ng u as it i a i i charge s ch rate m ght ﬁnd dv sable , w th the 1 76 Th e Fren c h Ban king System

o i i o o a ro pr v s n , h wever , th t the p ﬁts earned by c i ix harg ng a rate above s per c ent . should n otbe i i butc ri ma u d v ded ar ed to a per nent s rplus . The charter of 1 857 also authorized the i ssue of as ll a an notes sma as ﬁfty fr ncs , d the govern ment was empowered after 1 8 67 to requi re the

o i of r c i n r a pen ng a b an h eve y dep rtment . The

w r a ut or 1 8 6 i - B ank as eluct nt , b bef e 9 s xty ﬁve

r h a u ri i b anc hes d been a tho zed . The republ can

o r m i n 1 8 i i u g ve n ent 73 aga n appl ed the sp r , an d i n 1 8 8 0 all the required branc hes had been author

i z e d a ou r rou i n o , lth gh a few we e not b ght t opera i s la 1 8 8 2 i c a i ti on unt l a te as . S n e th t t me the number of c ommunities direc tly served by u i c as i n u the Bank has been f rther n re ed , part pon i i i i of butin om m the n t at ve the Bank , s e easure in response to requi rements imposed when its i i n 1 8 a ai in 1 1 1 c harter was rev sed 97 and g n 9 . In 1914 there were 142 branc hes an d a great n um ‘ “ f xili ar oﬁi c e s m i in all 8 ber o au y . , ak ng 5 3 places ba ca les n b . Although branches of the Bank of France do n ot r o u c i of o i pe f rm all the f n t ons the rd nary bank , the in si stent pressure for the extension of its facili ties affords striking evi denc e of the slow develop in of u i ac i i i ment France adeq ate bank ng f l t es .

' In addi ti on to th e n ec e ssity resting upon itas a central bank to keep i tself in a highly liqui d c on i i ra c i s u c ci l d t on , the Bank of F n e s bje t to a spe a statutory restri c ti on whic h narrows the ﬁeld of its i o a ma i sc ou o a operat ns . The B nk y d nt nly p per

1 78 The Frenc h Banking System deposit were established during the period of rapi d ec onomic advanc e whi c h marked the early years of the regime o f the third Napoleon . The u of o i a in a c h as o n mber dep s t b nks Fr n e , h wever , im lar i c as ca of atno t e been ge , and s n e the l t de de the nineteenth c entur y four large credi t i n stitu tions operating numerous branc hes have virtually c i mon opolized the entire field . The ons derable though declining number of private banking firms find iti n c reasingly diffic ult to hold their own i n c ompetiti on with the c redi t banks . These i s i u i o c om vi o u i ac o n t t t ns pete g ro sly w th e h ther, butonly within the narrow limits whi ch are largely determi ned for them by the magn itude of their Operati on s an d the wi de geographi c al diffusion of i o their branc hes . L ttle initiative can be all wed

ma a r of c u c the n ge s the bran hes , who are s bje t to rigi d rules an d constant supervisi on from the head oﬁi c e . Loans based on c onﬁdence in the c haracter an d ability of the borrower the bran c h manager cannot be permitted to grant sinc e he i s c ommonly a s ran r o l m t ge n y temporarily in the locality . S all regi onal banks operating a few branc hes could make suc h loans with less danger of frequent but a k of i ot a losses , b n s th s kind have n been ble to live in competition with the great Paris banks whi c h absorb the bulk of the loans of the hi ghest

u li u u r q a ty thro gho t the entire count y . With the opening of the Franc o- German war i n ul 1 8 0 a c r J y, 7 , the B nk of Fran e ente ed upon

os ma a i of its i s c the m t re rk ble per od ex ten e , Th e Frenc h Ban ki ng System 1 79 that i n whi ch its vi cissi tudes were most startli ng ri i al its i u r and c t c , serv ces to the co nt y most i ui u of its a a dist ng shed, and the s ccess m n gement

l r most bri liant . Three weeks before the b eakin g outof hostilities the Bank of France had in its ul l s ual its o va ts a reserve of cash a mo t eq to n tes , and amounting to nearly two thirds of all its cash liabili ti es . The approach of war caused a heavy u u for o press re pon the Bank loans , and both n tes i itin l a u an d and spec e were drawn from arge mo nts , began to ﬁn d their way either into private hoards i or into forei gn hands . Ne ther the government nor the public could see with patience thi s di s e rsion of i i itwas p a stock of spec e wh ch , felt , mi ght be an importan t resource in the desperate u l i u i of str gg e w th Germany , and s spens on pay ment as a precautionary step thus became probable early in August . Shortly afterward the govern ment resolved upon the adoption of a measure sus

Th e c i e movemen ts in th e accoun tof th e an of rance h f B k F , cause th e war can be seen in th e o owi n ta e i ven in d by , f ll g bl , g mi llions an d ten ths

’ Di so d Publi c Notes Deposi ts Cash P aper Loans

18 0 une 2 7 , J 3 1 Aug . 1 8 Sept. 808 . 1 8 1 une 2 7 , J 9

June 2 3d was th e day when the cash was ati ts maximum for 18 70 ; August1 1th was th e day be fore th e suspension ; no accountwas u lis e e tween Se tem er 8 1 8 0 and une 2 p b h d b p b , 7 , J 9,

18 71 . ‘ 1 80 Th e Fren c h Ban kin g System '

di th e i i l o i a i o pen ng collect on of commerc a bl g t ns, and thi s made the suspension of the Bank a n e c es f u u u sit. 12 th o y On the A g st , then , fo r weeks i ni of war a law was from the beg n ng the , passed , as m u i buton e di a govern ent meas re , and w th ssent in o i n u u o i i g v te each ho se , a th r z ng the Bank to u a of its in ci ref se p yment notes spe e , and for the second time in its hi story making its notes a i n legal tender for debts publ c a d private . The i ssue was atthe same time limited to

a an d au ri was i for i io fr ncs, tho ty g ven the em ss n of notes as small as 2 5 francs each . On the next u u 1 was a day, A g st 3th , p ssed the first of the measures establishing a moratorium which post all o ci a on e o poned c mmer l debts for m nth , and suc si io of im u i ul then , by ces ve extens ns t e , nt l J y, 1 8 1 i u u 7 , w tho t other b rden to the debtor than i i i 1 li ab l ty for nterest until the final payment . on 1 of u u i i of And finally, the 4th A g st , the l m t issues by the B ank was raised to ra c on u a to c on i u f n s, the gro nd th t for the Bank t n e its disc ounts itmust have a wi der margi n than was a o l i c o ll wed by the aw of the 12 th . Th s mpleted the series of measures under the authority of which the Bank was admini stered during the war .

3 Un der th e operation of thi s law th e Ban k of Fran ce held sus en e a er to th un r n Of p d d p p e amo tof n early f a cs. ti s mor h e than two thirds was pai d in before th e e xpiration of th e legal term of in dulge n c e ; an d of pri n ci pal an d in terestless than on e er n w ti o oi t. n C urt s ce as s un ai atth e e d of 1 8 . p ll p d 74 , Hi stoi r 2 e . 6 . , p 3

1 82 Th e Fren ch Banki ng System

i 1 80 di s The brief statemen t g ven on p . shows tin c tly enough the c hange whi c h a year of war ff i f a had wrought in the a a rs o the B nk . An enormous loan h ad been made to the state simul tan e ously wi th an inc rease of di sc ounts for in di vi duals an d i h ad f c , th s been ef e ted partly by the ac i c of ca an d ar an i r a s r ﬁ e sh p tly by nc e se of notes , the volume of whi c h n ow stood nearly

c o i i r fran s ab ve the h ghest po nt ever befo e reached . Thi s inc rease of notes had been managed wi th c au io i it c il great t n , so that wh le ne essar y expelled

m i cu a i i ra u of i fro c r l t on a cons de ble amo nt spec e , ith ad nevertheless brought about buta slight depreci ation of the paper ’ ; and with the repay ment by the government of the advances made it r i of i to by the Bank, the resto at on spec e

a r mi to . p yment p o sed be easy The government , i i n i i u however , was for the t me no cond t on to nder ak a i h ad t e the p yment of a domest c debt . It before it ro m of a i rm a in the p ble p y ng to Ge ny, the next two or r a a i i of th ee ye rs , the gre t ndemn ty ﬁve M ri an d a 1 8 8 0 i s a care u re ortu on tese loans an d Ap l y, , f l p p h u on tei r su se uen t a m n t p h b q p y e . 1 Durin g th e war quotations were made of e xchan ge on Lon don an d oc c asi on a of o in i catin in on e e traor inar case a lly g ld , d g x d y remium of our er c nto e ter h re storati on of e . n ci e te p f p sp . Af or er o c ease to be uote an d th e ri ce of e c an e on d g ld d q d , p x h g n on e to e ve of r e remium See th e Lo d f ll a l l about1 p e c n t. p . Econ omi stfor uotation s ot n on an d in ri Léon q b h i n Lo d Pa s. ' ’ Say s Rapportsur le P ayemen tde l Indemn i té de la Guerr gives a c hartshowin g th e rate s of e xc han ge in Paris on Lon don from un e 1 8 1 to Se tem er 1 8 J , 7 , p b , 73 . The Fren ch Ban ki ng System 1 8 3

il i n i c itwas thousand m l o s of francs , to wh h bound by the treaty of peace ; ithad yet to learn how far its credit would enable itto mak e thi s payment by i in al r borrow ng the gener ma ket , and the most that could be hoped was that itshould not have f i to call upon the Bank or further a d. The latter ul for l ar to co d not expect , therefore , severa ye s m i th e u i it co e , to extr cate reso rces wh ch had lent to the state . Butwhile the Bank thus saw its resour ces un available for a movement towar ds speci e pay itwas al all u i at ments , so c ed pon to ncrease once i i i the ass stance g ven by tto commerce . It was of paramount necessity that productive industry u u its ivi i ou a it sho ld res me act ty w th t del y, for was after all in the produc ti on of wealth and its proper use that France must ﬁnd the means of escape from the economi c mi sery caused by th e it tri i of in war, and was the h ft and prosper ty di vi duals u u i on i that m st s pport the cred t , wh ch the country now relied in making its settlement i u i with Germany . Spec al preca t on was needed to insure industry from being starved of its needed u i i al il s ppl es of cap t , wh e the government was

borrowing the vast sum to be paid to Germany . The Bank therefore took the bold course of rapi dly enlarging its discounts and advances to i i u ak i l in u ndiv d als ; and to m e this poss b e , a co ntry where deposi t accounts and checks are butlittle u it u ri e in 1 8 1 sed, was a tho z d December, 7 , to increa se its issue of notes to not more than ’ 1 84 The Frenc h Ban king System

’ a an d in u 1 8 2 i i was fr ncs , J ly , 7 , the l m t fur ther extended to Such an in of a i a orc i cul i ui crease p per w th f ed c r at on req red , as the con di tion of possible safety from seri ous

r c ia i o u ul i ci o dep e t n , a f rther exp s on of spe e fr m all o u i u use . The sm est n tes th s far ss ed by the B ank were notes for 2 0 francs authorized by a law of 1 8 0 but law of r December, 7 ; the Decembe , 1 8 1 ai si li i of l i u of o 7 , r ng the m t the tota ss e n tes , n ow authorized the issue of notes as low as 5 ra c an d u acili a i uc i o f n s, th s f t ted the ntrod t n of the a a i all of ula i o b nk p per nto the channels circ t n ,

small as well as great . i u u a W th the gro nd th s prepared, the gre t scheme for the simultaneous payment of Germany an d i o rev val of Franc e was carried through . The g v e rnme n t orr w in all ma of u o b o ed the rkets E r pe , i c u i a of a but al u th e n l d ng th t Germ ny, c led pon B ank of Franc e for nothing more than two or r a a an n ot a in oun th ee tempor ry dv ces , l rge am t

n i an ou its i sc ou a d soon repa d . The B k d bled d nts of c omm r i al a a e c p per for the next three ye rs , and for thi s purpose increased the note c irculati on u il atits u of c o nt maxim m at the end O t ber,

1 8 it ar c . 73 , ne ly rea hed francs From the data subsequently published itappears that the whole of the increase was made by the i u of of a 100 c an d ss e notes not bove fran s, the greater part of itby means of notes of 50 francs n i f a i r a a d less . The r sks o the oper t on we e mply om a its i l ou c pens ted by ga ns . A th gh the govern

1 86r Th e r n c an n stm , F e h B ki g Sy e

i in u 1 8 it at po nt J ne , 77, when stood wi an umu a io francs , sho ng acc l t n by the Bank of 1 in a over , 5oo , ooo , ooo francs three ye rs and a li al i of u . h f, ndependently any made by the p b c

hi c i far i . Of t s spe e , not from s xty per cent was gold, itbeing the policy of the B ank to hold much c u ol lo ul gold , partly be a se g d a ne co d answer a use in i a an d l dem nds for fore gn tr de , part y because of the uncertainty whi ch obscured the future value of silver . The precise period at whi ch speci e payments should be resumed was determined by the law of u u 1 8 in i c it o i A g st 3 , 75 , wh h was pr v ded that when the advanc es made by the Bank to the State u a u sho ld h ve been red ced to francs , a i p yment of the notes in specie should beg n . By the end of 1 8 76 only francs remai ned u i it ul a ifﬁul npa d , and wo d not h ve been d c t at an y time in 1 8 77 to c omplete the operation . The was r i to a i u year pe m tted p ss , however, w tho t i al a in i tak ng the ﬁn step , the B nk the meant me li u i i dea ng pon the spec e bas s . A payment of hi l francs , w ch owered the government to ui i l a ro debt the req red po nt , was at ast m de p orma c 1 1 8 i a f De ember 3 , 77, and spec e p yment was resumed wi th the opening of the new year without shock and without muc h thought on the part of the publi c . By the terms of the law the o i u l all n tes cont n ed to be a lega tender for debts , are to- but i i ul i as they day, the r forced c rc at on

- a by non p yment was atan end . The Fren c h Ban ki ng System 1 8 7

At the moment of resumption the outstanding notes of the Bank amounted to nearly hi 000 francs . T s was a great reducti on from the axi u in 1 8 but am m m m reached 73 , the ount was still nearly double that whi ch had been usual

war . l a before the It soon became c ear th t , wi th the free choice between speci e an d paper afforded u i by res mpt on , France had adopted a permanently a ci r ula i i larger p per c t on . Th s was i n large measure due to the c hange of habit produced by an use of a — y protracted forced p per , a change

i c it i hl i ro a a a i o wh h makes h g y mp b ble th t any n t n ,

f uc i c ill il o a ter s h an exper en e , w eas y return t the use of paper an d c oin in proporti ons the same as w ou i a ere once f nd sat sf ctory . f a i i in 1 8 8 1 8 1 8 Un avor ble cond t ons 7 , 79, and 80 u li hi on e ca sed a moderate dec ne , w ch at moment lo i u Deﬁ wered the ss e to francs . i iall in 1 8 1 8 80 u c ent crops, espec y 79 and , ca sed l a o arge imports of wheat and he vy exports of g ld , a large proportion of the latter ﬁndi n g its resting place in the Uni ted States . The B ank of France r i i ua i i a of its a el eved the s t t on by some ncre se lo ns , butparted with not less than franc s f i o ts gold . With the return of good harvests the l was u i c oss of specie made p , and the n reased demand of the public for notes soon began to show i tself . Perhaps to some extent by the di rect i al exchange of spec e for notes , and in gener by an inc reased proporti onal call for paper in payments received from the Bank as compared with the use 18 8 The Fren c h Ban king System

of a in to it u a i p per payments , the notes o tst nd ng and the speci e holdi ngs of the B ank both began to i an d t a cir ncrease , the grow h of th t part of the ul i o i i in c at n wh ch s mply represents specie hand, and i s not an extensi on of bank c redits in proﬁtable

a i i . 1 8 8 i u oper t ons , became rap d In 4, the ss e having risen to the limit was rai sed i i i i to francs . Th s l m t was ra sed u i u i n all fo r t mes d r ng the next twenty years , ﬁ y gi ving the Bank the right to issue franc s . The importance of maintaining a limi t of circulation which i s certain to be rai sed before it i s butitis o a can be reached not clear, pr b bly ou if all in u o u i to be f nd, at , the freq ent pport n ty thus afforded for legi slative revi ew of the use i 1 wh c h the Bank makes of its extensive privileges . During 191 3 the circulation of the B ank vari ed a from to fr ncs , and its c i 8 1 ooo 000 spe e ranged from 3 , 5 , , to i u u ll far francs , be ng s a y not from seventy n f i c . o u per e t the ss e . o c c i c u c By the f r e of r mstan es , then , rather than o i i i a i o h as by p s t ve leg sl t n , the Bank of France been made the storehouse for a vast mass of

c i c o i r in c i ul i spe e , nven ently rep esented rc at on by - u in its bank notes , and th s holds charge a large

Th e c ommi ttee w i c in 1 8 re orte to th e C am er of h h , 97, p d h b De uties th e i e ten i n th e c arter ran rec o n i e th e p b ll x d g h , f kly g z d uti it of th e imitbutac ce e to itas ro a h arm ess an d f l y l , d d p b bly l , agreed to th e advan c e from 4000 to 5000 milli on s as affordin g an — am e mar in for some time to c ome J ournal O ici el 1 8 Doc. pl g ﬁ , 97, arl hambr 1 C e . 6 . P . , p 7

190 The Frenc h Ban ki ng System exc eedi ng franc s in 191 3 an d usually

a i a u ou ﬁf of h m k ng bo t f r ths the cas reserve , often rising above th at proporti on and less frequently falling below it. uc c of i ou of c i h as The s ess th s c rse a t on been , in a utn otm i due a a a p rt b a nly , to the dv nt ge o of o enj yed by the Bank France , as a debt r, lli f i i under the bimeta c system o the Lat n Un on . Having the legal ri ght to make in silver any p ay

n i c it o n otc a to in me ts wh h d es re make gold , the B an k i s able to protec t itself against an y demands i i c for a r . a n the l tte The h rsh ess of th s pol y, whi c h if stri c tly carri ed outwould isolate the interests of the Bank to the great inconvenience di sa a a of ommu i h as and dv nt ge the c n ty, been soften ed by the practi c e of making gold payments at a premium i n cases ‘where suc h conc ession appeared advi sable . The line whi c h separates such a practice from a depreciation of the local a i s a o but of a st ndard n rr w , the Bank Fr nce appears to h ave managed thi s deli c ate business wi th suc h caution as to be able to sati sfy the c casio l a ma u o it o na strong dem nd de p n for gold , wi thout di sturbing in an y seri ous degree that i i i 1 n a of c u o . se s t ve ndex , the r te ex hange p n London

La an ue de ran c e rac e a n otre r ime mon taire ui B q F , g ég é q ' ermetde a er e n or on e n ar en ta u r uire les sorti es d or a p p y g , p éd c c qui étai trée llemen tn éc essaire aux besi on s légi times du com merc e in te ati o a rn n l. “ ' La prime defen si ve sur l or a montré un e fois de plus son ’ effi cacit e e n ous a ermi s de mai n tenir le tau de l escom te é , ll p x p le us sta e e tle us mo r du mon e en tie r san s en er en pl bl pl dé é d , g The Fren c h Ban king System 19 1

This gold premium devi ce i s an eﬁecti ve means of preventing wi thdrawal of gold for export

i . l on e at any g ven moment It has a so been , u m tho gh by no means the most i portant , of the in fluences which have occasioned the inflow and retention of the addi tional gold whi c h h as been i a ac qu red by the Bank of France . The sh re of ’ France i n the di stri bution of the world s stoc k of gold i s a resultant of all the various influenc es whi ch have shaped the economi c situation an d de termin ed the financi al positi on n otonly of Franc e butof all other countries as well . If Paris h ad i i l ar it ul a ma nta ned a free go d m ket , wo d h ve experienc ed a far more considerable deman d from

- foreign borrowers for short time loans . On the assumption that suc h accommodati on had been granted to the exten t of many hundreds of millions of francs and to an increasing extent during the l or iti s i a ast twenty years more , certa n th t gold would have been somewhat di fie re n tly distributed u u i in c thro gho t the world , a l ttle less Fran e , a li ttle more elsewhere . T0 check this tendenc y itwould have been necessary in periods of intense l i demand for oans to advance d sc ount rates . By thi s means virtually the same result c ould have butit u a i been reached , wo ld h ve nvolved more aucun e fagon les afiairss puisque lo change sur Londres est " tou ours rest re voisin du a r - m tR ndu au Nam da j é t s p i . Co p e e Conseil Géné ral la B a 1 de n ue 8 . 12 . q , 97, p For some ac countan d cri ti c ism of tis o ic see Geor e lare h p l y, g C , n Mar m 1 1 - 1 1 Mo e ket ri . . er 0 y P , pp 5 192 The French Banking System variable and on the average somewhat higher disc ount rates in Pari s than ith as been found possi ble to maintain through the protec tion afforded by the premium on gold . It h as not been possible to maintain an invariable of i c ou butc rate d s nt , hanges have been far less frequent and rates have not been advanced so i u i far as in London or Berl n . In those co ntr es the poli c y of a low stable di scount rate could har dly have been adopted with safety owing to the spirit of active enterprise whi ch pervades the i i i s i bus ness c ommun ty . In France wi th t stat on i all i i all ary thr fty and , gener y speak ng , financ y a i u a i o i h as n conserv t ve pop l t n , the pol cy not bee outof ac c o i i i B rd w th the business s tuat on . ut the obvious advantages of relatively low and stable rates for loans to the industry of the country have n otbeen secured without loss of other advan o i ri tages . The g ld premium pol cy has dep ved Paris of the place whi ch itwould otherwi se occupy n i amo g the international money markets . Th s c on sequence of the gold premium poli c y i s recog nize d buto i i o i s i in a , p n n w despread Fr nce that iti s not too high a pri c e to p ay when acc oun t i s taken of the benefit of the low stable rates to the large number of small-scale producers an d dealers whi ch i s still a charac teri stic feature of French i a i a i econom c org n z t on . A large part of the loans made by the Bank of Franc e upon c ommerc ial p aper take the form of a i c ou of hi c a a red s nt paper, on w h adv nces h ve

