Chapter III: Front Matter (3)

AUTHORITIES.--_Parliamentary Papers: Report, together with Minutes of Evidence and Accounts, from the Select Committee on the High Price of Gold Bullion_, House of Commons, 8th of June 1810; _Reports, Committee of Secrecy on Bank of England Charter_, House of Commons, 1832; _Select Committee on Banks of Issue_, House of Commons, 1840; _First and Second Reports, Select Committee on Banks of Issue_, House of Commons, 1841; _First and Second Reports, Secret Committee on Commercial Distress_, House of Commons, 1848; _Report, Select Committee on Bank Acts_, House of Commons, 1857; _Report, Select Committee on Bank Acts_, House of Commons, 1858; _Report, Select Committee on Banks of Issue_, House of Commons, 1875; _Report from Secret Committee of the House of Lords on the Causes of the Distress which has for some time prevailed among the Commercial Classes, and how far it had been affected by the Laws for regulating the Issue of Bank Notes payable on demand_, session 1847-1848; _Analysis of the Minutes of Evidence taken before the Select Committee of the House of Commons on Banks of Issue, 1875, with a selection from the evidence_, by R. H. Inglis Palgrave, London, 1876 (printed for private circulation).

GENERAL INFORMATION.--Articles on banking, &c., _Dictionary of Political Economy_, edited by R. H. Inglis Palgrave (Macmillan & Co., 1894-1906); _Handwoerterbuch der Staatswissenschaften_, edited by Conrad, Elster, Lexis and Loening, 1899; _Woerterbuch der Volkswirthschaft_, 2 vols. (ed. Elster, 1898); _Dictionnaire des finances_, edited under the direction of Leon Say, by L. Foyot and A. Lanjalley (1889); _Dictionnaire du commerce, de l'industrie et de la banque_, edited by A. Raffalovich and Yves Guyot; _Bankers' Magazine_, commenced 1844, to present time; _Journal of the Institute of Bankers_, commenced 1879, to present time; _Bankers' Magazine_ (New York); _Economist_ newspaper, commenced 1843, to present time; _Banking Almanac_, commenced 1845, to present time; _Reports of the Comptroller of the Currency_ (Washington).

EARLY.--_De Monetarum Augmento, variatione et diminutione, Tractatus varii_ (1509); _A proposal to supply His Majesty with twelve or fourteen Millions of Money (or more if requir'd)_, by A. D. of Grey's Inn, Esq., and some Others, his Friends (1697); Hayes' _Negociators' Magazine of Monies and Exchanges_, 1730; Lord King, _Thoughts on Bank Restrictions_ (1804); _The Theory of Money with considerations on the Bank of England_ (1811); William Cobbett, _Paper against Gold and Glory against Prosperity_, 2 vols. (1815); _Circulating Credit with Hints for improving the Banking System of Britain, by a Scottish Banker_ (1832); W. Leckie, _Bank Restriction_ (1841); _Debates in the House of Commons on Sir R. Peel's Bank Bills of 1844 and 1845_, reprinted verbatim from "Hansard's Parliamentary Debates," 1875; _Gilbart's Works_, 6 vols. (1865); _The History, Principles and Practice of Banking_, by J. W. Gilbart, edited and revised by A. S. Michie, 1882; Thomson Hankey, _Principles of Banking_ (1867); Walter Bagehot, _Lombard Street_ (1873), a brilliant picture of the city at that date (new ed., 1906); A. S. Cobb, _Threadneedle Street, a reply to "Lombard Street"_ (1891); John Dun, _British Banking Statistics_ (1876); R. H. Inglis Palgrave, _Notes on Banking_; George Rae, _The Country Banker_ (1886), and several editions later (many sound hints on practice); J. George Kiddy, _The Country Banker's Handbook_, 4th ed. (1903); C. F. Dunbar, _Chapters on the Theory and History of Banking_ (1891); Charles Gairdner, _The Making of the Gold Reserves_ (1891); J. B. Attfield, _English and Foreign Banks_ (1893) (refers to management of banks); T. B. Moxon, _English Practical Banking_, 10th ed. (1899); A. Crump, _The Key to the London Money Market_ (1872); W. Y. Duncan, _Notes on the Rate of Discount in London_, 3 vols., 1822-1856, 1856-1866, 1866-1873, privately printed, Edinburgh, 1856, 1867 and 1877; R. H. Inglis Palgrave, _Bank Rate and the Money Market in England, France, Germany, Holland and Belgium_, 1844-1900 (1903); Ernest Seyd, _The Bank of England Note Issue and its Error_ (1874); Ernest Seyd, _London Banking and Bankers' Clearing House System_; Ernest Seyd, _The Silver Question in 1893_; Walter Bagehot, _Depreciation of Silver_ (1877); Ernest Seyd, _Bullion and the Foreign Exchanges_ (1868); Clare, _The A B C of the Foreign Exchanges_ (1895, 2nd ed. 1895); _Tracts_, by Lord Overstone (1837-1857); _Select Tracts on Money, &c._, reprinted privately by Lord Overstone, 1856-1859 (containing much valuable and interesting information on early history); A. Crump, _A Practical Treatise on Banking, Currency and the Exchanges_ (1866); Bonamy Price, _Currency and Banking_ (1876) (the interest of this volume to the student of banking is found mainly in the correspondence between Mr Henry Hucks Gibbs (Lord Aldenham) and Professor Bonamy Price on the reserve of the Bank of England); R. H. Inglis Palgrave, _On the Influence of a Note Circulation in the Conduct of Banking Business_, read before the Manchester Statistical Society, 1877; Edgar Jaffe, _Das englische Bankwesen_ (Leipzig, 1905); _A History of Banks_ (1837); D. Hardcastle, _Banks and Bankers_ (1843); W. J. Lawson, _The History of Banking_ (1850); R. Baxter, _The Panic of 1866_ (1866); F. G. H. Price, _A Handbook of London Bankers_ (1876); Conant, _History of Modern Banks of Issue_ (New York, 1896); _History of Banking in all Leading Nations_, 4 vols. (New York, 1896); Viscount Goschen, _Essays and Addresses on Economic Questions, 1865-1893_ (1905), (arts. on "Seven per cent," "Two per cent," "Our cash reserves and central stock of gold"); C. F. Dunbar, _Economic Essays_, edited by O. M. W. Sprague (1904), (containing many articles on banking, particularly in the United States).

