Readings In Money And Banking - free ebook by Chester Arthur Phillips

READINGS IN MONEY AND BANKING

THE MACMILLAN COMPANY NEW YORK · BOSTON · CHICAGO · DALLAS ATLANTA · SAN FRANCISCO MACMILLAN &amp; CO. Limited LONDON · BOMBAY · CALCUTTA MELBOURNE THE MACMILLAN CO. OF CANADA. Ltd. TORONTO...

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CHESTER ARTHUR PHILLIPS

Assistant Professor of Economics in Dartmouth College and Assistant Professor of Banking in the Amos Tuck School of Administration and Finance New York THE MACMILLAN COMPANY 1921 All rights reserved PRINTED IN THE UNITED STATES OF AMERICA Copyright 1916 By THE MACMILLAN COMPANY Set up and electrotyped. Published September, 1916. FERRIS PRINTING COMPANY NEW YORK CITY...

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PREFACE

Designed mainly for class room use in connection with one of the introductory manuals on the subject of Money and Banking or of Money and Currency, this volume, in itself , lays no claim to completeness. Where its use is contemplated the problems of emphasis and proportion are, accordingly, to be solved by the selection of one or another of the available texts, or by the choice of supplementary lecture topics and materials. The contents of the introductory manuals are so divergent in character a

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THE ORIGIN AND FUNCTIONS OF MONEY

[1] In order to understand the manifold functions of a Circulating Medium, there is no better way than to consider what are the principal inconveniences which we should experience if we had not such a medium. The first and most obvious would be the want of a common measure for values of different sorts. If a tailor had only coats, and wanted to buy bread or a horse, it would be very troublesome to ascertain how much bread he ought to obtain for a coat, or how many coats he should give for a hors

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THE EARLY HISTORY OF MONEY

[3] Living in civilized communities, and accustomed to the use of coined metallic money, we learn to identify money with gold and silver; hence spring hurtful and insidious fallacies. It is always useful, therefore, to be reminded of the truth, so well stated by Turgot, that every kind of merchandise has the two properties of measuring value and transferring value. It is entirely a question of degree what commodities will in any given state of society form the most convenient currency, and this

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Currency in the Hunting State

Perhaps the most rudimentary state of industry is that in which subsistence is gained by hunting wild animals. The proceeds of the chase would, in such a state, be the property of most generally recognized value. The meat of the animals captured would, indeed, be too perishable in nature to be hoarded or often exchanged; but it is otherwise with the skins, which, being preserved and valued for clothing, became one of the earliest materials of currency. Accordingly, there is abundant evidence tha

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Currency in the Pastoral State

In the next higher stage of civilization, the pastoral state, sheep and cattle naturally form the most valuable and negotiable kind of property. They are easily transferable, convey themselves about, and can be kept for many years, so that they readily perform some of the functions of money. We have abundance of evidence, traditional, written, and etymological, to show this. In the Homeric poems oxen are distinctly and repeatedly mentioned as the commodity in terms of which other objects are val

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Articles of Ornament as Currency

A passion for personal adornment is one of the most primitive and powerful instincts of the human race, and as articles used for such purposes would be durable, universally esteemed, and easily transferable, it is natural that they should be circulated as money. The wampumpeag of the North American Indians is a case in point, as it certainly served as jewellery. It consisted of beads made of the ends of black and white shells, rubbed down and polished, and then strung into belts or necklaces, wh

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Currency in the Agricultural State

Many vegetable productions are at least as well suited for circulation as some of the articles which have been mentioned. It is not surprising to find, then, that among a people supporting themselves by agriculture, the more durable products were thus used. Corn has been the medium of exchange in remote parts of Europe from the time of the ancient Greeks to the present day. In Norway corn is even deposited in banks, and lent and borrowed. What wheat, barley, and oats are to Europe, such is maize

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Manufactured and Miscellaneous Articles as Currency

The enumeration of articles which have served as money may already seem long enough for the purposes in view. I will, therefore, only add briefly that a great number of manufactured commodities have been used as a medium of exchange in various times and places. Such are the pieces of cotton cloth, called Guinea pieces , used for traffic upon the banks of the Senegal, or the somewhat similar pieces circulated in Abyssinia, the Soulou Archipelago, Sumatra, Mexico, Peru, Siberia, and among the Vedd

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The Invention of Coining

The date of the invention of coining can be assigned with some degree of probability. Coined money was clearly unknown in the Homeric times, and it was known in the time of Lycurgus. We might therefore assume, with various authorities, that it was invented in the mean time, or about 900 b. c. There is tradition, moreover, that Pheidon, King of Argos, first struck silver money in the island of Ægina about 895 b. c. , and the tradition is supported by the existence of small stamped ingots of silve

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QUALITIES OF THE MATERIAL OF MONEY

[4] Many recent writers, such as Huskisson, MacCulloch, James Mill, Garnier, Chevalier, and Walras, have satisfactorily described the qualities which should be possessed by the material of money. Earlier writers seem, however, to have understood the subject almost as well.... Of all writers, M. Chevalier ... probably gives the most accurate and full account of the properties which money should possess, and I shall in many points follow his views. The prevailing defect in the treatment of the sub

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1. Utility and Value

Since money has to be exchanged for valuable goods, it should itself possess value and it must therefore have utility as the basis of value. Money, when once in full currency, is only received in order to be passed on, so that if all people could be induced to take worthless bits of material at a fixed rate of valuation, it might seem that money does not really require to have substantial value. Something like this does frequently happen in the history of currencies, and apparently valueless she

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2. Portability

The material of money must not only be valuable, but the value must be so related to the weight and bulk of the material, that the money shall not be inconveniently heavy on the one hand, nor inconveniently minute on the other. There was a tradition in Greece that Lycurgus obliged the Lacedæmonians to use iron money, in order that its weight might deter them from overmuch trading. However this may be, it is certain that iron money could not be used in cash payments at the present day, since a pe

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3. Indestructibility

If it is to be passed about in trade, and kept in reserve, money must not be subject to easy deterioration or loss. It must not evaporate like alcohol, nor putrefy like animal substances, nor decay like wood, nor rust like iron. Destructible articles, such as eggs, dried codfish, cattle, or oil, have certainly been used as currency; but what is treated as money one day must soon afterwards be eaten up. Thus a large stock of such perishable commodities cannot be kept on hand, and their value must

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4. Homogeneity

All portions of specimens of the substance used as money should be homogeneous, that is, of the same quality, so that equal weights will have exactly the same value. In order that we may correctly count in terms of any unit, the units must be equal and similar, so that twice two will always make four. If we were to count in precious stones, it would seldom happen that four stones would be just twice as valuable as two stones. Even the precious metals, as found in the native state, are not perfec

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5. Divisibility

Closely connected with the last property is that of divisibility. Every material is, indeed, mechanically divisible, almost without limit. The hardest gems can be broken, and steel can be cut by harder steel. But the material of money should be not merely capable of division, but the aggregate value of the mass after division should be almost exactly the same as before division. If we cut up a skin or fur the pieces will, as a general rule, be far less valuable than the whole skin or fur, except

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6. Stability of Value

It is evidently desirable that the currency should not be subject to fluctuations of value. The ratios in which money exchanges for other commodities should be maintained as nearly as possible invariable on the average. This would be a matter of comparatively minor importance were money used only as a measure of values at any one moment, and as a medium of exchange. If all prices were altered in like proportion as soon as money varied in value, no one would lose or gain, except as regards the co

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7. Cognisability

By this name we may denote the capability of a substance for being easily recognised and distinguished from all other substances. As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. If it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon. Hence the medium of exchange should have certain distinct marks which nobody can m

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LEGAL TENDER[5]

The essential idea of "legal tender" is that quality given to money by law which obliges the creditor to receive it in full satisfaction of a past debt when expressed in general terms of the money of a country. A debt is a sum of money due by contract, express or implied. When our laws, for instance, declare that United States notes are legal tender—and this is the only complete designation of a legal-tender money—for "all debts public and private," it must be understood that this provision does

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THE GREENBACKS The Greenback Issues

[8] The greenbacks were an outgrowth of the Civil War. Soon after the opening of the struggle the Secretary of the Treasury negotiated a loan of $150,000,000 with Eastern banks. Partly because of Confederate successes and partly because of the failure of Secretary Chase to adopt a firm policy of loans supported by taxation, public credit greatly declined, and Government bonds became almost unsaleable. The outlook became alarming and depositors withdrew gold from the New York banks in such large

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The Fluctuating Premium on Gold

Depreciation of the greenbacks occurred at once and the value of gold as expressed in greenbacks was subject to almost constant change. During the year 1862 the premium varied from 2 to 32; in 1863 from 25 to 60; and in 1864 from 55 to 185. Among the most important political and economic factors which caused these fluctuations may be mentioned: (1) The increase in the amount of the greenbacks. Each new issue was reflected in a rise in the premium. (2) The condition of the treasury. The annual re

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The Effects of Greenbacks upon Wages

Statistical evidence supports unequivocally the common theory that persons whose incomes are derived from wages suffer seriously from a depreciation of the currency. The confirmation seems particularly striking when the conditions other than monetary affecting the labour market are taken into consideration. American workingmen are intelligent and keenly alive to their interests. There are probably few districts where custom plays a smaller and competition a larger rôle in determining wages than

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Rent

In studying the influence of depreciation upon rent, it is necessary to use that term in its popular rather than in its scientific sense. This fact is less to be lamented, because the theorist himself admits that the distinction becomes sadly blurred when he attempts to deal with short intervals of time. Capital once invested in improvements can seldom be withdrawn rapidly. In "the short run," therefore, it is practically a part of the land, and the return to it follows the analogy of rent rathe

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Interest and Loan Capital

The task of ascertaining the effect of the greenback issues upon the situation of lenders and borrowers of capital is in one respect more simple and in another respect more complex than the task of dealing with wage-earners. It is simpler in that there are not different grades of capital to be considered like the different grades of labor. But it is more complex in that the capitalist must be considered not only as the recipient of a money income, as is the laborer, but also as the possessor of

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Profits

Laborers, landlords, and lending capitalists are all alike in that the amount of remuneration received by them for the aid which they render to production is commonly fixed in advance by agreement, and is not immediately affected by the profitableness or unprofitableness of the undertaking. It remains to examine the economic fortunes of those men whose money incomes are made up by the sums left over in any business after all the stipulated expenses have been met. A very important part of the sol

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The Production and Consumption of Wealth

What influence did the greenback currency have as one of the many factors that affected the production of wealth? In the first place, the paper standard was responsible in large measure for the feeling of "prosperity" that seems from all the evidence to have characterized the public's frame of mind. Almost every owner of property found that the price of his possessions had increased, and almost every wage-earner found that his pay was advanced. Strive as people may to emancipate themselves from

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The Greenbacks and the Cost of the Civil War

The reader who goes back to the debates upon the legal-tender bills will find that most of the unfortunate consequences that followed their enactment were foretold in Congress—the decline of real wages, the injury done creditors, the uncertainty of prices that hampered legitimate business and fostered speculation. But a majority of this Congress were ready to subject the community to such ills because they believed that the relief of the treasury from its embarrassments was of more importance th

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Contraction and Inflation of the Legal Tenders[9]

The policy of a permanent currency of government legal-tender paper at the close of the Civil War was unknown. Upwards of four hundred million notes of the United States were, it is true, in circulation at the return of peace. There were doubtless many individuals who approved the continuance of exactly this form of currency. But no such proposition had been advanced by any public man of influence or by any political organization. That the resort to legal-tender powers was an evil justified only

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Passage of the Resumption Act[10]

The Forty-third Congress had three months of existence left to it after the vote of November, 1874. Already defeated overwhelmingly at the polls, it had nothing to risk by a move in sound-money legislation, and possibly much to gain. It used this three-months' period to enact a law of the first importance, not only to the nation, but to the Republican party's future history—a law which must fairly be described, however, under the circumstances of the time, as an expression of death-bed repentanc

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The Struggle for Resumption[11]

The Resumption Act is one of the most curious laws in financial history. It was plain in its requirement that on and after January 1, 1879, the Treasury should "redeem in coin the United States legal-tender notes then outstanding, on their presentation for redemption"; but it left the Treasury to make whatever arrangements it might choose. The law, it is true, conferred ample powers. In order "to prepare and provide for the redemption in this Act authorized or required," it empowered the Secreta

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Arrangements for Resumption[12]

The Secretary of the Treasury now put the final touches on his arrangements for resumption. Partly by accident and partly through stress of circumstances, the Treasury gold reserve was defined, in later years, at a fixed and arbitrary minimum. The theory adopted by Mr. Sherman, however, in his early operations, was different and undoubtedly better. Following probably the practice of the Bank of England, he fixed his reserve at 40 per cent. of outstanding notes—"the smallest reserve," he wrote to

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Should the Greenbacks Be Retired?

