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Charles A. (Charles Arthur) Conant.

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A HISTORY OF
.MODERN BANKS OF ISSUE



WITH AN ACCOUNT OF THE ECONOMIC CRISES
OF THE PRESENT CENTURY



BY
CHARLES A. CONANT



FOURTH IMPRESSION




G. P. PUTNAM'S SONS

NEW YORK LONDON

*7 WEST TWENTY-THIRD STREET 24 BEDFORD STREET, STRAND

| fjumhcrbockrr $)rss
1902



PREFACE TO THE SECOND EDITION.



THE exhaustion of the first edition of the " History of
Modern Banks of Issue," less than six months after
its publication, is one among many proofs of the inter-
est taken by the people of the United States in financial sub-
jects. The banking problem was not directly involved in the
contest, which has just closed, regarding the metallic basis
of the monetary circulation. The relations of the metallic
standard and the paper currency are, however, so linked
with each other that the consideration of the one almost
necessarily involves the other. The decision which has been
made by the majority of the voters in favor of the gold
standard is, in some senses, only a negative decision, and
merely clears the ground for the radical reforms which are
needed, in order to place our currency system upon a scien-
tific basis and make it responsive to the legitimate needs of
business. The financial ills from which the United States
have suffered in recent years cannot be permanently cured
by a political victory over the forces of discontent. A defec-
tive currency system has undoubtedly been one among
several causes which have contributed to recent agitation,
and the political party which has the judgment and the
courage to reform the system will do much to commend
itself to the intelligent support of the American people.

The changes made in the present edition of this book are
unimportant, because of the short time which has elapsed
since the appearance of the first edition. There have been
few changes in the banking laws of important states within
the past six months, and even statistics are not yet available



VI PREFACE TO THE SECOND EDITION.

for a later year than 1895. The more serious criticisms of
the book made in leading newspapers and reviews have been
directed rather to the brevity of the discussion of banking
principles than to the actual contents of the work. These
criticisms would have force, if the author had proposed to
develop any new theories of banking. It was his more
modest purpose to record the simple facts regarding existing
banking systems, and in this record no serious errors have
thus far been pointed out.

CHARLES A. CONANT.
WASHINGTON, Nov. 12, 1896.




PREFACE.



reason for being of this work is the growing inter-
: est in the United States in financial and economic
subjects and the fact that they promise to be the
paramount issues of American politics for many years to
come. My purpose has been to bring together, in compact
form, the leading facts regarding the banks of the world
authorized to issue circulating notes and the history of the
financial and economic crises through which they have
passed. There is no work in English covering exactly the
ground covered by the History of Modern Banks of Issue.
The materials for such a history are accessible in public
records as well as special works, but they have never before
been brought together in a form easily accessible to the
American and English reading public.

The functions and character of history have changed
with the changes in the character of national development.
The historical development of the human race has passed
through two essential stages and has entered upon a third.
The first was the struggle for the existence of civilization
and national life ; the second was the struggle for the legal
and political freedom of the individual within the state ;
the third is the struggle for the complete development, ac-
cording to sound economic laws, of the producing capacity of
the community. The Muse of History has followed no un-
reasoning whim in turning her pen to the story of each suc-
cessive stage of the world' s progress. In the first stage of her
work, her theme was the history of nations and the acts of
their sovereign powers. In the second stage, the history of



Vlii PREFACE.

value to the community became the history of the people and
the contest for popular rights. The historians of each age
have been logical in looking to the dominant spirit of that age.

The issue of the present and of the immediate future,
and the subject with which the Historic Muse must most
concern herself, is the best means of developing the pos-
sibilities of individual and national life. This issue is
essentially an economic one and the history of economic
development must, in the very nature of events, be in future
the principal study of practical thinkers and workers. The
Massachusetts Senator who declared that of late years the
American people had given " too much attention, perhaps,
to economic questions, and too little attention to those great
and far-reaching questions on which the future of the repub-
lic depends," l spoke out of the education and out of the
political theories of the past and with his face to the past
rather than to the future. The pursuit of the best means
of increasing wealth, not for its own sake, but for the wider
opportunities of intellectual and moral development which
it places in the hands of the community, is the mission of
the student of public affairs for the future, and the public
man who seeks different political ends subjects himself to
the judgment pronounced upon himself by Lord Stanley a
generation ago, that he was brought up in the pre- scientific
period. 2

