PAPER
MONETARY SYSTEM

CHAPTER IV.
BANKS OF THE OLD WORLD.

IMPORTANT lessons can be learned from the teachings of experience.  A brief glance at the banks of the old world will be found useful at the present time, as well as interesting.  The first bank of which history gives an authentic account is the Bank of Venice, established in the year 1171, and which, strange to say, furnishes an example of success that has never been equaled.

THE BANK OF VENICE.

The Bank of Venice was established under peculiar circumstances.  The Venetian government, under the Duke Vitale Michel II., was engaged in a war with the Grecian Emperor, on account of an outrage perpetrated in his empire upon Venetian merchants, and also in a war with the Emperor of the West.  Standing greatly in need of means, the Venetian government resorted to a forced loan, and required its wealthiest citizens to contribute to the support of the government according to their ability.  A chamber of loans was organized, of which the creditors were constituted the managers, books were opened and an inscription of credit entered for the amount paid in by each, on which the State agreed to pay interest at the rate of four per cent. a year.  These inscriptions of credit were made transferable in whole or in part on the books of the bank.  The government entered into no obligation to repay the money, but, to quote from Colwell, “reimbursement of the loan ceased to be regarded as either necessary or desirable.  Every creditor was reimbursed when he transferred his claim on the books of the bank.  From being convenient and valuable as an investment readily obtained, and as readily disposed of, it became, by a natural process, a medium of payment in transactions of commerce.  That fund, which was desirable to all seeking investment, would be willingly, in many instances, accepted in payment of debts already existing, or for goods just purchased.  There is good reason to believe that this fund was largely used in this way for centuries before the final arrangements were made, of which our accounts are more clear. * * There is no question, although we have not the details, that the government had found it perfectly easy to enlarge the amount of the original loan or stock of the bank, as the demand for its funds generally exceeded the supply.  All money deposited for the purpose of obtaining a credit in bank was accounted an addition to the original loan, and as such taken into the public treasury as money lent the State.  Every such investment increased the stock of the bank, and replenished the treasury of the republic.  If individuals could make purchases and pay debts by transfers in bank, the public treasury could well afford to receive, in payment of its dues, credits in bank, as that would only be equivalent, to taking up its own obligations.  Thus, the more these credits were employed, the more the demand for them increased, the more rapidly money flowed into the treasury, and the more readily the government could afford to receive payment of its revenues in the funds of the bank.”

The history of the Bank of Venice is presented by Mr. Colwell, in his able work entitled, “The Ways and Means of Payment,” in such a clear light, that we can do no better than to continue to quote from him at length as follows :

“ The way was opened, by the experience of two centuries and a half, for the next chief characteristic of the Bank of Venice.  In the year 1423, in the administration of the Doge Thomas Moncenigo, it was decreed that all bills of exchange payable in Venice, whether domestic or foreign, should be paid, unless otherwise stipulated and so expressed, in the bank ;  and that all payments in gross, or in wholesale transactions, should be effected also in bank.  This at once brought the mass of the payments of that great commercial city to the bank.  Whatever irregularities, and whatever confusion had prevailed, this introduced a uniform and, from long familiarity with the bank, an intelligible system.  The endless diversity, and bad condition of the coins circulating in Venice were a sufficient recommendation of the new regulation to all who had not very special reasons, indeed, for disliking it.  This measure at once created a great additional demand for the funds of the bank, and brought large sums into the public coffers.  The government, however, no longer paid interest for the sums received from the bank.  The funds obtained in this way were brought to the bank for the payment of bills of exchange, and were paid in for that purpose, and not with a view to interest.  The rapid succession of payments occurring at a point where all the payments of Venetian commerce were accomplished, made the intervals during which the funds remained in the hands of any one merchant too short to make him solicitous about interest on balances or deposits.  As all payments of the kind above designated were, by law, to be made in bank, unless otherwise agreed, and as that mode of payment was far more convenient, it became almost the exclusive usage of trade.  All who had engagements to meet, found them in the bank :  of course, all such provided the bank funds necessary to meet them, or carried to the bank the amount of coins requisite for the purpose.  The government continued to take all money paid in as a consideration for allowing an inscription on the books of the bank to the credit of the depositor.  The sums which thus flowed through the bank into the treasury would, with the previous bank funds, make up the quantity needful for the convenient discharge of the commercial payments of Venice.  As this amount fluctuated from year to year, and during each year, with the course of commerce, a very effective mode of accommodating the supply of bank funds to the exigency of the demand came obviously into use.  When the payments in bank were heavy, and the bank funds in great demand, money flowed freely into bank, and the credits were proportionably increased.  When an occasional demand for the precious metals arose, the holders of bank funds could readily dispose of them at a slight reduction for coins.  The purchasers of bank funds were sure of meeting soon a demand for them ;  for the demand for a medium in which the ever-recurring payments of debts were made so much exceeded in intensity the occasional demand for specie for exportation, or any other use, that during the whole existence, of the bank, with very slight exception, the bank fund was at a large premium over coins, so large that it was finally fixed by law at 20 per cent.”