[13] Let us now consider for a moment an issue which twenty years ago was urgently pertinent, was in fact the very crux of so-called "currency reform," and which still persists as a live issue in the minds of some of the veteran "reformers" of those days, although the conditions which then gave it point have long since disappeared. In the middle nineties, when it was estimated that the total gold stock of the entire country was only about 600 million dollars and less than 200 millions of this wa

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The Confederate Currency[14]

The financial system adopted by the Confederate Government was singularly simple and free from technicalities. It consisted chiefly in the issue of treasury notes enough to meet all the expenses of the Government, and in the present advanced state of the art of printing there was but one difficulty incident to this process; namely, the impossibility of having the notes signed in the Treasury Department, as fast as they were needed. There happened, however, to be several thousand young ladies in

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INTERNATIONAL BIMETALLISM

[15] ... There are natural and commercial causes which may operate to produce either an incessant fluctuation in the relative value of silver and gold, or a wide and increasing divergence, from year to year, through a long period, from the ratio of exchange existing between the two metals at the commencement of the period. So far are the sources and conditions of supply of the one different from those of the other that, notwithstanding the influence of the durableness of the metals in giving ste

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THE SILVER QUESTION IN THE UNITED STATES

[16] Such was the singular combination of events after the peace of 1865 that almost at the moment when a million citizens were turned from organised destruction to pursuit of peaceful industry, the avenues of American employment and production were widened in a degree unprecedented in the history of trade. Within eight years after Lee's surrender, the railway mileage of the United States was literally doubled. Only a fraction of this increase belonged to the transcontinental lines which linked

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Agitation for Silver and the Passage of the Bland Bill

[17] In the summer session of 1876, several bills had been introduced, providing for increased silver coinage and for remonetization of the silver dollar. None of these propositions came to anything; they were chiefly remarkable from the fact that they first gave vogue to the theory of the "crime of 1873"—a theory which assumed that the dropping of the silver dollar from the list of coins in the statutes of that year was the outcome of a conspiracy which carried its legislation through in secret

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Provisions of the Act of 1878

[18] Although the silver dollar of which the coinage was resumed in 1878, dates back as a coin to the earlier days of the Republic, its reissue in that year marks a policy so radically new that the experience of previous years throws practically no light on its working. The act of 1878 provided for the purchase by the Government, each month, of not less than two million dollars' worth, and not more than four million dollars' worth of silver bullion, for coinage into silver dollars at the rate of

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Causes of the Act

[21] The passage of that act was due to causes easily described. It was part of the opposition to the contraction of the currency and the resumption of specie payments which forms the most important episode in our financial history between 1867 and 1879. The resumption of specie payments had been provided for by the act of 1875, and was to take place on January 1, 1879. In the meanwhile, the long-continued depression which followed the crisis of 1873 intensified the demand for more money and hig

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Wherein Peculiar

[22] Although the specific measure passed in 1878 thus rested on a long train of historical causes, it contained details that were essentially new, not only in our own experience, but in that of the world at large.... It ... provided for a regular mechanical addition of large amount to the general circulating medium. No precise experiment of this kind had ever been tried. It is true that Germany and the countries of the Latin Union possess, in their circulating medium, large quantities of overva

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Limited Circulation of the Silver Dollars

[23] The Government has made every effort to get the dollar coins out of its hands.... But the great bulk of the coins thus got out of the treasury return to it almost at once. The degree of favor which they meet with of course ... varies in different parts of the country, apparently reflecting in a curious way the popular feeling as to the desirability of having silver currency at all. They circulate very little east of the Alleghanies, but are used more freely and permanently in the Mississipp

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Provisions of the Act of 1890

[24] The act of July 14, 1890, is [25] more remarkable than that of 1878. It is unique in monetary history. It provides that the Secretary of the Treasury shall purchase each month at the market price four and a half million ounces of silver bullion. In payment he shall issue Treasury notes of the United States, in denominations of between one dollar and one thousand dollars. These Treasury notes, unlike the old silver certificates, are a direct legal tender for all debts, public or private, unl

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The Argument for Silver

[28] ... Is it desirable that we should have more money? Does the maintenance of the gold standard involve injustice or hardship to debtors, or to any class in the community? Does it have any ill effects in hampering industry or checking the advance of production? Is the free coinage of silver, or any measure leading ultimately to a silver basis, fairly open to the objections commonly urged against it on the grounds of dishonesty and injustice?... In considering these questions, we must look to

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The Repeal of the Sherman Silver Purchase Act and the Financial and Economic Consequences of Silver Legislation

[29] For fourteen years, 1878-1892, only an insignificant amount of gold was paid out of the Treasury in the redemption of legal-tender notes; the total amount of gold in the Treasury increased almost steadily and continuously from $140,000,000 on January 1, 1879, to $300,000,000 in 1891. In 1890 the new issue of Treasury notes, together with a change in commercial conditions, placed heavy burdens upon the reserve, the rapid diminution of which is shown in the following figures: The reasons for

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BANKING OPERATIONS AND ACCOUNTS

[31] The intermediate employed in actual transactions is, in increasing degree, that form of currency called credit, the lowest order of currency, rather than money itself. Checks and drafts make up a progressively larger share of the circulating medium. The net deposit credits in the national banks in the United States—to say nothing of the other banks—are double the volume of the actual money in the country. And a large share of this actual money is really employed as reserves to support the c

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Statement of A Representative National Bank

[33] The Method and Extent of Credit Issue.— Assume that a bank with a cash capital of $100,000 is opening for business in an isolated town and is the only bank in that town. How much can it lend? Ordinarily a bank lends by discounting a customer's note and by giving the customer a deposit credit upon its books for the proceeds of the note.... If, now, our bank in question lends $100,000, giving deposit credit for this sum, it has $100,000 of cash on hand against $100,000 of cash liability. Its

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The Relation Between Loans and Deposits

[35] The money of modern English commerce and finance is the cheque, and the credit dealt in in the London money market is the right to draw a cheque.... Now that we have come to the point at which the manufacture of the right to draw cheques has to be made as clear as may be, it will be well to come into close touch with the facts of the case and look at a bank balance-sheet of to-day. In order to get a fair average specimen I have taken the latest available balance-sheets of half a dozen of th

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Relation Between Reserves and Demand Liabilities Again

[36] ... a bank must so regulate its loans and note issues as to keep on hand a sufficient cash reserve, and thus prevent insufficiency of cash from ... threatening. It can regulate the reserve by alternately selling securities for cash and loaning cash on securities. The more the loans in proportion to the cash on hand, the greater the profits, but the greater the danger also. In the long run a bank maintains its necessary reserve by means of adjusting the interest rate charged for loans. If it

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THE USE OF CREDIT INSTRUMENTS IN PAYMENTS IN THE UNITED STATES

[39] Discussions concerning the issue of notes by banking institutions, which largely occupied the attention of students of finance and business men in the eighteenth and the first three quarters of the nineteenth centuries, have been succeeded by equally intense discussions of the amount and influence of credit deposits on the books of the banks, when drawn on by their customers with checks. The fact that the use of checks against deposits renders unnecessary a large amount of money, or currenc

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A SYMPOSIUM ON THE RELATION BETWEEN MONEY AND GENERAL PRICES

The form of this chapter was suggested by the proceedings of a session of the 1910 Meeting of the American Economic Association, devoted to a consideration of the causes of the rise in prices between 1896 and 1909. Selections from papers there presented, and from the relative discussion, make up a considerable part of the chapter, and it is suggested that all of the selections, except the last, may well be considered for purposes of study as having come from the papers and discussion of the sess

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Indirect Influences on Purchasing Power[52]

Thus far we have considered the level of prices as affected by the volume of trade, by the velocities of circulation of money and of deposits, and by the quantities of money and of deposits. These are the only influences which can directly affect the level of prices. Any other influences on prices must act through these five. There are myriads of such influences (outside of the equation of exchange) that affect prices through these five. It is our purpose ... to note the chief among them.... We

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[Summary]

[53] The purchasing power ... of money has been studied as the effect of five, and only five, groups of causes. The five groups are money, deposits, their velocities of circulation, and the volume of trade. These and their effects, prices, we saw to be connected by an equation called the equation of exchange, MV + M'V' = ΣpQ . The five causes, in turn,... are themselves effects of antecedent causes lying entirely outside of the equation of exchange, as follows: the volume of trade will be increa

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The Testimony of Ricardo

[78] Let us suppose that the circulation of all countries were carried on by the precious metals only, and that the proportion which England possessed were one million; let us further suppose, that, at once, half of the currencies of all countries, excepting that of England, were suddenly annihilated, would it be possible for England to continue to retain the million which she before possessed? Would not her currency become relatively excessive compared with that of other countries? If a quarter

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THE GOLD EXCHANGE STANDARD

It is an essential feature of the gold exchange standard as it exists in the Philippines, for example, that premiums charged by the Government in Manila for exchange on New York, and in New York for exchange on Manila are fixed at a point somewhat below the gold export points in each case. Thus the would-be exporter of gold in the Philippines never finds it profitable to ship gold to New York. On the other hand, international bankers in New York never find it profitable to ship gold or currency

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Objections To The Gold-Exchange Standard For The Straits Settlements Answered

[85] ... the establishment of the gold standard in the Straits Settlements ... in the spring of 1903 ... provided for the recoinage of the British and Mexican dollars then circulating in the Malay Peninsula into new Straits Settlements dollars ... of the same weight and fineness as the British dollar, and for the subsequent raising of the value of these new dollars to an unannounced gold par by means of limiting the supply, in accordance with the principle by which India raised the gold value of

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A PLAN FOR A COMPENSATED DOLLAR

[87] In the Purchasing Power of Money (1911) I sketched a plan for controlling the price level, i. e. , standardizing the purchasing power of monetary units. This plan was presented more briefly, but in more popular language, before the International Congress of Chambers of Commerce, at Boston, September, 1912. The details were most fully elaborated in the Quarterly Journal of Economics , February, 1913. Following these and various other presentations of the subject, especially the discussion at

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MONETARY SYSTEMS OF FOREIGN COUNTRIES England[89]

[90] The monetary unit is the pound , or sovereign , equal to $4.8665, divided into 20 shillings of 12 pence each, each penny equal to 4 farthings . Originally the pound was a Troy pound of silver, .925 fine. Under the law of 1816 gold was made the standard and silver subsidiary. The coinage of gold is free, and to avoid delay the Bank of England is required to buy all gold and pay for the same at once at the [minimum] rate of £3 17 s. 9 d. per ounce, a [maximum] charge of 1-1/2 d. being imposed

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Canada

In 1857 the legislature of Upper and Lower Canada formally adopted dollars and cents as the money in which public accounts should be kept. The Confederation in 1867 adopted the same for the Dominion, retaining, however, the sovereign. In 1871 the Currency Act prescribed the same for all accounts, providing also that the gold coins of the United States of America should be legal tender along with British sovereigns, the latter at a rating of $4.86 2/3. The silver and bronze tokens (including piec

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British Colonies

The British West Indies, as also Guiana, make British gold legal tender. United States gold also circulates freely. There are a few banks with limited note-issuing power, and minor coins are similar to those of England. There is a growing use of United States currency. British Honduras has a dollar unit, identical with that of the United States. British India has ... adopted the gold [-exchange] standard and India has for some years been largely absorbing gold; the pound is the unit—the metallic

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Latin Union

The Latin Union consists of France, Italy, Belgium, Switzerland and Greece; they are bimetallic, both gold and silver being full legal tender, and the coinage ratio being 15-1/2 to 1; they have identical systems, and formed a union to maintain the parity of silver and gold, at the above ratio, by accepting each other's silver coins; while their systems are bimetallic in law, silver is now coined only in small denominations and on government account. The general adoption of the gold standard by o

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France

France has the franc , equal to $0.193, as the monetary unit; the principal gold coin is the louis , equal to 20 francs. The paper currency of France is issued wholly by the Bank of France, a private corporation, privately owned, but whose chief officers are appointed by the Government, which thereby obtains a general control of policy and administration; the maximum amount of note-issue is fixed by law, arbitrarily, and by occasional increase is kept well ahead of the country's necessities; no

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Belgium

Belgium is bimetallic and its coins are the same as those of France and have unlimited lawful currency; bank-notes are issued only by one bank, privately owned; the Government receives a share of the dividends in excess of 6 per cent., and imposes a tax upon the note-issues; demand liabilities, including notes, must be protected by a coin reserve of 33-1/3 per cent. and the notes must be covered by cash, commercial paper and securities....

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Italy

Italy has the lira , equal to $0.193, and divided into 100 centesimi ; her coins correspond to those of France; the Bank of Italy largely, and two other banks to a lesser extent, issue notes against their credit, limited, however, to three times their capital, unless covered by gold; the issue may be increased, but comes in for a tax of 1 per cent. per annum and must be protected by a 33-1/3 per cent. reserve in coin and foreign exchange.......

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Switzerland

Switzerland's coinage system duplicates that of France, and her Federal Bank is very similar to the Bank of France.......

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Greece

Greece ... has for its monetary unit the drachma , equal to $0.193. Her coinage follows the Latin Union agreement. Paper currency is issued both by the Government and by banks, and both are depreciated. Greece had to resort to emergency measures during the Balkan War, which may have an influence upon her currency for some time....

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Spain

Spain ... has the peseta , equal to $0.193 United States, as her unit. The Bank of Spain has the sole right to issue notes, which may equal five times its capital and must be protected by a 25 per cent. coin reserve. Gold commands a premium. Silver is coined only on Government account.......

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Germany

Germany, gold standard, has for her currency unit the mark , of 100 pfennig , equal to $0.238; the 5-mark piece contains the same amount of pure silver as the 5-franc piece and two United States half-dollars.... Silver is legal tender to the amount of 20 marks. The coins for her colonies are varied to suit local needs....

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Austria-Hungary

Austria-Hungary, gold standard, has as its unit the krone , equal to $0.2026; 20-krone and 10-krone pieces are coined in gold, also gold ducats, worth $2.288; silver coins are of various fineness.......