Political economy is still in a large measure an experi-
mental and a disputed field, but this is less true of financial
administration than of the questions of taxation and the dis-
tribution of wealth, which still perplex economic students.
.The modern banking community have already learned, dur-
ing the past hundred years of the history of banking, the
leading lessons of the failures and experiments of that period.
There is doubtless much yet to be learned, but the system
of a banking currency and of the management of banking
operations is now a practicable and workable system. The

1 Congressional Record, Fifty-third Congress, Third Session, March
2, 1895, p. 3108.

2 McCarthy, I., 31.



PREFACE. IX

results of the experiments of the century can be summed up
and their lessons indicated in a clear and certain manner,
subject to little dispute by those who have given unpreju-
diced study to the subject. It is these experiments which I
have endeavored to describe in the following chapters, leaving
their lessons for the most part to be derived from a compari-
son of their results with the rules of sound banking policy.

The purpose of this work is historical rather than contro-
versial and I have even refrained from discussing the prob-
lem of the single or double standard, because the rules which
govern a banking currency apply with equal force, whatever
metal constitutes the standard money of redemption. I
have thought it proper to state, as simply and as clearly as
possible, the theory of a banking currency, but I have en-
deavored to avoid all digressions which were not essential to
an understanding of the history of banks of issue and of
recent events in the financial world. Systems of coinage,
the history of public loans and political events, the many
forms of mortgage, deposit and popular banks, and the new
problems relating to the uses of speculation and the part
played by negotiable securities in modern economic life, are
such important subjects of discussion that each is worthy of
separate treatment, and they are only referred to here where
they seem to form a necessary part of the history of one of
the great banks of the world. It has been necessary to
refer in several cases to the history of government paper
money, because it is related to the origin and growth of
banks of issue, but my plan excludes the systematic treat-
ment of paper money, which would of itself fill a volume.
My chief object, beyond that of a narrator, will be accom-
plished if the study of the dismal record of government
interference with monetary laws shall convince thinking
Americans of the axiomatic truth that

The currency of a commercial country should be regulated by
commercial conditions and not by the whims of politicians.

CHARLES A. CONANT.
WASHINGTON, D. C., April i, 1896.



I beg to acknowledge my obligations to the Hon. William
K. Curtis, Assistant Secretary of the Treasury ; to the Hon.
James H. Eckels, the Comptroller of the Currency ; and to
the Hon. Robert E. Preston, the Director of the Mint, for
the use of many valuable public documents of foreign coun-
tries as well as of the United States ; to them, and many other
officers of the Treasury, to the Hon. Lewis Sperry of Hart-
ford, Conn., and to Mr. L,. Carroll Root of New York, for
many helpful suggestions ; and to my Secretary, Miss Flo-
rence Johnson, for her intelligent assistance.

Amounts expressed in foreign currency in the following
pages are reduced only to round sums in United States
money, with sufficient frequency to afford a general idea of
the sums dealt with, but the exact equivalent of the foreign
monetary unit is usually stated early in the chapter in which
it appears.

The full titles of the leading authorities cited will be found
at the back of the book.

C. A. C.



CONTENTS.



CHAPTER I.

PAGE

THE THEORY OF A BANKING CURRENCY i



CHAPTER II.
ANCIENT AND MODERN BANKING IN ITALY . . . .21

CHAPTER III.
J BANKING IN FRANCE 38

CHAPTER IV.
FIRST CENTURY OF THE BANK OF ENGLAND .... 78

CHAPTER V.
SECOND CENTURY OF THE BANK OF ENGLAND . . . 100

CHAPTER VI.
THE SCOTCH BANKING SYSTEM 138

CHAPTER VII.
BANKING IN IRELAND 167

CHAPTER VIII.
-* THE BANKS OF GERMANY . 182



XIV CONTENTS.

CHAPTER IX.