BANK OF ENGLAND.--T. Fortune, _A Concise and Authentic History of the Bank of England_ (1802); John Francis, _History of the Bank of England_ (1847); J. E. Thorold Rogers, _The First Nine Years of [v.03 p.0345] the Bank of England_ (1887); B. B. Turner, _Chronicles of the Bank of England_ (1897); T. A. Stephens, _Bibliography of the Bank of England_ (1897); A. Andreades, _Histoire de la banque d'Angleterre_ (1904; Eng. trans., 1909); Sir F. Schuster, _The Bank of England and the State_ (1906).

HISTORY OF BANKING HOUSES.--L. H. Grindon, _Manchester Banks and Bankers_ (1877); J. B. Martin, _"The Grasshopper" in Lombard Street_ (1892); M. Phillips, _Banks, Bankers, and Banking in Northumberland, Durham and North Yorkshire_ (1894); C. H. Cave, _History of Banking in Bristol_ (1899); Bidwell, _Annals of an East Anglian Bank_ (1900); Richardson, _Coutts & Co., Bankers, Edinburgh and London_; H. T. Easton, _History of a Banking House_ (Smith, Payne & Smiths) (1903); J. Hughes, _Liverpool Banks and Bankers, 1760-1837_ (1906).

SCOTLAND.--W. H. Logan, _The Scottish Banker_ (1847); Robert Somers, _The Scotch Banks and System of Issue_ (1873); W. Mitchell, _Scotch Banks and Limited Liability_ (1879); A. W. Kerr, _History of Scotch Banking_ (1884); A. W. Kerr, _Scottish Banking, 1865-1896_ (1898); Boase, _A Century of Banking in Dundee_ (1867).

IRELAND.--Malcolm Dillon, _History and Development of Banking in Ireland_ (1889).

BRITISH COLONIES.--Edward B. Hamilton, _A Manual of the Law and Practice of Banking in Australia and New Zealand_ (1880); _Banking in Australasia_ (1883); _The Canadian System of Banking and the National Banking System of the United States_ (Toronto, 1890); _Journal of the Canadian Bankers' Association_ (Montreal).

FRANCE.--Annuaire-Chaix, _Les Principales Societes par actions_ (1905); A. Raffalovich, _Le Marche financier_ (1905).

GERMANY.--Dr W. Scharling, _Bank Politik_ (Jena, 1900); _Die Reichsbank, 1876-1900_ (a history and description of the operations of the bank); Dr Adolf Weber, _Depositenbanken und Spekulationsbanken, Ein Vergleich deutschen und englischen Bankwesens_ (Leipzig, 1902); Dr Felix Hecht, _Die Mannheimer Banken, 1870 bis 1900_ (Leipzig, 1902); Siegfried Buff, _Das Kontokurrentgeschaft im deutschen Bankwerbe_ (Stuttgart and Berlin, 1904); Dr Riesser, _Zur Entwicklungsgeschichte der deutschen Grossbanken mit besonderer Rucksicht auf die Konzentrationsbestrebungen_ (1905); G. M. Boissevain, _Duitsche en Engelsche Deposito-Banken_ (1905).

ITALY.--_La Banca Popolare di Milano_ (1881).

AUSTRIA.--Compass, _Finanzielles Jahrbuch fuer Oesterreich-Ungarn_ (Vienna).

JAPAN.--_The House of Mitsui_ (Tokio); _The Law and the By-Laws of the Nippon Kogyo Ginko (The Industrial Bank of Japan)_ (1903).

H. W. Wolff, _People's Banks_ (1893). (On systems worked by Schulze-Delitzsch, Raiffeisen, Luzzatti, Banche Popolari, Dr Wollemborg, Popular Banks in Belgium, Switzerland, France, England).

(R. H. I. P.)

UNITED STATES

The early history of the American colonies is strewn, like that of most new countries, with many crude experiments in banking and currency issues. Most of these colonial enterprises, however, were projects for the issue of paper money rather than the creation of commercial banks. Speculative banking was checked to a large extent in the colonies by the Bubble Act (6 Geo. I. c. 18), which was passed in England after the bursting of the South Sea Bubble. This act, which forbade the formation of banking companies without a special charter, was in 1740 extended to the colonies.

The serious history of banking in the United States may be said to have begun with the foundation of the Bank of Pennsylvania. This bank originated in the project of a number of the citizens of Philadelphia to supply the continental army with rations. The first bills, issued in 1780, were nothing more than interest-bearing notes payable at a future time. The advances in continental money made by the shareholders were secured by bills of exchange for L150,000, drawn on the American envoys in Europe, but not intended to be negotiated.

A further outgrowth of the needs of the continental government was the Bank of North America, which was authorized by congress on May 26, 1781. The act gave to Robert Morris, the financier, power to create a bank with a capital of $400,000, to be increased if desirable. Morris arranged with the Bank of Pennsylvania to take over its holdings of foreign bills and paid in cash its claims against the Federation. The Bank of North America did not begin business until the 7th of January 1782, and there was so much doubt of the power of the continental congress to charter a bank that it was thought advisable to obtain a charter from the state of Pennsylvania. Under this charter the bank continued to operate until it was absorbed in the national banking system in 1863, and it may be considered the oldest organized banking institution in the United States.

The bank did much, during the first eight years after its organization, to restore order to the chaos of Federation finances. It loaned to Morris, as government superintendent of finance, $1,249,975, of which $996,581 was repaid in cash and the remainder by surrendering the stock in the bank owned by the government.

