Banking Part 5

In the English system, the central bank is the Bank of England, with the possible exception of a few private banks, the oldest financial inst.i.tution in the country. It is privately owned and privately governed. Its board of directors, chosen by the stockholders, consists of twenty-four persons, a portion of whom are practically life members, being regularly reelected when their terms of office expire.

The others usually serve alternate years only, vacancies being filled by promising young men selected from the business houses of London.

The oldest director is regularly elected to the office of governor of the Bank, and the next oldest to that of deputy governor, both serving two years, the deputy governor regularly succeeding to the office of governor, and the ex-governors forming the life members of the board and const.i.tuting a kind of advisory council to the governor, and known as the Board of Treasury.

The head office of the Bank of England is in London, and there are eleven branches, two in London and nine in the provinces. By a law pa.s.sed in 1844, the Bank was divided into two departments, called respectively the banking and the issue departments, the latter having exclusive charge of the issue of notes, and the former of all other branches of the bank's business.

This same law prescribed the conditions under which notes could be issued. It provided that the Bank of England might issue 14,500,000 of notes in exchange for securities, and any amount in addition in exchange for an equal amount of coin or bullion. Additions to the amount issued in exchange for securities might be made by order of the government to the extent of two-thirds the amount of issues relinquished by the other issuing banks, all such banks in existence at the time the act was pa.s.sed being permitted to retain, without increasing, their existing issues. Most of these other issues having been abandoned since 1844, the Bank of England is now permitted to issue in exchange for securities 18,450,000. The securities against which these issues are made were transferred to the issue department by the banking department, and consist of the debt owed by the government to the bank and of other government or governmentally guaranteed securities. The issue department freely issues additional notes in exchange for an equal amount of gold coin or bullion, and on demand redeems notes in gold coin. Since the amount of notes all the time outstanding greatly exceeds 18,450,000, the business of the issue department is confined to the exchange of notes for gold coin and bullion and the redemption of notes in gold.

The banking department receives and disburses the funds of the government, manages the public debt, and serves as the government's agent in most of its other financial operations; receives on deposit from other financial inst.i.tutions the money which comes into their possession, and supplies them with such money funds as they need from day to day in payment of checks drawn against their balances; discounts bills of exchange with a minimum maturity of four, and in exceptional cases six, months; and to a limited extent makes advances on and invests in high-grade public and other securities. Besides the English government and financial inst.i.tutions, it has other customers, but it is to be presumed that these are of a special character, since the conditions under which it does business with private persons are in most cases more onerous than those prescribed by other banks, and consequently not attractive to the ordinary business man.

The so-called English Joint-Stock Banks are cla.s.sified into three groups, known as metropolitan, metropolitan and provincial, and provincial banks. The metropolitan banks have their head offices in London, and do not, as a rule, extend their branches beyond the suburbs of the metropolis. The metropolitan and provincial banks have their head offices in London and branches scattered throughout the provinces, as well as in various parts of the city and suburbs, and the provincial banks have their head offices in the larger provincial cities, and each one confines its branches usually to the town and country districts tributary to the city in which its head office is situated. Often the provincial banks establish branches in London.

For banking purposes, these banks are the chief reliance of the agriculture, industry, and commerce of the country, but competing with and supplementing them are the bill brokers and discount houses, the private banks, and the foreign and colonial banks. The bill brokers and discount houses make a business of dealing in foreign and domestic bills of exchange. They buy in the first instance a large percentage of the bills brought to market, keep some of them until maturity, and sell the remainder to the other banks, usually indorsing them first. A large part of the capital employed in their business is obtained by loans made from the other banks, subject to call and secured by the bills they purchase deposited as collateral.

The private banks are the remnant left of the oldest group in the country. There were private banks in London centuries before the Bank of England was incorporated, and previous to 1826 the Bank of England was their only compet.i.tor. Since 1844 their number has steadily diminished. Those which remain have, as a rule, built up a special const.i.tuency, to the special interests of which they cater. Among them are strong inst.i.tutions, but as a cla.s.s their importance in the system is not great, and is waning.