PAGE

THE AUSTRO-HUNGARIAN BANK ...... 209

CHAPTER X.
THE BANK OF RUSSIA ......... 235

CHAPTER XI.
THE BANKS OF NORTHERN EUROPE ...... 250

CHAPTER XII.
THE BANKS OF SOUTHERN EUROPE ...... 268

CHAPTER XIII.
THE BANK OF THE UNITED STATES ...... 286

CHAPTER XIV.
THE STATE BANKING SYSTEMS I



CHAPTER XV.
THE NATIONAL BANKING SYSTEM ...... 348

CHAPTER XVI.
THE CANADIAN BANKING SYSTEM ...... 386

CHAPTER XVII.
THE BANKS OF LATIN AMERICA ...... 4x3

. CHAPTER XVIII.
BANKING IN AFRICA AND THE EAST ..... 432



CHAPTER XIX.
CRISES AND THEIR CAUSES 453

'



CONTENTS. XV
CHAPTER XX.

S PAGE

THE EARLY CRISES OF THE CENTURY 467



CHAPTER XXI.
THK LATER CRISES OF THE CENTURY 492

CHAPTER XXII.
THE CRISIS OF 1893 524 ^

CHAPTER XXIII.
THE ADVANTAGES OF A BANKING CURRENCY .... 554

LIST OF AUTHORITIES 577





HISTORY O3&ERN BANKS
OF ISSUE.



CHAPTER I.

THE THEORY OF A BANKING CURRENCY.

The Distinction between Batik-notes and Money The Functions of
Currency as a Standard of Value and Medium of Exchange The
Mechanism of a Bank of Issue Do Note Issues Create Capital?
Importance of Redemption in Coin on Demand The Necessity
for Quick Assets The Operation of the Rate of Interest and the
Foreign Exchanges on the Volume of Circulation Difficulty of
" Cornering " Money under Free Banking.

IT is the purpose of this work to give the outlines of the
history of the leading banks of issue in the world and
their methods of doing business, and incidentally to set
forth the principles and uses of a banking currency. Bank-
ing can be done without the issue of bank-notes, but they
are an important factor in the development of the use of
capital and afford the best currency for general uses. In
their capacity as a circulating medium, bank-notes have
come to be confused with money and have attained in the
minds of many a special and official character different from
that of other commercial paper. The examination of the
history of banks of issue, as well as of the theory of a bank-
ing currency, will serve to show the gradual development of
the use of bank-notes as a means of transferring credit and the
part they play in commercial transactions alongside of other



2 HISTORY OF MODERN BANKS OF ISSUE.

forms of credit which differ from them only in degree of
negotiability.

The creation and regulation of a banking currency are
based upon the theory that bank-notes are a convenient
means of giving mobility to capital. There are two impor-
tant truths which should be clearly understood at the outset
of the discussion of banking and paper currency. They are :

1. That bank-notes are not money.

2. That bank-notes are a form of credit and are of substan-
tially the same nature as bills of exchange, promissory notes,
and checks.

The distinction between bank-notes and money is of prime
importance for the purposes of economic study and from the
standpoint of legislation, if not always important in daily
transactions. It will be convenient, however, first to point
out what bank-notes are, before considering what they are
not. It will be convenient also to state broadly, in the
beginning, the theory of a banking currency and of free
banking, as a theory, before dealing with certain limitations,
for the purpose of promoting uniformity and security, which
experience and sound judgment may suggest in practice.

Bank-notes are the proper instruments of commercial
transactions because they are the creatures of commercial
needs and are adapted in volume and use to commercial
necessities. In this respect they differ from government
paper money, which is regulated wholly by the necessities
of governments and not by the convenience of trade. Bank-
notes are substantially similar to checks and bills of ex-
change, because they are simply the paper representatives
of credit. In the language of Prof. Bonamy Price :

A seller by taking the bank-note makes himself the creditor of the
government or bank, and is willing to part with his property, sub-
stantially, on credit to the state or bank. He finds in this debt, now
due to him, of the issuer of the bank-note a sufficient guarantee for
being able to buy with it other goods. . . . Every buyer with a
note virtually says, " I have no money ; give me the goods and I will
tell a good man who owes me money to pay you for me." '

1 Currency and Banking, 42-43. The character of a bank-note is
clearly and simply defined by Prof. Charles F. Dunbar, professor of