_The Bank of the United States._--A national bank of issue was one of the essential parts of the system built up by Alexander Hamilton in organizing the finances of the Federal government under the constitution of 1789. The first "Bank of the United States" was accordingly incorporated in 1791, with a capital of $10,000,000, divided into 25,000 shares of $400 each. This bank issued circulating notes, discounted commercial paper and aided the government in its financial operations. The government subscribed one-fifth of the capital, but paid for it by a roundabout process which actually resulted in the loan of the amount by the bank to the treasury. Other loans were made by the bank to the government, which gradually carried the obligation by the end of 1795 to $6,200,000. In order to meet these obligations, the government gradually disposed of its bank stock, until by 1802 its entire holdings had been disposed of at a profit of $671,860. The bank did not publish regular reports, but a statement submitted by Gallatin to congress for January 24, 1811, showed resources of $24,183,046, of which $14,578,294 was in loans and discounts, $2,750,000 in United States stock and $5,009,567 in specie.

The expiration of the charter of the bank in 1811 was the occasion of a party contest, which prevented renewal and added greatly to the financial difficulties of the government in the war with Great Britain which began in the next year. Although foreign shareholders were not permitted to vote by proxy, and the twenty-five directors were required to be citizens of the United States, the bank was attacked on the ground of foreign ownership as well as on the constitutional ground that congress had no power to create such an institution.

The government was compelled in the war of 1812 to rely on the state banks. Their suspension of specie payments, in 1814, made it very difficult for the treasury to transfer funds from one part of the Union to the other, because the notes of one section did not circulate readily in another. Gallatin left on record the opinion that the suspension of specie payments "might have been prevented at the time when it took place, had the former Bank of the United States been still in existence."

The financial condition of the government became so bad during the war that the second Bank of the United States was authorized in April 1816. The general project was that of Alexander J. Dallas, who in October 1814 had become secretary of the treasury. The capital of the new bank was $35,000,000, and the government again appeared as owner of one-fifth of the stock, which was paid in a stock note. The president of the United States was authorized to appoint five of the twenty-five directors and public funds were to be deposited in the bank, "unless the secretary of the treasury shall at any time otherwise order and direct." The right of congress to charter the bank came before the Supreme Court in 1819 in the famous case of _McCulloch_ v. _Maryland_. Chief Justice Marshall rendered the decision that the right to create the bank was within the implied powers granted by the Federal constitution, and that it was not competent for the states to levy taxes upon the circulating notes of the bank or upon its property except in common with other property.

The second Bank of the United States was not well managed in the early part of its career, but was upon a firmer foundation under the presidency of Langdon Cheves in 1819. Its policy greatly benefited commerce, but invited bitter complaints from the private dealers in exchange, who had been enabled to make excessive profits while the currency was below par, because of its different values in different states and the constant fluctuations in these values. The Bank, in the language of the report of Senator Samuel Smith of Maryland in 1832, furnished "a currency as safe as silver, more convenient, and more valuable [v.03 p.0346] than silver, which through the whole western and southern and interior parts of the Union, is eagerly sought in exchange for silver; which, in those sections, often bears a premium paid in silver; which is, throughout the Union, equal to silver, in payment to the government, and payments to individuals in business."

The bank in 1835 had attained a circulation of $23,075,422; loans of $59,232,445; and deposits of $5,061,456. The institution was ultimately destroyed by the open enmity of President Jackson, who in 1833 had suspended the deposit of public money in its custody. This policy known as the "removal of the deposits," excited a bitter political controversy in which Clay and Webster led the opposition, but Jackson was supported by the public (see JACKSON, ANDREW). The Federal charter of the bank expired in 1836. Under a charter obtained by President Nicholas Biddle from the state of Pennsylvania, the bank continued its business, but without success, and in 1841 it went into liquidation.

_The State Banks_.--The Bank of the United States found powerful rivals during its life and successors after its death in the banks chartered by the separate states. In the undeveloped state of the country in the early days there was much unsound and speculative banking. The most successful systems were those of New York and New England, where the surplus capital of the country in the early days was chiefly concentrated. The least successful banking systems were those in the newer and poorer sections of the country, and they grew progressively worse as poverty and inexperience added to the difficulty of setting aside capital for investment in the tools of exchange.

The termination of the first charter of the Bank of the United States was followed by a banking mania. In Pennsylvania a bill authorizing 41 new banks was passed over the veto of the governor, and 37 of them were in operation in 1814. Similar movements in other states increased the number of banks in four years (1811-1815) from 88 to 208. The amount of specie was not adequate to support the mass of credit which these banks created, and what there was in the country drifted to New England, which was upon a metallic basis. A number of banks collapsed in 1814, and business prostration was prolonged for several years.

The banking laws of the states varied considerably. Some states authorized the issue of notes upon state bonds, many of which, especially at the outbreak of the Civil War, proved valueless. In New England, however, a system prevailed which required the prompt redemption of the banks' notes at par. The New England Bank was the pioneer of this movement in 1814. In 1824 what was known as the "Suffolk system" of redemption came into operation. This system provided for the deposit by a bank in the Suffolk Bank in Boston of a redemption fund, from which the notes were redeemed and afterwards sent home by the Suffolk Bank for collection. This system, with slight modifications, continued in successful operation until 1858. The circulation of the New England banks in 1858 was less than $40,000,000 and the redemptions in the course of the year through the Suffolk Bank were $400,000,000. It was the essential merit claimed for the system that it tended to keep the volume of the circulation constantly adjusted to the requirements of business. A branch redemption agency was established at Providence. Legal sanction was given to the system in Vermont by an act of 1842, which levied a tax of 1% upon bank capital, but remitted this tax to any bank which should "keep a sufficient deposit of funds in the city of Boston, and should at that city uniformly cause its bills to be redeemed at par."

