Chapter II: Front Matter (2)

It may be added that the government received from the note circulation for a typical year (ending 5th of April 1904), out of the profits of issue (Bank of England) L184,930, 2s. 2d., and also composition for the duties on the bills and notes of the banks of England and Ireland and of country bankers, L120,768, 18s. 6d.

In 1906 the banking business of England was carried on practically by about ten private and sixty joint-stock banks of which more than one was properly a private firm under a joint-stock form of organization. Though the number of individual banks had diminished, the offices had greatly increased.

The records of the numbers of banks in the United Kingdom have up to quite recent years been very imperfect. Such as exist were made by individual observers. The banks of England and Wales are believed to have been 350 in number in 1792. Those registered from 1826 to 1842 were:--

[v.03 p.0339] /* Private. Joint-stock. 1826 554 ... 1827 465 6 1833 416 35 1842 311 118 */

The number of banking offices in England and Wales was estimated by Mr. William Leatham in 1840 as being 697. The _Banking Almanac_ for 1845 gives the number in 1844 for England and Wales as 336 private bank offices and 640 joint-stock offices, Scotland 368 offices, Ireland 180 offices.

The number of inhabitants to each office was as follows in 1844 and 1906:--

+-------------------+-------------+----------------+
| | Number of | Number of |
| | Banking | Inhabitants to |
| | Offices. | Each Office. |
+-------------------+------+------+---------+------+
| | 1844.| 1906.| 1844. | 1906.|
| England and Wales | 976 | 5527 | 16,305 | 5885 |
| Isle of Man | ... | 23 | ... | 2417 |
| Scotland | 368 | 1180 | 7,120 | 3790 |
| Ireland | 180 | 777 | 45,417 | 5738 |
+-------------------+------+------+---------+------+
| In United Kingdom | 1524 | 7507 | 17,526 | 5530 |
+-------------------+------+------+---------+------+

In the latter years of the 18th century and the early years of the 19th, the note circulation was a very important part of the business, but about that date the deposits began to be, as they have continued since, far more important. It is unfortunately impossible to give any trustworthy statistics of the position of banking in the United Kingdom extending back for more than forty or fifty years. Even the Scottish banks, who have been less reticent as to their position than the English banks, did not publish their accounts generally till 1865. The figures of the total deposits and cash balances in the Irish joint-stock banks were published collectively from the year 1840 by the care of Dr Neilson Hancock, but it is only of quite recent years that any statement of the general position other than an estimate has been possible owing to the long-continued reluctance of many banks to allow any publication of their balance-sheets. A paper by W. Newmarch, printed in the _Journal of the Statistical Society_ for 1851, supplies the earliest basis for a trustworthy estimate. According to this the total amount of deposits, including the Bank of England, in England and Wales, Scotland and Ireland, may have been at that date from L250,000,000 to L360,000,000. The estimate in Palgrave's _Notes on Banking_ (1872), excluding deposits in discount houses and the capitals of banks, was from L430,000,000 to L450,000,000. The corresponding amounts at the close of 1906 were, in round figures, including acceptances &c., L997,000,000. The total resources, including capitals and reserves and note circulation (in round figures L177,500,000), were for 1906:--

England and Wales--
Bank of England and other banks L922,297,000
Scotland 135,042,000
Ireland 73,707,000
Isle of Man 898,000
-------------
L1,131,944,000

The progressive growth in bank deposits since it has been possible to keep a record of their amounts, affords some means of checking roughly the correctness of the estimates of 1851 and 1872. Broadly speaking, it may be said that the bank deposits of the United Kingdom have about doubled since 1872.

[Sidenote: Clearing.]

The purely city banks had associated themselves in a "Clearing House" certainly by 1776. An entry in the books of the Grasshopper,[4] namely--"1773 to quarterly charge for use of the Clearing-room of 19/6d.," points to an earlier and perhaps less definitely organized system of settlement. A house was taken for the purpose in 1810, in which year the number of banking houses who settled their accounts with each other at the "Clearing House" was forty-six (Gilbart's _History and Principles of Banking_, p. 78). The Bank of England has never been a member of the Clearing House, though it "clears on one side," _i.e._ its claim on the clearing bankers is made through the Clearing House, but the claims of the clearing bankers on the bank are forwarded direct to Threadneedle Street twice or thrice daily. Nor did the banks in Fleet Street or at Charing Cross belong to it. In 1858 the clearing of country cheques was added through arrangements made by Lord Avebury, then Sir John Lubbock. The "country clearing" is a great assistance to business, as it enables a cheque drawn on the most distant village in England to be dealt with as conveniently as a cheque on London. Of the forty-nine banks in London in 1844, twenty-six were connected with the Clearing House. At that time only private banks were allowed to be members. In 1854 the joint-stock banks made their way into that body, and in 1906 the numbers were one private bank and eighteen joint-stock banks who joined in the clearing--nineteen banks in all.

Practically at the present time every large transaction in the United Kingdom is settled by cheque, that is, by a series of ledger transfers, notes and specie being but the small change by which the fractional amounts are paid. A large proportion of these transactions are arranged through the operation of the London Clearing House. This is facilitated by the fact that every bank in the United Kingdom has an agent in London.