1 94 The Fren ch Ban kin g System fraction i s made up of sums not exc eeding 500 i i u i at2 0 a c francs the m n m m be ng ﬁxed 5 fr n s . Experi enc e h as shown that the business thus carri ed on with the class of small dealers i s singu larl om o an d rall a in i y free fr l ss , gene y ste dy ts o m an d iti s for i r of c on m ve ent , the nte est all as as a a of om m t cerned , well m tter s e mo en to the

ral u i c a of ac u l b r gene p bl , that the v st body t a o rowers thus ultimately depending upon the Bank should be as little di sturbed as possible by c hanges f i of rate an d un certainty o accommodat on . That the small borrowers should be absolutely u i s i si ma sec red aga n t a r ng money rket , even by i i uc a m as s to . s h syste th s , not be expected The intermedi ary who obtains h i s own loans from the B ank ata rate lower than that generally prevaili ng must still feel a strong i n duc ement to rai se the rate whi c h he c harges to hi s own customers . The tendency of suc h a network of established relation i s o to mo ra i m o ar i u , h wever, de te th s te p r y nd ce men t an d to sec ure for the small borrower a part at least of the relief afforded b y the ﬂow of loans at a steady rate from the great bank . The term for whi c h the law of 1 857 continued — c usi ri il of a of a e o r the ex l ve p v eges the B nk Fr nc , “ to use c u o the st mary phrase , extended the

— n 1 8 i charter e ded wi th the year 97. A b ll providi ng for a further extensi on was presented by the government in 1 8 89 an d reported by a c om i s i n 1 8 1 mitte e i n the Chamber of Deput e 9 . The complete c hange whi c h thi rty years h ad wrought Th e Fre n c h Ban ki n g System 1 95

in li i al i al an d a cial c di i the po t c , soc , fin n on t ons of the questi on c aused the debate to tak e a wi de an d ro i l range , the p ject was st l before the Chamber i at its di ssolut on in 1 893 . The measur e returned wi i i in 1 8 6 an d n th some mod ficat on 9 , fi ally became o 1 1 8 in r a law, N vember 7, 97, extend g the charte l of 1 2 0 but i to i a u to the c ose 9 , reserv ng the leg sl t re the power to termin ate itwith the year 1 91 2 by a ff c an law to that e ect adopted in 1 91 1 . The h ges of 1897 and also those of 1 91 1 were mainly de si gned to secure for the government a larger share of n an d i iffu i of in the profits the Ba k, the w der d s on

an d ou u c u r its branches agenci es thr gho t the o nt y . No important alteration was made in the general structure of the Bank or in its admi nistrative o a organizati on . It c ntinues to be a b nk of the i i i i i al o i io law pr m t ve type , w th no spec pr v s ns by imi a i of its li ili i axi for the l t t on ab t es , except the m mum a a for its i u of i rr nged ss e notes , and w th no provision as to an y reserve to be mai ntained or for the speci al protection of any particular class of i i i i l abili ties . In ts government t s still where a c itu i i i io N poleon pla ed , nder the mmed ate d rect n e two sub - i of a gov rnor and governors , appo nted i butai and removable by the ch ef of the state , ded by a board of ﬁfteen regents , who are elected by u l e the two h ndred argest shareholders , and whos i act on i s subject to a veto by the governor . Easily as the authori ty of the governor mi ght seem to lead to the absorption of the Bank as a i i l th e part of the pol t ca machinery of the state , 1 96 Th e Fre n ch Ban kin g System

Bank has for a large part of its life maintained a o si a f i c n der ble degree o ndependence . Materi al c hanges in legi slation and important fin ancial operati ons for the benefit of the government have generally been the subject of treaty an d agree t c si f 1 - m . n a ri o war of 8 0 1 ent Eve the s the 7 7 , the ai d given by the B ank was for the most part wi sely measured with c areful referenc e to the mainten anc e of the c redit of the B ank as an i i n l independent inst tut o . The aw h as from the first rec ognized the importance of guardi ng the

ank in i r c r ui i o B th s espe t , by eq r ng that the g vernor shall atall times hold atleast on e hundred shares

f its c n d ac sub - o a . sto k , e h governor ﬁfty shares

B ut i a i r of ffi c r so the pr v te nte ests these o e s , far i i i i of ul dent ﬁed w th the nterests the Bank , co d not have protec ted itif the government of the day had not generally used great di sc reti on and forbearanc e

i i r i in their relat ons w th it. The governo sh p of the B an k appears to have been treated butrarely as a o i i ca of c an d h as r m i u c a p l t l ﬁ e , e a ned n h nged

r i a ac i n even by evolut on . Whatever t kes pl e the i i c a r a h as ar pol t l wo ld , the B nk been reg ded and h as ac ted as the supporter rather of government

a a i i r i o n d u ai th n of an dm n st at n , a has th s m n tain e d u u i c r di i c i s an nq est oned e t , wh h among the most valuable of the national resources for a great emergency . In the repeated di scussions whi ch ended in the as a law of 1 8 a of a o r p s ge of the 97, the pl n st te wne ship of th e B ank was urged wi th great ability by a

1 98 The Fren ch Ban ki ng System

i s descri bed as préci euses garant e . The terms and even the nature of thi s support were declared a a c o to a u i to be st te se ret , no m re be m de p bl c o of a al but a a than the c ntents the rsen s , the rr nge uc for i i r ufﬁ i ment was vo hed by the m n st y as s c ent . By a vote of 2 98 to 2 36 the Chamber refused

r for fu i i an d to p ess rther nformat on , by nearly the same vote itrejected a proposition for placing the cash of the Bank and its right of issue at th e command of the government to be used in the nati on al defense in the event of a general mobili

1 Sin c e th e outrea of th e uro ean War i th as ecome b k E p , b kn own thatth e Bank h ad agree d to advan ce th e State 000 r c n er c th e w r a d o an s ato e en t. urin a n n e ear terea ter f p d g y h f . S tem er 1 1 th e amoun tof tis a an as In v ce w ou e . ep b , 9 4, h d d bl d CHAPTER "

THE GE RMAN BANKING SYSTEM

WHEN the present German Empire was estab lish ed in 1 8 1 of l i l i u 7 , the reform the eg s at on pon currency and bankin g was felt to be a pressing e i i n cess ty . In their co nage some German states had ranged themselves under the thaler system an d u d ul but all others n er the g den , in there was a mass of old coin in circulati on of obsolete den omi il an nation s . The s ver st dar d had been adhered to by all . Every member of the North German nf i i i u u c co ederat on, except the c t es Hamb rg , L be k, i i li i was and Bremen , and the pr nc pa ty of L ppe , issuing paper currency for the supply of its own d i - r of i u . An ll wants ﬁna y th rty th ee banks ss e , wi th capi tals ran ging from marks to a i s u u had been est bl hed , each pon s ch basi s as the state or city establi shi ng itfound i u l i n good, some hold ng perpet a charters , some r rate d of i c o po for terms years , and some hold ng i only r ghts revocable at pleasure . These banks di ﬁere d materi ally as to the limit of their author i ze d i u u i f i i ss es , and were nder d f erent obl gat ons u i as to the holdi ng of reserve . To red ce th s mass of confusion to order and to establi sh uni ty of 199 2 00 The German Ban king System

s in c u i sy tem rrency and bank ng , whi ch c on stantly taxed the German mind for of the ﬁrst four or ﬁve years the new Empire . law m 1 8 1 i u i The of Dece ber, 7 , prov ded for n ty of coinage an d prepared the way for the subsequent introduc ti on of the gold standard by the ac tof 1 law of ril 1 8 i ul 1 8 . v J y, 73 Another Ap , 74, pro ded for the extinc ti on of the paper c urrency issued by

s ra a a i u the eve l German st tes , by cre t ng a c rrency of i i al u r i - i mper treas ry notes ( e chs kassensche ne) , i i o u at u convert ble nto g ld pon demand the Treas ry, butn ota l l an d u i i di s ega tender, a thor z ng the tribution of al a the notes to the sever st tes , to be u i n i u i u sed by them tak ng p the r local iss es . Of the imperial paper marks were i i u to a in a i o ul i d str b ted the st tes the r t of pop at on , an d more were advanc ed in amounts as uir an d i i aid l l i u req ed, w th th s twenty oca ss es , amounting in the aggregate to rather more than i i u . marks , were ext ng shed And n law of 18 of s ue ﬁ ally by a March , 75 , the banks i s

x Th e coina e aws of 1 8 1 an d 1 8 are to be oun wi t g l 7 73 f d, h ' c o ious an notation s b Soetbeer in e o s Gesetz ebun des p y , B z ld g g

D utschen Rei c hs . um e . an ti s artof th e vo e ei n , Th II , B d h p l b g ' a so issue se ar at D un su l d p ely as Soetbe er s eutsche Mzverfas ng.

See . 6 . For a translati on see Lau lin B i metalli smi n the pp 35 , 7 gh , United States 2 , p . 37. Th e German law of ul 18 i s o te n s o en of as a law de J y, 73 , f p k ” mon eti in silver In ac ti ro e f r coini n o mone z g . f tp vi d d o g g ld y an d su stitutin ti s for silver butitdi d n ot emon eti e th e silver b g h , d z remainin i n ci rc u ti on t er w in Lon on g la . A partof hi s silv as sold d e tween 1 8 an d 1 8 and th e remai n er is ein ra ua l b 73 79, d b g g d l y a sor e its conversi o i nto su si i ar coin b b d by n b d y .

2 02 The German Ban king System the imperial chancellor and also by the appoint a i i i i ment of the bo rd of d rect on , g v ng to the shareholders the election of a commi ttee charged i i wi th certa n duties of consultat on . Government control i s therefore far greater than that exerc i sed over the Reserve banks in the United States and somewhat more complete than in the case ui of the Bank of France . The Bank was req red i u to rece ve and make payments , and to cond ct i i i i al u other financ al operat ons for the mper treas ry, wi u i al a r tho t compensat on , and so to man ge f ee of c ost the receipts and payments of the several in states of the Empire . It was thus made every thing except its ownership a national bank on l l l u l its a arge sca e , a tho gh not the argest , and had l i fif privi eges secured to tfor teen years . Certain general regulations adapted the thirty two existing independent ‘ banks of issue to the u i ri of i ui new system . The excl s ve ght ss ng ban k -n otes was then given to them and to the i c a i a i i i Re hsb nk , w th prov s on for transferr ng to the latter any right of issue whi c h may be surrendered s by an y of the others . N0 limi t wa fixed for the a ci cul i but i a a aggreg te r at on , the poss ble ggreg te of notes whi c h c ould be issued without being covered by c ash in hand was fixed at i o al i a marks . Th s t t was then apport oned mong

Th e banks whi ch are here called indepen den t are often “ " esi nate as ri vate an s to di sti n ui s tem rom th e d g d p b k , g h h f “ ei ban B ta te are i ncor orate th e term in de e nd R c s . u s h k h y p d , p " rea ent appears less likely to be equi vocal for Ameri can ders. Th e German Ban kin g System 2 0 3

i due ar u f the banks , hav ng reg d to the amo nt o the notes previously i ssued by each and to their ‘ probable needs in the future ; and by this appor ti onmen tthe limit for the allowed uncovered issue of n i l i every ba k taken by tse f was determ ned . For all notes i ssued by any bank beyond thi s li i of u i u law ui a m t ncovered ss e, the req res th t ll l nk i ll cash sha be he d , the ba be ng a owed to u i u rm c oi co nt as cash for th s p rpose Ge an n , gold ul i r i l i i al - u b l on , and fo e gn go d , mper treas ry notes , and the notes of other banks ; and if any notes are i u limi u ss ed beyond the t , and not th s covered by c u i on t ash , a tax m st be pa d them a the rate of

u . i ﬁve per cent . per ann m To nsure the prompt i a i o of i s ul i s ui appl c t n th r e , every bank req red to report its condi tion at four ﬁxed dates in every of o an month ; and any excess n tes , shown by y r l o li i such repo t , above the a l wed m t and not i s 5 of covered by cash , then taxed one per cent . i s l ui l c i It a so req red that the cash he d , ex lus ve of ll in of the notes other banks , sha any case be al i al c i c ul i equ to at least one th rd of the tot r at on , and that the remainder shall be protected by di s u i n co nted paper , hav g not more than three months i u i u to run . The notes ss ed under th s system th s li i i i rest upon a so d bas s of spec e . By a prov sion prohibiting the issue of any notes of lower denomi n ation than one hundred marks the presence of an ample speci e circulation in the country was

' As to tis a orti onmentsee Soetbeer s B ankve assun in h pp d g,

ezo as a ove . 2 . B ld , b , p 73 204 The German Ban ki ng System

se cured and also a field for the rei chs-kassen schein e the mini mum denomi nation of whi ch was ten marks . The appli cation of these provi sions is best se en i c by reference to the accounts of the Re hsbank . The limi t of uncovered i ssue allowed to the Reichs bank by the ori ginal apportionment was l i 000 outof the tota marks . F fteen li i u other banks , however, dec ned to ss e notes under the condi tions required by the law and ten more wi thdrew their i ssue before 1 894 ; so that by ra of a i of i u the t nsfer these bandoned r ghts ss e , the unc overed limi t of the Reichsbank was raised to a i ifi i i m rks . The s gn cance of the l m t may be understood easily by taking any ac c ount of i s for l of a the Re ch bank, as examp e that M rch 0 i 2 1 0 . u 3 , 9 As the notes then o tstand ng were i i o v 8 o m ll ns , and the cash reser e 95 , the n tes exc eeded the cash by butas the allowed limi t of uncovered notes was then the B ank c ould still increase its issue by 1 54 million mar i ou u c i i ks , w th t s bje t ng tself to the five per cent .

s ul u r ; tax . It ho d f rthe be noted that the circula ti on c ould have been increased by more than 1 600 milli on marks before enc ountering the absolute l of on e i i i ui i imit the th rd rule . The d st ng sh ng of law e i s im novelty the German , how ver, the a o i si o i of port nt pr v n by wh ch the tax ﬁve per cent . i s imposed upon any excess of notes above the i i i o r o f c a n a . unc ve ed l m t , not f set by sh h nd The law makes c lear the general design of the law

2 06 The German Banking System that the government upon giving due notice may

ri an i n 1 8 1 wi thdraw the ght from y bank 9 , or at the end of any decade thereafter ; the ﬁxed limit of notes to be i ssued wi thout spec ie ; and the automa tic arrangement for the issue of notes against c ash — a i i all i above th t l m t , are closely cop ed from the

i s o B ut i i iff s Engl h m del . there are str k ng d erence i i whi c h are of fundamental s gn ﬁcanc e . The requirement that the cash shall amount in c a ir of o i s u u u l any se to one th d the n tes n s a , although the ratio thus insisted upon has long a i i i c u i o o i been f m l ar i n d s ss ns f bank ng . The notes of the German bank unlike those of the Bank of England are not sec ured by any spec ial pledge of the spec ie or di sc ounted paper whi ch the law ui to i i req res be held for the r protect on . Not only does thi s paper as well as the specie remain i n the o ssi o of i ui but i p sse n the ss ng banks , the law g ves to the n ote -holders no spec ial li en upon the paper or spec ie or ri ght of payment i n preference to other i r i n c red to s . The law short has simply provi ded ui a m a u a ffai a by s t ble e s res th t the a rs of each b nk, i nc luding its i ssue of notes and the money and uri i it i of sec t es held by , shall meet certa n tests oun n s i i u i s d e s , bel ev ng that both the lt mate sol ve n c y of the bank an d the prompt payment of its irc ula i o are u c i c t n th s made secure . The red t of the notes i s maintained by their stri ct c onverti bility an d by the law whi c h makes them every r c u i n whe e rrent payments to any bank of issue . Every bank i s required to pay i ts own notes on The German Ban ki ng System 20 7

i i al u pr esentat on ; the Re chsbank so, nder ordi n ary u c its i ts circ mstan es , pays notes at branches ; and every independent bank i s required to redeem i ts t an c in li in k no es at agen y Ber n or Fran fort , as i in a i i the government may determ ne , dd t on to

‘ o o redeemi ng at i ts wn c unter . Every bank of issue is al so required to receive at par i n payment i the notes of every other bank , w th the pro i u i c vi s on that all notes th s rece ved , ex ept those of

i c an u i r the Re hsb k , m st be e ther presented for e i or u in m a dempt on , sed pay ents m de to the i ui or in i i ti s i ss ng bank the c ty where establ shed . i i io i i i Th s prov s n , wh ch mposes a safe restra nt i s l i i c a o i upon the smaller banks , a so s gn fi nt fr m ts tendenc y to allow the Rei c hsbank al one to obtain in i i u i o anythi ng resembl g a nat onal c rc lat n . -i of i o s The note ssue the Re chsbank , th ugh ub i l u u i io jce t to cons derab e fl ct at on over short per ds , has shown a strong upward tendency , the average yearly ci rculation ranging from to ar 18 6 18 m ks between 7 and 86, and 1 o oo 1 be from ,oo ,ooo ,o to ,4oo ,ooo ,ooo marks tween 1890 and 190 0 . During this period the Bank inc reased its stock of coin in almost the i i l i but i same ratio . Its or g na hold ngs were l ttle i i n c i more than marks , wh le the los ng years of the century they averaged nearly ar i c i in 000 marks . A p t of th s spe e , as the Bank i a i m of France , was s lver, her tage fro the years of si lver c oinage before 1 8 73 . The amount of this i in 1 8 far silver, first d sclosed 94, was not from one 20 8 The German Ban kin g System

i i c of i th rd of the ent re sto k spec e held by the Bank . The proportion of coin and i ts equivalents ‘ to -i u h a o d . the note ss e never fallen bel w 55 per cent , as u u in i o of 0 and w s ally the ne ghborho d 7 per cent . o on e - i u It foll ws , then , that the th rd r le had never been of an y importance i n the operati ons of the

i s a i c o a l Re ch b nk , s n e the n tes had alw ys be en ess by many hundred mi lli on marks than three times

r i ts c ash rese ve . From 1 8 76 to 1 895 the note- issue not c overed by c ash seldom exceeded the limi t at which taxa in u i i ti on beg s . D r ng that t me the devi ce of the elasti c limi t was resorted to on ten occasi ons i on e ou i for s ﬁve t mes for week , f r t mes two week , r c and onc e for th ee weeks . The ex ess of i ssue

a i r 1 10 illi tw v r ed f om 9 to 9 m on marks , bu as of o never as muc h as ten per c ent . the t tal ci rcula eﬂe c tiv e n e ss of a i c i i tion . The the el st l m t in time of c ri si s was never severely tested during this peri od of twenty years butitwas found to meet wi th muc h suc cess exc eptional temporary demands for c urren c y whi c h under the ri gi d English system of issue c an be sati sﬁed only by the withdrawal Of specie or notes from the reserve of the Bank of ac u f i use of c England . On co nt o the sl ght hecks ' i n Germany the demand for notes i s so c on siderable that the Reichsbank would have experienced great

Th e e a e ui va en ts for coin im e rial treasur n otes and l g l q l ; p y , n otes of oter an s ave n ot ee n su e ctto mar e vari ati on h b k h b bj k d , se ldom goin g above thirty-ﬁve mi lli on or be low twen ty-ﬁve m i on mar s ill k .

2 10 Th e German Ban kin g System they were neither readily nor economi cally sati sﬁed under a system of i ssue whi c h permi tted no per manent inc rease exc ept in proportion to the i n ﬂow u o i c on ten of specie to the Bank . In s pp rt of th s i i ll u o t on , attent on was ca ed to the freq ent res rt to c in ‘ the elastic li mit in the four pre ed g years . Dur in g these years the tax was pai d for thi rty-four on u a i bein above weeks , the excess fo rteen occ s ons g a an d i i m rks , more than once r s ng to a of 6 1 8 l . u near y m rks The law J ne , 99, i i u o i renew ng the charter, accord ngly a th r zed an increase of the uncovered issue not subject to tax a li i i c to marks , m t wh h had been exceeded butseven times in the history of the

Bank . Thi s increase i n the uncovered issue not subject tax o i a u u i i o o to pr ved n deq ate . D r ng the per d f a to i i of its a ten ye rs the next rev s on ch rter , there was only a moderate increase in the c ash holdings of i c limi c the Re hsbank , and the t was ex eeded far more frequently and to a muc h greater extent r io a than ever befo e . With the except n of ye rs of u i i a i i i u of a b s ness n ct v ty , the ss e t xed notes became an almost constant feature of the opera a i o of tions of the B nk . The elimi nat n the taxa tion arrangement would have been the simplest l i l u i i and most og ca co rse , s nce the Re chsbank has never allowed li ability to the tax to inﬂuence its policy in the determination of the rate of di scount or

In 1 8 th e tax was ai for tree wee s in 1 8 6 for si xwee s 95 p d h k , 9 k , in 1 8 for n in e wee s an d in 1 8 8 for si teen wee s. 97 k , 9 x k The German Ban king System 2 1 1

u c di th e amo nt of re t to be granted . At the out o i i i set , bef re exper ence w th the work ng of the Bank had created unquestioned conﬁdenc e in the man emen t i i u i ag of the nst t t on , the tax on the notes l u ul u doubt ess served a sef p rpose . For the con ti nuan ce of the tax itwas urged that itserved i l u i m u i bu as a danger s gna to the b s ness co m n ty , t vi n i i i of u i e de tly , as an nd cat on of the need ca t on , itcould have little or no value if taxed notes were n t in i 1 0 to be co s antly circulat on . In 9 9 the li mi t on untaxed notes was rai sed to marks and itwas further provi ded that for the last week of each quarter the untaxed limi t should be i i 000 marks . This nterest ng modiﬁcation of th e law was desi gned to enable the Bank to meet the heavy requirements for cash which came at th e u in end of each q arter of the year when Germany, u i a to a greater extent than in most other co ntr es , i i l great variety of obl gat ons are payab e . Under these new arrangements and also owing to some i i n i i u n slacken ng the act v ty of trade , the freq e cy and the amount of taxed issues of notes were greatly reduced though not entirely eli mi nated during th e years immediately followi ng the i in 1 0 charter of the Re chsbank 9 9. The act of 1909 also made the notes of th e i u Rei chsbank a legal tender . Th s attrib te of note s issued by a central bank has little positive l h importance of a pure y banking nature . In te experien ce of the Rei chsbank the notes had been taken as readily as if th e y had been a legal 2 12 The German Bankin g System

an d al u in i u i of u e t tender , tho gh d sc ss ons the s bj c much was sai d of the importance of strengthening th e an iti s i a i i a n i i B k, certa n th t m l t ry co s derat ons

u r prompted the change . Upon the o tb eak of the u ar i n 1 1 m i o of i s E ropean W 9 4, the rede pt n Re ch o i m i a i c o i u bank n tes was m ed tely d s nt n ed , and every effort was made to substi tute the notes for i i the c oin in circ ulat on . The mak ng the notes a legal tender i n 1 909 was un questionably a wi se measure pavi ng the way for the mon etary arrange ments whi c h were to be adopted i f the country in should engage a great war . It was expec ted when the system was established in 1 8 75 that the Rei chsban k would ultimately ab i u all i ou sorb the ss es of the other banks , e ther thr gh the reli nqui shment of these rights by the banks or in c onsequence of the intervention of the i al o but i imper g vernment , the seven ndependent banks whi c h c ontinued to exerci se that privilege after 1893 di d n otappear lik ely to give up their u i . a of r o c ss es The B nk F ankf rt alone ex epted , they r all u i u i a in on e of o r we e o ts de Pr ss a , e ch the the of i o i o states the Emp re , h ld ng a sort of terri t rial i i o an d u i a i pos t n , s sta ned by the s me nﬂuences which in so man y other directions oppose the c om l t u i c a io of m ir i a a p e e n ﬁ t n the E p e . The r ggreg te n ote-i ssue was small in c omparison with that of the

e were th e an s of Sa on avari a a en Sout Th y b k x y, B , B d , h u tem n c e n o Ge rman Hesse W rt er an d ru swi . Th otes f y ( ) , b g, B k th e astcou circu ate on i n run swi c in ce th e an re l l l ly k , s k ‘ d B b e su ecti tse to th e en era restri c ti on of th e law of 1 8 fus d to bj lf g l 75.