The period from 1836 to 1842 was a trying one for American banking. It was preceded by another great expansion in financial ventures, made without sufficient circulating capital or adherence to conservative banking methods. Foreign capital had come into the country in considerable amounts after the English crisis of 1825, the entire debt of the general government was paid off and a tremendous speculation occurred in public lands, which were expected to advance rapidly in value as the result of immigration and the growth of the country. The sales of public lands in 1836, on the eve of the crisis, reached 20,074,870 acres and brought receipts to the treasury of $25,167,833. How essentially speculative was the mass of these sales is indicated by the fact that such receipts declined in 1842 to only $1,417,972. President Jackson pricked the bubble of speculation by the "Specie circular" of July 11, 1836, requiring payments for public lands to be made only in specie or notes of specie value. Practically every bank in the Union stopped payment, and banking capital fell from $358,442,692 in 1840 to $196,894,309 in 1846. As usual in periods of business collapse the shrinkage of capital did not follow at once the outbreak of the panic, but was the result of gradual liquidation. Specie payments were resumed in 1838, but there was another crash in 1842, after the United States Bank finally suspended.

In New York, which was becoming the chief commercial state of the Union, the banks of New York City were generally sound, but several different systems were tried of securing the circulating notes. The "safety-fund system," inaugurated in 1829, provided for a contribution by each bank towards a fund to meet the deficit of any contributing bank which might fail with assets insufficient to meet its liabilities. It was the intention of the act to protect by this fund only the bank-notes, but it was treated as a fund for the payment of all the liabilities of a failed bank and in consequence the fund was exhausted by important failures which occurred in the panics of 1837 and 1857. Before 1843 the issue of notes was not controlled by the state, so that in several cases there were illegal over-issues.

What was called the "free-banking system" was inaugurated in New York by the act of 1838. This system permitted any body of persons, complying with the requirements of the law, to form a bank and issue circulation secured by the deposit of various classes of public bonds. This system was in operation at the outbreak of the Civil War, was imitated in several other states, and became in a measure the model of the national banking system. The state banks of Indiana and Ohio were among the most successful of the state banks, being modelled somewhat on the European plan of a central bank. They held in their states an exclusive charter for issuing notes and had branches at important points throughout the state. Under the management of Hugh McCulloch, afterwards secretary of the treasury, the bank of Indiana weathered the crisis of 1857 without suspending specie payments, and retired its circulation when gold went to a premium in 1862.

One of the defects of the state system of note-issues was the inconvenience which it occasioned. Notes issued outside a state could not safely be received without careful scrutiny as to the responsibility of their issuers. The systems prevailing in New England, in Louisiana, in Ohio and in Indiana were eminently successful, and proved the soundness of the issue of bank-notes upon the assets of a well-conducted commercial bank. But the speculation fostered by loose banking laws in some other states, and the need for uniformity, cast a certain degree of discredit upon the state banks, and prepared the way for the acceptance of a uniform banking system in 1864.

The power of note-issue formed a more important part of banking resources before the Civil War than in later years, because the deposit system had not attained its full development. Thus in 1835 circulation and capital of state banks combined were about $335,000,000 and deposits were only $83,000,000, in 1907 circulation and capital of national banks $1,430,000,000, while deposits were $4,322,000,000--in the earlier period deposits forming less than one-third of the other two items and in the later period three times the other items. The circulation of the state banks fluctuated widely at different periods. A maximum of $149,185,890 was attained in 1837, to decline to $106,968,572 three years later and to a minimum of $58,563,608 in 1843. From this point there was a tendency upward, with some variations, which put the circulation in 1845 at $89,608,711; 1848, $128,506,091; 1850, $131,366,526; 1854, $204,689,207; 1856, $195,747,950; 1858, $155,208,344; 1860, $207,102,477; 1863, $238,677,218.

Other leading items of the accounts of the state banks for representative years are as follows:--

[v.03 p.0347]

_State Banking Progress_, 1835-1863.
+------+--------+---------------+-------------+-------------+
| | No. of | | Loans and | |
| Year.| Banks. | Capital Stock.| Discounts. | Deposits. |
+------+--------+---------------+-------------+-------------+
| 1835 | 704 | $231,250,337 |$365,163,834 | $83,081,365 |
| 1845 | 707 | 206,045,969 | 288,617,131 | 88,020,646 |
| 1850 | 824 | 217,317,211 | 364,204,078 | 109,586,595 |
| 1855 | 1307 | 332,177,288 | 576,144,758 | 190,400,342 |
| 1860 | 1562 | 421,880,095 | 691,945,580 | 253,802,129 |
| 1863 | 1466 | 405,045,829 | 648,601,863 | 393,686,226 |
+------+--------+---------------+-------------+-------------+

_The National Banking System._--The creation of the national banking system was mainly the outcome of the financial necessities of the Federal government in the Civil War. It was found difficult to float government bonds at profitable rates, and Mr Chase, the secretary of the treasury, devised the scheme of creating a compulsory market for the bonds by offering special privileges to banks organized under Federal charters, which would issue circulating notes only when secured by the deposit of government bonds. But this plan, authorized by the act of 25th February 1863 (supplemented by the act of 3rd June 1864), was not sufficient to give predominance to the national banks. The state banking systems in the older states were so firmly entrenched in the confidence of the commercial community that it became necessary to provide for imposing a tax of 10% upon the face-value of the notes of state banks in circulation after the 1st of July 1866. The state banks were thus driven out of the note-issuing business, some being converted into national banks, while others continued their commercial business under state laws without the privilege of note-issue. A remarkable growth in the national banking system took place; in 1864 there were 453 national banks with an aggregate capital of $79,366,950, and in 1865 there were 1014 banks with an aggregate capital of $242,542,982.

The national banking system was specially marked by the issue of circulating notes upon United States bonds. Any national bank desiring to issue notes might by law deposit with the United States treasurer bonds of the United States to an amount not exceeding its capital stock, and upon such bonds it might receive circulation equal to 90% of their par-value. No bank could be established which did not invest one-third of its capital in bonds. This was changed in 1874 so as to reduce the requirement to 25%, with a maximum mandatory requirement of $50,000. Notes were taxed at the rate of 1% per annum. The banks obtained from the provision for circulation the benefit of what was described by critics as "double interest," being credited with the interest on bonds in the custody of the treasury department, and being also able to lend their notes to the public. But several deductions had to be made: notes could not be issued to the full par-value of the bonds; the tax of 1% upon circulation reduced by that amount the profit which would otherwise be earned; and the banks had to set aside in gold or other lawful money what was needed for redemption purposes and for reserves. As the banks suspended specie payments at the close of 1861 and great masses of government paper-money were issued, gold ceased to be a medium of exchange except in California, and the new banks redeemed their notes in government paper. The gold-value of the bank-notes, therefore, rose and fell with that of government notes until the resumption of payments in specie by the national treasury on the 1st of January 1879.