THE THEORY OF A BANKING CURRENCY. 3

Those who insist that gold and silver constitute the only
proper medium of financial transactions do not clearly distin-
guish the two essential functions of currency. These func-
tions are the creation of a standard of value and the provision
of a means of exchange. It is only in the fulfilment of the
first function that exchange value is required in the material
of which the currency is made. The fulfilment of the
second function requires only that the currency shall repre-
sent value, rather than that it shall contain value in itself. 1
A bank-note currency represents the value bound up in
commodities which are in process of production and ex-
change. The essential function of business operations is the
production and exchange of commodities for each other,
not the exchange of barren heaps of metal for each other nor
of commodities for metal. The intervention of gold and
silver in such exchanges adds nothing to the sum of produc-
tion and is not necessary to carry them on, except as the
metals afford, with paper, a convenient tool of exchange

political economy in Harvard University, as follows : " The bank-note
is the duly certified promise of the bank to pay on demand, adapted
for circulation as a convenient substitute for the money which it
promises. It is issued by the bank, and can be issued only to such
persons as are willing to receive the engagement of the bank in this
form instead of receiving money, or instead of being credited with a
deposit." Theory and History of Banking, 16.

1 It is difficult to get away from the term " intrinsic value," in the
terms of ordinary discussion, in spite of the well-reasoned demonstra-
tion of Prof. Macl,eod that value is a relation based upon exchange
rather than an inherent quality. Elements of Banking, 12. Gold
and silver, strictly speaking, are not only limited to an exchange
value, but they perform to a large extent, by the convention of civil-
ized nations, the same functions in monetary uses, as representatives
of value, as bank-notes and other commercial instruments. Roscher
illustrates the fact that even the currency of gold as money rests in a
measure upon credit. "The person who takes money as such must
always harbor the hope of being able to dispose of it again as money.
. . . The savage Goahiros, between Rio de la Hacha and Mara-
caibo, are too ' distrustful ' to take anything in trade but commodities
fit for the most immediate use." Political Economy, I., 351. The
refinement in the use of credit is a pretty accurate measure of na-
tional economic progress.



4 HISTORY OF MODERN BANKS OF ISSUE.

and, by themselves, a standard and common denominator
by which exchanges are measured. Bank-notes are not, as
government paper money usually is, pieces of paper created
out of nothing to represent value. They are simply the
paper representatives of a great mass of mercantile trans-
actions. They are the convenient counters by which men
carry on exchanges. The presence of gold and silver is a
necessary element in these exchanges only for the purpose
of applying the test of a common and fixed standard, and
this is secured for bank-notes by the condition that they
shall be redeemable in standard coin on demand.

The entire fabric of a bank of issue constitutes a harmoni-
ous whole. The capital subscribed by the stock-holders at
once becomes a liability and provides the bank with cash
for making loans and keeping a coin reserve. The issue of
notes enables the bank to furnish accommodation to the
holders of good commercial paper by covering the paper
Into its assets and treating the notes as demand liabilities.
A bank of issue, therefore, has on one side its liability to its
stock-holders for their invested capital and its liability to
its note-holders to pay coin on demand. It has on the other
side, as its resources, the cash derived from subscriptions to
the capital and the commercial paper payable in cash by its
makers at maturity. When deposits are received in cash or
paper convertible into cash, the proceeds can be employed to
enlarge the scope of the discounts. The obligation to pay
the deposit becomes a liability, but the cash deposited fur-
nishes assets of equal volume as an offset. Most of the
great banking institutions of the world have begun busi-
ness, and many of them continue it to-day, upon their capi-
tal and their loans and with but a small proportion of cash
deposits.

The volume of notes which a bank may issue, when not
directly limited by law, is determined by a prudent relation
between the issues and the coin reserve. The greater part
of the cash received in capital and deposits, over and above
the coin reserve, is available for loans and discounts. Loans
as distinguished from discounts are actual advances of money



THE THEORY OF A BANKING CURRENCY. 5

upon negotiable securities. They usually constitute a smaller
proportion of the transactions of a bank in a commercial
city than the commercial discounts. These are simply pur-
chases by the bank of commercial paper, carrying the right
to collect money at some future time. The wholesale mer-
chant, for instance, receives from his retail customer a pro-
missory note or bill of exchange, covering the cost of goods
he has sold, payable sixty or ninety days from date. By
taking this note or bill to the bank the wholesaler obtains
currency at once for the amount contracted to be paid, less
an interest charge which is known as discount. The busi-
ness of a bank of issue is simply to transform the bill of
exchange, which is itself a negotiable security, into another
sort of negotiable security. For this purpose it issues bank-
notes. In the concise language of an eminent French finan-
cial writer :