2 14 The German Bankin g System

i o a i do not ssue notes , and wh se oper t ons have hi ma law not been regulated i n t s tter by . The use of notes i s still far more important in i - i ou i in Germany than Engl sh speak ng c ntr es , though deposit banking has been increasing i l rapidly in rec ent years . A cons derab e number i - of hi c i i ll of j o nt stock banks , many w h were or g na y establi shed primarily to facilitate the organization and development of large corporate enterpri ses l i u li c and the sa e of the r shares to the p b , have de veloped the business of deposit banking upon a l l i great sca e . The re at ons of these banks to the i l u u Re chsbank are ana ogo s to , tho gh in some c i in u li respe ts str k gly n ke , those of the London i - a jo nt stock b nks to the Bank of England . The German deposit banks do not maintain large reserve balances with the Reichsbank butresort to itfor re -di scounts whenever they experienc e any i ic cons derable demand for money . The Re hsbank possesses the only available store of spec ie in the c ountry upon whi c h the German banking world r to m i an ‘ can ely eet any extraord nary dem d . The poli c y of the Bank i s therefore primarily deter mi i u i its ned by the necess ty of g ard ng reserve , n ot c au iti u ut u i be se ss es notes , b beca se the cred t system of the c ountry i s built upon the foundati on of c i i n its ul i of i s u h as i spe e va ts . The r ght s e g ven an s i an an i o the B k pre t ge , d has been mp rtant

Th e oter n ote -i ssuin an s mustto be sure ee teir own h g b k , , k p h reserve a ain stteir n otes buttei r a re ate o i n s of s eci e g h , h gg g h ld g p n o mmon r se muc a mar s do tco ly i h bove k . The German Banking System 2 1 5

factor in th e accumulati on of the lar ge store of speci e in its possession ; butthe dangers of i ts i i i mus deplet on , aga nst wh ch the Bank t be ever

its ua do - o on g rd , not come from the note h lders , butare due to its c entral position in the German

ar l o . i m ney m ket L ke the Bank of Eng and , the Rei c hsbank resorts to the variable rate of discount o c its r i i its e i n i o to pr te t rese ve , ra s ng rat t mes f danger in order to restrain the exten si on of credit an d chec k the outﬂow of speci e The importance of the ac tion of the B ank i n thi s matter i s c learly ni in u i li recog zed Germany , tho gh at t mes , ke the it ri iffi ul in Bank of England , expe ences d c ty bringing the outside rates of the general money market up to a c lose approximation wi th its own c i rate . The Fren h method of the prem um on u o u u gold , tho gh str ngly rged pon the Bank , has n its a oi i out never bee adopted , m nagers p nt ng that the present policy h as been suc c essful i n the past for the acc umulation an d protec tion of i c i ts sto k of spec e . The speci e held by the Bank i s not looked upon as a i of u but solely the b nk ng reserve the co ntry , i s also regarded as a most important resourc e for l i o i the Empire in time of war . Any oss of ts g ld s a i of l ui a ccord ngly a matter genera concern , q te part from the particular degree of importanc e which it i in i may have at a given t me purely bank ng aspects .

- t awa of Th e we ll kn own di sapproval wi th whi ch th e wi hdr l o for e orti s re ar ed atth e an is sai n lis wri ters g ld xp g d B k , d by E g h e to be a pote n tfac tor in th e protec ti on of its rese rv . 2 16 The German Ban king System

Some inc rease i n the stock of gold held by the ’ Rei c hsbank c ame wi th the expansi on of the world s supply of gold which began i n the c losing years of a u but i a was f the l st cent ry , the ncre se ar less considerable than i n Franc e and hardly i n propor tion to the expansion of credit whi c h was taking l u i p ace i n Germany . D r ng the years of active u i ss r i i i of 1 0 b s ne p eced ng the cr s s 9 7, the demand for accommodation at the Reichsbank increased greatly an d at times the i ssue of notes approached the rigi d limit of the on e thi rd cash reserve te ir me n t i i 1 0 u e . s of i q After the cr s 9 7, wh ch like that in 1 90 1 was handled effectively by the i c two f i i Re hsbank , ef ect ve means of strengthen ng it i i o r of i u s pos t n we e adopted . Rates d sco nt were maintained at a somewhat higher level than the poli c y followed i n previous years in similar c ir um an l i m c st c es wou d have required . By th s eans the further expansi on of credit was in some meas ur e c an low ri l l i to o che ked , d a p ce eve relat ve ther c ountries established whi c h would tend to inc rease i o u u i of o the nflow of g ld . The acc m lat on g ld was also furthered by the passage of a law i n 1906 authorizing a limited issue of notes by the Reichs bank i n denominations of fifty and twenty marks . These small notes entered into c irculati on slowly but ua a i m i at first , grad lly the h b t of ak ng small payments i n c oin was weakened and by 1 91 2 the notes h ad become so ac c eptable that an inc rease i n i u was ui ul the ss e req red . As a res t of these measures the Reichsbank secured a large addi tion

2 1 8 The German Ban ki ng System balanc es maintained by English banks at the a of a B nk Engl nd . The system of settlement by transfer on its m a i c a an d books, by e ns of wh h p yments transfers of funds c an be made between all those having ao counts on its books wherever situated wi thin the m i r u i i in a of E p e , f rn shes a most str k g ex mple the energy whi ch the management of the Reic hsbank has manifested i n modernizing and improvi ng a i i a Germ n bank ng methods . Unl ke the B nk of a c s u of l i i Fr n e , the p r eg slat on has not been needed i a u i fu i of its c of to br ng bo t the d f s on bran hes , whi c h nearly five hundred of various grades have n utin o ra i i c i i i u bee p pe t on . Bank ng fa l t es thro gh other agenc ies have also been developed far more ua in a c adeq tely than in France . As Fr n e the first banks of deposi t date from about the middle of as u of e s the l t cent ry . Most these banks were tabli sh e d primarily for the purpose of initi ating and financi n g industrial undertakings whi ch re uir a i m of c a i al was nl q ed l rge nvest ents p t . It o y after lon g years of gradual development that c ommerci al loans and the rec eipt of deposits from the people generally became the chi ef business of a o i a i i l u c i o the Germ n dep s t b nks . The or g na f n t n n ot o i a are i has , h wever , been d sc rded . They st ll the most import ant sourc e from whi ch c apital for

r ri i s i r u new ente p ses der ved , and th o gh them the securities of c ompanies whi c h have passed suc c e ssfully through the i nitial stages of development r a o o ci l are ma keted m ng invest rs . These ﬁnan a Th e German Ban ki n g System 2 19

c i i i c ar i c a t v t es , so ontr y to the pract e of the divi si on of func ti ons between c ommerci al an d in vestment bankers tradi tional in Anglo - Saxon coun i a n otmvolved a a tr es , h ve any pp rent loss of in m m 0 strength the Ger an bankin g syste . N more than the c apital and a part of the surplus of the banks i s employed i n development work an d the capi tal of the banks i s for thi s reason greater in i o to o i r c o i proport n dep s ts than in most othe untr es . Bankin g concentrati on h as reac hed an advanc ed in an butit ak i c i stage Germ y , has t en a d re t on i a i n a in a Re qui te unl ke th t Fr nce and Engl nd . cogni zing the inevi table necessity of limiting the activi ti es of a bank Operating numerous branches u i hi to b s ness , the safety of w ch can be tested by u in a a s i m a ro t e st nd rd , the lead ng Ger an banks h ve nei ther Opened many branches n or entirely ab l u i i sorbed arge n mbers of ex st ng banks . They have preferred to ac quire control or atleast a voice in the management by the acqui sition of shares in provi nci al banks an d have thus sec ured most of th e advantages of c entrali zed organization with outsacri ﬁcing the advantages of local interest and intim ate knowledge of the affairs and needs of in u borrowers all parts of the co ntry . CHAPTER "I

THE NATIONAL BANKS OF THE UNITED STATES

THE national banking system owes its exi stence i Al u i n a i of to:the C vil War . tho gh the m jor ty the States the banks inc orporated under State author it adl a i i c u an d al y were b y org n zed and nse re , though even suc h as were on a soli d foundation u o i a i cur co ld enj y l ttle more th n local cred t , the rent of opini on before the war was by no means o a to an c i a i of i i s fav r ble y onsol d t on bank ng ntere ts . Discontent wi th existing systems more frequently took the form of opposition to the exi stence of any banks of issue at all; the party then apparently holding permanent control of the national admin i stration c herished wi th pride the tradi tions of its vi c i u u i i a tor o s str ggle w th the Un ted St tes Bank , and of its devotion to a gold currency ; an d prob ably neither the friends nor the opponents of banks would have then thought the government of the United States able to reorganize upon a com

- B utin mon plan the note issues of all the States . 1 863 a system of national banks was established i i a l ou n otu a i u w th w despre d , a th gh n n mo s , con an d i ou li o i i o o sent , w th t so d ppos t n , except fr m 2 2 0

2 2 2 National Ban ks of th e U . S .

us io o o i i hi con s pens n . The bank pr p s t on , w ch , sidere d sim as o ou ply a ref rm , w ld then have had ros c of u a i ou small p pe t s ccess , beg n to ga n gr nd as affordi ng a possible escape from the ﬁnal ﬂood

- r a of legal tender paper whi ch seemed to th e ten . When the Sec retary again urged h i s plan upon the a i o ‘ it ui si niﬁ ttent on of C ngress , had acq red new g can c e in its bearing upon the ﬁnances of the govern i i o ment . Immed ate rel ef t the Treasury by the sale of bonds to the banks to be used as securi ty for i i ssu i the r es was not to be expected , for the organ z ation of banks under the proposed system c ould n ot ff c i u uc a an d be e e ted w tho t m h del y , many of the strong banks whi c h the Secretary hoped to see c on verted into national banks already owned bonds in a a c a c o l rge mounts . Indeed the Se ret ry ntented “ ” himself wi th sayin g that in a very few years the proposed nati onal banks would require bonds to the amount of and in fact the war was over before their deposits of bonds h ad ri sen muc h above B utthe banks were looked upon as important agencies for the govern m n in ac i n ew oa an d i i c ula i e t pl ng l ns , the r c r t on as a medium n eeded for use i n default of specie and i to aci i l kely f l tate the return to spec ie paymen ts . In short as the national bank system slowly passed

‘ Ibi d. D ec . 1 862 1 , 4, , p . 7. 2 In ovem er 1 8 6 th e M n e Unite assac usetts a s l N b , 3 , h b k h d d States securi ti es amoun tin to ﬁft-tree mi i on o ars n d th e g y h ll d ll , a an s of New or ci t an d coun tr ro a more tan b k Y k , y y, p b bly h on e un re mi l on o a h d d l i d ll rs. Natona an s of th 2 2 e . i l B k U S . 3

through its suc c essive stages of development from

1 86 to 1 86 its i o a c as o 3 5 , mp rt n e aff rdi ng in itself a market for United States bonds pretty well di s a ar an d its i o c as ua ppe ed , mp rtan e a val ble part of the commercial organization an d as the source of a paper curren cy of remar kable credi t an d security to mo u c i came be re and more f lly re ogn zed . The ac tauthorizing a system of nation al banks i n ru 1 86 butin ma i was passed Feb ary , 3 , ny po nts of detail itproved to be so unsatisfac tory an d incomplete that only 134 banks were organized u itin i o an um nder the next n ne m nths , d the n ber ri to an 0 in si m had sen less th 45 xteen onths . A i ac tmak i i a c a rev sed , ng mport nt h nges , was there

in u an a o si fore passed J ne , d mple pr vi on i n m u i c c hav ng bee ade , nder wh h banks hartered by the States c ould be reorganized as national i of s banks , the extens on the new ystem went on i o i rap dly . Its ad pt on was further stimulated by ta i tax of an ac l y ng a ten per c en t . on all notes of s ai out an a a u 1 State bank p d by y b nk fter J ly , The c ertainty of the prac ti c al exclusion of all State banks from the ﬁeld of c irculation caused the speedy reorganization of the greater part of th em as national banks ; an d thus the n ational um ri 1 6 an on ul 1 1 866 system , n be ng 34 b ks J y , , at on ce assumed the preeminence whi ch ith as since maintai n ed .

1 2 Statutes atLar e 66 . 1 ut ar 8 g , 5 3 States atL ge, 4 4. 1 Ibi d 3 . , 99 . 2 2 4 Nation al Ban ks of th e U . S .

i s n o ou a in o i a i l There d bt th t , ad pt ng the n t ona

s u r oo it bank sy tem , Congress nde st d that was establi shi ng the agency by whi c h the sole paper currency of the country should be issued in the al - i s u ill a future . The leg tender s es were st reg rded

m or r di n i u as a te p a y expe e t , rest ng pon the over whelming exigenc y of the momen t for their justiﬁc ati on ; the bank ac ti s entitled An ac tto ” i a i l u a i i its prov de nat ona c rrency , emph s z ng by title the permanenc e of the substitute whi c h was to ﬁll the plac e left vac ant when the legal -tender notes should be pai d ; an d the text of the act plainly oo ar to u c i a l ks forw d the ret rn of spe e p yment ,

hi c u a c i for w h sho ld le ve spe e the on ly tender debt . a i hi a a Con Est bl s ng a perm nent system of b nks , gress surrounded them by many of the safeguards whi c h h ad been adopted i n on e or another of i ou a o i i i u for i the var s St tes , pr v d ng m n tely the r

In 1 8 0 w en th e return to s ec i e a me n ts n a se eme to 7 , h p p y fi lly d ave een oston e in e n ite an ac twas asse autori in h b p p d d fi ly , p d h z g th e e sta i s me n tof o an s i ssuin n otes re eema e in o bl h g ld b k , g d bl g ld c oin an d se c ure th e e ositof n ite States on s earin , d by d p U d b d b g i n terest a a e in o wit h e urer o h Un t tates p y bl g ld h t treas f te i ed S . Th e n otes were n otto e c ee ei t er c e n tof th e va ue of th e x d gh y p . l on s an d were n otto be su e c tto tose rovi si on s of law w i c b d , bj h p h h ten limite th e a re c rc t -n o ver h d gg gate i ula ion of ban k tes. Se al o an s were or an i e c i efl in th e acific States buta ter g ld b k g z d , h y P ; f th e return to s ec i e a men ts th e i stin ction etween th e o p p y , d b g ld an s an d oters c easin to be of im ortan ce rovi sion was b k h g p , p m e th e ac ad by tof 1 8 80 for their c on versi on in to n ation al ban ks of th e usua t e an d tere ar e n ow n o nation a o an s in l yp , h l g ld b k ’ e sten c e 2 1 Stattes at a l er s Re ort 8 0 i . u L r e 66 Com tro l 1 x g , . p p , 9 , p . 53 .

2 2 6 Naton a an f h i l B ks o te U . S . framers of the measure n o doubt looked forward

i to a mor c o o i a s s m of at one t me e ns l d ted y te banks , and to a c loser intimacy wi th the government than was in fac t establi shed ; buttheir ac ti on as itstands

a an a r i ar c a of o i c ma m rks extr o d n y h nge p l y , de u r r sur of war a o m i c nde the p es e , by g vern ent wh h , a mor a two a o ru n o h rdly e th n ye rs bef re , t sted a c a i u of i ts u gen y wh tever w th the c stody f nds ,

c i n o iu of a c ci re ogn zed med m p yment ex ept spe e , an d c a u i ai all c c i o i or ref lly d scl med onne t n w th ,

s o i i i for an o i s m of re p ns b l ty , y p ss ble yste banks . The general provi si ons of the nati onal banking system have for their starting- point the restri c ti on

of i of o - i u to a i o al a the r ght n te ss e n t n b nks , the other func ti on s of banki ng being left free for banks c ar a au o i an d for ri a h tered by St te th r ty , p v te a t . a i o a o osi n o i u b nks Any n t n l bank , pr p g ss e

o i s ui r to c m a osi of n tes , req ed se ure the by dep t

i s r on of n i a o reg te ed b ds the U ted St tes , the b nds being tran sferred to an d held by the Treasurer at

ashi o but i r o c o c W ngt n , the nte est there n lle ted by

os ro o c o i n u to . the bank , wh e p perty the b nds nt e be The deposit of bon ds under these provi si on s en titled the bank making suc h deposit to rec eive

o om ro of u n c wh o h as fr m the C pt ller the C rre y , ra c ar of m o to the gene l h ge the syste , n tes the a oun of i c of mar a u of m t n nety per ent . the ket v l e

o osi butn ot c i in the b nds dep ted , ex eed ng n ety per

c n of i ar ri c io w i c c on e t . the r p value ; a rest t n h h i n rom 1 8 6 to 1 00 imi on o t n ed f 3 9 , when the l t n te

i ssue was rai sed to on e hundred per c ent . These Natona an s of th . 2 2 e . S . i l B k U . 7 notes when received ar e in blank c ertifying on ly the fac t that the sec urity for them IS in the hands of the government ; butwhen si gned by the proper oﬁce rs c its i of the bank , they be ome prom ses to

u man i u for c i r pay pon de d , and can then be ss ed

ul i o ff of i n it il c at n . The e ect th s arrangeme t , w l i s i suﬂi ci e n ta ou of be seen , s mply that a m nt the r ui in prope ty of the bank , req red to be held the of i s i o f ua form bonds , pledged w th pr per sa eg rds to insure the ultimate payment of all notes i ssued f an . l o c ou by the b k The notes are a so , rse , to be i i ui n pa d by the ss ng bank whenever prese ted , are to be rec eived in payment by all other national c an i or u in a m banks , and be pa d to be sed p y ents by the government in all c ases where speci e i s not required by law ; butthey have never been a legal t i i i ender as between nd v duals . These provi si ons have secured for the notes a uniform value and give to those of every bank an o unimpeded ci rculation in every part of the Uni n . i law in ac t 1 86 i l If , ndeed , the , as the of 3 , st l made no further provi sion for redemption than to require every bank to redeem its own notes when presented its u t u o a at own co n er , the ret rn of n tes for p yment would rarely take place an d thei r substantial con But vertibility would be nearly destroyed . the law of 1 864 made provision for redemption by all a i in i i i i i banks at genc es the pr nc pal c t es , and th s m i u un il u 1 8 arrange ent cont n ed in force t J ne , 74, n n i whe the prese t system was adopted , mak ng the Treasury of the United States the sole redeeming 2 2 8 . Naton a an s of th i l B k e U . S .

c for of a i l an d i i agen y all the n t ona banks , requ r ng r a to m i i in r asu to u eve y b nk a nta n the T e ry , be sed in m i o of its o a s u rede pt n n tes , re erve eq al to ﬁve f its c i c a i o o ul . c per cent . r t n The hi ef effect of

i m of i o c in th s syste redempt n , ex ept the case of i o n or of uc i i i u ns lvent ba ks banks red ng the r ss es , has been the easy removal from ci rc ulation of notes i c are o oi or o i u ﬁ for s wh h w rn , s led , therw se n t u e . For the establi shment of a system whi c h should test eﬁec tively an d c ontinuously the power of

every bank to convert its notes into. specie on ma it oul o ui de nd , w d pr bably be necessary to req re that no national bank should p ay outan y notes i I For exc ept ts own . the general purpose however of maintaining the c onvertibility of the aggregate

o -i u of a a m i s n te ss e the banks , the present rr nge ent

i s well dev ed . The n ati onal bank-note when i ssued i s the prom i se of i ui a an d mus u c u the ss ng b nk , t be p n t ally

it a m i s r ui as an o met by , when p y ent eq red , y ther i a i i mus o al o i l b l ty t be The n te , however , s carr es wi th itc ertain engagemen ts binding upon the

o m n of i o i si o g vern e t the Un ted States . The pr v n for redemption atthe Treasury binds the govern ment to p ay on demand all notes when presented in due o n otm o to of f rm , and erely n tes the extent An i ilu of a . d n of th e the reserve case fa re bank,

Suc h a prohibiti on was th e basis on whi c h th e Suﬂolk bank ” s stem of Ne w n an reste rom 1 8 1 to 1 866 an d mai n y E gl d d , f 9 , tai ne d atp ar a n ote circ ulation whi c h h ad otherwise butslen der r c on ert t provi si on fo v ibili y .