“ The republic could well afford to maintain a liberal policy towards an institution so important, both as a fiscal and commercial agent.  That the inhabitants of Venice were satisfied, we cannot doubt, as not an objection was ever made to the bank, at least none is extant ;  neither book, nor speech, nor pamphlet, have we found, in which any merchant or dweller in Venice ever put forth any condemnation of its theory, or its practice.  There was no hesitation in carrying money to the bank, so long as it was not doubted that the bank funds would purchase specie without a loss, whenever it might be needed ;  and the uniform premium of bank funds settled that point.  Under such a system, the regular payments of trade would proceed with a rapidity and economy previously unknown, so far as the history of commerce informs us.” * *

“ It is worthy of remark, that this very efficient mode of adjustment discovered and used so largely at this early period in the history of commerce, was not dependent for its efficacy on the guarantee of the republic.  That guarantee sprung out of the mode in which the bank originated :  this convenient method of liquidation sprung from the use of this new substitute for money.”

“ The facility of payment furnished by the bank, which made it the admiration of Europe, honorable at once to the government and merchants of Venice, and a support to the pride and power of its people, consisted in substituting, as a medium of payment, the debt of the republic for current coin. * * * The government took the coins one time for all, giving therefor a corresponding credit in the bank ;  and allowed the depositor or lender to transfer his claim upon the republic in payment of his debt, in place of transferring over the coin in each payment.  Whatever men can employ in payment of debts, they will be willing to receive in payment, and this independent of any legal compulsion.”

“ Experience soon evinced the power and convenience of this mode of payment.  These bank credits were divisible to every desirable degree, and they could be transferred with a readiness, speed and safety, beyond all comparison, superior to any mode of paying in coin.  The same sum or credit might be kept in such rapid circulation, as to effect an amount of payments, in a specified time, far beyond any possible movement of coin.  This rapidity became a great economy, for a much less sum of credits was made to effect a given amount of payments with far greater speed than could have been attained with coin.  But this economy resulting from an increased speed and power of circulation, was still more important, arising from the fact that the coins which were deposited as the basis of the credit were very soon again restored to the usual channels of circulation by the payments of government.  Thus the coin was not withdrawn from its proper functions, and the credits remained a perpetual fund, to be employed in large payments.  This system of payments was so well adapted to the exigencies of commerce, that it was maintained in full vigor, in the great commercial city of Venice, for almost four hundred years.  It was an institution or device of the credit system, for by its aid payments were effected, and that to a vast amount annually, without any use of coins or bullion.  It only perished, when the city itself fell, at the conquest of Italy by Napoleon ;  but the conqueror carried off no coin, no penny of prey.  The credits of the bank were crushed under the rude touch of an invading foe.  They were lost to the proprietor, but no equivalent passed into the hands of the destroyers.  If the holders of these credits suffered, the invaders were not enriched.  In assuming the sovereignty of Venice, the conqueror assumed the right and duty of making good these bank credits.”

The Venetian government was careful at all times to provide for the wants of the public.  In course of time it became necessary to establish in the bank a department for the custody of coin or bullion, which the owner might desire to use.  Deposits of this kind were subject to the order of the owner, who could reclaim them at pleasure, or transfer them in the same manner as bank credits.  This feature of the bank prove eminently useful to the public, but did not lead to any diminution in the funds of the bank itself, as the demand for inscriptions of credit was always greater than the supply.  The original capital of the bank was 2,000,000 ducats, but it rose to about 5,000,000 in the 18th century, and to over 14,000,000 (about $16,000,000) at the close of its long and remarkable career.

The history of the bank of Venice establishes several important facts of deep significance to the American people at the present time.  The inscriptions of credit of the bank were simply evidences of indebtedness of the government, bearing no interest, which constituted a medium of exchange.  The law which required all bills of exchange payable in Venice to be paid at the bank, unless otherwise expressly stipulated, was apparently an arbitrary requirement, but it worked no injustice ;  on the contrary it increased the strength of the bank inscriptions, and resulted in greatly promoting the facilities of commerce and in making Venice the commercial metropolis of the world for centuries.  The evidences of indebtedness, which the government in the first instance required its creditors to take, it in effect made a legal tender for private debts, which was no more than just.  The large premium which these inscriptions bore was not due to any act of the government, but to the value attached to them by the public.  It rose to as high as 30 per cent., when the government found it necessary to impose a limitation, which was fixed at 20 per cent.  This premium on inscriptions of credit in a bank, which were not redeemable or payable in gold, (mere “rag money” they might be styled) which existed for centuries, is inexplicable on any theory which can be advanced by the bullionists.  The Venetians were enabled, by the use of their irredeemable inscriptions of credit, to achieve a degree of power and prosperity, which they retained for centuries, that proved a constant source of envy and wonder to the rest of the world ;  and during the whole time they never once suffered from commercial crashes or money panics, such as are experienced in England and the United States every six to ten years.  It has been a matter of surprise that other nations witnessing the prosperity of Venice did not imitate her example, but that is not half so strange as the fact that the people of the United States, having experienced the great advantages of even partial legal tender paper money, should blindly cling to the rotten and disastrous specie basis system of banks of issue.

THE BANK OF GENOA.