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Portugal

The Portuguese Government, by decree of May 22, 1911, adopted a new monetary system and the coins will be placed in circulation as soon as possible. The unit of the system, excepting for her possessions in India, is the gold escudo ,... equal to $1.08 American gold. The escudo is divided into 100 equal parts called centavos .... Multiples are 2, 5, and 10 escudos. Divisions of the escudo are of silver, with values of 50, 20, and 10 centavos; subsidiary coins consist of bronze and nickel pieces.

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Netherlands

... The unit is the florin or guilder of 100 cents, equal to $0.402. The 10-florin piece is the principal gold coin; the ryksdaalder (2-1/2 florins), the florin and half-florin in silver are legal tender, as well as all gold coins; silver is maintained at parity with gold by law; coinage of silver is only on Government account; paper money is issued by a central bank and 40 per cent. metallic (gold and silver) reserve is required against deposits as well as notes; the balance of the notes are co

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Sweden—Norway—Denmark (Scandinavian Union)

These have the gold standard and have for their unit the krone , equal to $0.268 United States currency; their subsidiary silver has various fineness; paper currency of Sweden is issued by the Royal Bank, owned by the Government; notes are legal tender and may be issued to a fixed amount in excess of gold on hand or in foreign banks, but must at all times have gold to the extent of at least 10,000,000 kroner . Norway has a single bank of issue, controlled by the State, which owns a majority of t

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Russia

Russia is on a gold basis and has for its unit the ruble , of 100 kopecks , equal to $0.51456 in United States currency; the silver coins in common use are the ruble, one-half and one-fourth ruble; paper money is issued by the Imperial Bank, which is owned by the Government and managed as part of its finance department; the law requires the coin reserve to equal two-thirds of the note issue.......

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Japan

Japan maintains the gold standard and its unit is the yen , equal to $0.498; the yen is divided into 100 sen , the sen into 10 rin . The yen equals 11.574 grains of pure gold. The Bank of Japan may issue notes to the extent of $120,000,000 upon securities, any amount upon specie, and also may issue further sums in excess of specie, subject to a tax of 5 per cent. The stock of the bank is all privately owned. Japan first copied the national banking system of the United States and after trial aban

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China

China, silver basis, had for its unit the tael , divided into 1000 cash ; there are said to be sixteen different kinds of tael in the different states of China; the most valuable is the "Haikwan," or " customs tael ," the one in which customs dues are reckoned, and this equalled $0.664 United States currency, October 1, 1914. The cash is of base metal, with a square hole punched in the centre and is worth less than a mill in our currency. In the last years of the Empire a new system of coinage w

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Philippines

The unit of value is the peso , equal to $0.50 in United States currency. The fiscal affairs are administered by the United States and the currency is safe and maintained on [essentially] a gold basis....

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Argentina

At a time when the cultivation and development of trade relations with South America seem most alluring, we find a principal embarrassment in the currency and credit conditions which obtain in most South American States, but Argentina, one of the most favored of South American States, has a stable and sound currency system. Her unit is the peso , of 100 centavos . The gold peso is equal to $0.9647 in United States money. In 1889 the Government took measures to acquire gold and fixed the relation

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Brazil

Brazil was formerly a colony of Portugal, and naturally copies the parent country in her currency system. Her unit is the milreis , of 1000 reis . Nominally the gold standard prevails, but depreciated paper is the currency of her commerce. The milreis contains 12.686 grains of pure gold and is worth in United States currency $0.546. In 1898 the Government assumed the sole power to issue paper money, and strove to bring the same to a parity with gold; the arbitrary valuation put upon the milreis

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Chili

Chili has the gold standard, but her paper currency is not maintained at a parity with gold; her unit is the peso , of 100 centavos , of the value of 18 d. ... [89] The following table, from The Monetary Systems of the Principal Countries of the World , compiled in the office of the Director of the Mint, Washington, 1912, gives the weight, fineness, etc., of the coins of Great Britain: [90] A. Barton Hepburn, A History of Currency in the United States , pp. 450-473. The Macmillan Company. New Yo

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THE NATURE AND FUNCTIONS OF TRUST COMPANIES

[91] The trust company supplements the bank. Through a long process of evolution the bank has developed as a means of facilitating the exchange of commodities. The trust company is a still further step in the same process, and, in a highly organized society, it meets needs which the bank is not able to supply. In a new community the general store forms the centre of the business life of the place. With growth and increasing trade, the private banker sees room for the profitable employment of his

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The Advantages of a Trust Company as Trustee

A trust company is preferable to individual trustees, because it possesses every quality of desirability which the individual lacks, to wit:— (1) Its permanency: it does not die. (2) It does not go abroad. (3) It does not become insane. (4) It does not imperil the trust by failure or dishonesty. (5) Its experience and judgment in trust matters are beyond dispute. (6) It never neglects its work or hands it over to untrustworthy people. (7) It does not refuse to act from caprice or on the ground o

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Banking

The banking functions of trust companies may include any or all of the following: The receipt of money deposits payable on demand and subject to check, or payable at a fixed date, or according to special agreement. Interest is usually allowed on all deposits above a fixed maximum amount or on the total sum. Money advances secured by the hypothecation of stocks, bonds, life insurance policies, bonds and mortgages, or other personal property. Real estate loans, secured by bond and mortgage. It is

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Corporate Trusts

Among the most important functions of a trust company are those relative to the business of other corporations: Of late years the trust companies in the Eastern cities have been selected as trustees instead of individuals whenever the law of the State where the property was situated allowed such selection. Trust companies have manifold advantages over individuals in such a relationship; they do not die; the large amount of financial business which they daily transact provides them with the machi

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Individual Trusts

The execution of individual trusts is the function originally assumed by trust companies. The various other forms of business which are now engaged in, have, with the exception of life insurance, been later developments of the trust company idea. The earliest power granted these companies was to receive moneys or other property, real or personal, in trust. The trust company now also acts as executor and administrator of the estates of decedents. As executor appointed by the will of a decedent, i

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Other Functions

The trust company acts as guardian, curator, or committee of the estates, and in some states, of the persons of minors, those who are insane or mentally incompetent, spendthrifts, drunkards, and any other persons not legally qualified to take charge of their own affairs. In the case of a minor, the trust terminates on the ward's becoming of age; in other cases, when the disability is removed, or in accordance with a decree of court. These appointments are frequently made by order of court, and t

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Care of Securities and Valuables

The functions already recited have resulted in the assumption of the duty of caring for property other than that of the estates held in the trust department. In the safe deposit department, individual safes are rented, bulky packages—not containing stocks or bonds—are received on storage, certificates of deposit covering securities are issued, and provision is made for access to, and examination of, the property so deposited. For personal property received on storage, the charges are either acco

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Insurance

The examination and insurance of real estate titles is a later development often found in connection with the usual trust functions. Fidelity insurance and suretyship providing against loss by reason of the dishonesty of individuals and the non-performance of obligations, contracts, etc., have often been combined with the various forms of trust company activity. They are, however, largely passing into the hands of corporations especially organized for the transaction of such business....

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Compensation

When acting as trustee under corporation mortgages, a definite charge may be made for accepting the trust, and a fixed amount per annum thereafter for paying coupons and performing other duties. For the certification of bonds it is usual to charge fifty cents per bond in the case of large issues, and one dollar for small issues. The figures, however, vary in different places. The charge for certifying the bonds may be the only one, although an additional charge is usually made for counsel fees.

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Government Regulation

An examination of the laws of the various states is interesting as showing the attempts which are being made at regulation. Most of these laws have been enacted within recent years and to-day there are but few States which do not have such statutes on their books. The step which Massachusetts first took in requiring a legal reserve to secure deposits has been followed by similar action in other states. In general, the wisdom of prohibiting companies which engage in the care of estates from assum

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SAVINGS BANKS

[93] The savings bank works with those unacquainted with the ways of business and who could not single handed take good care of their money, or invest it safely or profitably. The bank of discount is generally managed by business men versed in the ways of business, acquainted with monetary affairs, and able to conduct financial operations with intelligence. They combine their capital in order to make it effective; the savings bank combines savings in order to make them capital , and as such to a

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Classification of Savings Banks

We may roughly classify savings institutions into: First, mutual (trustee), or philanthropic; second, stock (including "savings and trust companies"); third, co-operative, or democratic, as exemplified in the co-operative banks of Europe. The first are usually managed by a self-perpetuating body of trustees, who do not share the earnings; the second are managed by the directors elected by the stockholders; the third are managed by officials elected by the members. A second classification may be

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Trustee Savings Banks

The original savings bank is the trustee bank. As Hamilton says, "It stands for the attempt on the part of the well-to-do to improve the condition of the poorer classes, and involves a self-sacrificing service on the part of a few in the interest of the many." While many of the early savings banks partook of this character, others were organised from purely selfish motives and were characterised by bad management and bad faith from the start. A study of savings bank frauds will amply bear out th

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Stock Savings Banks

The stock savings bank, where it is a savings bank, and not a bank of discount under a savings title, differs in no essential degree from the mutual institution. The mutual bank belongs to the depositors; the stock bank to the stockholders. The mutual bank pays dividends to depositors only; the stock bank pays dividends to both stockholders and depositors. The stock bank does not pretend to be philanthropic in its management. It is purely a business proposition, and where the investments are of

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Guaranty Savings Banks

New Hampshire is the only state in which "guaranty savings banks" are found. These are a combination of mutual and stock—a cross between the two. They do not transact a commercial business, being strictly savings banks in their functions, yet having "special deposits," which to all intents and purposes are capital stock. "The guaranty savings bank differs from the ordinary mutual savings bank in that it has capital stock or special deposits , as they are called. It pays a certain stipulated rate

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Municipal Savings Banks

This form of savings banks properly belongs to a strong class of municipalities. They can only thrive in places where the local spirit is strong, the local government pure, and where the local officials are accustomed to wield a large measure of authority. Accordingly, they have come into being and met with success in those countries where the early history of the town made a large measure of local autonomy a necessity. Towns of this class possess the public spirit and the intelligent administra

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People's Banks

The co-operative banks of Europe, otherwise called "People's Banks," are essentially savings banks, in that they depend for their working capital upon the accumulated savings of their members. The aims of these banks are first economic , to enable the economically weak to make themselves financially strong by the power of combination; second, moral , to bring the members together in a unity of interests and to develop character by making thrift and good habits the groundwork of their operations;

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The Localization of Savings Banks in the United States

The home of the mutual savings bank is in the East, where it began operations in 1816, and may even be said to be in the Eastern States; for west of Buffalo and south of Baltimore, we find only 21 savings banks of the mutual character. Out of 647 savings banks of the mutual type found in the United States, 593 are found in New England, New York, and New Jersey; and over one-half, or 334, are found in the two States of New York and Massachusetts. Maine, Vermont, Connecticut and New Hampshire have

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Postal Savings Banks

The postal savings bank is not a bank, or a banking system, so much as it is an adjunct of the Government; for the fundamental idea is that through the post office the Government holds itself out as willing to accept the savings deposits of the people, invest them in its own securities and become absolutely responsible for the safe return of the funds when called for, with a nominal rate of interest. All the leading countries of the world except Germany and Switzerland now operate the postal sav

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American Postal Savings Banks

[94] In spite of the numerous differences in the postal savings bank system of the forty-odd countries possessing them, there are certain fundamental features common to all. Whatever else a postal savings bank may be, it is without exception an institution working principally through the post offices, and its primary object is the encouragement of thrift among the poorer classes by providing safe and convenient places for the deposit of savings at a comparatively low rate of interest. In the dis

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"Postal Savings Behind the Scenes"

Speech of Hon. Carter B. Keene, Director of the United States Postal Savings System at the Banquet of the Investment Bankers Association of America at Denver, Colorado, Tuesday evening, September 21, 1915. Mr. Toastmaster and Gentlemen: I appreciate very highly your invitation to speak here to-night, also the words of commendation from your presiding officer. I have often wondered whether the fact that I am the only director of a big savings institution has anything to do with the ability of tha

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DOMESTIC EXCHANGE

[96] The banker has become the bookkeeper and settling agent of the business world. The products of a locality, let us say the State of Georgia, move out to the markets of the world and create credits in favor of that locality on the books of banking institutions in the commercial centers, while at the same time a counter movement of commodities is under way from other localities into Georgia, in like manner creating credits for those localities which are debits against Georgia. The practical ef

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Exchange Relations Between Chicago and New York

[97] ... It should always be borne in mind that the fact that New York City is the country's dominating financial market results in making New York funds acceptable everywhere as a means of payment, and in making a ready market for New York exchange throughout the country for a large part of the year. Throughout January money in Chicago relative to that in New York City is cheap. Exchange rates on New York are high and there is a considerable movement of cash from Chicago to the Eastern States—p

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Exchange Relations Between St. Louis and New York

[99] ... General seasonal movements in the relative demand for money in St. Louis (as compared with New York City), ... are fairly regular in their occurrence. From the beginning of the year until the fore part of May the demand appears to be moderate, exchange rates rule near par, and there is a moderate tendency for cash to move from St. Louis to the Eastern States, with almost no tendency to move in the opposite direction.... The first eighteen weeks of the year, St. Louis bankers say, are a

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Domestic Exchange in San Francisco on New York City

[100] ... Before taking up the subject of seasonal variations in San Francisco domestic exchange rates on New York City, it may be well to observe that in a number of respects the San Francisco domestic exchange market is a peculiar one. In the first place the principal kind of money in circulation is gold coin and this fact materially influences the range of domestic exchange fluctuations, i. e. , the shipping points. Concerning this matter I can do no better than quote from letters of Mr. F. L