The annual circulation shown by the London Clearing House is more than L12,000,000,000. No one asks what stock of gold is held by the bank on which the cheques are drawn, or what the bank itself keeps in reserve. The whole is taken in faith on a well-founded trust. It is the most easily worked paper circulation and circulating medium in existence. Like the marvellous tent of the fairy Paribanou, it expands itself to meet every want and contracts again the moment the strain is passed. (See the article by R. H. Inglis Palgrave on "Gold and the Banks," _Quarterly Review_, January 1906.)

If we add to the returns of the London Clearing House those of the clearing houses in the large towns of England, Ireland and Scotland, and the numerous exchanges which occur daily, and the large number which the different offices of banks with a great many branches settle among themselves, and the number drawn by one customer of a bank and paid to another, we may form some notion of the vast amount of the yearly turnover in cheques. This may be roughly estimated to be at least twice as great as that registered by the London Clearing House. The earliest authentic statement as to the clearing is found in the _Appendix to the Second Report, Committee of House of Commons, Banks of Issue_ (1841).

In 1839 the figures of the London clearings
were L954,401,600, 29 banks.
In 1840 " " " " " 978,496,800, 29 "
In 1899 " " " " " 9,150,269,000, 19 "
In 1900 " " " " " 8,960,170,000, 19 "
In 1906 " " " " " 12,711,334,000, 18 "

[Sidenote: Scottish banks.]

In 1695, shortly after the establishment of the Bank of England, the Scottish parliament passed an act for the establishment of a public bank. Amongst the first names is that of Thomas Coutts, a name still commemorated in one of the most substantial banks in London. The terms of the establishment were more favourable than those connected with the establishment of the Bank of England, for they obtained the exclusive privilege of banking for twenty-one years without giving any consideration whatever. It may have been the natural caution of the country, or the fact that William III. was then king, which led to the Bank of Scotland being prohibited under a heavy penalty from lending money under any circumstances to the king. It is the only Scottish bank established by act of parliament. The directors began at a very early period to receive deposits and to allow interest thereon, also to grant cash credit accounts, a minute of the directors respecting the mode of keeping the latter being dated so far back as 1729.

Though the system of branches forms now so marked a feature of banking in Scotland, a good many years had to pass before they obtained any hold. It was not till about the year 1700 that the directors of the Bank of Scotland established branches at Glasgow, Aberdeen, Dundee and Montrose, but so little encouragement was given to these branches, the expenses far exceeding the profits arising from them, that the directors resolved to close them. In 1731 another attempt was made, and agencies were established at Glasgow, Aberdeen and Dundee. But after a trial of two years they were discontinued. It was not till 1774 that branches were again established by the bank.

Soon after the establishment of the Bank of Scotland the directors began to issue notes, or, as they were then called, bills or tickets, for L100, L50, L20, L10, and L5. In 1704 L1 notes were issued for the first time. In 1727 the Royal Bank of Scotland was established by a charter of incorporation,--which granted them "perpetual succession and a common seal." There was a great rivalry between the two companies. The British Linen Company was incorporated in 1746 for the [v.03 p.0340] purpose of undertaking the manufacture of linen, but by 1763 they found it best to confine their operations to banking transactions. This bank also was incorporated by charter.

The note circulation was always an important item in the Scottish banks. Thus in the case of the Bank of Dundee, the receiving money from the public did not commence till 1792. Up to that time the whole business of the bank from 1764 onwards, twenty-eight years in all, had consisted in its issue of notes, which had varied from about L23,000 to L56,000. The Bank of Dundee was amalgamated with the Royal Bank of Scotland in 1864, when its deposits amounted in round figures to L700,000 and its note circulation to L41,000. After 1792, the money deposited with the banks in Scotland rapidly increased, but the habit of hoarding savings in a chest up to amounts of L10 or L20 continued to a much later period (_History of the Dundee Banking Co._).

Private banking never appears to have had any considerable hold in Scotland. In 1819 eight private banks were in existence. These had all disappeared by 1844. In 1906 there were only ten banks of issue in Scotland, which practically carried on the whole business of the country. There were two other small banks established comparatively recently. These ten banks had, in 1906, 1180 branches.

The history of the growth and expansion of Scottish banking since 1826 is, as far as can be traced, as follows:--

+------+---------------+----------------------------------------+
| Date.| Deposits. | Number of Offices. |
+------+---------------+----------------------------------------+
| 1826 | L21,000,000 | 167 = 1 to every 13,170 inhabitants. |
| | | |
| 1841 | 27,000,000 | 380 = 1 to every 6,600 inhabitants. |
| | | |
| 1856 | 63,000,000 | 585 = 1 to every 5,230 inhabitants. |
| | and capital | |
| | | |
| 1872 | 92,000,000 | 790 = 1 to every 4,250 inhabitants. |
| | including all | |
| | liabilities | |
| | and capital | |
| | | |
| 1906 | 135,042,000 | 1,180 = 1 to every 3,790 inhabitants. |
| | including all | |
| | liabilities | |
| | and capital | |
+------+---------------+----------------------------------------+