The amount of bank-notes in circulation proved in practice to be influenced largely by the price of bonds. The maximum originally set for bank circulation was $300,000,000. This was increased in 1870 by $54,000,000, and in 1875 the limit was removed. The circulation reached $362,651,169 on the 1st of January 1883, but afterwards declined materially as bonds became scarce and the price rose. The fact that circulation could be issued to only 90% of the par-value of the bonds greatly reduced the net profits on circulation when the price of 4% bonds rose in 1889 above 129 and other classes of bonds rose in like ratio. The circulation of bank-notes fell as low as $167,927,574 on the 1st of July 1891, but afterwards increased somewhat as the supply of bonds was increased to meet the treasury deficiencies of 1894-1896 and the expenses of the war with Spain.

The national banks supported the government cordially in the measures taken to bring about resumption of gold payments on the 1st of January 1879 under the law of 1875. The banks held more than $125,000,000 in legal tender notes, of which sum nearly one-third was held in New York City. A run upon the treasury for the redemption of these notes would have exhausted the gold funds laboriously accumulated by secretary Sherman and compelled a new suspension. But the banks appointed a committee to co-operate with the treasury, declined to receive gold longer as a special deposit, and resolved to receive and pay balances without discrimination between gold and government notes. Thus resumption was accomplished without jar, and as early as the 17th of December 1878 gold sold at par in paper.

The silver legislation enacted by Congress in 1878 and 1890 caused uneasiness in banking circles, and the banks discriminated against silver dollars and silver certificates in their cash. When the treasury began to lose gold heavily, however, in 1893, a combination of leading bankers in New York, Boston, Philadelphia, Baltimore and Chicago turned over a large part of their holdings to replenish the government reserves. About 150 national banks suspended during the panic of 1893, but 84 of these afterwards resumed business. As in former periods of depression, the system suffered the greatest decline during the years of liquidation following the actual panic, the number of banks falling from 3856 on the 1st of June 1893 to 3585 on the 1st of June 1899, and aggregate capital falling during the same period from $698,454,665 to $610,028,895.

A new extension was given to the national banking system by the provisions of the gold standard law of 14th March 1900. Banks were authorized to issue circulation to the full par-value of bonds deposited, and the tax upon circulation was reduced from 1% to 1/2 of 1% in the case of circulation which was secured by the 2% refunding bonds, which were authorized by this law. By issuing 2% bonds in exchange for those paying a higher interest, at approximately the market-price, it became possible to obtain a given amount of notes upon a smaller investment in bonds, independent of other provisions of the law. Under these provisions the volume of notes outstanding, secured by bonds, which stood on the 31st of October 1899 at $207,920,774, reached on the same date in 1900, $298,829,064; in 1901, $328,198,613; in 1902, $335,783,189; in 1903, $380,650,821; in 1904, $424,530,581; in 1905, $490,037,806; in 1906, $536,933,169; and in 1907 $562,727,614.

The lowest denomination of national bank-notes authorized by law is $5, and not more than one-third of any bank's issues can be of this denomination. The government issues notes for $1 and $2, as well as for higher denominations. The largest amount of bank-notes of one denomination is in bills for $10, which on the 31st of October 1907 constituted $249,946,530 in total outstanding issues of $609,905,441. Of this total circulation $562,727,614 was secured by bonds, and the remainder, $47,252,852, was covered by lawful money in the government treasury, deposited for the redemption and retirement of the notes as they might be received.

An important extension of the national system resulted from the authority given by the act of 1900 to incorporate national banks with a capital as low as $25,000, in places having a population not in excess of 3000. The previous minimum limit had been $50,000. Under this provision there were incorporated to the 31st of October 1907 2389 national banks with capitals of less than $50,000, with aggregate capital of $62,312,500, of which 272 banks were conversions of state and private institutions, 752 were reorganizations and 1365 were new institutions.

The national banks possess most of the powers of commercial banks, but are not permitted to hold real estate other than their banking houses, unless taken for debt. Five reports are required each year to the comptroller of the currency at dates selected by him without notice, and each bank is subject to the visitation of bank examiners acting under the comptroller. No reserves against notes are required by existing law except 5%, which is [v.03 p.0348] kept in Washington for current redemption purposes. The redemption system is defective in that redemptions are not authorized at other places, and the notes reach the treasury on an average only about once in two years. For many years the banks were prohibited from retiring more than $3,000,000 of notes monthly, but the limit was raised by an act of 4th March 1907 to $9,000,000 per month.

Reserves are required against deposits to the amount of 25% in so-called "reserve cities," and 15% in what are called the "country banks" outside of reserve cities. Not all these amounts, however, are required to be kept in cash. The three central reserve cities, where cash is required, with only trifling deductions, are New York, Chicago and St Louis. In other reserve cities, which in 1908 numbered forty, the banks are permitted to deposit half their cash in national banks in central reserve cities, while country banks may deposit three-fifths of their cash in any reserve city. The shareholders of national banks are subject in case of liquidation to double liability upon their shares, and this is now the rule in most of the conservative state banking systems. National bank-notes are not legal tender, but are receivable by the government for all obligations except customs dues.

The panic of 1907 imposed a severe strain upon the cash resources of the banks of New York City, but did not cause any such considerable number of failures as occurred in 1893.