2 0 3 N ation al Banks of th e U. S . ban ks have obtained from their right of issuing i o o o n otes sec ured by a depos t of b nds . It f ll ws from what has been shown in the prec eding ch ap ters that their c ase i s in no respec t di fferent as regards proﬁts from that of banks whi c h use their c r i in o of o i in ak ed t the f rm dep s ts , order to m e

- i investments in interest bearing sec urit es . The notion often entertained that the nati onal banks have some pec uli ar opportunity of maki ng a double “ o c i i o i ar i pr ﬁt , by re e v ng b th nterest e ned by the r o an d i a o of o b nds , nterest e rned by the l an the n tes i u u o o o ac a ss ed p n the bonds , verl oks the f t th t a u as its i i u i every b nk ses , means for obta n ng sec r i its c a i al an d a itc an m t es , p t wh tever credi t e ploy i in a i . a a c on u dd t on Every b nk , then , as seq ence of its use of its c i in m u c i red t any for , m st re e ve interest earned by the investment of its capital an d also interest earned by what we may call the investment of its c redit ; an d the fac t that the

a i o al i r a o u i n t n banks , l ke othe s , h ve the pport n ty for mak i c di as as c a i i o ng re t well p tal y eld a pr ﬁt , neither spri ngs from the system on whi c h their

o are s c u n or it n u o . n tes e red , depends p n I deed , itmust be manifest that their deposits yield them a o in r c i a wa as i o pr ﬁt p e sely the s me y the r n tes , an d usua muc r r i o c on lly h g eate n am unt . The elusive prac ti c al answer to the idea of a supposed raor in ar o i s to ou ow r in ext d y pr ﬁt be f nd , h eve , c on uc of a s ci the d t the b nks them elves , espe ally a r assa of ac tof 1 8 hi c c o fte the p ge the 74, w h , re g n i zin g the desi re of many banks to reduc e their c ir N an s of h e . 2 1 ational B k t U . S 3

ti on u i of i eula and sec re possess on the r bonds , “ provi ded that an y bank might deposit lawful money wi th the Treasurer of the United States a h im its o u to en ble to redeem n tes , and there pon i ro tan to i i w thdraw p the bonds depos ted , prov ded the amount of its bonds left in deposit were n ot reduc ed below Several important na tion al i u al banks had never chosen to ss e notes , though required by the law to maintai n a deposit of bonds ; un der thi s provision a considerable number of others reduced their notes to the whi ch the requir ed mi nimum deposit of bonds u i a l would s pport . The w thdr wa s of notes con tin ue d for al al u sever years , and tho gh new banks were formed and the note ci rculation increased in c i al an in i al some se t ons , the tot b k g cap t and note i u i ali c li u il um of c rc lat on ke de ned , nt the s mer 1 8 8 i af u io 7 . Both ncreased ter the res mpt n of ci a n but i u a i - spe e p yme ts , the c rc l t on of bank notes did not reac h the amount outstanding in 18 73 of

Ban ks wi th a capital of less than remai ned subjec t to th e origi nal re qui remen tof a de posi tof bon ds equal to one ti r of te ir ca ita un ti 1 88 2 w e n itwas re uc e to on e h d h p l l , h d d fourth an d became applicable to all ban ks with a capital of less t 1 2 n han oo ooo . All o re uiremen ts we re re ea e th e act $ , b d q p l d by of un e 2 1 1 1 . J , 9 7 ’ Although i n its ge neral theory th e national ban kin g system “ " is on e of ree an in un er w i c th e usiness of an in f b k g , d h h b b k g in all its branches is Ope n to all persons wh o comply wi th th e orma ities rovi e th e law itwas neverte ess e tto be f l p d d by , h l f l dangerous to allow th e issue of an unlimi ted ci rculation so lon g as th e currenc remai ne irre eema l tou restri ctin y d d b e . Wi h t g 2 2 Naton a an s of h e t . 3 i l B k U S .

The highest point reached by the circ ulation of the nati onal banks during the twenty-on e years followi ng the resumption of speci e payments in u r 18 was at 1 88 1 it Jan a y , 79, the end of , when stood o a i its i above Fr m th t po nt , decl ne a i i a dl r i n c i u u was r p d , w th h r y a b eak the ont n o s l u i at of 1 8 0 it i fa l , nt l the end 9 was l ttle over The proximate c ause of thi s re markable disappearanc e of what was ori ginally the chi ef feature of the system was the steady p ay ment of the national debt and rise of the national c i u l i i c i a io of to red t , and the nat ra d s n l n t n banks o on an i a c i i c h ld , y cons der ble s ale , nvestments wh h could no longer be relied upon to yield the holder uc c r i a ﬁ so m h as per ent . The ext aord n ry n an ci al i i of 1 8 1 1 8 2 ulmi i cond t ons 9 and 9 , c nat ng in c i i o ci l a the r s s , both c mmer a and monet ry, of 1 8 i c u of 93 , n reased the ret rn to the holder bonds e c i u a i to thr e per cent . , and the bank rc l t on , for i o an d o th s reas n others , r se to nearly in c o 1 8 i u ic O t ber, 93 . In the d st rbed years wh h o o i s u l i a f ll wed the s e fe l sl ghtly , then rose to ne rly at of 1 8 6 i u the end 9 , w th a f rther in c rease of the earning power of the investment in u i h a i ﬂuc bonds , and d r ng the t ree ye rs follow ng tuate d between an d

th e esta i s me n tof an s th e ac ts of 18 6 an d 186 tere ore bl h b k , 3 4 h f limi ted th e aggregate amoun tof n otes to In 1 8 70 th e limi twas rai se d to an d ﬁnally by th e actof an uar 1 8 for th e res um tion of s ec ie a men ts all te J y, 75 , p p p y , stri c tion s upon th e aggre gate ci rculati on of th e n ational ban ks we re remo ved .

f h t . 2 34 National Banks o e U S .

i c a i the i ssue of notes was slightly n re sed . W thi n less than four months after the passage of the law

o - i u i c i io the n te ss e , wh h had rema ned almost stat n

f r or a a a o ro ary o m e th n ye r , r se f m to an d thereafter c ontinued to expand slowly butalmost continuously until 1 91 2 when there was more than of the notes in

i o B ut of - i u n ot circ ulat n . the system note ss e was

r ac tof 1 00 a essentially alte ed by the 9 . The g gregate c irc ulati on c ontinued to depend p roxi mately upon the c urrent pri c e of bonds and not upon the demand of the community for that form l i c i c u c . a of bank rren y Re elast ty , whether for c i i o i l c i a or a a . contr t on exp ns n , was st l l k ng In its regulation of the deposit business of the a io of 1 86 oll n t nal banks , the act 3 f owed the ex ample of legi slati on adopted in many of the States in a i i a c i i il War the ye rs mmed tely pre ed ng the C v , an d presc ribed a minimum reserve to be held for the protec ti on of the li ability for deposi ts whi c h c ontinued wi th no fundamental c hange until the Federal Reserve banks were established in “ ”

1 1 . in ci i a 9 4 For banks the reserve t es , n med in the original ac tof Congress or provi ded for by

la i s a i o a s w n -ﬁve of . ter leg l t n , re erve t e ty per cent

of osi was r uir for all o r the dep ts eq ed ; the banks ,

an actof 1 8 8 an c it avi n t tousan i nh a itan ts By 7, y y h g ﬁf y h d b cou be ma e a rese rve c it u on a icati on ma e tree ld d y, p ppl d by h ourts of th e n aton a an Sin c e 1 1 th e f h i l b ks established in i t. 9 3 powe r to design ate reserve ci ties has been lodge d wi th th e e era Reserve oar F d l B d . K an f th . 2 Nation al B ks o e U S . 35

r i i o i in fifteen per cent . The p ov s ns for determ n g u c u r w what sho ld be o nted as reserve we e , ho ever , l ui a less simple . The genera req rement was th t the “ ll awful or in reserve sha be l money , other words gold and silver c oin an d c ertificates and also legal o o i B ut ri n tender n tes f the Un ted States . Clea g u c i c i awful Ho se ert fi ates , wh ch represent l money speci ally deposi ted for the purposes of the Cleari ng u i i o i o i Ho se assoc at n , of wh ch the bank wn ng them an a of may be a member , d the c sh reserve five per its i u io hi c i s re cent . of c rc lat n , w h every bank ui in u c ou q red to keep the Treas ry , ld also be r i counted as a pa t of the reserve against depos ts . An d it u r i a for a in was f rthe prov ded th t , any b nk a reserve ci ty on e half of its reserve might c onsist of as i in ci o in c h depos ts the ty of New Y rk , or any “ al s r i an n other centr re e ve c ty , and for y ba k outsi de of the reserve cities th r ee fifths of its te serve mi ght in like manner consist of deposits with banks in reserve or in central reserve i cit es . For the enforcement of the provisions as to re v i ser e , the law prov des that whenever the reserve of l c i li i any bank falls be ow the pres r bed m t , the “ bank shall nei ther increase its li abilities by mak ” in i u i g any new loans or d sco nts , otherw se than

ter 18 8 a c it avi n two un re tousan in a i tan ts Af 7, y h g h d d h d h b could be made a cen tral reserve city upon application made by tree ourts of th e n ation a an s esta e n C ca o h f h l b k bli sh d i it. hi g an Louis aton ce ecame cen tra r d St. b l eserve cities butth e ban ks of oth e r ci ti es manifested no i nclination to ol ow tei r e am e f l h x pl . 6 2 a na an . 3 N tio l B ks of th e U S .

u of i il of e n or by the p rchase s ght b ls exchang , all itmak an i vi u i r sh e y d dend , nt l the rese ve has r e i been resto ed to its du proport on . The Comp troller of the Currenc y i s also authorized to notify any bank whose reserve i s in suﬁ ci en tthat itmust a in a of ilu be m de good , and c se fa re to comply wi i hi a i u c th n t rty d ys , he may, w th the conc rren e ' c of reasur i c i of the Se retary the T y, appo nt a re e ver l u to wi nd up the business of the bank . A tho gh the ample discreti on thus given to the Comptroller h as u i a i o i i i of been sed w th moder t on , the pr h b t on u di c ou ll o f rther s nts , when the reserve fa s bel w a i i i a g ven po nt , makes a hard and fast l ne , the p oac to i il u u i pr h wh ch never fa s to ca se neas ness , i i n u c i i a a u ual wh le any act al r s s , the fe r th t the s ac commodation of the publi c must stop and li qui dati on must begin i s the surest means of increasing the pressure for loan s and of thus c on i c i si i o a i vert ng a r s nt pan c . The permi ssion to c ount as reserve balances wi th a i in c o a for other b nks , wh ch were fa t nly dem nds h ad a a u com o i i cash , m rked effect pon the p s t on of r s r a an a a the e e ve held by the banks s ggreg te , and therefore upon the strength of the whole mass of atan ak banks y given moment . If we t e for example the returns of the national banks for 1 8 i i ou September 7, 99, we ﬁnd the r depos ts am nt

in in a r a i i ui ri g the gg eg te to m ll ons , req ng

of 6 0 8 mi i o u a reserve $ 3 ll ns . They were ret rned n i n all as holdi g milli ons of reserve , and

or on far a al were , theref e , the average , bove the leg

8 2 Nat na an f th e . 3 io l B ks o U S .

The relation of the New York banks to the other an of un osi o of i b ks the co try, as the dep t ry the r reserves I i ui al u of , was pla nly q te an ogo s to that the Bank of England as the depository of the joint i of ri i stock and pr vate banks Great B ta n . It was a relation shi p whi c h had developed before the i i ar m i of u i i c C v l W fro mot ves b s ness conven en e , step by step with the more intimate commercial relations whi ch improvements in transportation a i l c i i s u l for m de poss b e . Ea h c ty a nat ra center the settlement of payments for its surroundi ng i ili a ank in terr tory . To fac tate these p yments , b s

' the vi cin i ty of any c ity ﬁnd itnecessary to mai n i l i of i if ta n ba ances w th the banks that c ty, even suc h balances cannot be inc luded as a part of their ci i c reserve . A few t es be ome centers for settle for i i hi u r ments ent re reg ons wit n a large co nt y , and some on e city i s certain to bec ome the c enter for settlements between all parts of a country i i ou i r o c ar and w th fore gn c ntr es . It the ef re ne a u a for a in i ci i bo t th t , as example b nks the v n ty of o a ain ou itc o i to ai ai P rtl nd , M e , f nd nven ent m nt n

e Classiﬁcati on of Reserv . ' ' Reserve Reserve Legal Ten 5 o r c t Due from

e ui d c un d. a en s r red h el S eci e. der et. f g q p , t New or Cit 8 Y k y . Oter Res ci ties h .

Coun tr 0 2 . y 4 5 . 74

1 Totals $4 4.

1 aff te Th e ce n tral position of Ne w York was notse ri ously ec d th e c on versi on of C i ca o an Loui s in to c en tra reserve by h g d St. l c iti e s un er th e actof 1 8 8 , d 7. at na an f h 2 N o s o te . i l B k U S . 39

l i ba ances w th Portland banks , and the Portland and all other New England banks to mai ntain an i all n of bal ces w th Boston banks , so ba ks any importance throughout the coun try found it i i ai al c in des rable to ma nt n b an es New York , the al f centr money market o the country . In fram in g the nati onal bankin g law these arrangements were recognized in the provi sions authoriz ing wi thi n certain limi ts the inclusion of balanc es with other in i ui banks meet ng reserve req rements . al r of u r i The centr money ma ket a co nt y s, u o m i however , m ch m re than a center for ak ng i s on e in settlements . It the place any country in whi ch there i s at all times an indeﬁnitely large i i s a demand for loans . Th s because verage rates for loan s in the central money market are lower

i n c ou than elsewhere the ntry . Borrowers from all quarters resort to itfor accommodation and ﬁnancial business of every kind tends to become

a r an for concentr ted the e . Elsewhere the dem d loans i s more loc al and cannot be stimulated to any very consi derable extent in short peri ods of time u i in n by the offer of a red ct on le ding rates . Tem porarily idle funds of all the banks of a country can therefore ﬁnd employment in its central money market or may be attracted thi ther by the offer ’ i i of interest on bankers depos ts . By the w th drawal u u on u i of s ch f nds , the other hand , o ts de banks are able to sh ift to the cen tral money market vi rtually the entire burden of meeting the situa i i l i i t on in peri ods of ﬁnanc a stra n . In the Un ted 2 0 Naton a an s f th e . 4 i l B k o U S .

States wi th its thousands of independent local ban k s the burden restin g on the New York banks in a i c a emergenci es has been p rt ul rly heavy. When banki ng i s conducted by a small number of o a i u u a u i i banks per t ng n mero s br nches , n ted act on

i a or c ur i a . can be se ed w th compar t ve e se New Y k , alo a o i ne m ng money markets , has been obl ged to c onten d against the efforts of thousands of out i to a c au of s de banks strengthen themselves , se trouble whi c h in suc c essive crises proved far more seri ous than the wi thdrawal of funds by in di vi dual o i o dep s t rs . For m i uli l v i hi c eet ng the pec ar y hea y stra n to w h , as the c entral money market of a dec entralized m of a i itwas u c in m r i syste b nk ng , s bje t e e genc es , the New York money market itself was n otef fe c tivel ni i c o u y orga zed . Bank ng was nd cted by a a u a a ll but ne rly h ndred b nks , l rge and sma , none of c omma i i u of nd ng nﬂ ence . None these banks were accustomed to maintain i n normal times uc in c of ui reserves very m h ex ess legal req rements , an d although these requi rements were imposed so that the banks might have c ash on hand avail a for m r c i a a of os of ble e e gen es , the m n gers m t the ban ks man ifested a pronounc ed reluc tanc e to ma i r use of it c i i ac nk ke l be al . A t ng s ngly e h ba was c ai to a of o c c i ert n dopt the policy l an ontra t on , i c as a in li c a wh h , we h ve seen an ear er h pter, can n otbe c arried far wi thout spreading universal disaster an d which i s c ertain to involve the banks i n a hi general suspensi on of payments . T s l

' 2 2 s f h 4 National Ban k o te U . S .

an ro in i be taken then , y bank was as st ng spec e s an o r n ra i c r as of oa an d li a a y the . A ge e l n e e l ns bili ti e s mi for i all an d if ght the t me weaken , there were a fur ther loss of c onﬁdence in the c ommuni ty might expose all to a c ommon danger ; butno on e

a o i n c its oa c ou b nk , by h ld g ba k l ns , ld strengthen i s a o o r i c ci i it t elf b ve the the s , s n e the spe e wh ch might thus c ollec t must be held subjec t to assess

n for c ommo me ts the n beneﬁt . ff c of i s a m wasi a a u The e e t th rrange ent nst nt neo s . The an nounc ement that ith ad been made qui eted

mon - ma an a i c the ey rket d ended the p n . In the next week the banks inc reased their loans rapidly an d n early the whole of the additi on al loans went

to sw l ma of osi i on an in c on el the ss dep ts , w th ly side rable os of s c i a sio was c on l s pe e . The exp n n tin ue d ata more moderate rate for several weeks

u il u a ur f c of u i in nt , nder the n t al e fe t the rev ls on usi s ma for loa ll off an d i b ne s , the de nds ns fe spec e a to ac c umula beg n te . The i ssue of Clearing House loan c ertiﬁc ates an d the equalizati on of reserves were again resorted

to in 1 8 6 1 i u r i w th eq ally good esults . The s tua ti on i n 1 8 73 was more seri ous The money supply of the c ountry c ould n otbe enlarged in an wa i o a i of o i c it y y, even by the mp rt t on g ld , s n e c onsisted of a deﬁnite amount of irredeemable

o n a - g vernme t p per an d bank notes . The reserve

r n of a s i ufﬁc i n to ca st e gth the b nk , wh le s e t rry them

ou ors of s o m was n ot ou thr gh the w t the t r , en gh to

n a m to a oi o to s i e ble the v d the res rt su pens on . Na o na an s of th e 2 ti l B k U. S 43

1 8 8 oc i e i In 4, the next cas on wh n Clear ng House

i c a r i ssu si io to loan cert ﬁ tes we e ed , the oppo t n the provi sion for the equalization of reserves was so widespread that itdoes not appear that itwas even

s r formally c on ide ed . The ground for thi s oppo i u oo 1 8 si tion can be read ly nderst d . In 73 the ’ practice of payin g interest upon bankers deposits ral i i a was gene ly regarded w th d sf vor . Only twelve of the Cleari ng House banks oﬁere d thi s inducement to attrac t deposits ; butby thi s means they h ad secured the bulk of the balanc es of out

was in m i r si de banks . It eet ng the equirements of the se banks that the reserves of all the banks

a a n on - i r were exh usted tthat time . The nte est payi ng banks entered into the arrangemen t for the equalization of reserves in expec tation of se curi ng a Clearing House rule agai nst the prac ti c e i i r i B ut i f of pay ng nte est on depos ts . the r ef orts om had resulted in fai lure . S e of them had em ployed their reserves for the common good most u in 1 8 an d i a ai a sim rel ctantly 73 , the feel ng g nst ilar arrangement in 1 884 was naturally far stronger r r o in of and mo e general . Mo eover, the w rk g the pooling agreemen t in 1 8 73 had occasioned heart burnings whi c h had not entirely di sappeared wi th a i was i ou l . the pse of t me It bel eved , and d btless i a a m h ad w th re son , th t so e of the banks evaded the i lin n i obligat ons of the poo g agreeme t . It was sa d that some of the banks had en couraged special currency deposits so as not to be obliged to turn c u i . u money nto the ommon f nd F rther, as the 2 aton a a f h e N n s o t . 44 i l B k U S .

a m n h ad i c u a -n o an arr nge e t not n l ded b nk tes , b ks exchan ged green bac ks for notes i n order either to in c rease their holdings of c ash or to secure money

or a c ou r f p yment over the nter . He e we come upon an objec tion to the pooling arrangement whi c h doubtless h ad muc h weight with the spe c i all s ron a u iti s a y t g b nks , altho gh more app rent

r a or to u r ssi r than e l . In der s pply the p e ng equire of om o r wh o i ments s e banks , the s bel eved that they would have been able to meet all the demands of i osi or r o i to s i c a n the r dep t s we e bl ged re tr t p yme ts . That suc h an expec tation would have proved il

us a i c affor am roo l ory l ter exper en e ds ple p f . Wh en a large number of the banks i n an y loc ality suspend

o r c o sc a a o i sam ou the the s ann t e pe d pt ng the e c rse . B uti n 1 8 84 the erroneousness of the beli ef had not ma c a r c n i n c been de le r by e e t exper e e . The New York banks weathered the moderate to m of 1 88 1 8 0 i ou sus i o s r s 4 and 9 w th t pens n , by

an of ari ou oa c i ca alo me s the Cle ng H se l n ert ﬁ te ne , an d in the c ourse of time all rec ollec ti on of the arran gement for the equali zati on of reserves seems to have faded from the memory of the banking

i r s o in os a c ommu . wa n ty The e , h wever, th e ye rs another potent inﬂuenc e whi c h tended to lessen the likelihood of suspension following the i ssue of loan i c a a a r u willi cert ﬁ tes . M ny b nks we e n ng to take out i uc c i o ul re them , fear ng that s h a t n wo d be a c i of i u garded as onfess on weakness , and cont n ed the payment of c ash i n the settlement of Clearing 1 8 a ll House balanc es . In 93 also only sma part of

2 6 Naton a an s of th e 4 i l B k U . S . adopted i n 1 8 73 would have availed to prevent suspen si on on subsequent oc c asi on s i s hi ghly i c i c c ai 1 o a a a a . 8 pr b ble , ndeed pr t l ert nty In 93 events proved that the banks h ad maintai ned pay ments up to the very last of the suc cession of di s asters with the results of whi c h they h ad been u i u u um contendi ng . D r ng A g st the n ber of bank failures was n otlarge and none of them was of

r a i o a c . c a of c ou o g e t mp rt n e We nnot , rse , kn w how soon money would have begun to ﬂow back to Ne o butc ai us i o of a w Y rk , ert nly the s pens n p y m c ou ar a a mo m ents ld h dly h ve h stened the ve ent . From the beginning of September the reported movements of c urren c y showed a gain for the New

o an d for n in Y rk banks , the week e d g September 1 6th the gain was n o less than One mo mor of i r or was mo a nth e dra n , the ef e , the st th t a oul a i to u the b nks w d h ve been obl ged end re , and for the needs of that month the banks would n ot as i n 1 8 a c o n to i , 73 , h ve been nﬁ ed the s ngle resourc e of the of the c ash i n their aul v ts .

imi ar n o mous i c as i n S l ly , the e r n re e the money

u of c ou r i n o m r an d c m s pply the nt y N ve be De e ber , 1 0 oul a offs muc of os of r 9 7, w d h ve et h the l s eserve

i c an s woul a i c urr if h ad wh h the b k d h ve n ed , they c on ti n ued to meet all the demands of their c ustom e rs for a An d i a o s a c s . a tm h , fin lly , y be b erved th t i n the unlikely event that alarm h ad n otbeen allayed an d suspensi on in the e n d h ad bec ome nu a oi a it oul a a an r c i v d ble , w d not h ve m de y p a t cal Na on a an s of th e 2 ti l B k U. S . 47 di fference to deposi tors whether the reserves of c a the banks had been butten per ent . r ther than o i an li a i i i twenty per cent . f the r dem d b l t es . The fundamental defects in the banking system of i a in i ul of the Un ted St tes , part c ar the absence adequate lending power an d inabili ty to mak e ff c i use of n e e t ve the cash reserves of the ba ks , were cl s n oto uri ri ou i of 1 8 di s o ed nly d ng the se s cr ses 73 , 1 8 1 0 butal on u i of 93, and 9 7, so freq ent occas ons a al ai B ut more moder te financi str n . the need of radi cal change in the banking arr an gements of the coun try was not c learly recogniz ed until after the i 1 a i of l cris s of 907. The ttent on bankers as wel as of the publi c was for many year s absorbed by the — more urgent needs of monetary reform after 1 8 u i ci a an d 73 , the res mpt on of spe e p yments , after 1 8 a i u c u 93 , the repe l of the s lver p r hase law sec red i of s a at once , and the establ shment the gold t nd ard upon a firm basis whi c h was finally ac c om plish ed wi th the passage of the Curren cy Act of 1 00 Dimculti es due to u 9 . monetary ca ses were

i a i n i si 1 0 an d con se ent rely bsent the cr s of 9 7, quently the unsati sfactory state of the banki n g mac hinery an d prac tic e of the country atlength i a . a u became cle rly ev dent As a temporary me s re , i mor u i i a i ac t pend ng e thoro ghgo ng leg sl t on , an was passed i n 190 8 empowering the banks to issue bank -notes secured by bonds other than United a i al a butsub St tes bonds and by commerc p per, je c tto taxation sufﬁciently on erous to prevent i ssue except in emergencies and to insure spee dy 2 8 Na na an s f h e to o t . 4 i l B k U . S

i of vi ret rement . These notes proved great ser ce uri c i si i c c a in u u 1 1 i d ng the r s wh h me A g st , 9 4, w th ou of u o War o a the tbreak the E r pean . S mewh t more than of the notes were i s u an d ou a i u loa c ertifi s ed , alth gh Cle r ng Ho se n c a r u u i of u c tes we e also sed , the s spens on c rren y a was a i m of overc om p yments vo ded . As a eans in g the most serious of the difficulties enc ountered i n i ou c i o ro an f i prev s r ses , the n tes p ved ef ect ve i butitwas i i i dev ce , r ghtly bel eved that the bank ng legi slati on of the country was antiquated an d that a in om i i u a l m ny and , s e d rect ons , very f nd menta changes must be made if the banks were to be plac ed in position to render the greatest possible servi ce to the c ommunity in normal times as well in m c i hi i of i ua i as e ergen es . T s v ew the s t t on found expressi on in the Federal Reserve Actof 2 1 1 a u i December 3 , 9 3, a me s re wh ch gave the necessary legal authority for incomparably greater changes in the banki ng structure and prac ti ce of the c ountry than followed the passage of the i al o Nat on Banking Act fifty years bef re .