The foreign and colonial banks are branches of important inst.i.tutions in foreign countries and the English colonies which have a considerable volume of business to transact in London. They serve as intermediaries between their respective countries and the English money market, and on account of the enormous volume of foreign commerce which is financed in London, their number is large, and the role they play on that market is important.

In the operation of this machinery, the most noteworthy features are the reserve system, and the administration of the discount rate of the Bank of England. There is no law on the English statute books prescribing the amount of cash which banking or other financial inst.i.tutions shall keep in their vaults. The custom of these inst.i.tutions regarding that matter is to keep on hand relatively small sums and to rely upon the Bank of England or some other London banking house for the replenishment of their supply as needed. For this purpose, London and many provincial banks keep balances with the Bank of England, and other banks maintain balances with other London inst.i.tutions. These balances may be obtained by the deposit of coin or Bank of England notes or by rediscounts. Another widely used resource is the calling of loans made to bill brokers or discount houses. Such loans or a considerable volume of bills of the kind discounted by the Bank of England, or both, are regularly carried by London banks and counted as a part of their reserves.

On account of these practices, surplus cash not needed in the conduct of the current business of the country speedily finds its way into the vaults of the Bank of England, and additional supplies, when needed, come from this source. The administration of the cash reserves of the country thus becomes one of the important duties of the Bank of England, in the performance of which variation of the rate charged on discounts is the most important device.

Many years' experience has enabled the Bank to determine with a considerable degree of accuracy the volume of the demands for cash likely to be made upon it from day to day, and consequently the amount that it should keep on hand in the vaults. Whenever this amount approaches the minimum regarded as consistent with safety, the directors raise the rate of discount, and when the amount on hand becomes excessive, they lower it. The efficiency of this procedure in increasing the reserves in the one case and in decreasing them in the other is due to certain conditions and practices which deserve attention at this point.

Long-established custom has made the rate of interest paid on deposits in London and other parts of England vary with the discount rate of the Bank, and on this account the market rate of discount also varies in the same manner. The Bank of England is thus ordinarily able to regulate the market for commercial paper. Since paper payable in London is a favorite form of investment for continental bankers, by raising its rate of discount and with it the market rate above the level of the rates of some or all of the continental centers, the Bank of England is able to induce these bankers to send money to London for investment and thereby to increase her reserves, and by lowering its rate below the level of the rates in these continental centers, she is able to induce them to sell some of the paper they already hold, and thus to furnish a market for her surplus funds and diminish her reserves.

On account of the readiness with which the international gold movement responds to variations in the discount rate of the Bank of England, the need for an elastic system of bank note issues is not felt in England to the same extent as in other countries. It is this fact, doubtless, which explains the retention to the present day of the essentially inelastic bank note system created by the act of 1844.

_3. The French System_

In France, the Bank of France is the central inst.i.tution. It is the oldest of the important French banks of the present day, having been established in 1800 by Napoleon the First. Its capital, amounting at the present time to 182,500,000 francs, or approximately $36,500,000, is supplied by about 30,000 private stockholders, about 10,000 of whom own only one share each.

The two hundred largest stockholders appoint a General Council, consisting of fifteen regents and three censors. Five regents and all the censors must be chosen from the commercial and industrial cla.s.ses, and three of the remaining ten regents must be selected from the _tresoriers payeurs genereaux_, an important group of representatives of the public treasury scattered throughout the country. The General Council as well as the stockholders' a.s.sembly is presided over by a governor, who, together with two sub-governors, is appointed by the President of the Republic upon the nomination of the Minister of Finance. The governor is the chief executive officer of the bank and the final source of authority in most matters of vital importance. He is responsible to the government rather than to the stockholders, and is subject to removal only by the power which appointed him.

The Bank of France has about two hundred branches and sub-branches located in Paris and all the important cities and towns in the Republic, also over three hundred so-called agencies located in smaller places and transacting only a limited line of business. Each branch has a manager appointed in substantially the same manner as the governor, and the sub-branches and agencies are administered through the branches. Through this network of offices, every part of the country is brought into direct and easy access to the Bank.