Against every note issued in excess of the limit allowed by the acts of 1844-1845, gold has to be held at the offices of the issuing banks in Scotland and Ireland. The amount of the specie to be thus held was, as explained by Sir Robert Peel in his speech of the 25th of April 1845, to be ascertained by the average amount of the note-issue for four weeks preceding. The object of the holding of this amount of specie by the bank which issued the notes was designed by Sir Robert Peel to cause the circulating medium of the country, being partly of notes and partly of specie, to fluctuate in the same manner as if it had been a metallic circulation only. The specie held in Scotland and Ireland against the note-issue is not a special security for the note circulation, but is placed in the banks there for this purpose. The influence ascribed to the working of the note circulation in the earlier part of the 19th century accounts for this legislation, which, as Sir Robert Peel stated in his speech of the 6th of May 1844, was intended to "ensure the uniform equivalency of bank notes to coin." It is not applicable to the present position of the circulating medium of the United Kingdom, which now consists mainly of a circulation of cheques. This differs absolutely from what was contemplated by Sir Robert Peel; no attempt is or can be made to cause such a paper circulation to fluctuate as if it were one of specie only. One result of the limitation of the power of note-issue to the banks in Scotland which possessed that power in 1845 has been that no important bank has been established in that country since. Notes are so largely employed in ordinary business in Scotland that a bank which does not possess the power, practically cannot carry on business and supply the needs of its customers. This limitation in the number of the banks has, however, not been accompanied by any deficiency in the supply of banking accommodation to the people. There is a larger number of banking offices in proportion to the population in Scotland than in England and Wales or Ireland.

The large number of branches must, however, be a cause of great expense, and in several other respects it is obvious that a business carried on in such thinly peopled districts as are found in many parts of Scotland, must be conducted at a disadvantage in comparison with those banks which deal with more active centres of commerce. Although the profit derived from their large issue of notes may be thought to be considerable, yet, when we consider the many expenses incurred in conducting a large note circulation, the cost of printing, stamp duty, and the charges on importing gold from London when the circulation exceeds the limit fixed by the act of 1845. no small deductions must be made from the apparent profit to be derived from this head, if there is any direct profit at all.

On the other hand, the great number of branches possessed by the Scottish banks tends beyond doubt to their stability and prosperity. The network of banks on the surface of Scotland is as important to the development of the prosperity of the country as the network of the railways. It has caused a great economy of capital, as the universal practice of people, even of the most moderate means, is to lodge their money with the banks.

[Sidenote: Irish banks.]

The early history of banking in Ireland was marked by legislation even less favourable to the formation of a steady and dependable system than in England, and in 1695 several of the principal merchants in Dublin met together for the purpose of forming a public bank for Ireland on the model of the Bank of England. For many years this proposal met with no favour. It was not till 1783 that the Bank of Ireland was established and commenced its business. The first governor was David La Touche, junior, and two other members of his family were amongst the first board of directors. The bank met with very great success, but the jealousy against rival establishments was extreme. By the act forming the Bank of Ireland it was enacted that no company or society exceeding six in number, except the Bank of Ireland, should borrow or take up money on their bills or notes payable on demand. In the year 1821 the act was so far modified as to permit the establishment of banking companies exceeding six in number at a distance of 50 m. from Dublin. In 1824, in consequence of the ambiguity of that act, an act had to be passed to explain it. It was not till 1845 that the restriction as to the 50-m. limit was withdrawn.

The establishment of any other bank but the Bank of Ireland was for a long time hindered by the legislation on the subject. Some of the restrictions were so extraordinary that it will be interesting to refer to three of the more important acts.

1741, 15 Geo. II.--Partnerships authorized for the purpose of trade and manufacture; but such partnerships were not to exceed nine in number, nor was the capital stock of such co-partnership to exceed, at any time, the sum of L10,000.

1780-1781, 21 and 22 Geo. III.--"Anonymous Partnership Act,"--limited liability not to exceed L50,000, but "business of banking or discounters of money" expressly excluded.

1759, 33 Geo. II.--By this act a person while he continued a banker could not make a marriage settlement on a son or daughter, a grandson or granddaughter, so as to be good against his creditors, though for a valuable consideration, and though such creditors were not creditors at the time the grant was made. This act gave power to creditors over all conveyances by bankers affecting real estates; and all dispositions after the 10th of May 1760 by bankers of real or leasehold interest therein to or for children were made void as against creditors, though for valuable consideration and though not creditors at the time. No banker to issue notes or receipts bearing interest after the 10th of May 1760. Some of these enactments appear to be in force at the present day; suggestions have been made, though apparently unsuccessfully, for their repeal.

So extraordinary were the views of the common people that a banker in Dublin of the name of Beresford having made himself very unpopular, a "large assemblage of ignorant country people having previously collected a quantity of Beresford's notes, publicly burnt them, crying out with enthusiasm while the promises to pay on demand were consuming, 'What will he do now; his bank will surely break.'"

The number of banks which failed in Ireland in earlier times was extraordinary; thus Sir Robert Peel in his speech of the 9th of June 1845 on the Bank Act of that year, made a quotation "from the report of the committee of Irish exchanges, which sat in 1804. At that period there were fifty registered banks, but they all failed, and their failures, I know personally, led to the most fearful distress." Since the legislation of 1845, however, the business has been carried on with equally extraordinary steadiness and success, and at the present time is on a footing fully equal to that of any other part of the United Kingdom.

The earlier history of banking in Ireland pursued very closely the same process of development as in England. Circulation preceded and fed deposits. The credit which the banks obtained [v.03 p.0341] by the ready acceptance of their notes brought customers to their counters, and thus the existing system, fortunate in excellent managers, was built up gradually and surely.

Alone in the three kingdoms, Ireland maintains the same limit of authorized circulation as that established by Peel's Act of 1845. Not one of the six banks which had the privilege of issue at that period has lost it since.