The bank bill is a promise to pay a fixed sum at sight or to bearer.
In promising to pay at sight, the difficulty is avoided of maturity at a
fixed term and the bearer is relieved of the limitations which result
from it. By the promise to pay to bearer, one gets rid of the embar-
rassment of endorsements, protests, recourse, etc. One obtains by
this means a security always negotiable, to which suffices a signature
generally known and in some degree public to make it equally
accepted and demanded, even in preference to metallic money. 1

The bank by the issue of notes gives mobility to capital in
several ways. It enables the holder of a bill of exchange
to put it to active use instead of locking it up against the
time of its maturity. The wholesaler or manufacturer, by
paying a small commission to the bank upon such a bill, is
able to obtain in advance the use of capital in negotiable form
to which he would otherwise not become entitled for several
months. He is enabled to obtain it not only in advance of
the time it would otherwise be due, but in such form that he
can split it into small amounts and pay a part for his raw
materials, a part for his labor, and a part for his personal
expenditures. The issue of bank-notes also enables small
depositors to combine their capital in the hands of the bank,

1 Courcelle-Seneuil, 102.



6 HISTORY OF MODERN BANKS OF ISSUE.

so that it becomes available for constant use. This is one of
the great advantages of modern banking, that it brings out
into the light and into the current of the processes of pro-
duction the capital which would otherwise be locked up in
idle hoards. The bank-note is a loan from the holder, but
a loan which costs him nothing and, on the contrary, affords
him the benefit of security, convenience, and negotiability
for his capital. In the sense in which government paper
money, made by law a legal tender for the payment of debt,
is a forced loan, for non-commercial uses, upon the produc-
tive forces of the community, the bank-note, which is not
forced legal tender, is a voluntary loan, for commercial uses,
which tends to bring into play, for the mutual benefit of
borrowers and lenders, the full efficiency of those productive
forces. l

The simple statement of the theory of a banking currency
shows how absurd it is to imprison the volume of circulating
notes within fixed limits, or to condition their issue, when
they are kept in circulation at par with coin, upon any other
specific thing than the amount of loanable capital."^ The
Bank of England is limited in its note issues, beyond a fixed
amount, by the Bank Act of 1844, to deposits of gold coin
or bullion, with the result that there is an annual autumnal
stringency in the money market. 2 There have been repeated
periods of business paralysis when every possible substitute
has been employed to make up for the deficiency of circu-
lating notes, and the limitation itself has been finally sus-
pended in every acute crisis as the only means of averting
universal bankruptcy. The banks of issue of the United
States are required to purchase evidences of the national
debt and are allowed in circulation only ninety per cent, of



1 Exactly the opposite view was urged by some of the early oppo-
nents of the Bank of England. Davenant declared that the effort to
attract deposits by the offer of four per-cent. interest was a hindrance
to energy and enterprise. Rogers, 18. This view overlooked the fact
that the money would be loaned by the bank for active use.

2 V. Jevons, Investigations in Currency and Finance, Ch. v., 160-93,
" The Frequent Autumnal Pressure in the Money Market."



THE THEORY OF A BANKING CURRENCY. 7

the face value of these securities, with the result that as the
debt has been reduced, the bank-note circulation has de-
clined. The securities have reached an enormous premium
as they have become scarce, and the bank-note circulation
has fallen from $354,408,008 on June 30, 1875, to $211,600,-
698 on June 30, 1895, while loans and discounts, which indi-
cate the volume of business, have more than doubled. The
public, under these circumstances, have looked to other
sources than the banks for a circulating medium and found
it, until the repeal of the purchasing clause of the Sherman
law, in purchases of silver bullion, by the Treasury, and the
issue of government paper money in payment for the bullion.
This circulation proved absolutely irresponsive to the de-
mands of business and resulted, after periods of great strin-



Online LibraryCharles A. (Charles Arthur) ConantA history of modern banks of issue; with an account of the economic crises of the present century → online text (page 1 of 54)