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Currency Movements Between New England and the Eastern States

[101] ... The distance between New York City and the principal New England cities is very small, and there is a great community of financial interest among these cities and New York. Between New York City and Boston the currency shipping points are only about 25 cents premium and 25 cents discount. Single financial deals between New York City and Boston are frequently of sufficient moment to lead to considerable shipments of currency, although exchange rates previously were only moderate. The re

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The Domestic Exchanges During the Crisis of 1907[102]

There is no part of our banking machinery which has received so little elucidation as that of the domestic exchanges. Even for normal times the subject is obscure, and the writer therefore ventures upon an explanation of its course during a period of crisis with hesitation, and he is by no means confident that important considerations may not have been overlooked. As in the case of foreign exchange, domestic exchange rates fluctuate within limits fixed by the cost of shipping money, and also, in

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FOREIGN EXCHANGE The Nature of Foreign Exchange

[103] The bill, or order to pay money in a foreign centre, is the commodity that is actually bought and sold by dealers in foreign exchange, but it is better for the moment to leave bills out of consideration. They are only the tangible expression of the claim for money in another centre, and at this early stage of our inquiry it is better to keep our minds fixed on what is at the back of the bill, namely, the money in a foreign centre to which it gives its holder a claim. The French buyer of a

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"Favourable" and "Unfavourable" Exchanges

[104] The general feeling with regard to the function of the exchanges, as giving evidence of the mercantile (or rather monetary) situation of any country, is indicated by the usual phrase of a "favourable or unfavourable state of the exchanges." A phrase which occurs so frequently in all banking discussions that it cannot be passed over without remark. It may originally have implied the erroneous theory that the object of commerce is to attract gold, and that that country towards which the tide

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The Origin and Supply of Foreign Exchange

[105] Underlying the whole business of foreign exchange is the way in which obligations between creditors in one country and debtors in another have come to be settled—by having the creditor draw a draft directly upon the debtor or upon some bank designated by him. John Smith in London owes me money. I draw on him for 100 pounds, take the draft around to my bank and sell it at, say, 4.86, getting for it a check for $486.00. I have my money, and I am out of the transaction. The fact that the gold

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The Sources of the Demand for Foreign Exchange[106]

Turning now to consideration of the various sources from which spring the demand for foreign exchange, it appears that they can be divided about as follows: 1. The need for exchange with which to pay for imports of merchandise. 2. The need for exchange with which to pay for securities (American or foreign) purchased by us in Europe. 3. The necessity of remitting abroad the interest and dividends on the huge sums of foreign capital invested here, and the money which foreigners domiciled in this c

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Methods of Financing Imports and Exports[107]

The foreign trade of the United States has increased during the last forty years about 370 per cent.... This increase ... reflected not alone our own marvellous development, but as well the wonderful growth of trade throughout the world. The United States stands third among the countries of the world, its foreign trade being exceeded only by that of the United Kingdom ... and Germany.... Our imports and exports [108] are being financed more and more by means of what are known as commercial lette

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Credit Risks of Drafts Drawn on Buyers Abroad

[109] Many American manufacturers do not realize the essential "credit" element of transactions on the basis of drafts drawn on foreign customers .... The exporter has received an order; he purchases the goods covered by this order from the manufacturer, and should the customer change his mind the exporter may suffer a loss. Or the customer refuses to accept the goods, and the exporter may again suffer a loss. Or the customer may accept the goods and the draft, but fail to pay, and the exporter

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England Draws Few Bills, But Accepts Many—The Reason and the Result

[110] It has been shown that, if two countries buy of each other to the same amount, their transactions need not give rise to two separate sets of bills, but that on the contrary, if the foreigner draws on us to the full value of his exports, the bills so created will be sent as remittances to the exporter on this side and will pay him for his sales. Conversely, if the British exporter draws, there is no necessity for the other side to do so. What, then, are the facts? Does the United Kingdom, g

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The Recent Rise of the American Acceptance Market

[112] Probably the most important effect at this time [1915] of the Federal Reserve Act is the establishment of the American acceptance market. It may well be said that heretofore America has had no real money market. The only semblance of a money market previously existing in this country was the call loan market of New York City. That, however, did not truly reflect money conditions in this country, as it has more often reflected the secondary effect of some movement of the stock market. The d

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The Economies and Advantages of "Dollar Credits"[113]

Many radical changes in the mechanism of international finance have occurred during the past fifteen months, since the beginning of the European war. Not the least important among these changes, viewed from the standpoint of the American importer, is the evolution in the methods of financing our importations. Our imports in the way of commodities such as hides, coffee, rubber, wool, etc., etc., run into hundreds of millions of dollars annually, and these are financed generally through the medium

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The New York Foreign Exchange Market[114]

A market may be defined as the coming together of buyers and sellers. It therefore involves all the mechanism necessary to facilitate their intercourse. One may speak of a general market or of a local market, of a market in one or in another place. Thus, there is the New York market for the buying and selling of exchange on London. A bank in New Haven, Connecticut, may be a part of that market if it buys from and sells to it. That market includes, besides the commercial and industrial organizati

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New York City Practically Absorbs by Purchase All American Foreign Exchange

[115] There is, perhaps, no feature pertaining to banking throughout the country so dependent upon New York financiers, as foreign exchange. The very foundation of this branch of banking is constructed by the New York bankers, and from their banking houses emanate the basic prices and quotations upon which foreign bills are bought and sold throughout the United States. It is the custom of New York foreign exchange brokers to furnish their Western clients, direct, or through their local represent

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How Money Is Made in Foreign Exchange—The Operations of the Foreign Department

[116] Complete description of the various forms of activity of the foreign exchange department of an important firm would fill a large volume, but there are certain stock operations in foreign exchange which are the basis of most of the transactions carried out and the understanding of which ought to go a long way toward making clear what the nature of the foreign exchange department's business really is. The first and most elementary form of activity is, of course, the buying of demand bills at

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Gold Movements

[117] When there is a heavy demand for exchange and little supply, the price of exchange gradually advances. The banker, called on by his customers to draw exchange for them, finding few bills in the market that he can remit to cover his drafts, sends gold and directs its equivalent in foreign coin to be placed to his credit, and against this credit he draws. There may be no market abroad for our crops or manufactures; but gold need not be sold in order to produce money; it need only be coined.

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The Silver Exchanges

[120] ... It is acknowledged that commerce between gold standard countries is satisfactory to all classes of traders, for both importers and exporters know exactly the return they may expect, but in trade between a silver-using country and one on a gold basis, a large measure of uncertainty invariably exists. Whenever there is a fall in the gold value of silver, either the exporter in the gold standard country or the importer in the silver country must suffer. Let us take the case of the exporte

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CLEARING HOUSES

The following discussion of clearing houses is confined mainly to the United States and England. References to the clearing houses of France and Germany, where the introduction of the use of checks and the consequent development of clearing facilities have been tardy, are contained in the chapters devoted to the banking systems of those countries....

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I. In the United States

[121] What is a clearing house? The Supreme Court of the State of Pennsylvania has defined it thus: It is an ingenious device to simplify and facilitate the work of the banks in reaching an adjustment and payment of the daily balances due to and from each other at one time and in one place on each day. In practical operation it is a place where all the representatives of the banks in a given city meet, and, under the supervision of a competent committee or officer selected by the associated bank

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II. Clearing Houses in England

[135] The exact origin of the London Bankers' Clearing House will probably never be determined, for, like other institutions whose purpose has been to save time and trouble, its system appears to have been gradually evolved. [136] With the growth of the check system, each banker would daily find himself in possession of a number of drafts for the credit of his customers that needed collection at the offices of other bankers. This would necessitate each bank sending out one or more clerks on what

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STATE BANKS AND TRUST COMPANIES SINCE THE PASSAGE OF THE NATIONAL BANK ACT

[140] The banking institutions of the United States other than national banks are ordinarily classified into (a) state banks, (b) trust companies, (c) stock savings banks, (d) mutual savings banks, and (e) private banks. The following pages deal with two of these classes, viz., state banks and trust companies. It will be desirable at the outset to distinguish them from the other classes, and to outline the history of legislation concerning them since 1865. The term "state bank" has been used in

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The Evolution of the Trust Company

With the exception of the power to issue notes, which would be unavailable because of the tax on note issue, the powers of the state banks of to-day are essentially the same as the powers of the state banks which were in operation before the Civil War. On the other hand, the trust company is a new type of banking institution, the functions of which are even yet not clearly defined. A great part of the legislation with reference to trust companies, therefore, has had to do with defining the power

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Incorporation

Since 1865 state banks and trust companies have been incorporated by the use of one of three methods: (1) By special charter; (2) under the "business incorporation law"; (3) under the general banking law. Not very many of the States have used consecutively all three methods, for the special charter and the "business incorporation law" were used contemporaneously in different sections of the country. Both have given place, in the great mass of States, to the general banking law. From 1865 to 1875

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Capital and Surplus Requirements

When the States began to give attention to the regulation of the banking business the question of capital received immediate attention. The national-bank act and the banking laws in New York and the Middle West which had survived from the antebellum period contained provisions concerning the amount and payment of capital. A requirement with regard to capital was recognized as the central point in any system of bank regulation. The capital stock is a buffer interposed between the bank's creditors

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Liability of Stockholders

With the practical prohibition of the issue of state bank notes in 1866 and the consequent decrease in the number of state banks, the liability of stockholders in state banks became in nearly all of the States, except where an additional liability was imposed by the constitution, the same as that of stockholders in ordinary business corporations. Since 1880, however, provisions imposing an additional liability on the stockholders of banking corporations have been placed in the banking and trust-

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Restrictions on Loans and Discounts

The desirability of some legal limitation on the extent of the liability to a banking institution which any one person, firm, or corporation may incur is largely due to the fact, that, since the American banking system is a system of independent banks, the resources of many of the banks are necessarily small in comparison with the needs of some of their customers for loans. A large manufacturing concern located in a small town may very well be able to use all the assets of the local bank. If the

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Reserves

In most of the antebellum state banking laws reserves were required only against note issue. In Ohio, for example, the general banking law required a reserve of 30 per cent., against circulation, but none whatever against deposits. Several of the state banking laws which survived the destruction of the state bank-note issue contained, however, provisions requiring banks to hold a reserve against deposits; but in none of these States was the increase in the number of state banks important. In tho

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Branch Banks

The most characteristic feature of American banking is the extent to which the banks and trust companies are independent institutions. The national-bank act makes no provision for the establishment of branch banks except in cases of the conversion of state banks which already have branches. Such banks are allowed to retain their branches on condition that the capital is assigned to the mother bank and the branches in definite proportions, but only a few national banks have branches. Under none o

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Further Reason for the Lack of Branch Banks in the United States

[143] It would seem that there must be a reason for this peculiarity [the small number of branches] in the banking system of the United States. In searching for this reason, the first fact of importance seems to be that, although the organization of branches has been permitted to the non-note-issuing banks in some of the States, they have not been organized, while in other countries they have been established in nearly every case. by note-issuing banks. This seems at once to indicate that in pla

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The New York State Bank Act of 1914[145]

In June, 1913, George C. Van Tuyl, Jr., superintendent of banks of the State of New York, appointed a commission to look into the banking conditions of the State and to make a thorough revision of the law relating to banks. This commission conducted many public hearings; sought information from banking experts in this State and in other States; made a careful study of private banking conditions, rural credits, and other special banking problems of the State; and, finally, on February 25, 1914, t

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THE CANADIAN BANKING SYSTEM

[147] Financially, Canada is part of the United States. Fully half the gold reserve upon which its credit system is based is lodged in the vaults of the New York Clearing House. In any emergency requiring additional capital Montreal, Toronto, and Winnipeg call on New York for funds just as do St. Paul, Kansas City, and New Orleans. New York exchange is a current and universal medium in Canada and is in constant demand among the banks. A Canadian wishing to invest in securities that may be quickl

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The System Not New

But to the student of the history of banking in the United States there is little that is radically new in the Canadian system. He finds in it many of the practices and expedients that were found excellent in the United States in the first half of the nineteenth century, and is almost persuaded that but for the Civil War what is now known as the Canadian banking system would everywhere be called the American system. The fiscal exigencies of war, which have caused changes in the banking systems o

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Other Financial Institutions

The only other financial institutions in Canada which possess much importance are the mortgage and loan companies. These usually operate under charters granted by the provincial legislatures and do a business similar to that of the farm and mortgage companies which once flourished in the United States, making loans to farmers for a term of years and taking farm mortgage for security. They also make loans upon urban and suburban real estate and thus aid in the upbuilding of the cities and their s

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The Essentials of the System

A chartered bank in Canada is a bank of branches, not a bank with branches. The parent bank, technically known as the "head office," neither takes deposits nor lends money. All the banking business is done by the branches, each enjoying considerable independence, but all subject to the supervision and control of the head office. The law places no restrictions upon the number or location of branches. Canadian banks, therefore, have branches in foreign countries as well as in Canada. The provision

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Deposits

The liabilities of Canadian banks, like those of commercial banks in Great Britain and the United States, furnish a fairly correct index to the expansion of the country's credit. Since the Canadians, like other Anglo-Saxons, make free use of the check book in the settlement of both business and private accounts, any increase of bank loans and discounts is usually attended by a corresponding increase in deposits. When a Canadian business man discounts his note at his bank he almost invariably lea