50 Federal Reserv e Ban k s

o to u ni r li to o or f r the banks f r sh e ef thers , to c m i n i m of c i a s r prote t the selves , t es spe l t ess , when

c i a om s i c due i to ac ex ept on l d e t demand , e ther l k of c onﬁden c e or to need for sudden enlargement of c i th ad c om a dr f a red , pelled he vy a ts to be m de i o upon the vari ous i nstitut ns . (c ) The c ontrol of spec i e movements exerted in most forei gn c ountries by the loc al c en tral bank i n c i m m c s a i n all g me han s , and estee ed ne e s ry , to the proper working an d c ontrol of the reserve m of uc c ou i was ir a i n syste s h ntr es , ent ely bsent our i m a i o h ad wa bank ng syste , so th t the nat n no y of protec ting i tself agai nst the spec ie demands due o r m c i s a c t unfavo able er hand e b lan es . (d) Even i n spite of fairly good Federal over i an d a i i o an d i n i of a s ght ex m nat n , sp te st te ex ami nati on whi c h varied from exc ellent to poor i n ’ ua i r so uc i n eﬁi c i en c bad q l ty , the e was m h y and banking as to render i tobvious that some c entral

ro of u i w s i a cont l the b s ness a des r ble . It must n otbe supposed that rec ogniti on of these defec ts i n so c onc rete an d deﬁnite a way was i at i a i n io 1 8 0 or arr ved , e ther e rly the per d after 9 i atan i m be i . ndeed y spec ﬁed t e Indeed , the gi nnings of di ssati sfaction with the nati onal system o o a for a i c o i u to k f rm as demand el st n te ss es , and there was a proposal after 1 893 merely to imitate i a of c u c r rovid the Canad n system rren y , the eby p n as i c o s B utas i n i i . o t g safe and el t n te t me went ,

' was more an d more realized that a thoroughgoing of a i o m m o i i type b nk ng ref r , e b dy ng the essent als Federal Reserve Banks 2 5 1

of i c of o a t of wo w u the exper en e ther p r s the rld , o ld

c s a r c i o of 1 8 6 ma be ne e s ry . Afte the ele t n 9 ny proposals were made for the rectiﬁc ati on of vari ous

i n our an i ac i c but r was elements b k ng pr t e , the e no general plan for an i nc lusive pi ec e of legi slation u i r 1 0 ou a i an d nt l afte 9 5 , when the H se B nk ng u c mmi o ai a was C rren y Co ttee , wh se Ch rm n then f a Hon . a . o o Ch rles N F wler New Jersey , beg n to work outtentative banki ng measures based on the i dea of a general organi zation of the banks whi c h should embody the pri nci ples developed by the oc i i i n Cleari ng House Ass at ons year s past . Th ese eﬂorts reached a greater degree of c c h eren c e af r i of 1 0 ar iou te the pan c 9 7, when v s plans of r c ul i i o refo m were attempted , m nat ng , h wever , in the measure of only par tial reform known as the l i - L w i c u in i A dr ch Vreeland a . The bas tho ght th s law e i n i , as has been s en the preced ng chapter , was the establi shment of so -c alled currenc y asso ci ati on s representing the loc al banki ng strength of v arious communities and desi gned to bring i nto effective operati on the combined resourc es of the i ci i i n i c - banks part pat ng there . The Aldr h Vree l Ac t w was c l u . and , ho ever , a p rely emergen y p an The i mmedi ate results of the pani c of 190 7 were soon over and the new measure was not called into eﬁec ti ve use dur ing the years between i ts passage and the adopti on of the Federal Reserv e Ac t. u i i ts m D r ng develop ent , however , there had been a fairly thorough threshing outof the pre vailing vi ews and ideas concerni ng what was then 2 5 2 Federal Reserve Ban ks

ll u c m i i ca ed c rren y refor , wh le the Act tself pro vi de d for the organizati on of a body known as the i o i i National Monetary Commi ss n . Th s Comm s i c o i i ir of of s on , ns st ng ent ely members Congress , ev entually proposed a bill whose purpose i twas to provi de for a national reserve assoc i ation or central bank with ﬁfteen branches loc ate d atvar ious

ro o u points th ugh ut the country . The meas re had n otbeen developed until just before a c hange in i c c o o of o o u B ut the polit al ntr l C ngress cc rred . the Democ rati c Party having suc c eeded to the ri i n i a i was i n 1 10 majo ty power the leg sl t ve body , 9 , ur gently pressed to proceed wi th the c onsiderati on of the National Monetary Commi ssion Bill or else su i o f i to bst tute s methi n g else or t. — What was done by Con gr ess i n 1 912 1 3 was thus a c ontinuati on of the efforts whi c h h ad been on oo si c 1 8 0 or a it f t ever n e 9 soon after that d te , and was i om f o i i the log c al outc e o those years f d scuss on . — During 1 91 2 1 3 the man y bills whi c h h ad been devised an d p utbefore Congress i n the c ourse of two c a i c 1 8 0 i c u i a i al the de des s n e 9 , n l d ng the N t on o ar ommi s i o i a u M net y C s n B ll , were t ken nder i m an d as a sul i i c a adv se ent , re t the b ll wh h l ter bec ame known as the Federal Reserve Ac twas i uc i o o i n u 1 1 i ntrod ed nt C ngress J ne , 9 3 , becom ng w o 2 o m i la n the 3d f the followi ng Dece ber . Wh le i twas the outgrowth of a long peri od of banking di sc ussi on i tnevertheless represen ted a great ad

a o an r c i n m a ur ar u v nce ver y p e ed g e s e , l gely beca se itdid n othesitate to selec t an d i nc lude the best

2 54 Federal Reserve Banks shi p i n the system) was c ompulsory for nati onal banks an d was voluntary for i n c orporated State u o i a i o banks an d trust c ompan ies. A f rther bl g t n of membership (i n additi on to sub scription for c apital stoc k) was seen i n the requirement that eac h member bank should establi sh wi th the “ Federal Reserve B ank i n i ts di stri c t a reserve ” balan c e or balanc e on the books of that Federal Reserve B ank i n an amount equal to a speciﬁed

i s r perc entage of outstanding deposits . Th p e c a of ent ge was ﬁxed at7 per c ent . the demand

o i s n r of i o i s for c a dep s t a d 5 p e c ent . t me dep s t entr l s i f i s c 6 . o re erve ty banks , per cent demand depos t i an c . of im for c d and 5 per ent t e reserve ty banks , f n of . o i for 5 per c e t . demand and 5 per c ent t me c ou a B uti n c a of a ou i ntry b nks . the se b nks ts de of i o n oui a i o of o c a a d . New Y rk , Ch g St L s per d three year s was allowed for the c ompleti on of the n of i tra sfer reserves . Such reserves m ght be establi shed by ac tually transferri ng either cash or c urren c y to the reserve banks or by di sc ount i n g wi th the reserve banks paper of spec iﬁed ki nds .

uc a r n ow c i as i i was S h p pe , des r bed el g ble , to ou ro of c o m rc i a a i c u u a or be the tg wth m e l , gr lt r l industri al transac ti ons an d was to c omply wi th ai ui n otto of c ula cert n req rements . It was be spe i o i i butmu ui o a ﬁde t ve r g n , st represent gen ne b n

a sac i o u n i a tr n t ns . It m st otexc eed n nety d ys maturity must not atthe time of redi sc ount have more than ninety days to run before reac hing Federal Reserv e Banks 2 55 maturi ty) i n the c ase of the c ommerci al an d indus tri al or more than on e hundred an d eighty days i n a the case of agri cultural p per . The member banks u i n i n i ul 6 m st keep cash the r va ts per c ent . for i fo c c . r central reserve ty banks , 5 per ent reserve fo i a . r c u but c ty b nks , and 5 per cent o ntry banks ,

i if all i s m ght , they chose , transfer the r re erves above these figures to the reserve banks (and might further be allowed to establi sh suc h reserves both in the amounts already spec ified above as ui i n u req red and those referred to as vol ntary , m in u i of i i ak g ro ghly two th rds the r ent re reserves , — i through the redi scount of paper) . Th s left them obli ged to keep only about on e third of their entire i o a reserves i n actual cash in the r wn v ults . The reserve banks on the other hand thus had opened to them a large field of business in redi scounting paper whi ch mi ght be brought to them by their l i members . They themse ves were obl ged to keep a reserve of 40 per cent . (gold) against notes an d a fu a i i 35 per cent . (l w l money) ga nst depos ts ; and accordi ngly h ad a very large power of inc reasing i i n c i a the volume of cred t the ommun ty . In ddi tion to this regular work of redi scounting paper the reserve banks were ordered to recei ve on deposi t checks and drafts left wi th them for collec ti on an d to perform the functions of a clearing house for i of u i the r members . A broad field other d t es , some

i a m r ui Opt on l , so e eq red , was also Opened to them A t 6 under the terms of the c . Dividends at pe r c u a i to cent . ( mul t ve) were allowed members but 2 56 Federal Reserve Banks all earnings above that figure were to go to the government . The c entral c ontrolli n g mec hani sm of the new system was to be a governmentally appointed o a a body kn wn as the Feder l Reserve Bo rd , con i i of s a oi s st ng even members , five pp nted for that spec ific purpose by the President by an d wi th the i of a n o o an on e i i adv c e the Sen te ( two fr m y d str ct , i two to be me n of banking exper enc e) . These wi th the Sec retary of the Treasury and the Comp troller of the Currenc y made up the entire per son n l T o i i ral e . th s body were g ven the gene “ ” u i of a ma u k i f nc t ons wh t y be called p re ban ng . Such fun cti ons i nc luded the definiti on or selec tion of paper for di sc ount through the issuanc e of regu lation s desi gned to determine the character of thi s paper ; the passing upon rates of di sc ount (first to be named or suggested 1n the several banking i i c an d a i m of ala i an d d str ts) , the est bl sh ent s r es personnel as well as the general type of organi za

i o i n r ti c t n the several eserve banks . In h s conne ti on there was given to the Board the power to name three outof nine directors wh o made up the o of ac ra a o six b ard e h Fede l Reserve B nk , the ther direc tors i n eac h distri c t (thr ee bankers an d three business men) bei ng c hosen by the ban ks of the i ri c o i n i n ou or c i o d st t v t g three gr ps se t ns , estab li sh e d in ac c r i i of i i u i o o d w th the s ze the nst t t ns , and elec ting on e ban ker an d on e business man in

i n n eac h suc h group . An mporta t fu c ti on whi c h was entrusted to the Federal Reserve Board was

2 58 Federal Reserv e Ban ks

(so far as the ﬁrst i nstallment of ab out was c o c on o m I o o i n n erned) N ve ber f ll w g . The ﬁrst i nstallmen t of reserves was pai d to them on m 1 Nove ber 6 . While the Organizati on Committee ori gi n ally a i s w i s ri c itdid n ot uc c i n est bl hed t elve d t ts , s ee d drawi ng the lines between them altogether sati s f il c o i i a u mi ac tor y. Re gn z ng th t s c h ght be the outc ome of unavoi dably hasty work i n the new

a e Ac th ad ro i field , the Feder l Res rve p v ded for appeals from ban ks desiri ng to transfer from on e i s i c to a o r uc a a to d tr t n the , s h ppe ls be filed wi th the Federal Reserve B oard under regulati ons to am a o uri n be fr ed by th t b dy . D g the years 1 91 5 1 6 a n umber of suc h appe als were filed an d mi nor a ma i n i s i c i ch nges were de the d tr t l nes . The Federal Reserve B oard aton e time c ontemplated the i dea of reduci ng the number of di stri c ts an d of maki ng very extensive c hanges in the c omposition of o i c mai but a th se wh h re ned , these pl ns were ou c om was to a never matured . The t e le ve the general divi si on of the c ountry into di stri c ts sub j e c tto butlittle modific ati on an d prac ti c ally on the same basi s whi c h h ad been outli n ed by the

os o n c organization c ommittee . Cl ely c n e ted wi th thi s que sti on of di stri c ting was found to be a w i c i s i ari r a a a i t matter h h ord n ly t e ted p rt from . o Thi s was the questi n of branc hes . When the Federal Reserve Ac twas ﬁrst un der c onsi deration ith ad been thought that a number of banks c orrespon ding roughly to the reserve c i ties of Fed e ral Reserv e Ban ks 2 59

— — the c ountry then about ﬁfty i n n umber might s i n otbe too many . Fur ther di c uss on determined the reduc ti on of the number to a maxi mum of

butwi i i a an s twelve , th the prov s on th t y re erve bank mi ght establi sh branches wi thi n i ts own di s tri c t. Eventually the result of the exercise of thi s

to - power was create some twenty three branches , leavi ng the total number of banks and branc hes

- thi rty five . It was seen from the outset that the power to establi sh branches was to render not only the exact conformation of the di stricts but also the location of the parent banks a matter relatively of se condary i mportance owi ng to the i o u i n ff fact that w th a th ro gh branch system e ect , the mere location of the actual points of redis counting or holding reserves would be of n o p ri i i n a o mary si gni ficanc e . Th s f ct tur ned outtbe the eas for i a e , and save the psycholog cal tmosphere and loc al influences whi ch always affec t the per nn l of i i u i iti s o a so e every nst t t on , pr b ble that the exact si te of Federal Reserve Banks or the exact conformation of their di stri cts has become a

i n secondary matter . Certa nly iti s o e whi ch dropped from vi ew within a comparatively short i of time after the organizat on the system . As thus ﬁnally developed the system wi th its districts and branches assumed by the close of 192 1 the form indi cated i n the acc ompanyi ng map Selection of directors has continued to be made throughout succeeding years after substantially the man ner provi ded in the origi nal Federal Re 2 60 Federal Reserve Ban ks

s a ou ata a im om modiﬁ erve Act , lth gh l ter t e s e c a i i o u i o o of o t ons were ntr d c ed nt the meth d v ting .

o a of c oosi n i c ors i n suc On the wh le , the pl n h g d re t h a way as to gi ve representati on to the smaller

2 62 Federal Reserve Ban ks the bank and i n some has performed prac tically the func ti ons of a deputy governor although himself of i i the c hairman of the board d rectors . Th s anomalous situati on h as perhaps been the most c onspi c uous failure of the admini strative machi n ery of the Federal Reserve System . The ﬁrst payment of capi tal an d reserve s had a at o of left the reserve b nks the m nth November , 1 1 i as u a o i a i 9 4, w th c h f nds ppr x m t ng an d thus able to undertake prac ti c ally any work

a was i to a i . u th t l kely be ss gned them At the o tset , i c c i i of however , the d re t a t v ty the system was small an d the ﬁrst months of i ts hi story were spent i n helpi n g to c lear away the emergenc y c urrency i ssues whi c h the bank suspensi on at the opening of ha i i i i ts own the war d necess tated , n prepar ng i al ff o i i o i n u i i ntern sta and rgan zat n , and p tt ng nto operation regulati ons designed to control and direct the relati ons between the reserv e an d member i i u i o nst t t ns . As the later i nstallments of c apital and reserves r ai i o m a k we e p d nt the syste , the reserve b n s a u a i n i n t r lly nc reased i n power a d resourc es . The r natural growth was ac c elerated by ac tion of Con ~ gress i n 1 91 6 whi ch terminated the i nstallment proc ess of reserve payment and called for full ato as ai a i c transfer nce . It w ag n gre tly n reased

ac tof u 2 1 1 1 i c i c as by the J ne , 9 7, wh h n re ed the perc entage of reserves requi red to be kept i n r a rai si f ma i tto 1 er c . o eserve b nks , ng 3 p ent de nd o i for a i n c a c i i 1 0 er dep s ts b nks entr l reserve t es , p Federal Reserve Ban ks 2 63

. s i n c i i c cent for bank reserve t es , and 7 per ent . for m other ban ks . Me bers gradually fell into the habit of placi ng all their funds wi th the reserve i nsti tuti on s and aton e time their c ombined assets were more than At the c lose of 1 92 1 the combined position of the twelve banks of the in i system was as shown the statement g ven below . i i Before proceed ng , however , to a br ef revi ew of the hi story of the Operations by which the system u ll a i i u i i grad a y dvanced to the pos t on th s nd cated , iti s necessary to sketch certai n essential aspects of its organi zation whose understanding i s n ec es sar y to comprehension of the position reached at i the present t me . In thinki ng of thi s new system as on e of the ’ world s great central banki ng organi zations iti s desirable to bear i n mind certai n very fundamental differ ences be tween i tand other central banking ir of it ul a i n systems . F st all , sho d be noted th t most forei gn c ountri es the cen tral bank or reserve bank i s the nucleus of a banking structure whi c h Th e has later gr own up ar ound the institution . central bank i tself i s i n most cases older than the i i major ity of the banki ng nst tutions about it. It h as been establi shed because of the weakness or defect of previ ously exi sting banking systems and because of the fact that itwas desired to provi de a means for the attainmen t of some very deﬁnite object ; usually the development of a government plan of ﬁsc al reform . The Federal Reserve Sys tem on was u i u , the other hand , s per mposed pon an

2 66 Federal Rese rve Ban ks already ac tive and widely diffused banking system whose servi c e was entirely sati sfac tory to the u i i n all di a a i u ar alt u comm n ty or n ry p rt c l s , ho gh there was need for the ai d whi c h c ould be rendered

c i c i i i i io by a entral zing and oord nat ng nst tut n . For thi s reason the Federal Reserve System differs i n sundry very essenti al parti culars from an y other i s o i u a c entral bank . It w rth wh le to en mer te the i of i i c hi ef of these po nts ndi vi dual ty . (a) The Federal Reserve System deals only wi th banks (and with the Government) an d not in any parti c ular with indi vi duals so far as redi s u co nting i s c oncerned . (b) The Federal Re serve System i s owned by banks an d neither the Gover nment nor i ndi vi duals wn o any stoc k i n it. (c ) The direc tors of the Federal Reserve Bank

of two i r c are to the extent th ds ele ted by banks , the on e thir d who represent the Government being the holders of an indirect power of con trol i n c er i c i um a ta n rc st nces . From these considerations i twill appear that the Federal Reserve Banks are i n a very real and genui ne sense what h as been termed by some as a “ ’ of lo nk or matter ana gy ba ers banks , a means of extending ai d and support on behalf of the entire banking c ommunity to banks wh o need such c i i to i u i i a commodat on from t me t me , th s nd rectly redistributing the supply of credi t between differ i n i i i ent reg ons a d nd v duals . l As a ready remarked , the reasons why the Federal Reserve Banks 2 67

Federal Reserve System h as been gi ven thi s uni que posi tion an d wh y its func ti ons even i n the Ac tas ultimately passed were so greatly limi ted i n thei r ar e i u i scope , obv o s , be ng traceable to the c ir cum l i stance , a ready ment oned , that the system was grafted upon an already exi sting banki ng stem instead of bein g developed from the root as wi th