Payment of cheques in currency was suspended in New York on the 28th of October 1907, and continued until about the beginning of the year 1908. The panic was precipitated by over-speculation by a group of national banks, followed by the suspension of the Knickerbocker Trust Company on the 22nd of October with deposits of $48,000,000. Then came runs on other companies, a deficit in the required reserves of New York banks of $38,838,825 in the week of 2nd November, and arrangements for the importation of foreign gold to an amount which soon approached $100,000,000. With an increase during the autumn of about $77,000,000 in national bank circulation, a transfer of $72,000,000 from the treasury to the banks, and a further decline in required reserves in New York during the next week, the amount of currency which was added to the circulation or disappeared during a few weeks of the panic amounted to more than $275,000,000, or nearly one-tenth of the usual volume of circulation in the country. The total bank-note circulation on the 28th of December 1907 had risen to $687,340,835; but this amount was abnormal and was reduced somewhat during the spring of 1908.

The position of the trust companies, especially those of the city of New York, was one of the disturbing features of the panic. These companies were comparatively a small factor in New York finance at the time of the panic of 1893. The capitalization of all the trust companies in the United States, even as late as 1897, was only $106,968,253, and individual deposits were $566,922,205. The capital of these companies had risen in 1907 to $276,146,081 and their deposits to $2,061,623,035. The trust companies of New York were required by the law of the state to maintain only 5% of their demand deposits in cash in their vaults. Whilst most of them had also large amounts on deposit in national banks, these reserves proved inadequate to sustain the vast mass of credit which was built upon them. The absolute amount of the reserves, however, was perhaps less important than the class of business to which some of the less conservative of these companies had committed themselves. Instead of keeping their assets liquid by purchases of commercial paper and loans on first-class negotiable securities, they had in some cases engaged in speculative underwritings and had locked up their funds in enterprises requiring a long time for their consummation.

It was these combined influences which led to distrust of the Knickerbocker Trust Company, and to the runs upon that company and others during the late days of October and early November. The result was to reduce the total resources of the forty-eight trust companies of Greater New York from $1,205,019,700 on the 22nd of August 1907 to $858,674,000 on the 19th of December 1907. Individual deposits subject to cheque fell from $692,744,900 to $437,733,400. Such a reduction of resources within so short a time, most of it being accomplished within a few weeks, has hardly ever been recorded in the history of banking, and the fact that the stronger companies were able to call in their cash and meet such demands was evidence to a certain extent that the criticisms upon them were exaggerated. The necessity for stronger reserves and for greater safeguards against speculative operations was so strongly impressed upon the public mind, however, that several restrictive measures were enacted at the session of the New York legislature in 1908, designed to prevent any abuses of this sort in the future.

The function of issuing notes, which is exclusively a privilege of national banks, has diminished in importance in America, as other methods of transferring credit have attained a wide development. This has not only been true of the national banks themselves, but has accounted for the development alongside the national banking system of state banks, private banks and trust companies, which have not had the privilege of note-issue, but have obtained other privileges sometimes greater than those of the national banks.

The aggregate resources of all classes of banks in the United States have greatly increased in recent years. The following table shows the increase in the chief items of the accounts of national banks for representative years from the reports made nearest to the beginning of the year:--

PROGRESS OF NATIONAL BANKS, 1865-1908
+--------+----------+-------------------+-----------------+
| | No of | Loans and | Individual |
| Year. | Banks | Discounts. | Deposits |
+--------+----------+-------------------+-----------------+
| 1865 | 638 | $166,448,718 | $183,479,636 |
| 1870 | 1615 | 688,875,203 | 546,236,881 |
| 1875 | 2027 | 955,862,580 | 682,846,607 |
| 1880 | 2052 | 933,543,661 | 755,459,966 |
| 1885 | 2664 | 1,234,202,226 | 987,649,055 |
| 1890 | 3326 | 1,811,686,891 | 1,436,402,685 |
| 1895 | 3737 | 1,991,913,123 | 1,695,489,346 |
| 1897 | 3661 | 1,901,160,110 | 1,639,688,393 |
| 1899 | 3590 | 2,214,394,838 | 2,225,269,813 |
| 1900 | 3602 | 2,479,819,494 | 2,380,610,361 |
| 1901 | 3942 | 2,706,534,643 | 2,623,997,521 |
| 1902 | 4291 | 3,038,255,447 | 2,964,417,965 |
| 1903 | 4666 | 3,303,148,091 | 3,152,878,796 |
| 1904 | 5180 | 3,469,195,043 | 3,300,619,898 |
| 1905 | 5528 | 3,728,166,086 | 3,612,499,598 |
| 1906 | 5911 | 4,071,041,164 | 4,088,420,135 |
| 1907 | 6288 | 4,463,267,629 | 4,115,650,294 |
| 1908 | 6625 | 4,585,337,094 | 4,176,873,717 |
+--------+----------+-------------------+-----------------+

The combined returns of state and private banks, savings banks and loan and trust companies in the United States show a growth within a few years which is indicated by the principal items of their accounts:--

RESOURCES OF STATE BANKS, TRUST COMPANIES, &c.

+-----------------------+------------------+----------------+
| Items. | 1897. | 1907. |
+-----------------------+------------------+----------------+
| Capital stock | $380,090,778 | $807,178,262 |
| Surplus and profits | 382,436,990 | 924,655,010 |
| Loans | 2,231,013,262 | 6,099,897,535 |
| Deposits | 3,324,254,807 | 8,776,755,207 |
| Total Resources | 4,258,677,065 | 11,168,514,516 |
+-----------------------+------------------+----------------+

The aggregate banking power of the United States, as computed by the comptroller of the currency in his annual report for 1907, increased from $5,150,000,000 in 1890 to $17,824,800,000 in 1907, and the banking power of foreign countries from $10,835,000,000 to $27,034,200,000, representing an increase for all reporting countries from $15,985,000,000 to $44,859,000,000.