The Bank of Genoa was established early in the 13th century, and, like the Bank of Venice, had its origin in the necessities of the State.  The loans upon which it was based were not, however, forced, but were the spontaneous offerings of the people.  The creditors of the bank became a very powerful body.  In the course of time the bank adopted various new devices, and its system became greatly complicated.  According to Colwell, the Bank of Genoa was the first to originate the bank note, which has since played so important a part in the affairs of the world.  It met with the same fate that befell the Bank of Venice at the time of the French invasion under Napoleon.

THE BANK OF AMSTERDAM.

The Bank of Amsterdam was established in 1609 on the theory that deposits once made could never be withdrawn.  For nearly two centuries it enjoyed great credit, and contributed largely to the prosperity of Amsterdam.  Coin and bullion were also received on special deposit, and could be reclaimed by the owner at pleasure.  The fact that deposits once made could not be withdrawn, resulted in the bank accumulating a vast amount of money, but how much was kept a secret.  When the supply of credits based on deposits exceeded the demand, the excess was bought up by the bank, through brokers, at a premium of four per cent.  In 1790 it was discovered that, during the preceding fifty years, large loans had been secretly made to the East India Company, the Provinces of Holland and the city of Amsterdam, and that there was but little treasure left in the bank.  It consequently failed through the unfaithfulness of its officers.

THE BANK OF HAMBURG.

The Bank of Hamburg was established in 1619 on the model of the Bank of Amsterdam.  It is still in existence, and is a useful and flourishing institution.

THE BANK OF ENGLAND.

The next great bank established in the course of time was the Bank of England, an institution which has exercised, from its organization, a powerful influence in the commercial and financial affairs of the world.  Its charter was obtained in 1694, and it went into operation January 1, 1695.  Its charter conferred on it full authority to borrow or receive money and give security for the same under seal, buy or sell bullion, gold or silver, etc., etc.  No special power was granted to issue bank notes, but the authority to do so was assumed as an incident to the general powers with which the bank was invested.  It was, in brief, chartered as a bank of deposit, loan, discount, issue and circulation.  The whole amount of the capital stock originally subscribed, £1,200,000, was handed over to the government as a special loan, the interest on which was secured by certain taxes designated for that purpose, and the sum of $20,000 a year was allowed by the government to the bank for the management of the loan.  The capital stock of the bank is now about £14,000,000, and the accumulated profits about £3,000,000—in all about $88,000,000.  It can issue bank notes to the amount of $70,000,0000, not under £5 ($25) in denomination, against that amount of government securities, and also to the amount of gold and silver held in its vaults for their redemption.

At an early period in the career of the bank, it took a bold and dangerous step, which introduced a new feature in banking.  By its charter the bank was authorized to deal in bills of exchange and promissory notes, and, as has been mentioned, it also assumed the right to issue its own notes.  Bills of exchange and promissory notes, then as now, entered largely into all commercial transactions, and usually had some time to run before they were payable.  In order to acquire favor with the public and increase its business, the bank adopted the custom of giving its own notes, payable on demand, for discounted paper, payable in the future.  This custom was adopted on the theory that the small bills of the bank would pass into circulation, like money, and be dispersed throughout the kingdom ;  that they would become indispensable in business transactions, which would be greatly increased by the number in circulation, and that consequently they would not be returned suddenly, or in large amounts to the bank for redemption.

The unsoundness of the principles of banking, adopted about this time by the Bank of England, and upon which the specie basis system of banking has been built up, is fully demonstrated by Colwell, from whom we again quote as follows :  “Upon such considerations, the bank decided to issue notes payable to bearer on demand, in exchange for individual paper payable at a future day.  The bank thus undertook to do an impossibility, in the hope that it would not be called upon to redeem the promise or make the attempt.  What the bank could do was to give its own notes, of convenient denominations for circulation in exchange for individual paper and payable at the same time ;  and in doing this alone, the bank could have rendered a great service to the public with small risk.  The bank had not the money, and could not, therefore, purchase the paper offered ;  the notes offered by the bank were not money, though a much better substitute for money than the notes of individuals, which could only circulate to a very limited extent as a medium of payment.  The bank issued notes payable to bearer, without endorsement, and this certainly added to the facility and convenience of their passing rapidly from hand to hand as a currency.  It departed from sound principles, when it made these notes payable on demand in gold or silver ;  for it must be contrary to sound principles to undertake to do what cannot be done.  The bank notes were nothing more, and should not have been held up to the public as anything more, than the mere promissory notes of the bank, convenient in form for circulation among all those who chose to take them, not as money, but as promises to pay money.  The promise should have been only such as the bank could perform.  Strictly speaking, the bank could only pay in coin when it received in coin.  It could exact payment for the note received of every individual only when the note matured and not before.  The accommodation between the bank and its customers was mutual in this exchange of notes ;  the bank received a profit, and the customer received the bank notes, a better medium of payment, one which would be received out of bank as well as in it, in payment of debts or in making of purchases.  But it should never have been imagined for a moment, that by this process between the bank and its customers they manufactured money.* * This advantage, (notes payable on demand,) which the Bank of England only offered in the first instance to attract business, and to give currency to their notes, has been paid for since by the people of England, in a series of pressures, revulsions, and currency fluctuations, which have inflicted injuries and losses upon the government and people of Great Britain, in comparison with which the present national debt may be insignificant.* * * * * * * *