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No Bankers' Bank

The indebtedness of banks to banks is not large in Canada. The branch system makes it unnecessary for banks to carry balances in other institutions located in the financial centres. Nearly every bank has a branch in either Montreal or Toronto and in these branches carries the major proportion of its cash reserve, so that branches in the far West or in the maritime Provinces are always able to sell exchange on Montreal or Toronto. Canada has no bankers' bank. The Bank of Montreal, which is the la

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Amount of the Reserve Fixed by Each Bank

It must not be supposed that the Canadian banks do not carry adequate reserves. On the contrary, every bank manager gives to this subject daily and most conscientious thought. To the Canadian banker the word "reserve" means a fund immediately available for the liquidation of liabilities. How much this fund ought to be depends altogether upon the amount and character of the liabilities to be protected. A Canadian bank manager, having before him the amount of time deposits and demand deposits, res

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Competition Is Not Lacking

In many respects banking competition is quite as active in Canada as it is in the United States. Apparently there are only two things which the banks do not like to do in order to attract business—lower the discount rate, or advance the rate paid on depositors' balances. There is no express agreement among the bankers on these points, but every banker knows that he would become persona non grata among his brethren if he should discount certain kinds of paper at less than 6 per cent., or pay his

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Banking in Different Provinces

It is generally known that the Eastern branches get heavy deposits and are creditors of the head office, and that the funds they collect are forwarded to the Western branches, whose loans greatly exceed deposits. Bankers will admit that this transference of funds takes place, but there is considerable grumbling about it in the old communities of the East, and the bankers fear that a monthly or even annual publication of the facts would keep them perpetually in hot water. A glance at clearing-hou

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Large Use of Deposit Currency

It is sometimes assumed that a free and large use of bank notes tends to discourage the use of the check book and the growth of bank deposits. On the continent of Europe, for instance, where the notes of central banks supply all the currency the people need, the check book is comparatively little used. This fact is sometimes explained by the ease with which people can obtain bank notes for use in making all payments. Experience in Canada makes one doubt the validity of this explanation. The chec

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Banks Silent Partners in Industry

A large part of the so-called commercial paper of Canadian banks is secured practically by title to goods in warehouses, factories, and wholesale stores. Such security is more saleable than stocks and bonds, and paper having such security back of it is therefore better banking paper than notes secured by stock-market collateral. So far as would seem possible the Canadian Bank Act makes merchandise of all kinds a sort of collateral security for bank advances. It assumes that if a bank advances ca

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A Customer's Line of Credit

In Canada the banks are managed by men whose long experience in the business has taught them to avoid certain banking practices that are in vogue in other countries. Realizing how important is the relation between a bank and its customer, they believe that this relation should be made as intimate and helpful as possible. Among Canadian bankers, therefore, it is part of the law and gospel of banking that a bank is entitled to full knowledge of the financial condition and business operations and p

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Loans to Farmers

The branches of Canadian banks in agricultural districts quite commonly lend assistance to farmers. They do not make a practice of taking mortgages on farm property, but lend outright on the farmer's credit, depending for their security upon his character as a man and ability as a farmer, and often as well upon a neighbor's indorsement. Farmers' paper ranks high among the Canadian bankers and constitutes a considerable proportion of the assets of some of the banks. The banks, of course, do not u

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Call Loans in Canada and Elsewhere

After "current loans in Canada" the next largest item among the assets is "call and short loans elsewhere than in Canada." The call loans outside of Canada consist mainly of loans in the New York market and are as a rule secured by collateral easily convertible into cash. These loans are regarded by Canadian bankers as equivalent to cash and are figured by them as part of their reserve. Only the larger banks make a practice of loaning on call in New York....

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The Banks as Financial Institutions

That the chartered banks of Canada are financial as well as commercial institutions is evidenced by their holdings of stocks and bonds. These securities represent partly an investment carried as a secondary reserve and partly a business carried on for the benefit of their customers. In Canada the demand for long-time investments is not large, but whatever market there is for securities is mainly in the hands of the chartered banks. An investor seeks the advice of a bank manager and often is able

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The Revision of the Bank Act, 1913[148]

The Canadian Bank Act, as is well known, is subject to decennial revision. The last revision was due to take place in 1910; but owing to circumstances which it is not necessary here to describe, it was not until the present year that the work was finally undertaken. The leading features of the Canadian banking system are so well known that they may be passed over, and the nature and causes of the recent changes in the act alone described. There were many minor modifications, but the essential ch

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Comparative Figures of Condition of Canadian Banks[149]

Note. —Owing to the omission of the cents in the official reports, the footings in the above do not exactly agree with the totals given. [147] Adapted from Joseph French Johnson, The Canadian Banking System , Publications of the National Monetary Commission, Senate Document No. 583, 61st Congress, 2d Session . [148] W. W. Swanson. The Revision of the Canadian Bank Act , American Economic Review, Vol. 3, December, 1913, pp. 993-998. [149] The Commercial and Financial Chronicle , Vol. 102, January

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THE ENGLISH BANKING SYSTEM Foundation and Growth of the Bank of England

[150] About the year 1691 the Government of William and Mary experienced considerable difficulty in raising the necessary funds to prosecute the war with France; but "the hour brings the man." The man on this occasion was William Paterson, a merchant of Scotland, who had been educated for the Church, but had led a varied and adventurous life. The scheme he presented for the consideration of the Government for the relief of the situation was the foundation of a public joint-stock bank; which, in

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Peel's Act or the Bank Charter Act of 1844, and its Suspensions

[151] After the renewal of the charter in 1833, the directors of the Bank of England laid down as a principle on which their future operations were to be guided, that one-third of their liabilities should be kept in cash and bullion, and the remaining two-thirds in securities. If this principle had been acted on, the bank would have been saved from many of the troubles which shortly assailed it; but though the intentions of the directors were good, circumstances were too strong for them, and the

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Account of the Liabilities and Assets of the Bank of England

... Taken as a whole the act has worked well, and has succeeded, in combination with greater knowledge and foresight, in maintaining our banking system in a sound condition.... The main point of contention between the supporters and opponents of the act lies in its want of elasticity in time of need. Under no circumstances can the bank increase its issue of notes against securities beyond the prescribed limit, without a breach of the law; but on three occasions in the past the law has been broke

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The Functions of the Bank of England

[153] The distinctive functions of the Bank of England consist in its acting as: 1. Banker to the British Government. 2. Banker to the joint stock and private banks. 3. (a) Sole possessor of the right to issue notes which are legal tender in England; (b) sole possessor, among joint stock banks with an office in London, of the right to issue notes at all. 4. Provider of emergency currency. 5. Keeper of the gold reserve for British banking. 6. Keeper of the gold reserve which is most readily avail

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The Joint-Stock Banks

The most obvious function of the joint-stock banks of England is the business of taking care of money for customers and meeting cheques drawn against their balances. Customers place money with them either on current or deposit account. On current account it can be withdrawn at any time and earns, as a rule, no interest. Many banks make it a condition that unless the current account is maintained at a certain figure, generally £100, a charge shall be made for keeping it. A usual charge is £1 5 s.

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The Private Banks

Any differences that exist between the private and joint-stock banks of England lie in their ownership rather than in their functions. Their functions are the same, but the manner in which they carry them out is perhaps influenced to a slight extent by the fact, which really distinguishes them, that the private banks are owned by a few partners who generally conduct the business for themselves or exert more or less influence on it, while the joint-stock banks are managed by salaried directors an

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The Merchant Bankers and Accepting Houses

The most important function of the merchant bankers is not that of banking, but of accepting. Banking, in the strict sense of the term, they do not engage in—that is to say, they are not prepared to meet claims upon them by an immediate payment of cash or legal tender over the counter, but by payment of a cheque on one of the banks in the stricter sense of the term. The function of the London accepting houses, though of enormous importance, is still to a certain extent subordinate to the judgmen

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The Discount Houses

The great volume and diversity of the bills of exchange which come into the London market to be melted and turned into present cash before their date of maturity has caused the existence of a class of dealers in bills (bill brokers) who specialise in handling them and may be regarded as intermediaries between the holders of the bills—that is to say, originally, the drawers of them, or their representatives, or any one else into whose hands they may have passed them on—and the bankers, who are th

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Interview with the Governor and Directors of the Bank of England

[155] Q. When does your present charter expire? A. The bank's exclusive privileges of banking continue subject to one year's notice and to repayment by the Government of the debt of £11,015,100 and of all other public debt held by the bank at the time. Q. What is the par value and present selling price of your shares? A. The bank's capital is in the form of stock, £100 of which is at present quoted at about £267. Q. How many stockholders have you? A. There are at present over 10,000 accounts. Q.

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Interview with Sir Felix Schuster, Governor of the Union of London and Smith's Bank Limited

[156] Q. Your bank is organised under the General Companies Acts as are all joint stock banks in England? Q. You are not under government supervision or examination? A. No. Q. The authorised par of your stock is £100, and £15 10 s. have been paid on each? Q. Are your shares held by individuals and corporations? A. By individuals, not by corporations. There are upwards of 8,600 different shareholders. Q. In the transfer of shares, do you require the name of the transferee to be submitted and appr

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Interview with Mr. Charles Gow, General Manager of the London Joint Stock Bank, Limited

[157] Q. Your capital stock is £100 authorised, £15 paid? A. Yes. Q. Does your board pass upon a new stockholder? Q. Who really conducts the business of the bank? A. The managers, who are appointed by the directors; that is to say, myself and all those belonging to me. Q. Are most of your acceptances secured? A. Every one. Q. How are they secured, generally speaking? A. They are secured in the great majority of cases by bills of exchange, by first-class securities with plenty of margin, even by

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THE SCOTCH BANKS

[158] The functions performed by the eight Scotch banks and their 1,245 branches [159] are essentially similar to those already described as being carried out by their English brethren. The differences between the currency systems of the two countries are in degree rather than in essence. In Scotland the note issue has made a harder fight for its existence than in England, owing no doubt to the fact that the Bank of England's monopoly did not extend to Scotland and that the great Scotch joint-st

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Democracy of Scotch Banking

The Scotch note circulation increased from £5,332,000 in 1872 to £7,173,000 in 1908. This increase, when compared with the fact that the note issues of the English country banks have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the Tweed. This is partly owing to the fact that in Scotland notes may be issued of the denomination of £1, whereas in England the smallest allowed is of £5, so that the note was thus circula

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Use of Notes as "Till Money" in Relation to the Establishment of Branches

Banking by branches in Scotland has proceeded even more rapidly than in England, and the percentage of branches per head of the population is higher in the northern part of the Kingdom. This wide diffusion of banking facilities in Scotland has been largely brought about by the fact that its banks, having the privilege of note issue, were able to hold their own notes as "till money," so economising in the matter of cash. The following passage is from a work entitled Scottish Banking, 1865-1896 ,

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Evasion of Peel's Act

Scotland used the same weapons as England, namely, the cheque and the development of deposit banking. The eight Scotch banks have, according to their latest balance sheets, £7,000,000 of notes outstanding, and £108,000,000 of liability on deposits and drafts. With regard to the latter item Peel's regulations had nothing to say, and since ordinary banking prudence demanded that some cash should be held against it, and since the gold held against notes was not specially earmarked as such, Scotch b

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Defects

Scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. At the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking asset. Mr. Blyth points out that these unissued notes are "not a reserve but till money,

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Bank of Scotland

Q. When was the Bank of Scotland founded? A. In 1695. Q. When does your present charter expire? A. By act of Parliament the "governor and company of the Bank of Scotland" have "perpetual succession." Q. How many branches have you? A. One hundred and sixty-three branches and twelve sub-branches in Scotland: also an office in London. Q. How are your branches managed? A. By agents (managers at London and Glasgow) appointed by the directors. Q. Do your branches have business relations with merchants

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Royal Bank of Scotland

Q. When was the Royal Bank of Scotland founded? A. In the year 1727. Q. When does your present charter expire? A. It is perpetual. Q. How many branches have you? A. One hundred and fifty-two. Q. Are all your branches of the same class, or have you main and subsidiary branches? A. In some cases there are sub-branches. Some are mainly or almost entirely deposit branches; others have few deposits, but a large advance business. Q. Is the business conducted at your branches of the same class as at yo

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Commercial Bank of Scotland (Limited)

Q. When was the Commercial Bank of Scotland (Limited) founded? A. In the year 1810. Q. When does your present charter expire? A. It is not limited in point of time. Q. Has the Government any voice in the management of the bank or any interest in it through the ownership of shares? A. None. Q. Have the managers of the branches full control of the business in granting discounts, etc.; if not, what discretion is usually given them? A. Agents have power to grant advances, but subject to the approval

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Union Bank of Scotland (Limited)

Q. When was the Union Bank of Scotland (Limited) founded? A. In 1830. Q. When does your present charter expire? A. The bank has no charter expiring at any specified time. It is incorporated under the companies acts. Q. Have the obligations of the bank to the public or to the Government been changed from time to time? A. The liability of the shareholders was formerly unlimited, but when the bank became registered under the companies act, 1879, the liability of the shareholders—unless in respect o

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THE FRENCH BANKING SYSTEM The Bank of France

[165] The Bank of France was established in the year 1800, and was at first an entirely private concern, with a capital of $6,000,000. Among the first subscribers were Napoleon Bonaparte, Hortense Beauharnais, and bearers of names which are still prominent in the French banking world, such as Mallet, Hottinguer, Seillers, etc. At that time, the privilege of issuing notes was not confined to a single bank. But in 1806 the Bank of France was placed under state control, and, by and by, the other is

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Place of the Bank of France in the Distribution of Credit