The names of the banks carrying on business in Ireland, the years when they were established and their position in 1906, are as follows:--

CAPITAL OF IRISH JOINT-STOCK BANKS IN 1906
+---------------------------+------------+------------+
| | | Rate of |
| Name of Bank and Year | Capital | Dividend |
| when established. | paid-up. | per annum. |
+---------------------------+------------+------------+
| Bank of Ireland 1783 | L2,769,230 | 11 |
| Hibernian Bank* 1824 | 500,000 | 10 |
| Provincial Bank 1825 | 540,000 | 20 |
| Northern Banking Co. 1825 | 500,000 | 18-1/2 |
| Belfast Banking Co. 1827 | 500,000 | 36 |
| National Bank 1835 | 1,500,000 | 8 |
| Ulster Banking Co. 1836 | 500,000 | 18 |
| Royal Bank* 1836 | 300,000 | 12 |
| Munster Bank, Ltd.* 1864 | 200,000 | 8 |
+---------------------------+------------+------------+
* Thus marked are not banks of issue.

[Sidenote: Banking crises]

Banking, like every other business, has to pass through periods of difficulty. The severity of these in the case of banking is intensified by the vast number of interests affected. These, on the one hand, are world-wide in their scope, on the other they touch every home in the country. The stringency of such a time in England has since the passing of the act of 1844 been greatly enhanced by a doubt being sometimes felt as to whether a relaxation of the act of 1844 would be allowed. In any case, some little time must elapse before the assent of the ministers of the crown to the request of the Bank of England can be known. Since 1844 there have been five periods of pressure,--during 1847, 1857, 1866, 1870 and 1890. Of these in three, 1847, 1857 and 1866, the difficulties reached panic.

The crisis of 1847 was brought on by the speculation in railway enterprise which had gone on since 1845. So little had the anxieties of the autumn been anticipated that the bank rate of discount was 3% on the 1st of January. It was raised to 3-1/2% on the 14th and to 4% on the 21st. It became 5% on 8th April, 5-1/2% on 5th August, 6% on 30th September and 8% on 25th October. This was the highest. It was lowered to 7% on 22nd November, on 2nd December to 6% and on 23rd December to 5%. An announcement was made on the 1st of October that no advances would be made on public securities. This was followed by general anxiety and alarm.

The reserve of the bank was rapidly reduced to a very low ebb.

_Bank of England Reserve of Specie._
1847, 16th October .... L3,070,000
" 23rd October .... 1,990,000
" 30th October .... 1,600,000

Meanwhile the anxiety and alarm prevailing were causing a general hoarding of coin and bank notes, and it really appeared not unlikely that the banking department of the Bank of England might be compelled to stop payment while there was more than L6,000,000 of specie in the issue department. The chancellor of the exchequer (Sir C. Wood, afterwards Lord Halifax) was urged by many deputations and remonstrances to relax the Bank Act, but he declined. At last, on the 22nd or 23rd of October, some of the leading city bankers had an interview with the prime minister (Lord John, afterwards Earl, Russell), and on their explaining the necessities of the position, the desired relaxation was given. The official letter (25th October) recommended "the directors of the Bank of England, in the present emergency, to enlarge the amount of their discounts and advances upon approved security." A high rate, 8%, was to be charged to keep these operations within reasonable limits; a bill of indemnity was promised if the arrangement led to a breach of the law. The extra profit derived was to be for the benefit of the public. The effect of the government letter in allaying the panic was complete.

The crisis of 1857 was the last occasion of an official inquiry. This is contained in the _Report and Evidence of the Select Committee of the House of Commons on the Bank Acts_ (1857, 1858). The evidence given by Mr Sheffield Neave, the governor, and Mr Bonamy Dobree, deputy-governor of the bank in 1858, gives a vivid picture not only of what occurred, but of what might be expected to recur on such occasions. The wildest alarm prevailed, exchequer bills were scarcely saleable, and the bank itself sold L3,000,000 government securities at a considerable loss.

The extreme pressure was relaxed by the letter issued by the government on the 12th of November 1857, signed by Lord Palmerston, then premier, and Sir G. C. Lewis, which allowed a temporary relaxation of the Bank Act of 1844. The public alarm, however, was so great that it was not until the 21st of November that the severity of the pressure was in any way diminished. On the 20th of November the notes issued to the public on securities beyond the statutory limit (then L14,475,000) reached the sum of L928,000. By the next week the issue was almost down to the limit, and in the week following it was within the limit. On the 1st of January 1858 the bank rate was lowered to 8% and the anxiety gradually passed away. Had the treasury letter been issued earlier, the pressure might not have been so severe, and the governor of the bank expressed a strong opinion that, if it had been later, it would not have been sufficient. November 1857 was the only occasion when the limits of the Bank Act as to issue were actually passed.

During the crisis of May 1866 L4,000,000 left the bank on one day in notes and coin, and the reserve of the bank was reduced in the return of the 1st of June of that year to L415,000. The bank rate was raised to 10% and permission was given by the government to suspend the act. This, however, was not done. Tradition says that the bank asked the bankers, during the period of heaviest pressure of that terrible crisis--pressure more severe than anything that had taken place before or that has occurred since, to pay in every night the notes they had drawn out in the morning which were still in their tills at the close of the day, and that hence the legal limit was never exceeded. But it was not till the 6th of August that the rate was reduced to 8%.

The effect of the crisis of October 1890 was far less severe. This was due to the judgment and skill displayed by the governor (Mr Lidderdale) and the directors of the bank, who imported L3,000,000 in gold from Paris. The reserve in that year never dropped below L10,000,000, and before the end of November the anxiety had greatly passed away. "Caution prevailed, but not panic, and the distinction is a very clear one." (See arts. on "Crises," _Dictionary of Political Economy_, vol. i.)