European banking systems . Whatever may be the i u i v ff c of it reasons for the s t at on , howe er , the e e t , l t i s on e i i ar o as a ready no ed , wh ch necessar ly uses i o u u ur quest n and do bt as to the f t e . l ar l i Its ﬁrst prob em cle y lay , after organ zation ff in u in r ti i io o had been e ected , sec r g the pa c pat n f a number of banks suffi ci ent to make itreally representative of the commercial bankin g of the ui all a i o coun try . The Act had req red n t nal banks to acce pt membershi p and all except less than a i i did so re score of obscure inst tut ons . There mained the problem of securin g the membershi p i i a i u of state institutions . Th s nvolved sever l ss es of competition and banking cooperation not u on u t altogether obvi o s the s rface . The s ate banks and trust compani es had at the outset been very insisten t that they should be acc orded the i i uc i i privilege of jo n ng the system , and s h pr v lege n h ad even tually been i ncluded i the Act . When the Federal Reserve Boar d was formed i tfound i u in a long li st of appl cants for membershi p . D r g the few months following the organization of the Board a deci ded change i n the attitude of the trust a lac e b th e c omp ani es and St te banks took p , and y 2 68 Federal Reserve Banks time that the regulations c overing thei r admi ssion o u a i n Ma 1 1 few i f an had been f rm l ted y, 9 5 , , y, r a o as i were desirous of entering . The e s n s gned was that while they beli eved the c onditi ons laid o c air down by the B ard for entran e were f , they di d not think that the Ac thad made sati sfac tory

o io for i i i i an d pr vi s n perm tt ng the r w thdrawal , they doubted whether the B oard c ould assure them the i i power to retire at wi ll . Suc h prov s on was accordi ngly i nc orporated i n the Federal Reserve Ac tas a part of the law by an amendment whi c h o f c was was ad pted i n 1 91 6 . The ef e t greatly to enc ourage the movement of banks i nto the system and thi s movement was materi ally aided by the ﬁnal entranc e of the Uni ted States i nto the Euro pean War an d the feeling on the part of State instituti ons that itwas both a wi se and patriotic step for them to affi li ate themselves wi th the re

s s m u r l serve y te . Th s the Fede a Reserve B anks came to include by the c lose of 1 92 1 about members of whi c h 1 63 1 were organized under a c t an d to a ou 8 0 c . St te har ers , represent b t per ent

of c o c i a a a of c ou the mmer l b nk ssets the ntry . Closely connec ted wi th thi s questi on of member shi p was another problem whi c h i n volved the u c i o of a i o a a ac i c a f n t ns n t n l b nks . Pr t lly through outthe world the tendenc y for many years past h ad i n i c i o of an i n ci a i a i been the d re t n b k g spe l z t on . In the European c ountri es a sharp line was early drawn between the i nvestment bank and the c i a i i u i o i a i commer l nst t t n , wh le the l tter n its

2 70 Federal Reserv e Ban ks

i s uc i a u c i n rec eived authori ty to exerc e ﬁd ry f n t o s . In reac hi ng c onclusi ons regarding the effec tive

ss an u of Ac tas it a or i ne d s c c ess the st nds , w th

c i ts o a u u ri n c i s a referen e to pr b ble f t re , expe e e a far better guide than theory . Yet the ye rs whi c h have passed since the adopti on of the law have been singul arly unfruitful i n settling di s

ut i s i i s c au of un u ua p e d sues . Th s be se the s l c harac ter of the banki ng problems that have been a i presented during th t t me . The history of the Federal Reserve System may rou i i i o ri o s be ghly d v ded nt three pe ds , the fir t extending from shortly after its formal organiza tion up to the date of our entry into the European War on i 6 1 1 c o i o Apr l , 9 7 ; the se nd extend ng fr m i a to i o mi th s l tter date a. per d shortly after the Ar sti c e on November 1 1 1 91 8 ; an dthe thi rd c overing i o the years s nc e the c lose of the sec nd period . It would be prac ti c able to make several di stinct sub i i i o s i i i but a ur d v s n w th n these per ods , for gener l p poses the hi story of the system i s well marked ofi i o ai o o i a i i io nt the three m n c hron l g c l d v s ns . Duri ng the two an d on e half years pri or to our entry into the European War the Fe deral Reserve System may be regarded as havi ng passed through u o a i a o a i a p rely f rm t ve st ge . Its per t ons were small an d i ts direc t i nfluenc e upon the banking an d di c oun si ua i o i i ir c itwas a s t t t n l m ted . Ind e tly fac tor of very great influenc e bec ause of the knowl edge that a sati sfactory organi zati on h ad been o i aroun i c i i i ua a s c ou pr v ded d wh h the nd v d l b nk ld , Federal Re serv e Ban ks 2 71

if c atan i o li i they hose , y t me c nso date the r forces . Nevertheless during thi s early period i twas always doubtful what part the system would be able to l o i o fo play . Severa reas ns may be ment ned r th is

of i . l state th ngs In the first p ace , the Federal of i ts vi Reserve Act , by reason ha ng reduced re serve requir ements and li mi ted the nec essi ti es of a i o al of in the n t n banks , and thereby the banks for i i i h ad os general , mmed ate accommodat on , tabli sh e d a margin of credi t -granting power whi ch was sufli ci en tto carry the banks through a period of very c onsi derable increase in demand wi thout subjectin g them to the necessi ty of resorting to i l . u i s r i Federa Reserve banks D r ng th fi st per od , l n i i i however , very abnorma co d t ons had also man l l i of feste d themse ves . Not ong after the open ng ur a i n a i n u i i the E ope n War an mme se tr de m n t ons , suppli es and food had sprung up between thi s i n c ountry and the bell geren t nations . In a ge eral way our sellers of goods demanded paymen t in ca sh or Ameri can securities and the result was a great inflow of both gold and Ameri can securities i into the Uni ted State s . Th s tended to lessen the degree of commerci al dependence upon the bank i n m or of on l a g syste , banks Federa Reserve b nks , and would have done so regardless of the type of i i u was r a n . o gan z t o F rthermore , there a very gen eral attitude on the part of city banks that was s i to s n wh o ho t le the re erve system itself . Ba kers would ordi n arily have redi scoun ted sought to avoid doing so in order to refrain from havi ng any 2 72 Federal Reserve Ban ks

i ali i r s m i bus ness de ngs w th the eserve sy te . F nally , the system h ad n otyet learned to adapt i tself completely to the needs of the c omm unity and some of i ts regulati ons were of a nature that tended to li mi t or restri c t the c onditi on s under whi ch free

e c oul ma of a . us d be de the new b nks Altogether ,

o r two an d on e a of its theref re , the ﬁ st h lf years hi story were years i n whi c h growth was di rec ted w a a or un u along lines that ere bnorm l sual . . The sec ond period of the Federal Reserve ’ System s hi story was even more greatly di sturbed

n a o o i i on n by unusual a d bn rmal c nd t s tha the ﬁrst . With our entry i n to the war itbec ame nec essary for us to take over i n very large measure the i s u i bus ne s of ﬁnanci ng it. D r ng the two years u 1 1 u 1 1 h a i from J ne , 9 7, to J ne , 9 9, we d prov ded vari ous forei gn c ountri es with of advanc es besi des i n c urri ng expenses on our own ac c ount whi c h probably ran to about 000 of i c a sum , wh h l tter some con

i u a di i o to our om st t ted d t ns public debt . Fr the outset of the war itwas a seri ous questi on h ow far

to on or o i an d h ow far on a a i o i n rely b r w ng t x t n , the effort to take prac ti c ally the en tire available surplus of savings or new wealth produc ed by the ou rom on a c ntry f m th to month . The eventu l basi s of our war financ e theoreti c ally c ontemplated the poli cy of levying a dollar i n taxes for every three dollars i n bonds or certificates of i n debtedness s butitwas u s ou a ro old , s b equently f nd th t the p gram of financing was so large as to exc eed the

2 74 F e deral Reserve Bank s

of c o i u u a i c u i pressure nt n o s and he vy red s o nt ng , butthey c ame to consi st very largely of the di rec t notes of member banks c ollateralle d by govern f i o or c i o s. ment b nds , ert ﬁcates ndebtednes a on The Feder l Reserve banks themselves , the a u l u u i c other h nd , became the n c e s aro nd wh h was built up the organization whose mi ssi on i twas to

on s to o u i il i n a sell b d the c mm n ty , wh e the b nks themselves n o small part of the ac tual routine

c i i n i ll i u i labor ons sted clear ng , co ect ng , and ro t ng the checks growi ng outof government rec eipts an d ill o . i payments As w be seen at another p nt , the banks themselves had eventually been obli ged to ’ take over the function of holding government de i u of u i c i pos ts , and as a res lt the enormo sly n reas ng Operati ons of the Treasury attendant upon th e expansi on of the budget from somethi ng like i n pre-war years to over i n 1 1 a i 9 9, there was correspond ngly great inc rease i n the scope of the routine activi ties of the l a . h o Feder l Reserve banks A together , t eref re , the serv i c e of the Federal Reserve bank s during the ou i a u i a war , alth gh nv l able from the nat on l stand oi if an i p nt , was very d ferent from y serv c e that would ordinari ly be expected from such in stitu in i of tions t me peace . One of the factors i n the general ﬁnanci al si tua tion whi c h had contributed largely to the troubles that exi sted before the war had been the method f c ol c i i i u i o o le t ng , keep ng; and d sb rs ng g vernment in 1 8 6 w h ad i n o u . e i f nds Ever s ce 4 \ had perat on Federal Reserve Ban ks 2 75

the so- called Independent Treasury Ac twhich h ad superseded the older system of keeping public funds i n State insti tutions subjec t to all of the u a of o u i of a c rrent d ngers l ss and s spens on p yment . Under the Independent Treasury Ac tprovi si on c i i a was made for colle t ng , keep ng , and p yi ng out

u i c u i n . o i u i p bl f nds cash The meth d was nj r ous , i u as exper ence showed , not merely beca se i twas inconveni ent and expensive butbecause i tresulted in wi thdrawi ng large sums at times when they i n i on were needed the market , wh le other occa sions they were suddenly poured outinto current use or l i n a of c u , were p aced p rts the o ntry where a of they were not needed , by the pl n deposi ting

them in specially favore d banks . Thi s system had for a long time been so un satis factory that when the Federal Reserve Ac twas framed efiortwas made to relieve the situation by the plan of consti tuting the reserve banks ofici al i i ui i r of depos tor es , req r ng the Secreta y th e u hi s u i Treas ry to place f nds w th them , and then “ " c on sti tuti ng the reserve banks fiscal agents of eflortof a the governmen t . The Treasury uth ori ties resulted i n making these provi si ons as carried n l i i i a in the fi a Act perm ss ve nste d of mandatory , an d itwas two years after the organization of th e reserve banks before much progress had been made i o in g vin g them even full depository functi ns . im of our n i o u an Indeed , at the t e e try nt the E rope i n 1 1 ill i sum of War 9 7, there was st a cons derable publi cfundson deposit i n the so-called pet banks 2 76 Federal Reserv e Banks

— national banks sc attered through the country while n o real effort h ad been made by the Treasury to adapt its method of management of publi c o of a i resourc es t the new system b nk ng . The opening of the war c hanged these c onditions by compelling the Treasury to arrange for support and to make use of the reserve banks as agenci es ua a i of u ic a for the act l h ndl ng the p bl ﬁn nces . As great sums were offered i n bonds and c ertiﬁc ates of indebtedness the Treasury authori ti es soon found i ta matter of convenience to use the reserve bank i o c i i c o v a organizat on not nly as a re p ent , nser tor i u of u but as c i and d sb rser f nds , also a me han sm for the i ssue of bonds and for their redemption i ou a ua and c onvers on . Ar nd them gr d lly grew up “ ” the so-called Liberty Loan Organization whose duty i twas to diffuse as wi dely as possible the

r u sc i i for uc c s i a an d cur ent s b r pt ons the s e s ve lo ns , to manage through their di sc ount dep artme n ts th e ac i u c i i to an whole m h nery for the s bs r pt on , d “ ” i of o c a . the rry ng , the b nds war a a c u i c c i s an d a As the dv n ed , p bl re e pt p y ments c ame to be made prac ti c ally wholly i n bank i a of m s i i n c a . ua cred t nste d as for erly , h Event lly Congress ordered the sub - treasuri es c losed (July I 1 92 0) an d with the suspension of these instituti ons i n a a of u i c in a new era the m n gement p bl funds set . The thi rd peri od of Federal Reserve bank h i s tory has been far less uniform i n its c haracteri sti c s or a ac i o a i of its t o c s o tr ns t ns th n e ther w prede e s rs , although in some aspec ts the work of the system

2 78 Federal Reserve Ban ks should be no serious shock or di saster to business

i i il it i n o . cond t ons , wh e was pr gress Abstractly in u of l v speak g , the d ty the Federa Reser e System , f i of te or o any central bank ng system , was that tardi ng or slowing down as much as possible the progress of the business community toward th e of i i of i i n 1 2 0 in th peak act v ty and pr ces 9 , and e of te same way , after the peak had been passed , tarding the descent to a low point of prices and u low i volume of business . S ch a po nt was reached about the mi ddle of the year 1 92 1 when the price u 1 0 ff its level to ched 4 . In the e ort to perform vi i il u i ser ce most sat sfactor y d r ng these years , the system naturally sought to make use of the i n strument whi c h had been found effecti ve i n forei gn countri es during past years of banking experience — periodi c chan ges in th e central bank discount r u r d i of ate . In order to nde stan the work ng the Federal Reserv e System during the post-war years and to appreciate i n its true value much of the di s cussi on and ﬁnancial criti c ism which has centered u i of its c i i i aro nd th s phase a t v ty , a br ef reference to the theory of credi t control through discount i s c rates ne essary . In classi c al banking practice during the latter of i u it part the n neteenth cent ry , had become customary to view changes in the discount rate as an effec tive means of performing two services the control of the supply of credi t i n the aggregate and the regulation of the amount of gold ﬂowing i out u use of nto and of the co ntry . The the rate Federal Reserve Ban ks 2 79

of di scount in thi s way had been gi ven a c on spi c u ous an d c onvi ncing demonstrati on i n the e xpe i n f r e c e of the Bank o England . That Bank habitu ally mai ntai ned a rate of di sc ount slightly higher than the prevaili ng market rate so that those who needed acc ommodati on were under n o temptati on o i n to borr w order to make a proﬁt . When the Bank rai sed its rate i tpracti cally refused to the market further ac c ommodation except atan increasi ng

or o . u as of penalty c st F rthermore , the Bank England was the ch i ef holder of speci e in the country the exportation of such speci e usually involved the necessi ty of borrowi ng at the bank in order to build up the reserve s of the commerci al banks whi c h had been depleted through the wi th drawal of uc i of l s h spec e from the Bank Eng and , and the consequent lessening of thei r own balances s oo use of i n a of on i t b ks . The changes the r te di scount was thus a very effec tive means of regula ti on i n a country whose ﬁnancial affairs and whose relati ons wi th others were as deli cately balanced a i u i u as those of Gre t Bri ta n . Other co ntr es so ght to imitate the Briti sh method and h ad more or less i ci a iffi u i success i n so doing . One of the pr n p l d c lt es in i a o i i of the Un ted St tes , bef re the organ zat on a s of an the Feder l Reserve Sy tem , was the lack y central bank whi ch could be relied upon i n thi s way to control credit and specie movements . When the Federal Reserve System was organ ize d many supposed that it would follow the same plan th at had been pursued by the Bank of 2 80 Federal Reserve Banks

i r . i u England The cond t ons , howeve , were fo nd to be suc h as almost totally to prohibit an y very c o i s us of i i i c i ns tent e the Br t sh pol y . Exper ence h as shown that i n a di sturbed state of international

ra wi c u of o s i all in on t de , th the rrent g ld ett ng e — — ir c i o i a an d i d e t on , t ward the Un ted St tes , w th a o i of ou i on a a i — the m j r ty c ntr es a p per b s s , as oo war h ad i they were s n after the fa rly opened , many of the old principles of banki ng were im i prac ti c able i n operat on . The Federal Reserve System i n its early years made vari ous experiments i a i c u but o of w th r tes of d s o nt , n ne them were s i i i o of c onc lu ive . Ne ther the cond t ns the market nor of the world in general would have permi tted use of old of o il the the methods contr l , wh e the Federal Reserve System i tself was too small a factor i n the di scount market of the United States to have muc h i nfluence in any event . When the i a i i c d Un ted St tes entered the war , cond t ons hange a i i twas a l very r d cally , for at once seen th t the sa e of Government bonds i n huge quantities would c i a i to ne ess t te extens ve resort the reserve banks , an d that the rate they fixed would have a con ol i i u u tr l ng nfl enc e on the market . Press re was consequently brought to bear upon them to make their rates n o hi gher than those whi c h h ad been a i on its own o est bl shed by the government b nds , i o i c s u was a and th s p l y wa ac c epted . Th s est b li sh e d a rate of i n terest which was muc h below the o a or a u a in i n rm l n t ral r te the market , w th the result that there was a strong tendenc y to what i s

2 8 2 Federal Rese rv e Ban ks of the poli c y of the Federal Reserve banking sys te m during these months would seem to i ndi c ate that a muc h more effec tive i nstrumentality than th e rate of di sc ount i n br i n ging about a lessening of c redi t expansi on was found i n the eff ort made by both Federal Reserve ban ks an d member ban ks to reduc e the volume of loans whi c h they h ad made upon the strength of government sec uriti es as well as upon long - term an d i nvestment obligati on s of m all kinds . The c ontrol of the volu e of c redi t ou a i i n i n a of i c oun i c thr gh v r at o s the r te d s t , wh h h ad been successfully exerc i sed under the nicely balanc ed system of credi t an d of spec i e holdings whi c h existed i n Europe pri or to the European was i i u l War , mposs ble nder the wholly a tered o i i o o uc war i u n c of c nd t ns pr d ed by , and the nfl e e the c hanges i n the rate of disc ount made by the Federal Reserve System must be regarded as i a i o pr m r ly psyc h logi c al . So outstanding was the servi ce of the Federal Reserve banks i n the financing of the war an d i n ma a of o - a i l i i the n gement p st war fin nc a cond t ons , that i th as i n no small measure tended to obscure the broader an d more normal functi ons of reserve i i i . a a n bank ng These h ve lways been , the Un ted a a a of o St tes , m tter c ntroversy . The servi c e of the Reserve System i n its domestic relations was ori gi nally c onc eived of by many bankers as being c onfined entirely to the rendering “ “ ” “ of relief or the stopping of pani c i n emer ” Ac ti h a n ot o enci e s. d g The tself , h wever , been Federal Reserve Ban ks 2 83

wn i an su i a i n i butin dra w th y ch de m nd , the beli ef that i n order to avoi d the danger of pani c or “ ” cri si s i twas necessary to have wi se and sound ban ki ng servi c e c onstantly atthe di sposal of the Two u a communi ty . f nd mental problems i n c on nec ti on wi th reserv e ban k poli c y accordingly presented themselves from the begi nning ; the hi ﬁrst , the method and extent to w ch the system should endeavor to get its funds actually i nto the of u li a of ul hands the p b c ; the second , th t reg ating th e of i i u i or it process d str b t on, as some express , i u of c f di . o controll ng the s pply , re t In studying the problem of placi ng funds at th e

l of mu i i sub - di sposa the com n ty , two spec fic prob l l a e v s. ems have alw ys present d themse e Of these , th e first i s that of the regular or systematic di s in of il th e is a i c ount g paper , wh e other the m k ng of provi sion for exceptional or seasonal needs such as u of crop movi ng . A st dy the mechani sm provi ded by the Federal Reserve Ac tshows that the system had some diffic ult problems to deal wi th from the in ternal standpoint besides confrontin g a question ult i a in i tself of n o mean dific y. In fore gn b nking systems two classes of operations are rec ogni zed i i e a i direct red scount ng and op n market oper t ons . The vari ous bills which had preceded the Federal Reserve Ac thad i n most cases attempted to limit th e operations of the central reserve institutions f to direct rediscoun ting on behalf o member banks . In this class of business a reserve bank merely wai ted for an appli cation or offerin g of paper to 2 84 Federal Reserve Banks

it m u it come to from a me ber , where pon redi s counted the oﬁe re d paper (if eli gible) and placed the proceeds to the c redi t of the member on its l Ac t of . v u books The Federa Reser e , co rse , provi ded for thi s ki nd of business butitalso did what none of i ts predec essors h ad proposed to do provi ded for open market Operations by permitting reserv e banks to buy or sell bills of the same kinds i i i i a that were el g ble for d scount . Th s meant th t a l of a i i i c o arge ﬁeld b nk ng transact ons , otherw se l sed

to . to the reserve banks , was now Open them They could purc hase or sell with or without the endorsement of a member bank ei ther to or from a or i i i u l i an d any b nk nd v d a as they m ght see fit , they could undertake this business either in domes i or o i a u o a i tc f re gn tr de . S ch open market per t ons always c onstitute a means by whi ch central bank s i u i i for li c a i o may , w tho t wa t ng app t ons fr m de ositors or u ou u i or i h p c stomers , p r f nds nto , w t a m o l dr w the fr m , the genera money market , thereby relieving stringenc y or reduc ing the avail able supply of c redi t as circumstanc es may re i i i i on a qui re . The w se exerc i se of th s ab l ty the p rt of any central bank gives to ita very great au th orit i n c o u i i c ula i s y the mm n ty , part rly when , as a i n o c u i it a a the c se m st o ntr es , represents l rger reservoir of fluid funds than exists anywhere else The early regul ations of the Federal Reserve Board naturally dealt first of all with direc t re disc ounts and even tually establi shed a fairly broad system whereby the single name notes of ordi n ary

2 8 6 Federal Reserve Banks

of a i si ua i o som of be dents the b nk ng t t n , e whom lieve that a poli c y more nearly patterned after the f European model i s c alled or . The suc c ess experien c ed i n dealing with the o of a o a si on of c r i h as h ow pr blem se s n l exten s ed t , uc a a a o i n ever , been m h gre ter th n th t enj yed Li i i o of c onnec ti on with general c redit . m tat n Open market operati ons h as been due i n n o small measure to the fears of member banks that they

Th e followi n g table shows th e di stribution an d size of th e re di scoun toperation s for two sele c ted mon ths c hose n as represent ti e a a r o e i i io a v t p e i od f sp cial actv ty in operat n .

V R G SI" AND MB R OF T MS P R R DI C T D A E A E E NU E I E , PA E E S OUN E WITH D RAL R RV K RY AND FE E ESE E BAN S , JANUA LY 1 2 0 JU , 9

Average Number Average Number Size Of of Size of of Ite ms Ite ms Ite ms Items

I— oston —B 2 New York

1 2 — i NO . San Fran c sco . Federal Reserve Banks 2 87

mi om i or mi ght be prevented fr gett ng , ght lose , a u usi or i s i i n v l able b ness , m ght be re tr cted their si rates of interest . The seasonal exten on of c redi t presented a qui te different problem an d on e in i c a ou i of m a a wh h the je l s es me bers pl yed no p rt . Iti nvolved the establi shment of a plan whereby the reserve banks could deal wi th other reserve banks in order to get ai d from them for the p ur pose Of enlarging the loans granted i n their own o i i a a distri c ts . In all c untr es wh c h h ve seasonal of i ul u or i u i s type agr c t re other nd stry , there a peak of c redi t representing very in tensive de mands i n c ertain parts of the c ountry atcertain of a a li off at seasons the ye r , these demands f l ng a later date as productive condi tions c hange and as i i seasonal needs decl ne . In the Un ted States in former years itwas customary for banks in the cotton and grain -growing States to rely on the of i ai i banks the North and East for spec al d. Th s was rendered unnecessary under the Federal in l u u Reserve System , at least arge meas re , thro gh i i i as i l a prov s on wh ch , appl ed by the Federa o c o l a i Reserve B ard , mpe led reserve b nks w th high reserves to purchase paper from other reserve i in c banks w th low reserves , transferr g the pro eeds of such purchases through the gold settlement fund to the selli n g bank an d thereby placing iti n posi tion to go on enlarging i ts discount acc ommoda i c a i on tions . Suc h Operat ons have been rr ed at the express di recti on of the Federal Reserve Board under the terms of the Ac t.