We purpose now to investigate the organs of French credit, and to assign to each of these organs its function, in order then to ascertain what operations the Bank of France can perform and within what limitations. We have therefore to examine (1) the function of local banks and of financial institutions; (2) in what manner the Bank of France promotes the free distribution of credit; (3) in what measure the bank must control credit. The natural organs for the distribution of credit are the banks,

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Territorial Expansion of the Bank of France

With its growth in extent the bank has not only developed its services to meet new business needs, by providing an increased staff, and larger, more attractive, and better conducted offices, but it has also endeavored to reach a more and more widely extended territory. Indeed, the mere fact that the bank has entered a place, if only to make collections there, gives a favorable turn to credit conditions; credit becomes cheaper, in that the basis for money rates becomes the official discount rate,

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The Bank of France and Agricultural Credit

"There is no such thing as agricultural credit; there is only credit," said M. Dupin in 1845. [174] Matters have not changed since. It is certain, for instance, that Scotland, which for a long time was the classical land of pauperism, owes its prosperity to the banks, which, by developing credit in favor of agriculture, have entirely transformed the soil and the country. Indeed, more than any other, the Scotch farmer needed credit, and more than any other he has benefited by it. It may be said t

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The Bank of France

Q. Is the Bank of France ever attacked in the controversies between political parties? A. No charge has ever been made that the bank favored or aided any political party. There is never any claim that politics enters in any degree into the management of the bank. Q. Is the capital entirely private property? A. Yes. All the shares are divided between 30,000 shareholders, of whom about 10,000 have not more than one share. Q. How are your branches managed? A. All branches are managed by a manager,

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The Crédit Lyonnais

Q. What is the date of the organisation of the Crédit Lyonnais? A. July 6, 1863. Q. Under what law was it organised? A. We are under the general law, a general companies law. Q. What is the minimum amount of capital required? A. There is no minimum, but at least one-fourth of the capital is required by law to be actually paid in. Q. How many shareholders have you? A. Our capital is divided into 500,000 shares, but as many of these shares are issued to "bearer" we do not know how many shareholder

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Comptoir d'Escompte

Q. One of the things that we have in mind is to inquire in regard to the character of the business done by your branches. A. Yes. We are especially a discount bank and our customers are mostly commercial people engaged in commerce and industry, so that our principal business in our branch offices consists in discounting commercial paper, in making advances against securities, goods, or warehouse receipts, or sometimes giving blank credits to our customers for commercial requirements. Q. Have you

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Banque de Paris et des Pays-Bas

Q. We assume that your business is in many respects quite unlike that of the other joint-stock banks? A. Yes; in some respects. Q. What is the difference? A. The Société Générale, Crédit Lyonnais, etc., receive deposits from the public; they invest these deposits and try to make the most of them, paying a small rate of interest on them; they also loan money on commercial paper which can be rediscounted at the Bank of France. Here we are more a business bank; we do not care for deposits from the

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Crédit Foncier de France

Q. Is the Crédit Foncier a public institution? A. Yes, it is a mixed institution; it is at the same time a joint-stock company and a society under the control of the Government by reason of privileges which the Government has granted to it. Q. Who are the shareholders? A. Any one; the shares are dealt in on the Bourse. The firm capital is at present 200,000,000 francs; the shares are issued at 500 francs. Q. What dividend do you pay? A. We now pay 6 per cent.; for several years it was only 5 per

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Caisse des Dépôts et Consignations

Q. We should like to know the general character of the business conducted by your institution. A. The mission of the Caisse des Dépôts et Consignations is to receive, hold, and repay all private funds intrusted to the State either voluntarily or under compulsion. Q. You say that you also do an insurance business. What do you mean by that? A. The insurance office, managed by the Caisse, issues policies of life insurance, insurance payable after death or in case of accident, like any private insur

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Crédit Agricole

Q. What is the nature of the business of the Crédit Agricole and when was it instituted? A. The first law was in 1899. The first bank was opened in 1900. The Crédit Agricole is based upon local organisations. France is divided into 86 departments, in each of which we are to have a regional bank ( caisse régionale ); and we hope eventually to have a local office ( caisse locale ) in each commune of each department. Among these 36,000 communes there are many which are cities, which naturally would

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THE GERMAN BANKING SYSTEM Banking Arrangements in Germany

[184] Various systems can be adopted in the banking profession for the transaction of business. The most lucrative method, at all events the one in which the power of large capital is most effectively turned to account, is that of the Rothschild firms, whose example was followed by many large private concerns at home and abroad. These firms avoid troublesome current business, maintain only a few connections, and concentrate their whole energies on isolated but important ventures and undertakings

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General Sketch of Bank and Credit Organisation in Germany

[187] Germany witnessed a tremendous economic expansion during the twenty-year period 1888-1907. There occurred a considerable increase and extensive circulation of capital. This movement of capital naturally passes through the banks and is brought about by them. As collectors and distributors of capital, the banks are, so to speak, the focal points of economic life. We are here concerned with three kinds of credit institutions—the note banks (banks of issue), the credit banks, and the land cred

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Interview with Herr Kleemann, Director of the Dresdner Bank

[190] Q. When were the first of your co-operative societies organised? A. In 1848. They were organised on a voluntary basis and for philanthropic purposes. They developed very rapidly. The first form which developed was for the purchase of means of subsistence, such as sugar, coffee, grain, wine, cigars, etc. Then they bought agricultural machinery, threshing machines, etc., which they would rent to small farmers in the country who could not purchase such machinery. They also formed societies to

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The Reichsbank

Q. By whom are the shares of the Reichsbank owned? A. It is all private ownership. The shares are held mostly in Germany and Holland, and distributed in small lots. Q. Would the bank discount a bill drawn by one merchant and accepted by another? A. Yes. The Reichsbank is not only a bank for banks, but for the commercial and industrial enterprises of the Empire. Q. If a railroad finds it necessary to make improvements and wants to borrow money could they get money at the Reichsbank? A. Only on co

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Königliche Seehandlung (Royal Sea-Trade Society)

Q. When was this bank organised? A. In 1772. Q. What is the capital of the bank? A. One hundred million marks. Q. By whom are the shares owned? A. There are no shares; the capital is owned by the bank, which may be regarded as a juristic person, an independent legal subject. Q. Who invested the money? A. The money was originally invested by stockholders in the time of Frederick II, but afterwards the shareholders gave up their stock, for which they were paid. The shares were mostly owned by the

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Deutsche Bank

Q. When was your bank organised? A. In the year 1870. Q. How is your stock owned? A. By a large number of shareholders. Our shareholders are principally in Germany, but also in England, France, Austria, and elsewhere. Q. What does the item "Shares in other banks," $19,000,000, represent? A. This represents the purchase by us of practically the controlling interest in 13 independent banks in the Empire. We are represented upon each board and we are kept closely informed of the business. Our retur

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Dresdner Bank

Q. What is the date of your organisation? A. 1872. Q. In practice, you and all other banks endeavour to fully employ all available funds? A. Yes; we only carry in the Reichsbank and other banks sufficient cash for the conduct of business. Q. You regard your item "Bills discounted" as one of practical reserve? A. Yes; it is immediately convertible into cash at the Reichsbank. Q. Referring to the item "Shares in other banks," $6,662,753, do you control all banks in which you have any interest? A.

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Bank des Berliner Kassen-Vereins

Q. When was this bank organised? A. In 1823, under the general companies act. Q. What are its particular functions? A. This bank might be called strictly a clearing bank. It clears transactions made on the stock exchange and also cheques on banks which do not clear through the Reichsbank Clearing House. As you know, our banks do a large stock exchange business. It is their custom to send to us all securities sold to others clearing through us with a list of the purchasers. We charge the purchase

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BANKING IN SOUTH AMERICA

[196] The special interest in South American banking which exists at this time is the product of at least four distinct factors: First. It has been evident for some years that the trade between North and South America is rapidly developing. In the ten years, 1903-1913, the exports from the United States to the ten Republics of South America increased 274 per cent. against an increase of all our exports during the same period of 73 per cent. In spite of inexperience, crude methods, lack of banks

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Our Growing Surplus for Foreign Investment

Second. Other forces have gradually been bringing this country more and more into the position of looking for investment opportunities abroad. While it is true that the United States is a debtor nation in the sense that a large amount (estimated at $3,000,000,000 to $6,000,000,000) of European capital is invested here, it is also true, on the other hand, that the national income has for some years been sufficient to meet annual payments abroad, to make large fresh investments in our own enterpri

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Greater Lending Power of Banks

Third. The adoption of the federal reserve system has made a remarkable improvement in the handling of gold and of credit. It has released and made available for other forms of financing great sums which were formerly tied up in scattered reserves. We have only to look at the monetary history of the German Empire during the last forty years to see how powerful an influence on industry, trade, and investment is exerted by the centralisation and control of bank reserves. The London Statist has cal

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European War

Fourth. The European war has suddenly stimulated the tendencies which were previously evident. It has temporarily cut off a considerable amount of European trade in South America, thus leaving an opening for even more rapid development of our trade than would otherwise have taken place. It has deprived South America for a period of several years of the steady inflow of European capital. It has enormously increased the exports and decreased the imports of this country, thus placing suddenly at ou

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English Banks in South America

Although English interests have share holdings in other institutions, there are only five banks in South America that stand out as unmistakably British. In the order of their development, these are the London and River Plate, London and Brazilian, British Bank of South America, Anglo-South American Bank, and Commercial Bank of Spanish America. Each institution, with one exception, has concentrated on one country, in which it has established most of its branches and to which it has devoted its fi

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German Banks in South America

To understand the energetic development of German banks in South America during the last forty-five years we must consider the conditions prevailing in Germany during that period and the strong forces working toward industrial and banking expansion. Beginning immediately after the Franco-Prussian War of 1870-71, German industrial interests, with the strong support of the German Government, began to struggle more vigorously and more effectively than ever before for a larger share of trade in inte

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Other Banking Institutions

Other nationalities besides the English and the Germans have invaded the banking field in South America. The French, the Italians, and the Spanish have all been active, particularly on the east coast, and are represented by large institutions. Only after the federal reserve act went into force in November, 1914, was it possible for any bank organised under the national-bank act of the United States to establish branches abroad. The act restricts this privilege to institutions having capital and

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Conditions of Commercial Banking

A banking business, like any other, must adapt itself to surrounding conditions, including laws, business customs, precedents created by older banks, and the like. In South America these conditions differ in a number of respects from those which prevail in the United States. Probably the first impression of most observers gives an exaggerated idea of the differences. However, they should be fully and carefully considered. The chief differences that directly affect banking operations are the foll

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AGRICULTURAL CREDIT IN THE UNITED STATES

While agricultural credit has been a subject of intermittent discussion in the United States for almost a generation, the movement has had its main development within recent years. In November, 1911, the American Bankers' Association created a committee to study land and agricultural credit at home and abroad. In March, 1912, American ambassadors and ministers were instructed by the State Department to gather information concerning rural credit institutions in Europe. A year later the Southern C

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Agricultural Credit Conditions in the United States

[198] The United States, although the leading country of the world in the amount of its agricultural products and in the extent of its banking business, is behind nearly every other progressive country of importance in the development of agricultural credit, i. e. , short-time non-mortgage credit. Our manufacturing and commercial businesses are financed largely by means of such credit, and the capital invested in these industries is thereby rendered manifoldly efficient; not so with agriculture.

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Value of Farm Implements and Machinery in the U. S.[206]

The increase in the value of farm implements and machinery per acre of land in farms from 1900 to 1910 was from $0.89 to $1.44, or 61.8 per cent. An analysis of the figures for farm machinery by geographic divisions shows a marked difference in the rates of increase, but the tendency in all sections during the last forty years has been decidedly upwards, the greatest growth having been witnessed in the decade ending 1910. During that decade the lowest rate of increase in any section was that of

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Farm Credit in a Northwestern State[225]

In North Dakota the average farm mortgage runs for 4.94 years; and the average interest rate is approximately 8 per cent. (accurately 7.88 per cent.). This 8 per cent. does not include the expense of abstracting titles, examining the property, and the recording of the mortgage. These fees are invariably paid by the borrower. Nor does this interest rate of 8 per cent. take account of the bonus that is frequently exacted, in the newer regions, from the borrower for the privilege of securing a loan

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Cattle Loan Banks[226]

Consumers desiring a reduction in the cost of food supplies will be interested in a study of the operations of cattle loan companies and in the development which these may reasonably attain as a result of the provision in the Federal Reserve Act for the rediscounting of agricultural paper. The cattle loan company, commonly referred to as "cattle bank," is a middleman between borrowing cattle-owners and lending bank-managers. Its business methods and forms closely parallel those of real estate mo

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THE CONCENTRATION OF CONTROL OF MONEY AND CREDIT Have We a Money Trust?