The most important requirement of banking in the United Kingdom is still the establishment of an efficient specie reserve. The reserve in the banking department of the Bank of England averaged:--

L8,500,000 in 1845. L11,600,000 in 1875.
8,400,000 in 1855. 15,100,000 in 1885.
8,000,000 in 1865. 29,900,000 in 1895.
L23,500,000 in 1906.

[Sidenote: The "Reserve" question.]

This provides but a narrow basis for the whole business requirements of the country. Though much larger than in several previous years, it cannot be regarded as adequate. The figures fluctuate more severely than these decennial averages show, and the progress has not been one of uniform increase. Thus the L15,100,000 in 1885 was followed by L12,700,000 in 1888. The L29,900,000 of 1895 was followed by L34,600,000 in 1896 and L21,200,000 in 1899.

Beyond, or side by side with, the reserve of the Bank of England there are the reserves held by the other banks. Part of these are held in the form of balances at the Bank of England, part in specie and bank notes in their own tills. The latter, hence, are not unlikely to be estimated twice over. The published figures on this point are meagre.

The expectations expressed by Sir Robert Peel in his speech [v.03 p.0342] on the bank charter and the currency of the 6th of May 1844 have not yet been fulfilled. "I rejoice," he said, "on public grounds, in the hope that the wisdom of parliament will at length devise measures which shall inspire just confidence in the medium of exchange, shall put a check on improvident speculations, and shall ensure the just reward of industry and the legitimate profit of commercial enterprise conducted with integrity and controlled by provident calculation."

The extreme measures which have been required since the act af 1844 point out for themselves the necessity for reform. Three times since the date of the Bank Act of 1844 it has been needful to give permission for the suspension of that act which forms the very foundation of the monetary system of Great Britain. This, whenever it has occurred, has exercised a very injurious effect on credit abroad, as well as on prosperity at home.

The British money-market, the clearing-house of the world, is, in consequence of the smallness of its reserve, exposed to greater fluctuations than that of any other country. These fluctuations may arise from the need of meeting the requirements of other countries for specie or those arising from domestic trade. The recorded excess of imports over exports, L147,000,000 in 1906, though the difference is eventually balanced by the "invisible" exports, gives foreign nations at times a power over the British money-market greater than has ever previously been the case. The current must always have a tendency to flow outwards; this is enhanced by the great increase in the number of foreign banks which have branches in England. The need of providing sufficient reserves to meet requirements thus occasioned is obvious.

[Sidenote: British banking abroad.]

As regards the banks in which British interests are concerned in British colonies and other countries we can only speak briefly. It must not be overlooked that in the Dominion of Canada there are 29 banks, many of them large, managed much on the Scottish principle with capitals of nearly L19,000,000 and deposits of about L140,000,000. These banks have more than 1200 offices. In Australia and New Zealand there are 24 banks with capitals of nearly L18,000,000 and deposits of about L130,000,000. The number of offices is nearly 1700. There are, including the three Presidency banks, about 15 banks doing business mainly in India--in some cases connecting neighbouring countries and places like Bangkok, Hong-Kong and Zanzibar. These banks have capitals of more than L5,000,000 and deposits of fully L36,000,000 and over 210 offices. There are at least 8 banks in South and West Africa with capitals of nearly L5,000,000, deposits of nearly L50,000,000 and nearly 370 offices. There are 5 banks, including the Colonial Bank, in other British territories with capitals of about L1,000,000 and deposits of L3,300,000, and about 25 offices. There are thus, besides many private firms doing very considerable business, more than 80 joint-stock British banks working in the colonies with capitals amounting to L48,000,000, deposits L360,000,000 and offices 3505. Outside British territories there are 6 banks, principally in South America, with nearly L4,000,000 capital, L36,000,000 deposits and about 60 offices. There are 6 large banks doing business principally in the East with more than L6,700,000 capitals, L77,000,000 deposits and 106 offices: and 7 other banks, including Barings, with about L4,500,000 capitals and L22,000,000 deposits There are thus about 20 British banks doing business in foreign countries with capitals amounting to L15,200,000, deposits L135,000,000 and offices 173.

In this statement we have included only the more important banks, which collectively wield about L63,000,000 capital and more than L495,000,000 deposits--in all about L560,000,000 of resources operating at about 3700 offices situated in places as different from each other and as widely separated as California and Hong-Kong, Constantinople and New Zealand.

_France_.--In France the first bank of issue, originally called the _Banque Generale_, was established in 1716 by John Law, the author of the _Mississippi Scheme_ and the _Systeme_. Law's bank, which had been converted into the _Banque Royale_ in 1718, and its notes guaranteed by the king (Louis XV.), came to an end in 1721; an attempt at reconstruction was made in 1767, but the bank thus established was suppressed in 1793. Other banks, some issuing notes, then carried on operations with limited success, but these never attained any real power. There were many negotiations on the subject of the establishment of a bank in 1796. The financial difficulties of the times prevented any immediate result, but the advice of those engaged in this plan was of great assistance to Napoleon I., who, aided by his minister Mollien, founded in 1800 the Bank of France, which has remained from that time to the present by far the most powerful financial institution in the country. The objects for which it was established were to support the trade and industry of France and to supply the use of loanable capital at a moderate charge. These functions it has exercised ever since with great vigour and great judgment, extending itself through its branches and towns attached to branches over the whole country. At its establishment and for some time subsequently the operations of the bank did not extend over the whole of France. Departmental banks with the privilege of issue had been formed under a law adopted in 1803. At the close of 1847 there were nine of these banks existing in as many of the larger towns. In 1848, however, they were absorbed into the Bank of France, which has since possessed an exclusive privilege of issue, and in 1863 took over the Bank of Savoy after that province was united to France.