The Bank of France is the only inst.i.tution in the country privileged to issue circulating notes. The maximum allowed it is regulated by law and is increased from time to time. At present it amounts to 5,800,000,000 francs, or approximately $1,160,000,000. The bank is obliged to redeem these notes on demand in gold coin or silver five-franc pieces, but it is free to determine how much cash it shall keep on hand for that purpose, and when and under what conditions it shall issue them.

Its discount operations are limited by law to bills maturing in not more than three months, and bearing the signatures of at least three solvent persons, or two signatures and secured in addition by specified forms of collateral. It is also permitted to make loans or advances, as they are called, on securities of the French government maturing at fixed dates, gold and silver bullion, and the money of foreign countries, and obligations of the French railroads, French cities, and departments, the Credit Foncier, and the Societe Algerienne. It is also obliged to loan 180,000,000 francs ($36,000,000) to the government without interest.

One of the chief branches of the business of the Bank of France is the service of the public treasury and the performance of other financial duties imposed upon it by the government. It serves as the depository and disbursing agent for the government, and performs important functions connected with the public debt, the mints, the savings inst.i.tutions, and publicly administered trusts of various kinds. It is also the depository for the banking reserves of the country. In France, as in England, it is not the custom of banking and other financial inst.i.tutions to h.o.a.rd money in their vaults, but to depend upon the Bank of France for supplies as needed. To this end they keep funds on deposit there, and regularly rediscount the paper of their customers when balances need to be replenished.

Through its network of branches and agencies spread over the entire country, the Bank of France is able economically and expeditiously to conduct the intermunic.i.p.al exchanges of the country. It partic.i.p.ates in local clearings through members.h.i.+p in the clearing houses, at which balances are paid by checks drawn against credits on its books maintained for that purpose by all members, and it conducts so-called transfer accounts with other banks and financial inst.i.tutions against which drafts can be drawn payable at any place where one of its offices is located. Such drafts const.i.tute the chief means through which transfers of funds are made between different places.

The business of the Bank of France with private persons is limited by the requirement that all paper discounted must have three signatures, or two signatures and collateral security, and that advances can only be made on the security of the forms of collateral indicated above.

Most business men find it either inconvenient or impossible to comply with these conditions, and consequently transact most of their business with other banking inst.i.tutions. The third signature on paper discounted by the Bank is, therefore, usually supplied by these inst.i.tutions, which thus act as an intermediary between the Bank and the commercial world.

Next to the Bank of France, the most important banking inst.i.tutions of the country are the Credit Foncier, the Credit Lyonnais, the Comptoir d'Escompte de Paris, the Societe Generale, and the Credit Industrielle et Commercial. The Credit Foncier is princ.i.p.ally engaged in extending credit based on real estate security, but it also discounts large amounts of commercial paper. Its organization is modeled after that of the Bank of France, and, like that inst.i.tution, it is controlled by the state. Since it is primarily an investment bank, a description of its princ.i.p.al operations will be deferred to the next chapter.

The four other banks mentioned are a product of the commercial life of modern France, all having been established since the revolution of 1848. They are all heavily capitalized, the smallest, the Credit Industrielle et Commercial, having a capital of 100,000,000 francs ($20,000,000), and the largest, the Societe Generale, having a capital of 400,000,000 francs ($80,000,000), and all extend their business by means of branches. The Credit Lyonnais and the Comptoir d'Escompte have branches in France itself, the French colonies, and a number of foreign countries; the Societe Generale, throughout France, in London, and San Sebastian, Spain; and the Credit Industrielle et Commercial, in Paris and its suburbs. Taken together, these four inst.i.tutions supply the French people in Paris and the Provinces with banking facilities for both their domestic and their foreign business. While in some of the larger provincial cities local banks with branches in surrounding towns and sometimes in Paris are to be found, branches of one or more of these four inst.i.tutions are the chief reliance in nearly all places.