2 90 Federal Reserve Banks

The e ﬂe c tof the system thus was that of trans ferring li qui d reserves from on e di stri c t to another and maki n g payment for them at a later date when current sales of produc ts h ad proc eeded far enough o i i f a u to pr v de the means requi s te or th t p rpose . As i m ac c o i o i a th s syste rd ngly devel ped , the rel nce of c ountry ban ks upon c ity i nsti tuti ons fell Off an d the total volume Of ac c ommodati on Obtained i n a th t way was undoubtedly much lessened . In thus surveying the general servi c e of the s i n i i u i of c i is re erve banks the d str b t on red t , there on e techn i c al phase of the domesti c operati ons of hi the system w c h should be carefully noted . The Federal Reserve Ac thad i n a degree been based u a so- c ll two- a a pon preference for a ed n me p per , of ac i a r paper the ceptance var ety , whether b nke s — or a i i on e re re tr de , as aga nst paper w th name p i i u o sent ng the d rect borrowing of a bank c st mer . al v a o i to ar The Feder Reser e Board , ende v r ng c ry out i c i of law h ad a i the d re t ntent the , est bl shed highly preferenti al rates for bankers ac c eptances and h ad also granted a moderate preferenc e to commerci al or trade ac ceptanc es when endorsed a ank ﬂ a i a by b er . The e ortthus c onserv t vely m de — to enc ourage the growth of two name paper did i i a not prove ent rely successful. Th s was l rgely c u i o of l a c u be a se , over a per d a most h lf a ent ry , the Ameri c an business man as well as the Ameri c an banker h ad steadily acc ustomed himself to the single name type of borrowing based upon a line

f c i a o to iff o red t gr nted by a bank . In rder d eren Federal Reserve Ban ks 291 ti ate between the customer of hi gh credi t and prompt payment and the c ustomer whose n ec e ssi

i c for o c o a i o t es alled l nger term ac mmod t n , most Ameri c an man ufac tur ers an d dealers generally have adopted the prac ti c e of allowi n g a di scount s a i for cash . Term re hab tually quoted as from 2 to ff fo 5 per c ent . O r c ash wi thi n ten days Of date of i i i I 2 ff f c . O or s i nvo e , w th to per cent ca h w thin i or i a u a a th rty s xty d ys , and f ll p yment there fter . It was difﬁc ult to adj ust thi s system to the use Of two -name paper drawn for a speciﬁed amount at the time of shi pment Of goods since the shi pper ul u di d co d not , and the b yer often not , know whi ch method of payment he would probably a o employ . The effort to encour ge the use f such trade or commerci al acceptances was urgently e u i a 1 1 8—1 2 0 was pr ssed d r ng the ye rs 9 9 , and there a general di sposition to claim for the trade accept i ance many meri ts whi ch i td d not possess . Un familiarity wi th i tand lack of conservatism in its use stimulated the growth of abuses and severe losses were incurred by banks whi ch had di s i counted suc h paper wi th too li ttle restra nt . The reserve banks themse lves never held many accept an ces growing outof domestic business . Both the trade acceptances and the domestic bankers acceptances held by them have been small i n v u but i was th e ol me , cons derable harm done to banking system i n general by unskillful use of both lu i i s u i instruments . The conc s on navo dable that the acceptance movement in the United States has 2 92 Federal Reserv e Banks

a i a s r - been only p rt lly suc c es ful . Whethe two name paper of thi s kind will ever be largely i n troduced i i n the Un ted States i s doubtful . Greater suc c ess was experienc ed i n developing the use of the ac c eptanc e for the ﬁnan c ing of the o i a om a - i of f re gn tr de . Fr non ex stent type p aper i n 1 91 3 the bankers acc eptance (inc luding both paper made by n on - members as well as that made by members) rose to a level estimated atthe c lose of 1 92 0 as high as $ 1 Reserve banks di scounted suc h ac c eptanc es attimes i n large — volume an d while they suc ceeded i n 1 92 0 2 1 i n induc ing member ban ks to purc hase an d hold one ’ another s ac c eptanc es i n c onsi derable quantity as i s a u i n i own i nvestment , the mo nt the r portfol os a was always l rge . i c o i of a Ac t S n e the ad pt on the Feder l Reserve , the vari ous problems growing outof the general ' c redi t situati on have been so serious as largely to Obsc ure the Old c ontroversy about n ote i ssues an d i c u a c . ma h ad o el st c rren y These tters , h wever , as

a am ri n c i a ac o alre dy seen , been ong the p p l f t rs

i n o r o lead g t the movement for banking ef rm .

i as i o i u r n ot i n a c ou Wh le el t c n te ss es we e , ntry li i a an a o u un a a ke the Un ted St tes , bs l te f d ment l they were nevertheless a very desi rable means of meeting the c redi t nec essities of member banks an of c ou an a of d the ntry at large . In m y p rts the South an d West the use of c hec ks instead of c ur ren c h ad an d il h as a o a i y , st l , re c hed nly relat vely low a of a a uc i s te st ge dv ncement . In s h reg on

2 94 Federal Reserve Banks

an d h i s a was tween the reserve agent b nk , that not a c onveni ent or sati sfac tory way of dealing with

a a h ad a the m tter . On the other h nd , there lways been a desire to be allowed to use ban k notes as a — c onstituent i n reserves a policy i ndefensible from a the standpoint of banking soundness . It w s argued that i nasmuch as credit on the books of

s u as an di a uc the re erve bank co nted reserves , n sm h as reserv e bank notes could be redeposited wi th the i ssuing bank an d thus i mmedi ately give ri se to c i was reserve red t , there no reason why the notes should n otbe permitted to c ount direc tly i n the c a for i i reserves of banks . Hen e a dem nd perm ss on thus to count them i n reserves an d a well - organi zed i uc a u movement to bring th s about . S h req est would prob ably n othave rec eived muc h c onsi dera ti on h ad i tn otbeen for the entry of the United i oc c u it States i nto the war . When th s event rred o u a ou was , h wever , rged that reserve b nks sh ld be puti nto posi tion to grant the maximum amount of c redi t an d i twas argued that by allowing their notes to c ount as vault reserves very muc h more i c o ﬂexible c onditi ons would be establ shed . A m promi se was ﬁnally arrived atwith the result that s a i o c utdo 1 8 1 2 an d re erve r t s were wn from , , 7, ac o i to oc a i o of ff to 1 c rd ng the l t n the bank a ected , 3 , 1 0 c i o i a i , and 7 per ent w th the pr v so th t the ent re a ou ou c a i i n a n o m nt sh ld be rr ed the reserve b nks , s i i vault reserve be ng required . Th s left the mem “ ber ban ks free to use reserve bank notes as till ” o if c o an d i c i n c o d m ney they h se , s n e exper e e sh we Federal Reserve Ban ks 2 95

o that about 4 r 5 per cent . of dep osi ts must be carri ed i n the vaults of members i n the form of a i t s c sh , left the banks free to hold Federal Re erve notes to that extent as what was practi cally but i c l l i n not techn al y an e ement their reserves . The measure tended to increase the amount Of ci rc ulati on outstanding and also to keep i tout very much longer than would otherwi se have been a i i u i u efi tal o the case , th t be ng the nj r o s ec ways b u l t served nder simi lar conditions . Short y after h e Uni ted States entered the war there was developed li l l “ ” a fee ng th at go d Should be close y conserved . Such conservation had become fashi onable in Europe and while there was no occasi on for itin i th the Un ted States , owing to the fact that e balance of trade had been continuously and enor mously favorable to us ever si nce the outbreak of i n 1 1 it i ll the war 9 4, was determ ned to fo ow Euro l i n pean methods . The export Of go d was forb dde , foreign exchange was subjected to strict govern ul i u de ment reg at on , banks were enco raged to posit their speci e Of every kind i n the reserve in stituti on s u li i ll l u , and the p b c was pract ca y (a tho gh never technically) refused the redemption of notes o c ertifiw tes i u im in gold . G ld had const t ted an of l i ul i ium portant part the genera c rc at ng med , while Uni ted States notes (greenbacks) had been of l u si another element some , a tho gh decrea ng , n si gnificance . Both now disappeared from commo use an d their place was taken by Federal Reserve notes or by Federal Reserve bank notes. Owing 296 Federal Reserve Ban ks

to these many and i nﬂuenti al elements the c ircula~ ti on of reserve notes enormously i ncreased and at the c lose of 1 92 0 reac hed a ﬁgure c lose to i i of i u OOO OOO. , Meanwh le the pol cy lend ng pon the direct Obligations of member banks secured by

r o i a i c u i c om gove nment b nds , nste d Of red s o nt ng

r i a a c o as sul of o me c l p per , had be me ﬁxed a re t ur war ﬁnanc e poli cy so that the i deal of a note c ircu “ lati on resting on c ommerci al paper was again l a i of u i ost , the real b s s the c rrency be ng the new

- SO called Liberty bonds . During the year or two after the war many c ame to the conc lusion that the Federal Reserve notes i u of i i had become an nstr ment nflat on and , that il ul a i l c on wh e they co d be exp nded very rap d y , i of outof u i hi tract on them was the . T s “ q est on n i i n u v o ot on , however, was a meas re pro ed err n 1 2 0 i de clin of neo s after May , 9 , when a very rap d e pri ces and slowing down of business decreased the u of u was amo nt hand to hand c rrency that needed , while i talso c urtailed the amount Of appli cations u i n to reserve banks for credi t . The note i ss e the c of a i spa e year shrank by very nearly a th rd , reac hing a figure of about at the 1 2 1 i a i uc i o close Of 9 . Th s r p d red t n was referred an i c of a i c i i n ul i c u to as ev den e el st ty , pop ar d s s i but ou n ot ro so s on , c ld p perly be regarded by i f i i a i sci ent fic students o the b ank ng s tu t on . It was an adjustment due to the c hange i n the level Of prices an d to the reduc ti on i n the general volume of u i buth ad if c o b s ness , only a remote , any , nnec

2 98 Federal Reserv e B anks be maintai n ed wi thout performing the servi c e of

n i ru h ad for ma collecti o . Th s t th ny years been recognized by the reserve-holding banks of the c i i i on e of i i c i a s of c om t es ; ndeed , the r pr n p l form petiti on wi th on e another h ad been furni shed by the terms whi c h they held outfor the c ollec tion an d deposit of i tems sent them by their c orrespondents o o A t c u . a c all ver the ntry The Feder l Reserve , o was i o a i c h wever , b tterly pposed by the b nks wh h h ad been i n the habi t of c harging high rates of exc hange n otmerely for the c ashing of i tems drawn u o o a buta o a u p n ther b nks , ls for those dr wn pon if u i i i u i o themselves , s ch tems came from nst t t ns i of i i i i outs de the r immed ate locality . The r oppos i was i u Ac th ad t on cont n ed after the been passed , and rendered i tdoubtful how far the Federal Reserve System would go i n introducing the c ollec i t on system . it a l i i a Nevertheless , bec me so c ear w th n very fe w months after the organizati on of the reserve banks that a means of c ommuni c ation an d settle amo was i a a ment ng them essent l , that the Feder l Reserve B oard ordered the establishment of a gold clearanc e system atWashington known as the “ gold settlement fund The plan for the estab li sh men tof thi s fund h ad been c arefully worked outi n advanc e by the c ommi ttee of tec hni c al ex perts whi c h h ad framed the plans for the re organ i z ati on of a reserve banks . These pl ns were followed i n detai l an d the r esult was the establishment on u 1 1 1 of a un o o i of J ne , 9 5 , f d f rmed by the dep s t Federal Reserve Ban ks 299

gold by each Federal Reserve bank i oa x w th the B rd at Washin gton . Clearanc e was eﬂec ted i c l c telegraph a ly ea h week . Later , gold

f c an settlement was ef e ted every day , d the fund in the hands of the Board gradually increased to a maximum (for the banks and reserve agents com bin ed) of near The eﬁec tof the workin g of the fun d was to convert i tems held by rese rve banks upon on e another i nto immediate i i n reserve cla ms , the gold the hands of the Board at Washington being reckoned as a part Of the vault reserves of the Federal Reserve banks them i u selves . Transact ons nder the gold settlement fund have run as hi gh a day over l i servi of i ong per ods , and the ce th s method Of clearance both during and si nce the war has been lu ul i i t in l termi n at inva able , res t ng as has large y i ng the shipment of gold .

Later deposits were to be made when required th noug h deple io e t n of balan c s. Th e facts as to th e use of th e se ttlemen tfund may be bri eﬂ y revi ewed as follows DAILY AVERAGE NUMBER AND AMOUNT OF ITEMS HANDLED B " THE FE DERAL R ESERVE COLLEc e N Sve u

Duri ng 6-Mon th Peri od Ending Amoun t

une 1 1 1 10 J 5 , 9 9 4 , 300 Federal Reserv e Banks

The next step was the introduc tion of a c learing i i i T o i servi ce w th n the di str cts themselves . th s the strong opposition of member banks was e n countered from the begl n mn g especi ally from two — sources ci ty banks whi ch beli eved that the assumption of such a duty would lessen thei r i u a hi c country bank depos ts , and co ntry b nks w h beli eved that suc h action on the part of reserve banks would impair their i ncome from hi gh ex f i o a . i o i ch nge charges The necess ty do ng s meth ng , o c a i a i h wever , be me so ev dent th t representat ves of the reserve banks devi sed a plan of voluntary c learance permitti ng members to deposit i tems for i a u collec t on if they c hose to do so . Only bo t a ui i a a ai u an d year was req red to prove th s pl n f l re , on ul 1 1 1 6 was i uc a a of J y , 9 , there ntrod ed pl n

i o u a or u o c i o . n i nv l nt ry comp lsory c lle t n U der th s , if B ank A deposited wi th a Federal Reserve ban k a c hec k drawn upon another bank (whether a

Durin g 6-Mon th Period En di n g Numbe r Amoun t

un 1 1 2 0 e 5 , 9

c c . 1 1 2 0 5 , 9 1 1 2 1 un e 5 , 9

c . 1 1 2 1 e 5 , 9

— NOTE Ite ms drawn on Treasurer of th e Un ited States are tms an l m r n on ra R erv in c luded . I e h d ed by o e tha e Fede l es e an or ran c av e een c oun te on on c e e c e ti n th e ures b k b h h b d ly , x p fig for th e rstth ree mon ts th e eri o e n in un e 1 1 1 fi h Of p d d g J 5 , 9 7, rin w n o re o when separate figures cove g suc h items ere t p rted .

302 Federal Reserve Banks

i i Of u l i a u . a was , co rse , who ly d s stro s The pr nc p l outstanding results of the war from the stan dpoint of banki ng pure and simple may be summarized as : ( 1 ) a very great inc rease i n government Obliga i i c u i a an d c a t ons d s o nted w th b nks , hen e tendency to render their portfolios very unli qui d ; (2 ) an enormous expansion i n the volume of paper c ur ren c y an d a c omplete reti rement of spec i e from the field of c irc ulation ; and (3) i n many countri es th e substitution of a government i rredeemable note as a a of a u u i an d c on the st nd rd v l e , s persed ng gold ” stitutin g the basi s for redemption of bank i notes . The clos ng of the war found banks i n nearly all c ountri es i n an extremely feeble c ondi m f tion . Gold reserves had been i n so e o them prac ti cally exhausted ; i n others they had bec ome inadequate to the mai ntenance of spec i e redemp f o i i . a i a o t on In pr ct c lly all , the movement g ld nto o o i i and utof the country h ad been pr h b ted . Ex change relations between the United States and u u i m of E ropean co ntr es , as well as among so e l l u c to the atter themse ves , had been s bje ted i ul i o a i i str ngent government reg at n , the dm n stra ti ons of the several countri es undertaki ng to c onvert the loc al c urrenc y of on e i nto that Of a o ata u u i a n ther fixed rate . Th s d r ng the l tter part of the war an d for some months after the c lose of the struggle the British government suCa c e e de d in maintaining a fixed exchange rate of ou i u i per p nd sterl ng , both s pply ng ex change on Great Britain an d redeeming all ex Federal Reserve Banks 303 change that was Ofiere d to i tin New York at that rate . Due to these and other abnormal condi tions there h ad been a complete redi stri bution of gold on an artificial basi s and at the close Of the war the Uni ted States had become the possessor of a very l of i large share Of the free go d the world . Th s share was somewhat dimini shed after the end of the war by reason of the fact that when the United own ul 1 States removed her gold embargo (J y , i o i 1919) some m n r exportat ons occurred . The u o i u o tflow was not very l ng cont n ed , however , and comparatively soon there was a backward move ment both of gold and securi ti es whi c h hardly Ofise tthe enormous excess of merchandi se whi ch the Uni ted States continued to export to forei gn l of 1 2 1 countries . By the c ose the year 9 the stock of gold i n Federal Reserve banks was nearly European countries had i n corre o n u l i sp ndi g meas re ost the r gold , and exchange h ad i u s ui il , w th some p and downs , q te stead y Al deteri orated throughout the whole peri od . together the Federal Rese rve System had bee n o an d u i i i subjected t a new pec l ar cond t on , some “ ” times descri bed as gold i nflation . Thi s would i n ordinary circ umstances have led to a fresh rise in i c but ri l its r u pr es , the p ce leve , after t emendo s 2 0 i n 1 2 0 a u 1 0 drop from about 7 May , 9 , to bo t 4

i n ul 1 2 1 i i . J y , 9 , rema ned pract cally stable Com petition wi th European countri es was gradually i u i n u i c and restored , part c larly So th Amer an 304 Federal Reserve B an k s

a buti of a i u of Eastern m rkets , nstead great nr sh i o i i a uc fore gn go ds nto the Un ted St tes , s h as had i c our an d our i ll been pred ted , both exports mportsfe Off a — our i i very gre tly , mports , however , more ser — Ouslythan di d exports down to the c lose of 192 I c i c u a i a i In these r mst nces , as w ll re d ly appear , there was Offered an unusual opportuni ty to the member banks of the reserve system to ﬁnanc e not only the trade of the United States butthat of as hi as a ai the world well . T s , however , w v led of i n a i a an d i a i u ll only a p rt l hes t t ng way , and event a y a i 1 2 1 i the b nks , dur ng the year 9 , largely w thdrew from any substantial part i n such forei gn trade a i c i l i u i u O or oper t ons . Pre se y why th s n q e pp tun ity was thus neglected or mi sused c an be better understood from a survey of the relation of the

Act to the foreign trade situation . From the very beginning the relation of Federal Reserve banks to foreign countries and their bank i i n g systems c onsti tuted a serious problem . Th s would have been true i n any case bec ause the Ameri c an banki n g system h ad oc c upied so i solated a position an d h ad been able to do so li ttle i n the

directi on of ﬁnanc ing American foreign trade . It became Of exc epti onal importance during the war bec ause of the fac t that most foreign c urrenci es had bec ome so largely depreciated while mi litary danger to London an d Par i s le d many banks and indi vi duals throughout the world to transfer their to i h ow a c . i o bal n es to New York In addit n th s , v i i ssum a far r a e er , Amer can fore gn trade a ed g e ter

306 Federal Rese rve Banks i ncreased the amount of suc h ac ceptances to 1 00 n s i c . a i a d u u per ent of c p tal s rpl , wh le Of this amount on e half mi ght be acc eptances drawn against domesti c transac tions pure an d

simple . Unfortunately the acceptanc e even i n foreign trade was often drawn for the purpose of p ro moti n g spec ulative operati ons designed to assist in the holdin g an d storing of c ommoditi es or to i i a a anti c pate the r movement . The l tter evil w s aggravated by a further amendment to the Federal Reserve Ac t( 1 91 6) whi ch authori zed the drawing of acc eptanc es to create what was c alled dollar ” exchange i n favor Of c ountries whi c h mi ght be o a approved by the Federal Reserve B ard . P rtly as the result of generally unfavorable c ommerc i al conditions affec ting the whole world during the i o i c i n i of 1 2 0 react n wh h set after the spr ng 9 , partly as the result of poor management of foreign a c an d i to u of br n hes , partly ow ng the ab se the a c i of 1 2 1 u a o i accept n e , the spr ng 9 fo nd m ny f re gn branc hes losing money rapi dly and n ota few Ameri c an b anks faced with the necessity of renew i n g thei r outstanding acc eptanc es or of takin g a o on u was i heavy l ss them . The res lt the clos ng , u i 1 2 1 of of o i d r ng 9 , a good many the f re gn branches whi c h h ad been previously established while the total volume of ac ceptanc es whi c h h ad been afloat i n the market was c utfrom a total of possibly (inc luding both member and non -member paper) to about At Federal Re serve Ban ks 30 7 the same time several foreign c redit institutions i i ui a or u ai i were e ther l q d ted c rt led Operat ons . In the meantime Federal Reserve banks h ad been hesitant i n taking any direct part i n the in i financ g Of fore gn trade . The Federal Reserve Board had atthe outset defined the paper whi ch they could di scount i n such a way as to requi re it i n to be drawn terms of dollars . They purchased and di scounted large quantiti es Of member and - a but l non member cceptances , on y when drawn in

l i i a ik r dol ars , the reason ass gned be ng th t a l e p ac tice (of dealing only i n bills drawn in sterling) had l nk of l il ong been prevalent at the Ba Eng and , wh e it a a on the other hand , was asserted th t the d nger of loss due to fluctuation of currency as the war progressed was too great to be i ncurred by reserve For i i l banks . s m ar reasons there had been refusal to establi sh agenci es abroad . Soon after the i a e u Un ted St tes entered the war , pr ss re from the government led Reserve banks to establi sh agency i of a u relations w th the Bank Engl nd , s bject , how to i i i ever , a pr vate agreement wh ch spec fied that during war there should be no actual Operation by either the reserve system or the Bank Of England was i n the market of the other . The arrangement largely on e for the fiscal convenience of the govern ments concern ed an d for the holding of coin wi th outdanger of transoceani c shipment . In these i buti t i l aspects itwas well worth wh le , had l tt e significance as a commercial bankin g relationsh ip . Similar relations were subsequently establi shed 308 Federal Reserve Ban ks wi th vari ous foreign banks butupon an equally i a lim ted basi s . The Feder l Reserve System never ac quired a portfoli o of foreign bills nor di d itever undertake to support the Operati ons of American banks i n the markets wher e branches were estab li h i i d i t u a o s e d. Ne ther d ever ndert ke t supply exc hange or remittances to forei gn c ountries save i n a limi ted way for the Government of the United

a uri a a of war for St tes , and d ng the l tter p rt the business uses through arrangements wi th c ertain