The Bank of France has successfully surmounted many political as well as financial troubles both during and since the times of Napoleon I. The overthrow of the government of Louis Philippe in 1848, the war with Germany in 1870, the many difficulties that followed when the Commune reigned in Paris in 1871, the payment of the war indemnity--not completed till 1873--were all happily overcome. Great pains, too, have been taken, especially of recent years, to render services to large and small businesses and to agricultural industry. In 1877 the offices of the Bank of France were 78 in number; in 1906 they were 447, including the towns "connected with the branches"--an arrangement which, without putting the bank to the expense of opening a branch, gives the place connected many of the advantages which a branch confers. The quantity of commercial paper discounted is very large. More than 20,000,000 bills were discounted in 1906, the total amount being L559,234,996. The advances on securities were in the same year L106,280,124. The rate of discount in Paris is as a rule lower and the number of alterations fewer than in London. From May 1900 to January 1906 there was no change, the rate remaining uniformly at 3%. Bills as low as 4s. 2d. are admitted to discount, including those below 8s.; about 232,000 of this class were discounted in 1906. Since the 27th of March 1890 loans of as small an amount as L10 are granted. In most cases three "names" must be furnished for each bill, or suitable guarantees or security given, but these necessary safeguards have not to be furnished in such a manner as to hamper applicants for loans unduly. In this manner the Bank of France is of great service to the industry of the country. It has never succeeded, however, in attracting deposits on anything like the scale of the Bank of England or the banks of the English-speaking peoples, but it held, as stated in the balance-sheet for the 23rd of December 1906, about L35,000,000 in deposits, of which L14,000,000 was on account of the treasury and L21,000,000 for individuals, and the amount held in this manner gradually increases. The report for 1904 says "each year the movement in these increases, and this economical and safe mode of effecting receipts and payments is more and more appreciated by the public." In one respect the Bank of France stands at a great advantage in connexion with this branch of its business. The average amount held in this manner for individuals during 1906 was about L23,000,000. As the accounts numbered 77,159 the average for each account was comparatively small. Accounts so subdivided give a great probability of permanence. The figures of the accounts for 1904 were as follows:--

11,178 current accounts, with power of discount.
4,576 simple current accounts.
26,709 current accounts, with advances.
24,106 accounts, deposits.

Total 66,569 accounts, against 59,182 at the end of 1903.

At the present time the Bank of France operates chiefly through its enormous note circulation (averaging in 1906 L186,300,000), by means of which most business transactions in France are carried on.

The limits of the circulation of the Bank of France and the dates when it has been extended are as follows:--

+--------------------------+-------------+-------------------+
| Dates | Millions of | Converting the |
| | Francs | Franc as 25 = L1. |
+--------------------------+-------------+-------------------+
| 15th March 1848 | 350 | L14,000,000 |
| 27th April, 2nd May 1848 | 452 | 18,000,000 |
| 2nd December 1849 | 525 | 21,000,000 |
| 12th August 1870 | 1800 | 32,000,000 |
| 14th August 1870 | 2400 | 96,000,000 |
| 29th December 1871 | 2800 | 112,000,000 |
| 15th July 1872 | 3200 | 128,000,000 |
| 30th January 1884 | 3500 | 140,000,000 |
| 25th January 1893 | 4000 | 160,000,000 |
| 17th December 1897 | 5000 | 200,000,000 |
| In 1906 | 5800 | 232,000,000 |
+--------------------------+-------------+-------------------+

[v.03 p.0343] Most business transactions in France are liquidated, not in cheques as in England, but in notes of the Bank of France. These, owing to their convenience, are preferred to specie. This is accumulated in the vaults of the Bank of France, which in 1906 held on average L115,000,000 gold and L42,000,000 silver. The gold held by the Bank of France is generally considerably larger in amount than that held by the Bank of England, which in the autumn of 1890 had to borrow L3,000,000 in gold from the Bank of France at the time of the Baring crisis. The large specie reserve of the bank has given stability to the trade of France, and has enabled the bank to manage its business without the numerous fluctuations in the rate of discount which are constantly occurring in England. It is true that the holding this very large amount of specie imposes a very heavy burden on the shoulders of the shareholders of the bank, but they do not complain. The advantage to business from the low rate of interest which has to be paid for the use of borrowed capital in France is a great advantage to the trade and industry of that country.

The mass of the reserve in France is so great that the movements of the precious metals, when they are the result only of natural causes, are allowed to go on without corresponding movements in the discount rate. But it must be remembered that this large reserve is held in part against a gigantic note issue, and also that the trade activity and enterprise of the French people are less intense than in either the United Kingdom or Germany; thus it is much easier for the Bank of France to maintain a steady rate of discount.