“ But the bank was still more daring ;  it discounted notes largely, and carried the amount of the proceeds to the credit of the party, as so much money deposited ;  that is, in the same column in which the bank gave its customers credit for gold and silver deposits, it gave them credit for the amounts of notes and acceptances having months to run before maturity, and engaged to pay the amount of these securities on demand.  It mingled a process of credit with a process of cash, in a mode as absurd in theory as it was dangerous in practice.  The men who had given their notes on time had provided for a regular progression of payments, according to the movements of business and the demands of consumption ;  but the Bank of England virtually abolished the contract of deferred payment between the parties, and became paymaster on demand of debts not due for months, to an immense amount.”

“ The bank had no warrant, in principle or practice, for this hazardous engagement.  Its only excuse was the same which was given for the issue of bank notes payable on demand, without the money, namely, that the bank would not be asked to pay for them all at one time.”

“ We regard this error of the Bank of England as the parent of the greater portion of the mischiefs and evils for which banks in more modern times are answerable.  The banks from that day to this have continued to issue notes payable on demand, and to grant credits so payable, in exchange for securities payable in from 30 to 120 days.  They do this, relying wholly on the forbearance of the public, just as the Bank of England did at first.  Sad experience has shown, that there are times when the public is not only not forbearing, but when men rush with frantic haste to demand of the bank payment of both notes and deposits.  Nearly every bank in existence, conducted on this plan, has, at some period of its history, felt the power and rashness of the public in seasons of commercial panic.  The banks lose their power and usefulness at the very moment when the public most needs their assistance.  Friends in sunshine, they become enemies in the storm.”

The most notable event in the history of the Bank of England was the suspension of specie payments in 1797.  This was caused by the large advances made by the bank to the government, to aid in the prosecution of the wars with France.  The specie in the bank had been reduced to a little over £1,000,000, when the directors of the bank became alarmed and brought the matter to the attention of the Privy Council.  The council on the 27th of February, 1797, determined “ that it is indispensably necessary for the public service, that the Directors of the Bank of England should forbear issuing any cash in payment, until the sense of Parliament can be taken on the subject.”  On the 3d of May following, the suspension was sanctioned for a limited time by an act of Parliament, and was subsequently continued by repeated acts of Parliament until 1820, when an act was passed providing for the resumption of specie payments by degrees, beginning on the 1st of October, 1820, and reaching full payment on the 1st of May, 1823.  The people of Great Britain were obliged, therefore, to carry on their affairs for a period of twenty-five years with an irredeemable bank paper currency.  During this period, notwithstanding the vast expenditures of war and the great burdens of taxation, Great Britain increased in wealth and prosperity more rapidly than at any other period in her history.  The public revenues were increased from £23,126,000 in 1797 to £72,210,000 in 1815, at the close of the war with France, and stood at £54,282,000 in 1820.  The amount raised by loan and taxation, during the time referred to, was never less in any one year than £47,362,000 ;  during nine years it was over £70,000,000 a year ;  and for the years 1813 and 1814 it was respectively £108,397,000 and £105,698,000.  The loans negotiated by the bank for the government during the suspension of specie payments amounted to £350,000,000.  During this period the Bank of England was a tower of strength to the government.  But what after all enabled Great Britain to surmount all difficulties and come off victorious in one of the greatest contests of modern times, was the wonderful development of her producing forces, occasioned by the abundance of money put in circulation by the war, irredeemable though it was.  During this time 3,000,000 of acres of unimproved land were brought under cultivation, and the exportation of manufactured cotton goods increased, in amount from £7,000,000 in 1801 to £27,000,000 in 1822.  All classes of society participated in the general prosperity which prevailed, and during the entire period the nation never once suffered from a commercial crash or money panic.

The guns of Waterloo, however, had hardly ceased to echo, until the money power became clamorous, just as it is in the United States now, for a return to specie payments.  No one was so blind as not to be able to see that Great Britain was enabled, by her paper money alone, to carry on her wars on the Continent, and that by it alone were the people enabled to make such remarkable progress in commerce, agriculture and manufactures ;  but there were, nevertheless, large numbers who were bitterly hostile to paper currency, and who seemed to imagine that they were being subjected, in some way, to a great wrong.  Landlords, for example, in many instances, in contempt of the law which gave their tenants the right to pay in bank notes, compelled them to pay their dues in gold.  There were evidently fools and rascals in those days, as well as at the present time.  The “political economists,” backed by the “cannibals of change alley,” were strong in Parliament, and the country gentlemen were led to believe that a return to specie was essential to their interests and safety.  Specie payments were accordingly resumed in 1823, and the resumption was accompanied by the most disastrous commercial crash and money panic that ever visited any nation.  The era of general prosperity departed to return no more.  Real estate depreciated largely in value, and the real estate owners of the kingdom decreased in number from over 150,000 to less than 40,000 ;  business men, merchants, manufacturers, etc., were ruined by the thousand ;  wages were reduced, and laborers thrown out of employment by the tens of thousands ;  and the public revenue fell off to such an extent that payments on the public debt ceased, and have never practicably been resumed.¹