[227] If by a "money trust" is meant— An established and well-defined identity and community of interest between a few leaders of finance which has been created and is held together through stock holdings, interlocking directorates, and other forms of domination over banks, trust companies, railroads, public-service and industrial corporations, and which has resulted in a vast and growing concentration of control of money and credit in the hands of a comparatively few men— your committee has no

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The Borrower and the Money Trust

[228] Some trusts are denounced because of their attitude toward their employés. Many trusts are efficient or inefficient because of the way their millions of labourers work. But let us be fair to Big Business. Why not examine its one branch where labour is almost absent, where there is no brawn and all brain? A bank in New York City gave its employés a Christmas present equal to half their annual salary. The bank had assets of $100,000,000. A fine example, you say, to other great business conce

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The Banks and Railway Finance

[230] Close relationships of railways with banks or other credit institutions have grown up naturally through the need for new capital constantly imposed upon an expanding railway system. Some railways have been fortunate enough to possess a relatively stable body of stockholders whose confidence in the management is so complete that new funds can be raised by direct appeal of the management to the stockholders without the intervention of outside financial interests. But these cases have thus fa

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CRISES The Nature of an Economic Crisis

[231] A definition of an economic "crisis" is, like most other definitions, very difficult to construct. By way of introduction we shall quote a few chosen somewhat at random. Adolph Wagner, the German economist, expresses his idea by saying: "Crises imply ... the overwhelming and simultaneous occurrence of inability on the part of independent entrepreneurs to pay their debts." This is similar to the statement of John Stuart Mill: "There is said to be a commercial crisis when a great number of m

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The Crisis of 1907 in the Light of History

[232] ... From one point of view ... every economic crisis is a financial crisis. For since values are expressed in terms of money, and since the modern business superstructure is erected on the basis of credit, every economic revulsion expresses itself through the medium of a change in prices; and since the bank is the center of credit operations, every crisis inevitably involves a revolution in the conditions of credit. From this point of view, all crises may be declared to be financial crises

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Current Theories of Crises

[233] Wide divergences of opinion continue to exist among competent writers upon crises; but in recent years substantial agreement has been reached upon two points of fundamental importance. Crises are no longer treated as sudden catastrophes which interrupt the "normal" course of business, as episodes which can be understood without investigation of the intervening years. On the contrary, the crisis is regarded as but the most dramatic and the briefest of the three phases of a business cycle—pr

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Mitchell's Theory of Business Cycles

[244] Only by putting any theory to the practical test of accounting for actual business experience can its value be determined. The case for the present theory, therefore, and also the case against it, is to be found not in the easy summary which follows, but in the difficult chapters which precede, [245] or better still in an independent effort to use it in interpreting the ceaseless ebb and flow of economic activity. With whatever phase of the business cycle analysis begins, it must take for

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Moore's "Rainfall" Theory

[246] To Professor Moore the fundamental problem of economic dynamics is to formulate the law governing the "ebb and flow of economic life" which is "the most general and characteristic phenomenon of a changing society." The motto of the department of agriculture of the United States—"Agriculture is the foundation of manufacture and commerce"—is significant and that the farmer is at the mercy of the weather is proverbial. There may be such a close connection between the weather, the crops, and c

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Stringent Money and Financial Panics[247]

Is there any tendency for financial panics to occur more frequently in the seasons of the year when the money market is normally stringent? It has been found that the two periods of the year in which the money market is most likely to be strained are the periods of the spring trade revival (about March and April) and that of the crop-moving demand in the fall; and that the two periods of the easiest money market are the "readjustment period," extending from about the middle of January to about t

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How Banks Should Handle Panics

[248] Whatever persons—one bank or many banks—in any country hold the banking reserve of that country, ought at the very beginning of an unfavourable foreign exchange at once to raise the rate of interest, so as to prevent their reserve from being diminished farther, and so as to replenish it by imports of bullion.... A domestic drain is very different. Such a drain arises from a disturbance of credit within the country, and the difficulty of dealing with it is the greater, because it is often c

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THE WEAKNESSES OF OUR BANKING SYSTEM PRIOR TO THE ESTABLISHMENT OF THE FEDERAL RESERVE SYSTEM Conflicting Opinions

[249] For fifty years the United States has lived rather happily under the National Bank Act, born in the strife of the Civil War and developed in the period of the nation's greatest expansion and growth. This act has, by its record, earned for itself a place as a great piece of constructive legislation; and the recognition of this fact is responsible for the preservation of our national banking system almost intact under the Federal Reserve Act. The National Bank Act removed the ills of wild-ca

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Inflexibility of Ledger Balances

When we turn to credit in the form of ledger balances or "deposits" and enquire as to the causes of their inflexibility, the explanation also rests in quite familiar facts. There are two peculiar features of our banking system which are practically without counterpart in other important countries, and which render ledger balances or deposit credits in this country less flexible and responsive than such balances or credits are elsewhere. The first is the rigidity of our reserve laws, and the seco

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The Parcellation of Reserves

[252] If the absolute certainty of ability to pay all depositors in money on demand be taken as the summum bonum of banking, an idea which quite generally prevails among the unthinking, it is interesting to reckon the cost. A bank has no fairy wand with a wave of which it can transmute into gold the amounts due it, whether represented by borrowers' notes or balances due from other banks. Such repayments have an element of uncertainty which pervades all human affairs. All uncertainty could be eli

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Redeposited or Overlapping Reserves

[254] If we are to understand the radical change which will be worked by the Federal Reserve Act in the reserve situation in this country it is necessary to examine at some length the system heretofore prevailing. Under the National Bank Act these banks were divided into three groups or classes, referred to as the country banks, the reserve city banks and the central reserve city banks. There are three central reserve cities: New York, Chicago, and St. Louis. Every national bank in these cities

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The Perverse Elasticity of National Bank Notes

[255] ... It is not quite correct to call our national bank notes inelastic. They are decidedly elastic. The trouble is that their elasticity is of a wrong sort; they expand when there is need of contraction, and contract when the need is for more currency. By calling the notes inelastic we mean that their volume does not correspond automatically to the need for currency. This is true, and is one of the most serious defects of the bond-secured notes.... The demand for currency depends upon the v

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National Bank Notes Unsound and Unsafe

[257] ... Any correct system of credit currency must be based on a foundation of gold. Bank credit is issued in the two forms of deposits and notes. The former are based on a reserve of gold, the latter are not. We have here a fundamental weakness of our bank-note system. Under proper banking methods, deposits cannot expand without a proportional increase of the gold reserves of the banks. This furnishes the natural and necessary check to inflation. Our bank notes, however, have no such connecti

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Speculation Involved in the Issue of Notes

[259] When a banker takes out currency he engages in two distinct transactions and enters upon two different hazards. In one transaction he assumes the risk and holds the expectation of greater profit for taking out circulation. Since buying bonds and taking out circulation most of the time shows some theoretical profit over loaning direct, presumably if there were no other consideration, most of the time our bankers would keep outstanding all the notes they could. In the other transaction, howe

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The Lack of Adjustment Between Bank Notes and Deposits

[261] Under our present currency system the volume of money in circulation is perfectly flexible. It constantly expands and contracts in automatic adjustment to the requirements of trade and the convenience of the people. An increase in the volume of cash transactions brings promptly an increase in the volume of currency in circulation through the current withdrawals of money exceeding the current deposits of money. A lessening in the volume of cash transactions promptly drives unneeded currency

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The Commercial Paper Situation in the United States

[262] ... At the present time the commercial paper situation in the United States is peculiar. "Commercial paper" in the old and strict sense is little used in this country. "Trade paper," as it is now called, arises in less than 3 per cent. of the credit transactions in the United States. [263] In some lines of trade, especially where a local wholesaler does a large business with small tradesmen, the wholesaler will extend credit by taking the retailers' notes; but in obtaining credit for himse

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No System of Bank Acceptances and the Absence of an Open Discount Market

[274] The weakness of our banking system as compared with the systems of Europe may very certainly be attributed in part to the omission of the bank act to permit bank acceptances. It is a weakness, furthermore, which involves the country in serious economic loss. Without a national discount market, the great majority of our merchants and manufacturers are compelled to confine their borrowings to American capital, either through the discounting of their paper with their local banks or through it

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Cash Stock Exchange Dealings

[277] In England, France, and Germany there exist monthly or half-monthly settlements of stock exchange transactions, and as stock exchange loans run from one settlement to the next the amount of money employed on the stock exchange between settlements remains stationary. If, at the settlement, it develops that commitments on the stock exchange have increased and that a larger amount of money is needed there, so much additional money will under normal circumstances be withdrawn from the bill mar

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No Power to Lend on Real Estate[278]

Most of the restrictions in the national banking law have to do with loans, reserves, or the issue of notes. Of these the restrictions upon loans are by far the most serious impediment in competing for business with state banks and trust companies. For the banks outside the large cities this is particularly true of the provision which forbids loans upon real estate as security. This restriction is based upon a sound banking principle, learned after much bitter experience. But the experience whic

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The Independent Treasury as a Source of Weakness in Our Banking System[280]

For many years the banks of this country have conducted a persistent agitation for the abolition of the Independent Treasury system. It has been their contention that the Independent Treasury was an archaic and inefficient system of administering the finances of the nation; that it worked serious hardship upon the banks and the business of the country, and that any system of reform should include its abolition. The treasury is, in reality, a central bank of deposit with branches, run by the Gove

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Lack of Central Control

[281] There is no country in the world where the volume of currency in circulation and the demand for bank credits fluctuate more widely than in the United States. This is due to the great expanse of our territory, to the annual harvest requirements of the agricultural sections, to the prevailing business activity and enterprise, and to the rapid and unequal increase of population and wealth in different sections. Furthermore, there is no country in the world where intelligent control over bank

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Absence of Regulation of Ratio of Deposits to Capital and Surplus

[283] The reports of condition of the national banks, according to the statements of September 12, 1914, to the Comptroller of the Currency, show that, on an average, the total deposits of all national banks amount to about four and six-tenths times their total capital and surplus. This means that the average capital and surplus of these banks is equal to approximately 21 per cent. of the total amount of deposits. There are, however, national banks whose deposits amount to ten or more times thei

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Banking Abuses

[284] ... Among the many abuses and violations of law and regulations with which the department has to contend are excessive loans; overdrafts; loose and unbusinesslike methods of accounting; excessive borrowings by the banks; investment of the bank's funds in securities not authorized by law; charging of usurious rates of interest; unlawful loans on real estate; excessive loans to officers, clerks, and employés of the bank employing them; loans to a bank's officers or employés and others throug

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THE FEDERAL RESERVE SYSTEM The Federal Reserve Act[287]

The primary purpose of the Federal Reserve Act of December 23, 1913, is to make certain that there will always be an available supply of money and credit in this country with which to meet unusual banking requirements. Banks of a new class, to be known as Federal Reserve Banks, are to be established, and upon these banks is to rest the heavy responsibility of supporting the structure of credit in periods of financial strain. The new banks are expected to keep themselves in a condition of such st

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The Federal Reserve Act—an Experiment

[295] Banking is the most delicate and sensitive of all businesses in which men engage. It goes without saying that it is a business in which the law maker should not needlessly interfere. Perhaps some of you may not know that modern banking is a product of evolution. In this respect it is like all great human institutions. No language worth while was ever invented by a human being. Speech, with all its intricacies and inconsistencies of grammar and syntax, was not planned by some master mind ce

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The Federal Reserve Act and Democracy in Banking

[298] Beneath his skin every American citizen of every station and avocation, and whatever party name he may wear, is a Democrat in all the essentials and fundamentals. That is, he is attached passionately to the principles of local self-government, of the widest individual liberty compatible with the general weal and order of society. This new currency measure is democratic essentially. It looks to decentralisation of direct financial control, to financial local self-government, so far as is co

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The Elasticity of Note Issue Under the New Currency Law[299]

To anyone who has been interested in currency reform for, say, twenty years, probably nothing is more striking than the change in emphasis which has taken place among the advocates of reform during this period. The typical reform plan of the earlier time, for example the so-called Baltimore plan brought forward in 1894, devoted itself almost exclusively to providing a thoroughly elastic note issue, based on ordinary assets. In contrast, the new law has as its central, primary object the organiza

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Notes Printed and Issued

[300] During the year 1915 the circulation of Federal Reserve notes has increased to $188,817,000 as of December 31, 1915. Believing that the country should be prepared against any contingency, the Board had authorized the printing of about $700,000,000 of these notes. Almost one-quarter of the total supply printed has been placed in circulation. On December 31, 1915, however, only $16,675,000 of notes secured by commercial paper pledged with the Federal Reserve Agents was outstanding as an obli

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Impounding Gold

[301] On November 16, 1914, the first shipment of Federal Reserve notes was received by the Federal Reserve Agent [of the Federal Reserve Bank of New York] from the Comptroller of the Currency. On November 19 the bank pledged with the Federal Reserve Agent $500,000 of commercial paper rediscounted by member banks and received from him a similar amount of Federal Reserve Notes. These notes were not required by the banks which made the rediscounts, as they had already withdrawn by checks the credi

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The Financial Policy of the Federal Reserve Banks[302]

It seems clear that the cardinal principle in the management of the Federal Reserve Banks will be to disregard the course which will lead to maximum profits, following instead the path which will lead to the greatest safety and which will permit these banks to be of the greatest service to the nation. Large reserves should be maintained, and these should consist chiefly of gold. The payment of interest upon bankers' deposits and government deposits should be avoided, if possible, for the reason

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Relations of Federal Reserve Banks with Member Banks[303]

The aim of this bank [Federal Reserve Bank of New York] at all times has been to maintain frank and friendly relations with its member banks. At every meeting of the New York or New Jersey Bankers' Associations, or of their groups, to which invitations have been received, one or more of the directors or officers have been present and discussed the development of the various functions of the system. When the establishment of an intradistrict collection system was under consideration, the director

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Federal Reserve Banks and the Acceptance Market

[306] The right to accept drafts was conferred on New York State banking institutions by the act of April 16, 1914. Shortly afterwards a few acceptances were reported, principally against securities. It was not until the derangement of international credit facilities at the opening of the European war that American bankers' acceptances, especially those relating to foreign commerce, came into existence in substantial volume. At that time some of the trust companies with foreign connections exten