Besides the Bank of France, several great credit institutions carry on business in the country; as the _Banque de Paris et des Pays-Bas_ (capital and reserve, L3,729,000; other liabilities, deposits, &c., L14,842,000), the _Banque Francaise pour le Commerce et l'Industrie_ (L2,450,000; and L3,505,000), the _Credit Lyonnais_ (L14,000,000; and L82,570,000), the _Comptoir National d'Escompte de Paris_ (L6,772,000; and L47,593,000), the _Societe Generale pour favoriser le developpement du Commerce et de l'Industrie en France_ (L7,469,000; and L45,800,000), and the _Societe Generale de Credit Industriel et Commercial_ (L1,600,000; and L10,060,000).

There is also the _Credit Foncier de France_ with a very considerable capital, but the business done is so largely that of mortgages that it can hardly be included among banks, though it carries on in some measure the business of banking.

Besides the six important joint-stock banks mentioned above, there exists in France a large number of banks, principally in the provinces, carrying on a very considerable business. Little is known as to their deposits, but their business appears to be conducted with great prudence and discretion. One hundred and eighty-two of these firms were members of the French Country Bankers' Association in 1898. They carry on business in 66 out of the 86 departments into which France is divided. More than one of these banks has several offices--one possessing 18, including the head office. These branches are situated in the small towns in the vicinity. In this the business follows more the English method of small branches. The French Country Bankers' Association holds its meetings in Paris, where matters of interest to bankers are discussed. (See _Bankers' Magazine_, July 1898.)

_Germany_.--Besides the Imperial Bank of Germany, the "Reichsbank," there are about 140 banks doing business in the states which form the German empire. These credit and industrial banks with their large resources have had an immense influence in bringing about the astonishing industrial development of their country. Five banks possess the right of uncovered note-issue; these are:--

The Imperial Bank of Germany with right of issue L23,641,450
The Bank of Saxony " " " 838,500
The Bank of Bavaria " " " 1,600,000
The Bank of Wuerttemberg " " " 500,000
The Bank of Baden " " " 500,000
-----------
L27,079,950

At the Bank of Germany the coin and bullion held is sometimes larger than at the Bank of England. The statement of the specie in the weekly accounts includes silver. The amounts held in gold and silver are only separated once a year, when the balance-sheet is published. The figures of the balance-sheet for the 31st of December 1906 showed in round numbers L24,000,000 gold and L9,000,000 silver. As far as the capital is concerned the L18,000,000 of the Bank of England considerably exceeds the L9,000,000 of the Bank of France and the L12,200,000 of the Bank of Germany. The note circulation of both the other banks is considerably larger than that of the Bank of England, that of the Bank of France being L186,300,000, and of the Imperial Bank of Germany L69,000,000 in 1906.

The capitals and reserves of the German banks, including those of banks established to do business in other countries, as South America and the Far East, and of the Bank of Germany, are about L133,000,000, with further resources, including deposits, notes and mortgage bonds, amounting to fully L414,000,000. The amount of the capital compares very closely with that of the capitals of the banks of the United Kingdom. The deposits are increasing. The deposits, however, are not the whole of the resources of the German banks. The banks make use, besides, of their acceptances in a manner which is not practised by the banks of other countries, and the average note circulation of the Reichsbank, included in the statement given above, is between L60,000,000 and L70,000,000.

A large and apparently increasing proportion of the resources of the German banks is employed in industrial concerns, some of which are beyond the boundaries of the empire. The dangers of this practice have called forth many criticisms in Germany, among which may be quoted the remarks of Caesar Strauss and of Dr R. Koch, the president of the Reichsbank. Dr Koch especially points out the need of the development of powerful banks in Germany unconnected with speculative business of this kind. The object of employing their funds thus is the higher rate of interest to be obtained from these investments than from discounting bills or making loans at home. But such an employment of the resources of a bank is opposed to all regular rules of business and of banking tradition, which abstains from making fixed investments of any large part of the resources of a bank. On the other hand, Dr Koch observes that the risks of the one "reserve system" mentioned by Bagehot are not to be feared in Germany.[5] The recent movement in favour of concentration among the banks has been described by Dr E. Depitre and Dr Riesser, who give particulars of the business done by these banks, which does not correspond with banking as practised in the United Kingdom, being more of an industrial character.

There are also many private banking firms in Germany which do a considerable amount of business.

The Reichsbank, by far the most powerful banking institution in Germany, is managed by the bank directory appointed by the chancellor of the empire. The shareholders join in the management through a committee, of which each member must be qualified by holding not less than three shares. The government exercises complete powers of control through the chancellor of the empire. The influence of the Imperial Bank now permeates, by means of its branches, all the separate kingdoms of the empire--the uniformity of coinage introduced through the laws of 1871-1873 rendering this possible. The Imperial Bank assists business principally in two ways--first, through the clearing system (_Giro-Verkehr_), which it has greatly developed, and secondly, through the facilities given to business by its note circulation. The Imperial Bank also receives deposits, and cheques are drawn against these, but in Germany notes are principally used in payments for ordinary business.

Before the Reichsbank was established, Hamburg was the first, and for a long time the only, example of a clearing in Germany. This was taken up by the Reichsbank when it established its office in Hamburg in the time-honoured building which had belonged to the Hamburg Clearing House. Similar business had long been undertaken by the Bank of Prussia. This was absorbed and developed by the Reichsbank in 1876. Through the "clearing system" money can be remitted from any of the 443 places in which there is an office of the Reichsbank, to any of these places, without charge either to the sender or the receiver. It is sufficient that the person to whom the money is to be remitted should have an account at the bank. Any person owing him money in the remotest parts of the empire may go to the office of the bank which is most convenient to him and pay in the amount of his debt, which is credited on the following day at the office of the bank, without charge, to the account of his creditor wherever he may reside. The person who makes the payment need not have any account with the bank. The impetus given to business by this arrangement has been very considerable. It practically amounts to a money-order system without charge or risk of loss in transmission. From Hamburg and Bremen to the frontiers of Russia, from the shores of the Baltic to the frontiers of Switzerland, the whole of the empire of Germany has thus become for monetary purposes one country only. The amount of these transfers for the year 1906 exceeded L1,860,000,000.