These inst.i.tutions cater to all the financial needs of their const.i.tuents. They supply their needs for cash and for exchange; conduct checking accounts for them, although these are not used in France to the same extent as in the United States; discount their commercial paper and make loans to them on personal and other security; and receive on deposit their savings and provide them with investments. In performing these functions they make extensive use of the Bank of France and of the stock exchanges of the country. With the former they conduct checking and transfer accounts and rediscount their customers' bills, by these means procuring the coin, bank notes, and exchange needed; and from the latter they obtain the investment securities required for the satisfaction of both their own and their customers' needs.

Gold and silver coin and the notes of the Bank of France const.i.tute the hand-to-hand money of the country. The latter form the elastic element, and their operation approximates perfection. When demand for money increases for any reason, more commercial bills are presented for discount to the banks, which, after indors.e.m.e.nt, exchange them at the Bank of France for the notes with which they supply their customers' needs. The note issues of the Bank thus expand in direct and immediate response to the needs of the country for more currency.

When such needs have pa.s.sed, the discounted bills, in exchange for which these notes were issued, mature and are paid in greater volume than new bills are created and presented for discount, and notes, or a corresponding amount of coin, acc.u.mulate in the vaults of the Bank.

The notes are cancelled and destroyed and the coin is kept in store until it again pa.s.ses into circulation through exchange for notes still outstanding, or for discounted bills.

On account of the elasticity of its note issues, and the extent to which they are used in the commerce of the country, the Bank of France has occasion to change its rate of discount less frequently than any other bank in Europe. The result is that the country enjoys the advantage of steady and low rates, since in France, as in England, the discount rate of the central bank controls the market rate, and the ease and inexpensiveness with which the notes are issued make low rates possible.

_4. The German System_

The Imperial Bank, with head offices in Berlin, and about one hundred branches and more than four hundred sub-branches scattered throughout the country, plays essentially the same role in the German banking system that the Bank of England and the Bank of France play in the English and French systems, respectively. It was established in 1875 by an act which also profoundly affected the entire banking system of the country, and its development has been aided and directed by several acts pa.s.sed subsequently.

Its capital, supplied by the general public, amounts at the present time to 180,000,000 marks ($45,000,000), and it is governed by three boards, known respectively as the Curatorium, the Direktorium, and the Central Ausschuss.

The Curatorium is composed of five members, of which body the Chancellor of the Empire is ex-officio chairman. A second member is appointed by the Emperor, and for that position he has always selected the Prussian Minister of Finance, and the three remaining members are appointed by the Bundesrath. It meets quarterly and reviews all the operations of the bank. It, or rather, the Chancellor, its chairman, has supreme power, which, however, he has never exercised except on one occasion, when he ordered the bank not to accept Russian securities as collateral for loans, an order since revoked.

The administration of the bank's affairs is chiefly in the hands of the Direktorium, consisting of a president, vice president, and seven other persons, all of whom are appointed by the Emperor for life, from a list of candidates recommended to him by the Bundesrath. This board selects the staff of bank officers and clerks, and superintends the daily conduct of the bank's business.

The Central Ausschuss is a committee of fifteen persons elected by and representing the stockholders. It holds monthly meetings; has the right to demand complete information concerning the bank's operations, to discuss all matters freely, and to tender advice and counsel; but it has no power to control except regarding two matters: it can set a limit to the amount of securities the bank can purchase, and can veto any proposed transactions with the Imperial Government or with the governments of any of the states.

Like the other central banks described above, it receives on deposit and disburses the funds of the Imperial Government; administers the coin reserves of the country; conducts the domestic exchanges, and serves as a bankers' bank. It is free to do business with the general public, but the legal and other limitations under which it must operate give the other banking inst.i.tutions of the country the advantage in compet.i.tion for this kind of business.

It shares the right of note issue with four other banks, which, out of thirty-two that retained that privilege at the time the Imperial banking system was established, alone retain it at the present time.