The bank act of 1844, by which the issue department was separated from the general banking business of the institution, remedied some of the defects of the system which the bank had founded, but suspensions of specie payment are still of frequent occurrence.  In 1837 another crash and money panic occurred in England, which also involved this country.  Congress, in 1832, had raised the price of gold, as compared with silver, to sixteen to one, and demonetized silver by making it a legal tender only for small sums.  Gold thus became the basis of the currency, and when the Bank of England called it away to supply the wants of England, the banks of the United States were obliged to suspend.  Business in the United States was brought to a complete stand, and for three years the American people were left without any gold basis, and were consequently obliged to use shinplasters.  In England the losses were so enormous and the distress so great, that Parliament at its next session reorganized the bank by separating the issue department from the general business department, as already mentioned.

From September 7, 1844, when the bank was reorganized, to February 4, 1858, it altered its rate of interest fifty-six times, raising it, from time to time, from two to ten per cent., in an effort to retain its specie in its vaults ;  this, in the meantime, led to great financial embarrassment, and a panic was only averted by the bank suspending specie payments (October 23, 1847) and affording relief by issuing irredeemable paper.  In 1857, having ruined the merchants and business of England, it was again obliged to suspend.  Eleven changes in the rate of interest were made between April, 1857, and January, 1858.  The bank again drew upon the United States for gold, causing the banks to suspend, involving thousands of people in ruin and bankruptcy.

In 1866 the Bank of England suffered another suspension in consequence of the war on the Continent of Europe ;  but this time the United States escaped.  Greenbacks were the medium of exchange, and the nation was no longer at the mercy of foreign banks.  Gold was shipped abroad to the amount of $45,000,000, and sold as a commodity at a high price for the use of the Bank of England, without occasioning the slightest ripple in the business affairs of the country.

A distinguished statesman,² in commenting on these facts, says :

“ Thus, three times within less than twenty years in this generation, each time in violation of law and without right, has the bank of England suspended, and acknowledged her bankruptcy ! what a ‘marvel of financial strength and credit’ she has been, to be sure !  Well may the bullionists sing pæans to this destructionist of all values for their benefit.  True, each time her failure was sanctioned by a healing act of Parliament, because her illegal suspensions were necessary to save the credit of the government itself and to prevent the widespread destruction of all values and the overthrow of commerce and manufactures which was then going on.”

“ Neither of these suspensions took place until she had refused all discount to her customers, even on the best sixty day commercial bills secured by government securities.  It will be thus seen that gold was not the regulator of the currency of England, but the price paid for money at her bank, and having provided herself with a currency based on gold, in order to retain that basis whenever it is wanted for foreign loans, or because of a foreign war, she is obliged to increase the value of her unit by changing the rate of discount, or the interest which her people were obliged to pay for their money.”

“ This is a very important matter to be borne in mind.  Indeed it is the root of the whole matter, and in discussing questions of finance has been too often overlooked, because it shows that after all, a currency based on gold must have its value determined by the rate of interest paid for it, and not by the stability in value of gold itself.  Because of this necessity of keeping gold in her vaults, the Bank of England could not maintain a steady and permanent rate of interest for money to which her business men could adjust their affairs.  Hence come fluctuations of trade, financial depression, ruin of commerce, the stoppage of manufacture.  Who can carry on business requiring credit, successfully and without failure, when the rate of interest which he must pay for his accommodations and loans, alters day by day and quintuples in a month, and especially when these changes come from causes that he can neither foresee, guard against, hinder or alleviate ?”

“ I challenge all the bullionists of the country to show any disasters and losses in trade and commerce, traceable to inconvertible paper, continental money and all, which shall be, equal in effect, either as to sums, amounts, disasters or ruin to the business and people of a country, with these I have sketched coming from a currency called ‘honest money,’ based on gold in the vaults of a bank.”

The average bank note circulation of the Bank of England for the past twenty-eight years has been $100,000,000 ;  its average of bullion, $80,000,000 ;  its average rate of discount, 4 per cent.;  its average deposits, $100,000,000 ;  its average liabilities, $102,000,000 ;  and its average reserve, $9,500,000.

BANKS OF SCOTLAND.