The note circulation is also a powerful factor of the business of the Reichsbank. It is governed by the law of 1875 and the amending law of 1899, corresponding in some degree to Peel's act of 1844, which regulates the note circulation of the Bank of England. An uncovered limit, originally L12,500,000, increased to L14,811,450 by the lapse of the issues of other banks allowed to it, has been extended by these and by the act of the 5th of June 1902 to L23,641,450. Against the notes thus issued which are not represented by specie, treasury notes (_Reichskassenscheine_, the legal tender notes of the [v.03 p.0344] empire)[6] and notes of the issuing banks which are allowed to be reckoned as specie or discounted bills, must be held--maturing not later than three months after being taken--with, as a rule, three, but never less than two, good indorsements. There is also a provision that at least one-third of the notes in circulation must be covered by current German notes, money, notes of the imperial treasury, and gold in bullion or foreign coin reckoned at L69, 12s. per pound fine. The Reichsbank is bound by law to redeem its notes in current German money. It is stated that this may be gold coin or silver thalers, or bar-gold at the rate of 1392 marks (L69, 12s. reckoning marks as 20 = L1) the pound fine of gold. In practice, however, facilities have not always been given by the Reichsbank for the payment of its obligations in gold, though the importance of this is admitted. In the balance-sheet for 1906 the bills held amounted to L67,000,000, and the loans and advances to L14,200,000. The notes issued averaged for the year L69,000,000. The gold held amounted, 30th December 1906, to L24,069,000. If the condition of business requires that the notes in circulation should exceed the limits allowed by the law, the bank is permitted to do this on the payment of 5% on the surplus. In this respect the German act differs from the English act, which allows no such automatic statutory power of overpassing the limit of issue. Some good authorities consider that this arrangement is an advantage for the German bank, and the fact that it has been made use of annually since 1895 appears to show that it is needed by the business requirements of the country. Of late years the excess of issue of the Reichsbank has been annual and large, having been L25,267,000 on the 29th of September 1906 and L28,632,000 on the 31st of December of the same year. The amount of the duty paid on the excess issue in the year 1906 was L184,764, and the total amount paid thus from 1876 to 1906 was L839,052. The increase of the uncovered limit (untaxed limit of issue called in Germany the "note reserve") has not been sufficient to obviate the need for an excess of issue beyond the limit.

In accordance with a law passed in 1906 the Imperial Bank issues notes (_Reichsbanknoten_) of the value of 20 marks (L1), and 50 marks (L2, 10s.) in addition to the 5, 10, 100 and 1000 mark notes (5s., 10s., L5, L50) previously in circulation. Imperial paper currency of the value of 20 or 50 marks (L1 and L2, 10s.) had previously existed only in the form of treasury notes (_Reichskassenscheine_); these will in consequence be withdrawn from circulation.

The amendment of the banking law of Germany, passed in 1899, not only affects the position of the Reichsbank, but that of the four other note-issuing banks. The capital of the Reichsbank has been raised by the bill of that year to L9,000,000. The reserve fund has been raised out of surplus profits to L3,240,000. This exceeds the amount required by the act of 1899, which was L3,000,000. The amending act further diminishes the dividend receivable by the stockholders of the Reichsbank and increases the share which the government will obtain.

The arrangement with the four note-issuing banks is designed to cause them to work in harmony with the Reichsbank when the Reichsbank has to raise its bank-rate in order to protect its gold reserves. The official published rate of discount of the Reichsbank is to be binding on the private note-issuing banks after it has reached or when it reaches 4%. At other times they are not to discount at more than 1/4% below the official rate of the Reichsbank, or in case the Reichsbank itself discounts at a lower rate than the official rate, at more than 1/8% below that rate. If the Reichsbank discounts below the official rate, it is to announce that fact in the _Gazette_.

The subject being important, we quote from the amending act the sections governing the discount rate:--_Gesetz, betreffend die Abaenderung des Bankgesetzes vom 14. Maerz 1875; vom 7. Juni 1899, Artikel 7, S. 1_. The private note-issuing banks are bound by _Artikel 7, S. 2_, after the 1st of January 1901:--"(1) Not to discount below the rate published in S. 15 of the bank law, so long as this rate attains or exceeds 4%, and (2) moreover, not to discount at more than 1/4% below the Reichsbank rate, published in S. 15 of the bank law, or in case the Reichsbank itself discounts at a lower rate, not to discount at more than 1/8% below that rate."

It remains to be seen whether the note-issuing banks will find these conditions too onerous, and rather than be bound by them will give up their right of issuing notes. The object of the enactment is apparently to protect the specie reserve of the Reichsbank, but it may be doubted whether, considering the importance of the other banks of Germany--none of which is bound by similar conditions--relatively to the note-issuing banks, the restrictions put on the note-issuing banks will have any practical effect.

Since 1870 banking has made immense progress in Germany, but it may be some time before the habit of making payments by cheque instead of specie or notes becomes general.