The issues of these four inst.i.tutions, however, are relatively small in volume, and the Imperial Government has the right to deprive them of it January 1, 1921, or any tenth year thereafter, on condition of giving one year's notice of its intention so to do. The issues of the Imperial Bank are subject to the following regulations: they must be covered by cash and discounted bills maturing in not more than three months, and signed by at least two solvent persons, the proportion of cash being not less than one-third of the total. If the total amount issued exceeds the Bank's holdings of gold bullion, specie, and government notes by more than 750,000,000 marks at the end of March, June, September, and December, and 555,000,000 marks at other times, a tax of five per cent per annum is levied on the excess.

The law confers upon the Bank the following powers:

a. To buy and sell gold and silver coin and bullion.

b. To discount, buy and sell bills of exchange whose maturity shall be three months at the longest, and for which usually three, and in no case less than two, accredited vouchers shall stand good; furthermore, to discount, buy and sell bonds of the Empire or of any German state, or domestic munic.i.p.al corporations, provided such bonds mature within three months at the longest and conform to the new standards of value.

c. To grant interest-bearing loans for terms no longer than three months, upon movable security (lombard, or deposit loan business), such as: gold and silver, coined or uncoined; interest-bearing or non-transferable bonds maturing within a maximum term of three months, whether of the Empire, a German state, or of domestic munic.i.p.al corporations; interest-bearing non-transferable bonds on which the interest is guaranteed by the Empire or by any one of the German states; capital stock and stock priority shares, fully paid up, of German railway companies in actual operation; mortgage bonds of the provincial, munic.i.p.al, or other land credit inst.i.tutions of Germany that are subject to state control, including shares of German mortgage banks to an amount never exceeding three-fourths of their market value; interest-bearing non-transferable bonds of foreign states, and foreign railway priority bonds, covered by state security, in amounts not exceeding 50 per cent of their market value; bills of exchange of recognized soundness, after deducting at least 5 per cent of their market value; and pledges of native merchandise, in amounts within two-thirds of their value.

d. To negotiate collections for the account of individuals, inst.i.tutions, and governing boards; and upon security, as before mentioned, to furnish payments, and make orders or conveyances on the branch banks or on correspondents.

e. Upon prior security, to buy on behalf of outside parties, effects of all kinds, including the precious metals; and after delivery to sell the same.

f. To receive money for circulation or on deposit, with or without interest, the sum of interest-bearing deposits not to exceed that of the capital stock and reserve fund.

g. To accept the custody or other management of objects of value.

Besides the Imperial Bank there are in Germany eight very large and powerful banking inst.i.tutions and a considerable number of smaller and less powerful ones. The eight great ones have each its head office in Berlin, and connections, through branches, agencies, and controlled inst.i.tutions, in other parts of the Empire, the German colonies, and foreign countries. Together they control about eighty per cent of the entire banking capital of the Empire. In reality they are federations of banking inst.i.tutions, many of which were once independent, and some of which were promoted and established in the interests of the group.

While these eight inst.i.tutions are primarily engaged in commercial banking, they are also promoters on a large scale of German industry and commerce, both at home and abroad. Through interlocking directorates, stock owners.h.i.+p, and in other ways, they are closely allied with the leading industrial and transportation interests of the Empire, and they have been and are leaders in the promotion of these interests in other parts of the world, notably in the Orient, South America, and Africa. They are, therefore, leaders on the stock as well as the discount markets of the country, and are widely influential in investment as well as commercial banking affairs.

These, as well as the other commercial banks, consisting for the most part of local inst.i.tutions and those catering to special interests, use the Imperial Bank for rediscounts, for transfers of funds between different parts of the country, and as a depository for surplus funds.

They do not normally keep on hand more cash than is needed for till purposes. Being in easy reach of an office of the Imperial Bank, supplies can be obtained at any time by checks drawn against credit balances or through rediscounts of commercial bills. Special accounts are carried for transfer purposes and are used even in the transfer of funds between different offices of the same inst.i.tution.