The first public bank in Scotland was established in 1695, under a charter from the Scottish Parliament before the union with England.  The Scotch banking system is similar to that of England, but is conducted very differently.  With a population of a little over 3,000,000, Scotland has nearly 400 banks.  From Colwell we learn that, “Whilst the Bank of England, from its first conception, was identified with the government, the Bank of Scotland, and those which succeeded it, identified themselves with the whole body of the people, from the laborer who could save five pounds to the richest merchants and manufacturers.  They became at once, and have continued to be, the savings banks of the poor but industrious classes.  The banks paid one per cent. below the current rate of interest for these deposits, and returned them on demand, or according to stipulation.  These savings of the poor help largely to make up the vast sum of deposits which characterize the banks of Scotland.  One result has been to give the benefits of these savings to the general customers of the banks, instead of their being invested in the public debt, or lent upon mortgage, as in England.  No doubt this has contributed greatly to that progress in wealth and productive industry which has so much distinguished Scotland for more than a century.  It had another good effect in begetting that care, caution and prudent management for which the banks of Scotland have so well founded a reputation.”  Another peculiar feature of the banking system of Scotland consists in the manner of giving cash credits.  An applicant deposits approved securities with the bank and is allowed a standing credit on its books.  He then draws checks for this amount and makes deposits in the ordinary way.  An account is made up every six months, the rate of interest charged on loans being one per cent. more than that allowed on deposits.  In commenting upon this feature of banking in Scotland, Colwell says :  “ In England, the bank which deals in promissory notes and bills of exchange, is dealing in paper which represents business transactions which are past ;  in Scotland, the bank opens credit for its customers, with reference to business which is to come.  In Scotland, the banks give their customers a credit which helps their standing, and upon which they can draw for the purpose of payment, whenever there is need.  The theory of the English banks is, that the currency must follow, and be controlled in quantity, by the business transactions which go before.  The theory of the Scotch banks is, that these business transactions being all managed by men of business, who decide according to the exigencies of industry and trade what will promote their private interest, and meet the wants of the people, it must prove an important aid to men thus engaged to supply them, in advance of the progress of their business, with a credit upon which they can draw at pleasure. * * In England, they think this will lead to over-trading, by the stimulus it affords to so large a class of dealers :  in Scotland, long experience has taught them that this English apprehension is wholly groundless.  They know that the dealers who enjoy these cash credits are so immediately brought under the supervision of the banks, and their own sureties, that they are, perhaps, the most prudent and safe men of business in the world. * * There is a prevalent idea among statesmen and writers upon money, that there should be a broad basis of money or gold coin, under and as a support to the paper circulation ; * * that a paper currency, to be perfect, should fluctuate as a gold currency would do, if it were the sole medium of payment.  To the mind of a Scotch banker, a greater absurdity could not be presented in as many words.  He would say :  ‘What ! when a demand springs up for gold, in consequence of some foreign war, must we so regulate the issues of our banks, as to reduce the currency of notes in the same proportion that the currency of gold is carried off !  Rather should we increase our issues, and supply the place of the currency that is exported.’  They know that bank notes can fully discharge the functions of money, for they see it every day ;  and not only so, but they are certain that almost no business of Scotland is carried on by means of a currency of gold.  The Scottish people can never be made to comprehend why their bank notes, bank deposits, and cash credits, should fluctuate in amount as gold would fluctuate, if exclusively employed.  These forms of currency do not come of gold ;  they are not founded upon it, and they have nothing to do with it.  In Scotland they understand, as well as they do in England, the use of gold as money ;  they know its value as a commodity, but being a costly commodity, they do not incline to employ it as a currency, except so far as their bank currency fails of its object ;  nor do they wish to purchase or hold it as a commodity, except for such special purpose as may promise adequate advantage.  Their system of banking enables them to dispense with it almost entirely.  In this, they are far from thinking themselves behind their neighbors, in intelligence or financial skill.”  The banks of Scotland issue bank notes as low as £1, and the people of Scotland are always amply supplied with a medium of exchange.

THE FRENCH SYSTEM OF FINANCE.

France enjoys a financial system superior to that of any other nation.  The fiscal affairs of the government are conducted by a central administration, or Ministry of Finance, and eighty-six branches located in different districts.  All transactions between the government and the people are carried on in the forms and methods of the treasury department, without the intervention of banks.  The government has no connection with the Bank of France, but deals with it as it does with individuals, except that its notes are made a legal tender whenever the scarcity of specie renders such a step necessary.  The treasury department of France in many respects takes the place of banks.  It is regarded as a duty by the French government to afford the people all the facilities in the way of domestic exchange that banks could give, instead of allowing it to be furnished exclusively by the banks.

In each district there is a receiver general, in whose office the revenues of the district are paid.  When once paid in they are subject to the order of the central administration alone, and abundant precautions exist to insure strict accountability and integrity.  The treasury is managed with special reference to the wants and requirements of the public.  The manner in which its operations in this respect, are conducted is thus set forth by Colwell :  “ Among its numerous officials, is one in direct relations with the chief minister of finance, who has special charge of the locality of all money in the treasury.  He can neither receive nor pay money ;  but he can transfer the public money from one office of the treasury to another, and place it wherever the exigencies of the government may require.  It is in the office of this functionary that is established a direct and very important connection with the current business of the day.  His duty requires of him a careful and timely study of the points of public expenditure ;  he must know not only where the money will be wanted, but he must have it ready when required.  To accomplish this important object, it becomes his duty to study the domestic trade of the country, that he may avail himself of the internal exchanges in the necessary distribution of money in the treasury.  It is very rare, indeed, that the French treasury ever shifts the locality of gold or silver.  It may require many circuitous transfers to move the excess of revenue, in some departments, to the points of expenditure, and to supply the deficiency in other departments.  To make these transfers, the officer who has special charge of that duty relies almost wholly on the domestic exchanges.  He is well informed where funds are wanted for the purposes of industry or trade ;  he learns where and when those who reside in the vicinity of each office of the treasury desire to remit funds ;  and he learns whence and when they wish to draw them.  His office becomes the depository of this information, because he intervenes in this business of giving drafts upon the treasury, payable at other points, and giving money at his own office for money received at other offices.  His intervention in the transmission of funds assists in balancing the internal exchanges of the country ;  for, of course, the office is only applied to when the business of individuals requires such accommodation.  But this business is not confined to receiving money at an office of the treasury in one place, and paying the amount as may be required at another office, in a different place ;  that is, to a mere exchange of money between the treasury and individuals at different places ;  it goes much further.  At times and places where large transfers of funds become necessary, the proper officer of the treasury becomes the receiver of commercial or individual paper to a large amount.”