South American states . Whi le there h ad been much sporadi c discussi on of the financing of foreign trade before the Federal was a i i Reserve System est bl shed , and wh le there had been well-grounded cri ti c i sm of the c onditions i n our legi slati on whi c h necessitated appli cations to Engli sh banks for the opening of ac c eptance i ac of o i a n a c i h ad cred ts , the l k f re gn tr de fi n ng never been so i mportant i n i ts effec t as to c on f i o on a to stitute an evil o first proport ns . C tr ry the c o i i o i n uc u as a i ai nd t n s h a co ntry Gre t Br t n , the United States depends only i n a sec ondary degree u o its o i a a ou uc ra i s un p n f re gn tr de , lth gh s h t de questi onably essenti al as a regulator an d supple i ua i ment to domesti c commerc e . A new s t t on i i s c oo a war came nto ex ten e s n fter the opened , due to the fac t that European countries found i t nec essary to rely very largely upon the United States as a sourc e of supply for muni ti on s an d o to a for s c a i a i u food . In rder p y the e ne ess r es v r o s a ua i i of i means were found . L rge q nt t es fore gn

3 10 Federal Reserve Ban ks

i o s of an s su i m wi th f cred t r the b k , pply ng the un ds

wi to a o i i s s where th m ke f re gn nve tment . All thi s h ad o a i an d o a i a i o f h wever , t ken t me , the rg n z t n o new i nstituti ons under the Edge Ac twas slow partly bec ause of the imprac ti c al provi sions of the law an d partly bec ause of the inc reasing ec onomi c

u i o i n o Ac tur conf s n Eur pe . The Edge f ther made provi sion for ac c eptanc e business to be under taken by Edge c orporations organi zed for tha t pur pose butther e was li ttle suc cess i n thi s i direc t on . Very few Edge banks were ever organi zed (two i n ac tive Operation atthe c lose of butduring — the years 1 91 9 1 92 1 our forei gn trade was largely ﬁnanc ed by manufacturers an d merc hants wh o o di to i c u o extended pen book cre ts the r st mers , ﬁnanc ing themselves by direc t borrowing at their own i l u i m a commerc a banks . Thro gh th s e ns there was built up an enormous unfunded balance due the Uni ted States an d estimated at the close of 1 92 1 as somethi ng like Reserve banks i n the meantime h ad di sc ounted foreign bills growi ng outof ordinary trade Operati ons i n c on siderable ua i i s buto a i n q nt t e , nly when st ted terms

f o i of ri c a Ma o a . i a d ll rs W th the shr nk ge p es fter y, 1 2 0 an d c osi o u i i c 9 , the l ng d wn Of b s ness wh h ac c om a i i t v o u of uc a Off p n ed , the l me s h p per fell an d the serv i c e rendered by reserve banks i n the

a c i n of o i a i c h ad a wa ﬁn n g f re gn tr de , wh h l ys been

or s i mi c am ss i m o a . more le s l ted , be e even le p rt nt In its relati on to foreign business the Federal Federal Reserve Ban ks 3 1 1

Rese rve System h as perhaps been less effic i ent an d i a in serv ceable th n any other aspect. A cri ti cal estimate of the servi ce of the Federal Rese rve System i s necessarily very mi xed in char l o i acter . The g oomy foreb d ngs expressed when i t was first organi zed have been warranted in no o n ot essential respect . L ans have been made on a “ i i ” i pol t cal bas s , and there has been butlittle difficulty in organizing and conducting the several banks in substanti al harmony on e wi th another in mi i i a i i l short , the ad n strat ve mech n sm , wh e far

r rvi l ffici . from pe fect , has been se ceab e and e ent i i of On the other hand , the bank ng mechan sms the t — its h li of e its sys em and ng res rves , clearance and i its of i u c ollect on system , plan note ss es , and other u i c i n i basi c feat res , have been very sat sfa tory the r i o i a operat n and , ndeed , h ve worked more nearly perfectly perhaps than any si milar systems now in al s i f i . o operat on Moreover , the gener erv ce the reserve banks has been far greater and more i a c u nationally essent l than o ld have been hoped . No one c ould have foreseen the comi ng on of the European War or the fact that we should find our selves obliged to furni sh the means for carryin g itth rough its later stages . Few would h ave believed that the Reserve System would prove adequate to the task of handling and c onduc ting r i t i the finances of such a wa . Yet was n this very field that the system was foun d most c ffi — ci ent and satisfac tory itmight be sai d most fundamentally essential to th e mai ntenan ce of 3 1 2 Federal Reserve Ban ks national solvenc y an d fin ancial success during the i c confl t . The defects of the system have been found in unexpected direc tions buthave been real and to ou o ac to i t u day present seri s bst les s s c c ess . Start i n g wi th the i dea of a small fundamental reserve i u c mm i a a contr b ted by o erc l b nks , the reserve resources of the system have been greatly expanded u o i a i u si thro gh g ld mport t ons , thro gh depo ts by an d u c a i n s r u members , thro gh h nges re erve eq ire h as n o c ments . Yet there been orresponding c hange i n the methods of releasing these funds for use an d i n c u c O a i o of market , onseq en e the per t ns un s a u a ma the system , le s c ref lly h ndled , y tend somewhat t oward c onstri ction of c redi t atvari ous a u a an d a ila m i s times . A n t r l va ble re edy the free

use u i n a ra ac i or Of the f nds open m rket t ns t ons , their appli cation to the ﬁnancing of foreign trans

i ou aS o alre ad h s i o . a act ns Ne ther c rse , y seen , been o but h as ai o foll wed , the system refr ned fr m the a of ac i o i c o i i o Open m rket type trans t ns , wh le nd t ns have n otbeen favorable for the undertaking Of i i a iff i fore gn operat ons . Whether d erent s tuation i l u a a i ti s i c u to w l s pervene at a l ter d te d fﬁ lt say , buti n the meantime the great ac c umulati on of gold an d the enormous unused len ding power of the system have aroused the persi stent hostility of of c ommu i many elements the n ty . During the year 1 92 1 legislati on of various kinds was c onsidered by Congress i n the attempt to secure appli cati on of reserve funds on a freer basi s

3 1 4 Federal Reserve Banks

f i i i f i o organ zat on somewhat d f erent . Th s state of i u u i n o i o u o th ngs , of co rse , f rn shes reflect n p n the i i c or a c i al i of but u sc ent fi fin n mer t the system , m st be taken as i ndicating a reason why the organiza ti on h as n otfitted c omfortably into the general i an c i u u of a i bus ness d e onom c str ct re the n t on . al i n o The Feder Reserve System , sh rt , has proved its practi cabili ty and servi c e to the com munity ; h as been i ndispensable i n ai ding in fin an c i n g the war and post - war operations of the govern o i s -da i ment ; has perf rmed , and to y perform ng , wi thout cost both for the government an d for the u c i i n c a of banks , f n t ons the transfer and re money which are almost i nvaluable ; h as shown i tself able to expand its credit - granting powers and to resist almost any ordinary strain to which itc an be sub d u u li i i u j ec te has been free from nd e po t cal nfl ence , h as on l a l fi i and been , the who e , re sonab y ef c ent i i t use of u h as and c areful n s f nds . It failed to come i nto contac t wi th the rank and file of the publi c ; to control rates of interest and di scount as many h ad expected that itmight ; h as done little to correc t exi sting i nequali ti es i n the di stributi on of c redit among i ndivi duals ; has abstained entirely from participation i n foreign trade financi ng or i nternational Operati ons except those of a stereo i n i i of c o typed sort ; and , the op n on large lasses f u i l i i iff the comm n ty , has been re at vely nd erent to o ui i ar thei r needs r req rements . Its serv ces e thus u i a an d i i c i i i i s bstant l the cr t sms d rected aga nst t, ou i n a u l i n alth gh p rt well fo nded , are a so part Federal Reserve Banks

i a i or . l m g nary exaggerated Neverthe ess , the or has sti ll to make a deﬁnite plac e for i tself i n Ameri can ban ki ng although its servi c e has so i cu u u i o or been consp o s that the destr ct n , ev en a i i i it s very far re ch ng mod ﬁcat on of , doe not now

3 1 8 I n dex

— Ca ita Con ti nued n ature of ia i it 1 6 imits p l l b l y , ; l an 2 0 1 ; of German an s on e ansion of 2 - b k , b k , xp , 33 , 5 55 ; 2 1 h ow tran s erre - 6 9 f d , 43 4 ; Cas i te ms e anation s of 0 simi ar to an n otes 60 —6 2 h , xpl , 4 l b k , Cen tra an s n ote s of Di scoun t e an ation of 1 2 ° l k , , 79 , pl , b — x 8 0 8 8 un c ti on s of 8 8 8 rate of an rot ti on of , ; , 3 ; , d p e c f — activi ti es of . in n orma time s reserve 8 c an e 1n l , , 3 , 94 9 ; g — 3 h 8 8 2 ; evi c es of to rote c t rate of i n e era rese rve 9 d , p , F d l re serv e 2 — rate di s an s 2 8—2 8 2 , 9 9 4; O k , 7 — f b c oun tOf 1 00 ac tivi ti e s D oc umen tar i s of e c an e , 94 ; y b ll x h g , of uri n c ri ses 1 00 c ear IO , d g , ; l 9 i n g un c ti on s of 1 0 1 in Domesti c e c an e rates of f , ; x h g , , de btor an d c reditor mon ey 1 03 mar ets 1 2 8 - 1 1 k , 3 E Cen tra reserve ci ti es 2 l , 35 — C ase Sa mon R 2 2 0 2 2 2 e orei n an i n Ac t h , l , , Edg F g B k g , 2 33 309 — C ec s as c urren c 6 n i s oin t-stoc an s h k , y , 43 4 E gl h j k b k , rin of ti of r t of c ea c o ec on c a ita of 2 n . ; ow l g , 47 ; ll p l , 5 g h , on i stan t an s col 1 8 1 62 re ati on of to d b k , 49; 3 , ; l , ec ti on o f e era R e an of n an 1 1 62 l , by F d l B k E gl d , 49, serve an s 0 ; c o ec ti on en ses ac e of i n an b k , 5 ll Exp , pl , b k of an d th e e an sion of ac coun ts 0 , p , 4 — x cre it6 1 orts nan cin of 1 12 d , 9 7 Exp , fi g , C earin House o eration of l g , p , — re strain s e x an 47 49, 5 7 ; p F si on of c reditby parti c ular an s butn ot all an s ai ures in th e Unite States b k by b k , F l d , 6 — f on on f 8 1 o L 8 o 2 11 . 9 7 ; d , 4 ; n ° n i sor Coun c i 2 osto c ertificates . e era v B , 49 , 47 F d l Ad y l , 59 oan c erti cates i stor of e era R eserve ban s c ollec l fi , h y , F d l k , in suc c essive cri ses 1 8 60 tion of c ec s 0 are , h k by , 5 ; 1 0 2 1—2 6 c en tra an s 8 0 reason s 9 7, 4 4 l b k , ; Co mmerc ia oan s 1 0—1 2 for e sta li s men tof 8 2 l l , 3 , 7 b h , 5 , 49 , 2 i ui n ess of 8 1 2 0 or ani ation of 2 9; l q d , 5 ; g z , 49 om tro er of th e Curren c 2 8 2 6 1 ran c e s of 2 8 C p ll y , 5 , ; b h , 5 2 i stri cts of 2 8- 2 60 2 57 59 ; , 5 ; d — ri ses si tuati on an d o i c of di re c tors of 2 2 60 c om C , p l y , 59 ; anks urin 8 2 —8 1 00 i n ari son of oter n ationa b d g , 4, ; p h l th e ni te State s 1 8 an i n s ste ms wi t 2 6 U d , 57 b k g y h , 3 , 1 0 8 2 1—2 6 of 1 8 0 2 66 tab e s of re sourc es an d 9 7, 4, 4 4 ; 9 , ; l 0 1 0 1 1 6 ; of 1 1 1 2 1 i a i iti es 2 6 2 6 ; servi c es 9 , , 4 9 4, l b l , 4 , 5 Of 1 8 2 1 of uri n war 2 —2 6 5 , 44 ; , g , 73 7 ; d — of 1 8 1 1 1 6 1 2 1 a ter war 2 2 8 2 i n 5 7, 5 , 4 f , 77 Curren c Actof 1 00 2 omesti c o erati on s 2 8 2 y 9 , 47 d p , 2 90 ; an d d1scoun tan d re i 8 8 6 8 8 D scoun t2 n . 2 n . 2 d , 5 , , , 2 8 9 ; seasona l e xten sion of D e osits rom oan s 1 ° cre it 2 8 2 86 2 8 2 8 p f l , 3 , 55 d , 3 , , 7, 9 ; rom oter o erations 1 ac c e tan c e mov emen t 2 0 f h p , 4 , p , 9 I n dex 3 19

— Cont - Fe era Reserv e Banks . s i men t 10 106 accumu d l h p , 4 ; 2 an d n ote i ssue 2 2 29 ; , 9 ati on of th e an of l , by B k n - 2 97 ; c earan c e a d co ecti on , ran c e 1 8 1 8 th e l ll F , 7 9; by o f r — 0 1 an d rovi si ns o , 2 7 3 ; Rei c s an 2 1 Eederal p 9 h b k , 5 ; by relati ons to forergn an ki ng Reserve an 2 k , 7 — b B stems 0 1 1 Go ttl m t , 3 4 3 ld se e en 298 era Reserve oar c om F l B d , osi ti on of 2 6 uti es of p , 5 ; d , 2 6 2 5 , 7 era eserve S stem mem Fe l y , Hami ton d e an er n . — l , Al x d , 55 ers of 2 6 2 6 i stor of , 7 9 ; , T Han . b h y e 1 0 n . k , , 4 2 0 - 2 8 an d orei n an s y 7 7 ; f g b k , 305- 308 , , rlls 1 1 —1 1 8 Fman ce b , 5 in Forei gn ills of e c ange , b x h m orts meto s of nanci n vestmen ts in cen tra I p , h d fi g , , by l 1 1 1 an s 1 1 k . 93 . 3 b n terest a men t of on orei n e c an e and di sc oun t I , p y , F g g ' x h an ers e osi ts 2 8 — 10 - 1 08 de b k d p , 43 rates, 9 99, 7 ; ssue see ote issue n e 1 0 eman rates of I , N fi d , 3 ; d d , 10 - 10 ca e trans er rate s 3 7; bl f , 1 0 vari eti es of time ills 7 ; b , 108 - 1 10 ; nan ci ng e orts fi xp a an S — , 90 an d im rts 1 1 0 1 1 ; eter p m , 4 d evons WS . J , , 7 n . minati on of si trates 1 1 4 gh , 4 1 1 nan ce il s 1 1 - 1 1 8 ; 5 ; fi b l , 5 borrowin g and len di ng mar ets 1 1 8 - 12 0 ace of k , ; l — p i l D n e n . London i n 1 1 1 2 1 an d th e K , . , 55 , 9 ; y — uro ean War 1 2 1 12 ; de E p , 7 ve o men tof an s in th e l p , by b k Unite States 1 2 d , 7 ranc e an s of i ssue oter° Lia i i ties ratio of reserve to F , b k h b l , , tan th e an of ran c e in h B k F , 1 2 s ow eve o men t of Li Loans Or anization 7 ; l d l p g , an in a en ci es i n 1 6 2 6 b k g g , 7 7 e osit an s i n 1 Liver oo Lo r 1 d p b k , 77 p l , d , 7 ran co -German War o era Loan s nature of fun —1 F , p , k , 9 tion s of th e an of ran ce vari e ties of 12—1 2 —2 ° B k F , 3, 7 9 urin 1 8 - 186 i mi ts o n merease of d g , 7 l , , 33 i ui n ess of 8 1 2 2 dis l q d , , 7 ; 0 astrous conse quen ces of w o esale con trac tion of 8 2 h l , ; German curren c of 1 of ce ntra an s 8 8 - 2 of y, y , 99 l b k , 9 ; 2 0 1 m e en en t an s of sma amoun ts of th e an ; d p d b k , ll B k issue o f 2 02 2 12 ; e osit of rance 1 2 , , d p F , 9 an s of 2 16 Lo n on th e cen tra mon e b k , d , l y

Gi rt W 1 8 11. mar t f t wor 1 a . . e o h e 1 lb , J , 3 k ld , 9, Gol means o f ch ec i n e x 1 8 ; and th e uro ean War d , k g 4 E p . orts of 106 costs of 12 1- 12 p , 93 , ; 7 320 I n dex

Lon don an dWes tmi n ster an an s e ore 1 8 1 6 of B k , b k b f 44, 3 ; I g an of n an a te r 1 8 3 B k E gl d f 44, Loui siana re ulation of th e 1 —1 1 of oter n i s , g 39 4 ; gl — h E h an s of 8 an s 1 1 1 2 an d sus b k , 3 b k , 4 4 ; ’ en si on of ee s Ac t 1 p P l , 45 , M 1 5 6- 1 60 ; o f th e Ban k of 1 —1 8 1 8 - 1 ran ce , 73 7 , 7 90 ; F — Mc Leod H . D . 6 1 n . 100 n . o R i 2 0 , , , , f th e e c s an k , 2 02 7 ; h b — 1 2 n . of nati on a ank s 2 2 6 2 2 3 l b , 9, Mora ri um of 1 8 0 in ran ce to 2 of e era R e 7 F , 33 ; F d l eserv 1 8 0 an s 2 2—2 b k , 9 97 Morta e oan s ro er em g g l , p p for savin gs de 0

0 Other assets, 4 P National ban k of th e Unite d States oun ation of 2 2 0 m 1 aterson W . , f d , P , , 33 2 2 en era sa e- uar s 6 1 tn . en ni n o n . 3 ; g l g , P g , J , f d ° ° ' — 2 2 ; o an s 2 2 n . ee s Ac t1 8 1 6 sus On 4 g ld b k , 4 P l , 3 4 ; u i c un cti on s of 2 2 ; of 1 6—16 1 an d th e p bl f , 5 , 5 ; c on iti on of n ote i ssue 2 2 6 law relatin to an notes d , g b k , 2 2 2 ro t rom i ssue 9, 33 ; p ﬁ f , - 2 ssue 2 2 9 3 1 ; amoun tof i , — 2 1 2 33 regu ation an d c om R 3 l — osi ti on of reserve 2 2 p , 34 37 ; e ec ts i n suc c essi ve Rate of i scoun t an d ro d f Of , d , p cri ses 2 8—2 8 em r en c 8 , 3 4 ; e g y tection of reserve , 33 , 4 2 n otes i ssue i n 1 1 , 7 ; an d orei n e c ang e d byy , 9 4 4 99: f g x h mem ers of th e e e ra r tes 1 08 of th e an of a , ; k b —F d l B Rese rve an s 2 6 2 6 ran c e 1 1 2 ; of th e b k , 7 9 F , 75 , 9 Ne w or ree an i n s s Re i c s an an d oter Ger Y k , f b k g y h b k h tem of 6 man an s of i ssue 2 1 of , 7 b k , 3 , - otes a er of over i ssue , ; e era Re serve an 2 8 N , d ng 7 F d l B k , 7 un tri es use of, in vari ous c o , 2 8 2 6 ° reasons for restri cti on s Re e m ti on of an n otes 5 d p b k , on 60 —6 me to s of sa e un er Suffo s stem and in , 4 ; h d f d lk y , uar in 6 —68 over-i ssue Sc otan an d Cana a g d g , 4 ; l d d , 74 of an d of e osits com are i ffi cu ties of w ere , d p p d , s; d l , h 68— 2 re u ar re em ti on gau s are n ume rous 7 ; g l d p k , 75 ; — n s van ta es of 6 n of, 72 75 ; o as a sa e a g , 7 ; O a — b d f d f uar ; s ec i a c arac tion al ank s, 2 2 g d , 77 79 p l h b 7 ter of w en i ssue cen tra Rei c s an th e 8 ori i n of , h d by l h b k , , 9 , g , — - an s 80 1 2 0 1 ; or ani ation of b k , 79 99 g z , u i m ortan c e of to 2 0 1 - 2 02 n ote i ssue of 2 02 ote i ss e , p , ; , s 8 —8 8 of 2 0 in crease i n unta e c en tra an k , 7 ; 7 ; , l b — x d Lon on ri vate an s 1 2 i ssue of 2 08 2 1 1 ; n otes of d p b k , 3 ; , , of an of n an e ore ma e e a ten er 2 1 1 ; an d B k E gl d b f d l g l d , 1 8 1 - 1 6 of oin t-stuc oter German an s of i ssue 44 , 34 3 ; j k h b k ,

B y CHARLES A. CONANT

A i sto r o f Md H y o e r n B a n k s o f Issue

Wi th an Ac c ountof the Ec onomic Crises of the N ne teenth Centur and the Cris s o i y, i f 1907

xth Editi on R vi 0 Si , e sed and Enlarged. 8 0.

N0 better volume can be rec ommended to th e general reader wh o wish es to familiari ze ims n on i or of a ki h elf ot ly w th the the y b n ng. butwi th th e hi story an d ac tual experience of ” h i s r a n c of i u ri t g eat ge y nd st al progress.

' n Chrc ago E ve i ng Post.

We can only express our hearty appreciati on f i o th e book as a wh ole . It s extremely in i cann o butbe u terestn . use and us g It t f l , to M ' iti s r c rin . r . ona s m ve y hee g C nt book, fro e nn i n i s ta ou cu en c b gi g to end , a proof h t s nd rr y i s evolved nec essarily from the progress of an in " — i . N Y. i m . dustri al an d commerc al people . T

’ tn am s G. P. Pu Son s