The system of clearing cheques has attained a higher development in the United States than in any other country, except perhaps, Great Britain. Clearing-houses exist in about 112 leading cities, and the aggregate clearings for the year ending 30th September 1907 reached $154,662,515,258. The New York Clearing-House inevitably does a large proportion of this business; its clearings constituted in 1906 67.2% of the total clearings in 55 of the larger cities. The volume of clearings fluctuates greatly with the volume of stock-exchange transactions and with the business prosperity of the country. An indication of these fluctuations at New York is afforded by the following table, taken from Conant's _Principles of Money and Banking_, brought down to 1907.

[v.03 p.0349]

VARIATIONS IN CLEARINGS AT NEW YORK

+------+-------------+-------------+-----------------------------+
| | Average | Per cent | |
|Year. | Daily | Balances to | Remarks. |
| | Clearings. | Clearings. | |
+------+-------------+-------------+-----------------------------+
| 1870 | $90,274,479 | 3.72 | |
| 1873 | 115,885,794 | 4.15 | Great business activity. |
| 1874 | 74,692,574 | 5.62 | Industrial depression. |
| 1881 | 159,232,191 | 3.66 | Renewal of railway building.|
| 1885 | 82,789,480 | 5.12 | Results of bank panic. |
| 1890 | 123,074,139 | 4.65 | Business expansion. |
| 1894 | 79,704,426 | 6.54 | Depression following panic. |
| 1896 | 96,232,442 | 6.28 | Free silver panic. |
| 1899 | 189,961,029 | 5.37 | Renewed confidence and |
| | | | activity. |
| 1901 | 254,193,639 | 4.56 | Culmination of industrial |
| | | | flotations. |
| 1904 | 195,648,514 | 5.20 | Diminished stock-exchange |
| | | | and business activity. |
| 1906 | 342,422,773 | 3.69 | Stock-market activity. |
+------+-------------+-------------+-----------------------------+

The Clearing-House Committee of the New York Clearing-House exercises a powerful influence over the banking situation through its ability to refuse aid in emergencies to a bank which is unwisely conducted. This power was used in the panic of 1907 to eliminate several important, but speculative, financial interests from control of national banks. Only national and state banks and the sub-Treasury were members of the Clearing-House at this time. Their weekly reports of condition were awaited every Saturday as an index of the state of the money-market and the exchanges; but this index was incomplete and sometimes misleading, because regular weekly reports were not made by trust companies. It was announced early in 1908 by the state superintendent of banking that he would exercise a power vested in him by law to require weekly reports in future from trust companies, so that the two classes of reports would present a substantially complete mirror of banking conditions in New York.

AUTHORITIES.--William M. Gouge, _A History of Paper Money and Banking in the United States_ (Philadelphia, 1833); Condy Raguet, _A Treatise on Currency and Banking_ (Philadelphia, 1840); J. S. Gibbons, _The Banks of New York, their Dealers, the Clearing-House and the Panic of 1857_ (New York, 1858); Albert S. Bolles. _Financial History of the United States_ (3 vols., New York, 1884-1886); Charles F. Dunbar, _Chapters on the Theory and History of Banking_ (New York and London, 1891); Horace White, _Money and Banking_ (Boston, 1902); Charles A. Conant, _A History of Modern Banks of Issue_ (New York, 1896); Alexander D. Noyes, _Thirty Years of American Finance_ (New York, 1898); Davis Rich Dewey, _Financial History of the United States_ (New York and London, 1903); John C. Schwab, _The Confederate States of America_, 1861-1865 (New York, 1901); David Kinley, _The Independent Treasury of the United States_ (New York, 1893); _Report of the Monetary Commission of the Indianapolis Convention_ (Chicago, 1898); Charles A. Conant, _The Principles of Money and Banking_ (2 vols., New York, 1905); William G. Sumner, _A History of American Currency_ (New York, 1884); Amos Kidder Fiske, _The Modern Bank_ (New York, 1904); William G. Sumner, _A History of Banking in the United States_ (New York, 1896), being vol. i. in _A History of Banking in All the Leading Nations_; John Jay Knox, _History of Banking in the United States_ (rev. ed., New York, 1900); and R. C. H. Catterall, _The Second Bank of the United States_ (Chicago, 1903).

Much statistical information is contained in the annual reports of the comptroller of the currency of the United States, published annually at Washington.

(C. A. C.)

ENGLISH LAW AFFECTING BANKS AND THEIR CUSTOMERS

_Issue of Notes_.--The legislation which culminated in the Bank Charter Acts of 1844 and 1845 secured to the Bank of England the absolute monopoly of the note issue within the city of London and a 3-m. radius. Outside that radius, and within 65 m. of the city, there is a concurrent right in banks, consisting of six or less than six persons, established before 1844, and issuing notes at that date; beyond the 65-m. radius the privilege may be exercised by all banks established before 1844, and then issuing notes, who have not since lost their right to do so by bankruptcy, abandonment of business, or temporary suspension of issue. According to some authorities, the effect of 20 and 21 Vict. cap. 49, sec. 12 [re-enacted Companies Consolidation Act 1908, sec. 286 (d)] was to sanction the increase in the constitution of any bank issuing notes outside the 3-m. and within the 65-m. radius from six to ten persons without affecting the power to issue notes. The rule as formulated above is, however, that enunciated by Bowen J. in _Capital and Counties Bank_ v. _Bank of England_, 1889; 61 L.T. 516. The increase in the number of joint-stock banks and the gradual absorption of the smaller and older concerns have had the effect of minimizing the output of notes other than those issued by the Bank of England, and, as exemplified by the case of _The Attorney-General_ v. _Birkbeck_, 12 Q.B.D. 57, it would seem impossible to devise any scheme by which the note-issuing power of an absorbed bank could be continued to the new or amalgamated body. But a bank having the right would not necessarily lose it by absorbing other banks (_Capital and Counties Bank_ v. _Bank of England_). Foreign banks may establish branches in Great Britain on complying with the regulations imposed on them by the Companies Consolidation Act 1908, but cannot apparently issue notes, even though payable abroad.

[Sidenote: Relation between banker and customer.]