“ The receivers-general of the eighty-six departments, and their subordinates, the receivers of the treasuries of the arrondissments and communes, maintain reciprocal business relations by frequent exchanges of money, by drafts upon each other, and by bills upon Paris and other places.  The chief officers of the treasury become, by the constant report of this business to them, intimately acquainted with the whole industrial and commercial movement of the population.  They regard it as extremely important to these interests, that the money which is necessarily withdrawn from private uses for public purposes, should be retained in the treasury as short a time as possible.  Out of 300,000,000 or 400,000,000 of francs annually remitted from the country treasuries to Paris, not more than ten per cent., or 30,000,000 or 40,000,000 of francs, are ever at one time in the public treasuries.³  This shows that disbursement follows so rapidly upon receipt, that the money taken from the people for taxes does not remain, on the average, more than a month or two out of its proper channels, and that the government has carefully reduced the inconvenience and disadvantage of taxation to the lowest possible point.  By this regular and constant communication with men of capital and business, by this constant association with them in the business of transferring funds, the officers of the treasury are able at all times to command, in advance of the regular receipts, large sums of money, which are freely placed in the public treasury at low rates of interest.  Money is, in fact, frequently pressed upon the various receivers by those who desire short but safe investments, and by those who would secure, in good season, the aid of the treasury in placing money at particular points.  The treasurers of the departments do not lend money, though they receive it in the way of short loans ;  they transfer money for individuals, and they purchase bills of exchange upon such points as the exigencies of the public may require.  Upon one side, then, there are open relations between the public treasuries and the movements of trade, industry and currency ;  that is, upon the side of the domestic exchanges of the country ;  the transactions of the treasury, in relation to the distribution of its funds, are blended with the movements of the internal exchanges as conducted by the individuals concerned in it.  This constitutes a very broad field of contact between the business of the country, from which the money is withdrawn by taxation, and the public treasury.  The public money being retained for the shortest possible time, is so managed, nevertheless, as to render an important service in aiding and regulating, the internal exchanges.”

“ Taxation having reached, in France, a point beyond which it cannot be increased without passing the ability of the people to pay, an alleviation of the burden, like that we have just mentioned, is of signal advantage.  According to the former revenue system of France, the money remained for many months in the hands of the receivers, who merely made advances, on interest, to the government from time to time, and settled their accounts once a year.  Now, all money is held to be in the treasury from the moment it is received into the office of any department ;  and it is sent into general circulation again with as little delay as possible.  The assistance thus afforded to the adjustment of the domestic exchanges greatly promotes punctuality in commercial and industrial payments and remittances, by diminishing the expense and the disturbances occasioned by paying the balances of the internal trade.  These features of the present financial system, by which it is so closely connected with the internal trade and exchanges, are regarded by an eminent French writer upon finance as rendering less necessary in France than in other, countries, that development of credit in banking which is so prevalent and so dangerous elsewhere.”

Business in France, owing to the abundance of money always kept in circulation, is done mainly with cash, and the credit system, which has wrought so much evil in Great Britain and the United States, has never gained a foothold there.  So great is the prejudice of the French people against the system, doubtless because they are not blind to its workings in England, that they cannot be induced to even keep ordinary bank accounts and use checks, in the way of business.  M. Pinard, Manager of the Comptoir d’Escompte, testified before the French commission of Inquiry of 1865-8, that great efforts had been made by that institution to induce French merchants and shop-keepers to adopt English habits in this respect, but in vain ;  “ it was no use reasoning with them,” he said, “they would not do it, because they would not.”

Gold and silver are the legal tender money of France, but whenever occasion renders it necessary the notes of the Bank of France are declared a tender in payment of debts ;  and the channels of trade are thus always supplied with a medium of exchange, to keep the producing forces of the nation at work.  The wisdom of this policy has been signally illustrated twice within the past thirty years—in 1848 and in 1870.  In 1848, after the revolution, the republic found itself without revenue and the people out of employment.  Matters were in a precarious situation, and the Bank of France alone possessed any available money.  Instead of looking after its own interests alone, it united with the government in a hearty effort to stimulate industry, by supplying the arteries of trade with a fresh supply of money.  To accomplish this end, the government declared the notes of the bank a legal tender—an act which was everywhere denounced by the bullionists as suicidal.  The marvelous results of this step are thus depicted by the London Times, of February 16, 1849, although less than a year before it had been loud in its denunciation of such a course :