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Clearings and Collections in Practice

[309] Section 16 of the Federal Reserve Act made general provision for the establishment of a system of clearance of checks throughout the United States, each Federal Reserve Bank being required to act as a clearing house for its members if directed by the Federal Reserve Board, while the Federal Reserve Board was authorized to clear for the reserve banks themselves. The Board had from the first recognized its duty to make this provision of the law effective as fully and at as early a date as co

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Branches and Agencies

[310] The question of branches of federal reserve banks has received careful attention during the past year. There has been intimation from several quarters that the establishment of a branch at a given point would be acceptable to the banks of that place. Only in one instance—that of New Orleans—did the Board receive a definite request from a Federal Reserve Bank to establish a branch. Believing that New Orleans and the adjacent territory could make advantageous use of this additional banking m

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Proposed Amendments to Federal Reserve Act[311]

A year's experience in the operation of the Federal Reserve Act has confirmed the Board in its profound conviction that the act has been one of the most beneficial pieces of legislation ever adopted by Congress. Not only have its fundamental principles been fully vindicated but in most details the working of the measure has been successful. The act, however, is a progressive piece of legislation and creates new conditions as the result of its own operation. Modification in its terms growing in p

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THE EARLY EVENTS OF THE EUROPEAN WAR IN RELATION TO MONEY BANKING AND FINANCE American Finance and the European War

[313] During the half-century that has elapsed since the Civil War, there has probably been no period of six months within which there have occurred transformations of so far-reaching a nature in American banking and finance as during the half-year between July 1, 1914, and January 1, 1915. It will be long before the full meaning and significance of these events are thoroughly understood; for what has been done cannot be finally interpreted until facts which have not yet been ascertained have de

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National Bank Failures and Suspensions—1914 Compared with 1893 and 1907[317]

A comparison of the failures and suspensions of national banks during the past year with failures and suspensions in the panic periods of 1893 and 1907 may be interesting at this time. The figures show that for the 12 months ended October 31, 1914, 26 national banks, with aggregate capital stock of $2,510,000, failed or suspended payment. The total liabilities of these banks (in the case of receiverships claims proved) amounted to $14,177,408. In the case of six recent failures, the figures of t

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The Effects of the War with Special Reference to the Central Banks of France, Germany, and England

[318] In France the gold held by the Bank of France (February, 1916) is, in actual quantity, larger by about 25 per cent. than that held in normal times before the war. Instead of former gold reserves of about $800,000,000, they are now well over $1,000,000,000. The percentage of gold to the notes—the main demand liability—has, of course, fallen from about 65 to 35 per cent. because of the increase of notes from about $1,200,000,000 to $2,800,000,000. This increased supply of gold has come from

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Darlehnskassen and Other Financial Novelties in Germany

[319] Germany, at the outbreak of the war, removed the limit of notes issuable by the Reichsbank without tax; created about 1,800 Darlehnskassen (loan banks), located throughout the Empire, wherever the Reichsbank maintained a branch; they were started without capital, in lieu of which they issued Darlehnskassen Scheine (Imperial Loan Bank notes) in denominations of one mark and upwards, the aggregate amount being limited to 1,500,000,000 marks; these banks made loans against stocks, shares, pro

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The War and the World's Financial Centre

[321] With the end of the moratorium on November 4, it may be said that the crisis produced by the outbreak of war was over. When peace comes and prices [of securities] adapt themselves to the new price of capital that the present destruction of some eight to ten millions of it a day will bring about, and creditors begin to try to collect debts from impoverished debtors in war-wasted countries, then there will be a new set of problems, the acuteness of which will largely depend on the length of

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America's Chance of Holding World Purse-Strings[323]

Since the outbreak of the war New York has assumed a position of leadership in international banking. Will this position be permanent or will its duration be limited practically to the period of the war? Is the mantle of world financial leadership about to pass from London to New York, as it passed after the Napoleonic Wars from Amsterdam to London? These are questions which many are asking, but which no one can answer positively, because so much depends upon those incalculable items—the duratio

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AN APPROXIMATE FORMULA FOR DETERMINING THE VELOCITY OF THE CIRCULATION OF MONEY

[324] For the purpose of tracing the circulation of money, and measuring it by bank records, [325] we may classify the persons who use money in purchase of goods into three groups: 1. Commercial depositors, i. e. , all engaged in business—firms, companies, and others—who have bank deposits mainly or wholly apart from personal accounts. 2. All other depositors, chiefly private persons. 3. All who, like most wage earners, are not depositors at all. These three classes we shall distinguish as "Comm

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SOME REGULATIONS OF THE FEDERAL RESERVE BOARD

Federal Reserve Board Washington , January 12, 1915. Whenever a member bank shall offer for rediscount any note, draft, or bill of exchange bearing the indorsement of such member bank, with waiver of demand notice and protest, the directors or executive committee of the federal reserve bank may, until July 15, 1915, accept as evidence that the proceeds of such note, draft, or bill of exchange were or are to be used for agricultural, industrial, or commercial purposes (and that such notes, drafts

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I

In this regulation the term "acceptance" is defined as a draft or bill of exchange drawn to order, having a definite maturity, and payable in dollars, in the United States, the obligation to pay which has been accepted by an acknowledgment written or stamped and signed across the face of the instrument by the party on whom it is drawn; such agreement to be to the effect that the acceptor will pay at maturity according to the tenor of such draft or bill without qualifying conditions....

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II

Section 13 of the Federal Reserve Act as amended provides that: (a) Any federal reserve bank may discount acceptances: (1) Which are based on the importation or exportation of goods; (2) Which have a maturity at time of discount of not more than three months; and (3) Which are indorsed by at least one member bank. (b) The amount of acceptances so discounted shall at no time exceed one-half the paid-up capital stock and surplus of the bank for which the rediscounts are made, except by authority o

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III

The Federal Reserve Board, exercising its power of regulation with reference to paragraph II (b) hereof, rules as follows: Any federal reserve bank shall be permitted to discount for any member bank "bankers' acceptances" as hereinafter defined up to an amount not to exceed the capital stock and surplus of the bank for which the rediscounts are made....

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IV

The Federal Reserve Board has determined that, until further order, to be eligible for discount under section 13, by federal reserve banks, at the rates to be established for bankers' acceptances: (a) Acceptances must comply with the provisions of paragraph II (a), (b), (c) hereof; (b) Acceptances must have been made by a member bank, non-member bank, trust company, or by some private banking firm, person, company, or corporation engaged in the business of accepting or discounting. Such acceptan

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V

While it would appear impracticable to fix a maximum sum or percentage up to which federal reserve banks may invest in bankers' acceptances, both under section 13 and section 14, it will be necessary to watch carefully the aggregate amount to be held from time to time. In framing their policy with respect to transactions in acceptances, federal reserve banks will have to consider not only the local demands to be expected from their own members, but also requirements to be met in other districts.

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CLEARINGS BETWEEN FEDERAL RESERVE BANKS I

"The Federal Reserve Board shall make and promulgate from time to time regulations governing the transfer of funds and charges therefore among federal reserve banks and their branches, and may at its discretion exercise the functions of a clearing house for such federal reserve banks, or may designate a federal reserve bank to exercise such functions, and may also require each such bank to exercise the functions of a clearing house for its member banks."...

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II

In the exercise of the functions of the clearing house authorised under the provisions of section 16, quoted above, the Federal Reserve Board and the federal reserve banks will be governed by and subject to the following regulations and the Federal Reserve Board will be the custodian of the funds hereinafter termed the gold settlement fund. The board will appoint a settling agent who shall keep the necessary records and accounts....

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III

(a) Each federal reserve bank shall, not later than May 24, 1915, forward to the Treasury or the nearest Sub-Treasury, for credit to the account of the gold settlement fund $1,000,000 in gold, gold certificates or gold order certificates, and, in addition, an amount at least equal to its net indebtedness due to all federal reserve banks. (b) The Treasurer of the United States or Assistant Treasurer will, in accordance with arrangements made with the Treasury Department, advise the Federal Reserv

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IV

(a) A safe in the Treasury vault will be set apart for the exclusive use of the Federal Reserve Board. (b) To open the Treasury vault, the presence of two persons designated by the Secretary of the Treasury is required. The combination of the safe set apart for the use of the board will be controlled by two persons designated by the board. (c) A vault record shall be kept, giving a memorandum of all entrances to the safe, by whom made, for what purpose, and the certificates deposited or withdraw

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V

In its relations with other federal reserve banks each federal reserve bank shall keep an account showing balances "due to" other federal reserve banks representing the proceeds of items which it has actually collected, and payments and transfers which have been made to it for the account of such other federal reserve banks; and an account showing balances "due from" other federal reserve banks representing the proceeds of items which it has sent to such other federal reserve banks, and payments

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VI

(a) At the close of business each Wednesday night, each federal reserve bank shall telegraph to the Federal Reserve Board, confirming such telegram by mail, the amounts in even thousands due to each other federal reserve bank as of that date, as indicated by its "due to" account provided for in Rule V. If Wednesday is a holiday in the State in which a federal reserve bank is located, then such bank shall telegraph as herein provided on Tuesday, at the close of business. (b) The settling agent sh

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VII

(a) Should the debit settlement balance of any federal reserve bank be in excess of the amount of its credit in the gold settlement fund, such deficit must be immediately covered either by the deposit of gold, gold certificates, or gold order certificates in the Treasury or nearest Sub-Treasury, or by credit operations with other federal reserve banks which have an excess balance with the gold settlement fund. Any delay in covering such deficit shall be subject to such charge as the Federal Rese

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VIII

Any excess balance shall, on request, either by telegraph or letter, of the federal reserve bank to which it is due, be refunded by the return to the reserve bank of the gold order certificates held by the gold settlement fund properly indorsed; or by the indorsement and delivery to the Treasurer of a like amount of such certificates for which he will give in exchange bearer gold certificates, which the Federal Reserve Board may send by registered mail, insured, to the banks, if they want funds

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IX

Each federal reserve bank shall count as a part of its legal reserve the funds standing to the credit of its account on the books of the gold settlement fund....

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X

Cost of operation of and shipment of currency by the gold settlement fund shall be apportioned by a semi-annual accounting among the 12 federal reserve banks on a basis to be hereafter determined by the board after consultations with the federal reserve banks....

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XI

At least once in each three months an audit shall be made of the gold settlement fund by a representative of the Federal Reserve Board and representative appointed by the federal reserve banks....

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XII

The Federal Reserve Board reserves the right to add to, alter, or amend these regulations. Charles S. Hamlin, Governor. H. Parker Willis, Secretary. Federal Reserve Board Washington , June 7, 1915....

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I

Specific provisions of the Federal Reserve Act applicable to State banks and trust companies which become member banks are quoted at the end of this regulation....

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II

A State bank or a trust company to be eligible for membership in a federal reserve bank must comply with the following conditions: (1) It must have been incorporated under a special or general law of the State or district in which it is located. (2) It must have a minimum paid-up unimpaired capital stock as follows: In cities or towns not exceeding 3,000 inhabitants, $25,000. In cities or towns exceeding 3,000 but not exceeding 6,000 inhabitants, $50,000. In cities or towns exceeding 6,000 but n

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III

Any eligible State bank or trust company may make application on Form 83, made a part of this regulation, to the federal reserve agent of its district for an amount of capital stock in the federal reserve bank of such district equal to 6 per cent. of the paid-up capital stock and surplus of such State bank or trust company. [328] Upon receipt of such application the federal reserve agent shall submit the same to a committee composed of the federal reserve agent, the governor of the federal reser

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IV

In passing upon an application the Federal Reserve Board will consider especially: (1) The financial condition of the applying bank or trust company and the general character of its management. (2) Whether the nature of the powers exercised by the said bank or trust company and its charter provisions are consistent with the proper conduct of the business of banking and with membership in the federal reserve bank. (3) Whether the laws of the State or district in which the applying bank or trust c

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V

Every State bank or trust company while a member of the federal reserve system: (1) Shall retain its full charter and statutory rights as a State bank or trust company, and may continue to exercise the same functions as before admission, except as provided in the Federal Reserve Act and the regulations of the Federal Reserve Board, including any conditions embodied in the certificate of approval. (2) Shall invest only in loans on real estate or mortgages of a character and to an extent which, co

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VI

Any State bank or trust company desiring to withdraw from membership in a federal reserve bank may do so twelve months after written notice of its intention to withdraw shall have been filed with the Federal Reserve Board. The board will immediately notify the federal reserve bank of the receipt of such notice. At the expiration of said twelve months, such bank or trust company shall surrender all of its holdings of capital stock in the federal reserve bank, which stock shall then be cancelled a

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VII

Every State bank or trust company, while a member of the Federal Reserve system, shall be subject to such examinations as may be prescribed by the Federal Reserve Board in pursuance to the provisions of the Federal Reserve Act. In order to avoid duplication, the board will exercise the broad discretion vested in it by the act in accepting examinations of State banks and trust companies made by State authorities wherever these are satisfactory to the board and are found to be of the same standard

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VIII

The Federal Reserve Board reserves the right to make such amendments and adopt and issue, from time to time, such further regulations authorised by the act as it may deem necessary, but no amendment of section VI of these regulations, relating to voluntary withdrawals, shall take effect until six months after its adoption and issue by the board. Charles S. Hamlin, Governor. H. Parker Willis, Secretary. [327] Drafts and bills of exchange eligible for rediscount under section 13, other than "banke

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