_Deposit Business_.--The term "bank of deposit" gives a mistaken idea of the real relation between banker and customer. So long ago as 1848 it was decided by the House of Lords in _Foley_ v. _Hill_, 2 H. of L. 28, that the real relation between banker and customer was that of debtor and creditor, not in any sense that of trustee and _cestui que trust_, or depositee and depositor, as had been formerly supposed and contended. The ordinary process by which a man pays money in to his account at his banker's is in law simply lending the money to the banker; it fixes the banker with no fiduciary relation, and he is in no way responsible to the customer for the use he may make of the money so paid in. And as being a mere debt, a customer's right to recover money paid in is barred on the expiration of six years by the Statute of Limitations, if there has been no payment meantime on account of principal or interest, and no acknowledgment sufficient to bar the statute (_Pott_ v. _Clegg_, 16 M. & W. 321). Such a state of affairs, however, is hardly likely to arise, inasmuch as, in the absence of specific appropriation, earlier drawings out are attributed to the earlier payments in, as in the ordinary case of current accounts, and so the items on the credit and debit side cancel each other. An apparent exception to this system of appropriation exists in cases where a man wrongfully pays into his own account moneys held by him in a fiduciary capacity. In such circumstances he is presumed to have drawn out his own moneys rather than those affected by the trust, and so long as the account is in credit, any balance will be attributed to the trust money. As between contending claims to the money, based on different breaches of trust, the ordinary rule of appropriation will apply.

[Sidenote: Cheques.]

It has often been suggested that the only method of withdrawing money from a banker is by cheque, that the presentation of a cheque is a condition precedent to the liability of the banker to repay. This is not so; such view being inconsistent with the cases establishing the effect of the Statute of Limitations on money left in a banker's hands, and with the numerous cases in which a balance at a bank has been attached as a simple and unconditional debt by a garnishee order, as, for instance, in _Rogers_ v. _Whiteley_, 1892, A.C. 118. The banker's position with regard to cheques is that, superadded to the relation of debtor and creditor, there is an obligation to honour the customer's cheques provided the banker has a sufficient and available balance in his hands for the purpose (_Foley_ v. _Hill_). If, having such funds in his hands, the banker dishonours a cheque, he is liable to the customer in substantial damages without proof of actual injury having accrued (_Rolin_ v. _Steward_, 14 C.B. 595). Where several cheques are presented simultaneously and the available balance is insufficient to pay all, the banker should pay as many as the funds will cover, and is not bound to discriminate between particular cheques. It would seem a legitimate condition that a cheque should be drawn in the ordinary recognized form, not in one raising any question or doubt as to its validity or effect. Cheques drawn to "wages or order," "petty cash or order," or the like, are common, and are sometimes regarded as payable to bearer. Such payees are not, however, "fictitious or non-existent persons," so as to render the cheques payable to the bearer under sec. 7, subs. 3 of the Bills of Exchange Act 1882, nor can such payees endorse. Some banks refuse to pay such cheques, and it is conceived they are justified in so doing. Money paid in so shortly before the presentation of the cheque that there would not have been time to pass it through the books of the bank would not be treated as available for drawing against. If a person have an account at one branch of a bank, he is not entitled to draw cheques on another branch [v.03 p.0350] where he has either no account or is overdrawn, but the bank has, as against the customer, the right to combine accounts at different branches and treat them as one account (_Garnet_ v. _McEwen_, L.R. 8 Ex. 10). Funds are not available so long as a garnishee order, founded on a judgment against the customer, is pending, since it attaches all moneys on current account irrespective of the amount of the judgment (_Rogers_ v. _Whiteley_).

The very questionable practice of post-dating cheques has been the source of considerable doubt and inconvenience to bankers. The use of such documents enables the drawer to obtain the results of a bill at a fixed future date without the expense of a regular bill-stamp. But the Bills of Exchange Act 1882, sec. 13, subs. 1, provides that "a bill is not invalid by reason only that it is ante-dated or post-dated, or that it bears date on a Sunday." The banker cannot therefore refuse to pay a cheque presented after the apparent date of its issue on the ground that he knows it to have been post-dated. On the other hand, he is entitled and indeed bound to refuse payment if such a cheque is presented before the apparent date of its issue (_Morley_ v. _Culverwell_, 7 M. & W. at p. 178). Revocation of authority to pay a cheque must come to the banker's conscious knowledge and be unequivocal both in terms and method of communication. He is not bound to act on an unconfirmed telegram (_Curtice_ v. _London City & Midland Bank_ [1908], 1 K.B. 293). The banker's authority to pay cheques is terminated by the death, insanity or bankruptcy of the customer, or by notice of an available act of bankruptcy committed by him.

The banker is bound to observe secrecy with respect to the customer's account, unless good cause exists for disclosure, and the obligation does not cease if the account becomes overdrawn (_Hardy_ v. _Veasey_, L.R. 3 Ex. 107). In England a cheque is not an assignment of funds in the banker's hands (Bills of Exchange Act 1882, sec. 53). The holder of the cheque has therefore no claim on the banker in the event of payment being refused, his remedy being against the drawer and endorser, if any. On this section is also based the custom of English bankers not to pay part of the amount of a cheque where there are funds, though not sufficient to meet the whole amount. The section does not apply to Scotland, where it would seem that the bank is bound to pay over what funds it has towards satisfaction of the cheque. A banker is entitled to hold paid cheques as vouchers until there has been a settlement of account between him and the customer. The entries in a pass-book constitute _prima facie_ evidence against the banker, and when returned by the customer without comment, against him; but the proposition that such return constitutes a settlement of account has been much disputed. Indeed where forgery is the ground of repudiation of a cheque, no dealings or omissions of the customer with regard to the pass-book would seem to preclude him from objecting to being debited and throwing the loss on the banker (_Kepitigalla Rubber Co._ v. _National Bank of India_, 25 Times L.R. 402). As against the banker, however, credit entries in the pass-book cannot be disputed if the customer has altered his position in reliance thereon, and cheques drawn against an apparent balance must be honoured (_Holland_ v. _Manchester & Liverpool District Bank_, 25 Times L.R. 386).