“ As a mere commercial speculation, with the assets which the bank held in its hands, it might then have stopped payment, and liquidated its affairs with every probability that a very few weeks would enable it to clear off all of its liabilities.  But this idea was not for a moment entertained by M. D’Argout, and he resolved to make every effort to keep alive what may be termed the circulation of the life blood of the community.  The task was overwhelming.  Money was to be found to meet not only the demands of the bank but the necessities, both public and private, of every rank in society.  It was essential to enable the manufacturers to work, lest their workmen, driven to desperation, should fling themselves amongst the most violent enemies of public order.  It was essential to provide money for the food of Paris, for the pay of the troops, and for the daily support of the ateliers nationaux.  A failure on any one point would have led to a fresh convulsion.  But the panic had been followed by so great a scarcity of the metallic currency, that a few days later, out of a payment of 26 millions fallen due, only 47,000 francs could be recovered in silver.”

“ In this extremity, when the bank alone retained any available sums of money, the government came to the rescue, and, on the night of the 15th of March, the notes of the bank were by a decree made a legal tender, the issue of these notes being limited in all to 350 millions, but the amount of the lowest of them reduced for the public convenience to 100 francs.  One of the great difficulties mentioned in the report, was to print these 100 franc notes fast enough for the public consumption—in ten days the amount issued in this form had reached 80 millions.  No sooner was the bank relieved from the necessity of paying away the remnant of its coin, than it made every exertion to increase its metallic rest.  About 40 millions of silver were purchased abroad at a high price.  More than 100 millions were made over in dollars to the treasury and the executive departments in Paris.  In all, taking into account the branch banks, 506 millions of five-franc pieces have been thrown by the bank into the country since March, and her currency was thus supplied to all the channels of the social system.”

“ Besides the strictly monetary operations, the Bank of France found means to furnish a series of loans to the government—50 millions on exchequer bills on the 31st of March, 30 millions on the 5th of May, and on the 3d of June, 150 millions, to be paid up before the end of March, 1849 ;  of this last sum only one-third has yet been required by the State.  The bank also took a part in the renewed loan of 250 millions, and made vast advances to the City of Paris, to Marseilles, to the department of the Seine, and to the hospitals, amounting in all to 260 millions more.  But even this was not all.  To enable the manufacturing interests to weather the storm, at a moment when all the sales were interrupted, a decree of the National Assembly had directed warehouses to be opened for the reception of all kinds of goods, and provided that the registered invoice of these goods, so deposited, should be made negotiable by endorsement.  The Bank of France discounted these receipts.  In Havre alone, 18 millions were thus advanced on Colonial produce, and, in Paris, 14 millions on merchandise—in all, 60 millions were thus made available for the purposes of trade.  Thus, the great institution had placed itself, as it were, in direct contact with every interest of the community, from the Minister of the Treasury down to the trader in a distant outport.  Like a huge hydraulic machine, it employed its colossal powers to pump a fresh stream into the exhausted arteries of trade, to sustain credit, and to preserve the circulation from complete collapse.”

Again, in September, 1870, after France became involved in the war with Germany, the Bank of France suspended specie payments and issued legal tender notes to an immense amount, with like marvelous results.  In June, 1870, the circulation of the bank was $275,000,000 ;  in 1871, after the termination of hostilities, it amounted to $420,000,000, and in October, 1873, to $602,000,000.  When the first installment of the indemnity of $1,000,000,000 to Germany fell due, gold, for a short period, bore a premium of 2½ per cent., but with this exception the notes of the bank circulated at par with coin, and continue to do so to this day.  The amount of irredeemable bank notes in circulation in France at the present time is nearly $500,000,000.  The only reason that can possibly be given why French irredeemable bank notes, to the amount of $500,000,000, circulate at par with coin, while United States Treasury notes, less than $400,000,000 in amount, are at a depreciation of over 12 per cent., is that the French notes are a full legal tender for all debts and dues, both public and private, while the United States Treasury notes are only a partial legal tender, not being receivable for duties on imports.

By the free use of irredeemable paper money, the French people, like the people of the United States during the Rebellion, were enabled to rally to the support of their government.  But there the parallel ends.  After the German war had ended, the circulation of irredeemable bank notes, as we have seen, was increased nearly $200,000,000, and the producing forces of the French people were developed in every way possible, in order to repair the losses sustained during the war, and to enable the government to pay the indemnity to Germany.  The wonderful success of this policy is known to all the world.  The German indemnity of $1,000,000,000 was paid before it fell due, apparently without an effort, and gold has flowed into France until now the French people have, besides their legal tender bank notes, a specie circulation estimated at $1,200,000,000.  It has been the lot of the French people to suffer, in common with other nations, many evils resulting from bad government, but they have great cause to feel profoundly thankful that they have never, in the administration of their finances been cursed with a Hugh McCulloch.

¹ See Chapter on Specie Resumption.

² Address of Hon. B.F. Butler, at the request of the Board of Trade of NewYork City, Oct. 14, 1875.

³ This was prior to 1860.