Banking

BANKING

A BANK, in its simplest form, is an institution where money may be deposited for safe keeping; but banks are usually established to lend as well as to receive money; and the profits of a banker are commonly derived from the excess of the interest he receives from those indebted to him over the interest he allows, so far as he allows any. to those who have deposited money with him. Early denunciations of usury (Exod. xxii. 25) show the antiquity of the practice - of lending money at interest; but this must have long preceded the origin of the business of both borrowing and lending money. When this first appeared it was not, at least in modern Europe, a distinct profession, but was undertaken by goldsmiths and dealers in precious metals. In the progress of the separation of employments, which is a characteristic of an advancing society, banking became a business of its own, which has again been subdivided into many branches independently pursued. It was, for example, formerly generally allowed to be part of the business of a banker to borrow money by issuing promissory notes payable to bearer, which passed from hand to hand as money, within the sphere of the operations of the banks, and banks thus borrowing money were called Banks of Issue; but it has been contended of late years that the function of issuing notes passing by delivery as money should be reserved for the state, or for some institution controlled and directed by the state; and we shall have hereafter to notice the controversy that has arisen on this point, and the steps that have been taken in consequence of it. An explanation of the different species of banks will also properly be deferred till· a later stage, but it will be convenient here to give a general sketch of the nature of the business of an ordinary banker. We have said he receives and lends money; he may receive money either on a deposit or on a current or drawing account. When money is received on deposit it is commonly repayable to the depositor alone, to whom a deposit note or receipt is given; but it may also be paid to any one to whom the depositor gives an order on the bank either endorsed on the deposit note or receipt or accompanying it. If the banker undertakes to pay interest on deposits, the rate varies according to the length of the notice the depositor agrees to give before withdrawing the money, the ability of the banker to deal with it being, of course, dependent upon the time he may rely upon keeping it. When money is received on a current or drawing account, the customer of the banker draws it out, as he requires, by means of orders, to which the specific name cheques is given; and, partly for convenience and partly by way of security against fraud, bankers are in the habit of giving their customers books of forms of cheques consecutively numbered. Cheques are generally payable to the person in whose favour they are drawn (the payee) or bearer, though they are sometimes payable to the payee or order, in which case endorsement by the payee is necessary before the money can be received. By the usage of bankers in the United Kingdom a “crossed” cheque, that is, a cheque across the face of which two parallel lines, with the name of a banker or the words “ & Co.” inserted between them, have been drawn, has been long held payable by the banker on whom it is drawn to the payee alone or to another banker; and this usage received the force of law by statutes of the present reign (19 and 20 Vict. e. 25, and 21 and 22 Vict. c. 79).

Bankers lend money by opening credits in their books, against which their favoured customers may draw to the extent of the credits opened; by discounting bills; by the purchase of securities; or by advancing money on securities, &c., &c. It will have been gathered that they also undertake the business of collecting the money for cheques, for bills, and for other securities as they mature, which they may have received from their customers. The labour of collection is much facilitated in England by the fact that bills of exchange are almost invariably made payable in London, and that every country banker has a correspondent among the London bankers who collects for him and pays for him; and the London bankers again maintain an establishment called the Clearing-house (see p. 328), where their clerks meet to effect their interchanges.

Banking appears to have reached a high state of development among the ancients. The bankers of Greece (τpaπeζιτaι) and Rome (argentarii, mensarii, nummularii) exercised nearly the same functions as those of the present day, except that they do not appear to have issued notes. They received money on deposit, to be repaid on demands made by cheques or orders, or at some stipulated period, sometimes paying interest for it, and sometimes not. Their profits arose from their lending the balance at their disposal at higher rates of interest than they allowed the depositors. They were also extensively employed in valuing and exchanging foreign moneys for those of Athens, Corinth, Rome, &c., and in negotiating bills of exchange. In general they were highly esteemed, and great confidence was placed in their integrity. The rate of interest charged by the bankers was sometimes very high, but that was not a consequence, as has been alleged, of their rapacity, but of the defective state of the law, which, as it gave every facility to debtors disposed to evade payment of their debts, obliged the bankers to guarantee themselves by charging a proportionally high rate of interest. Banking reappeared in Italy ’upon the revival of civilization. The bank of Venice is reputed the first in date in the history of modern Europe; but it did not become a bank, as we understand the term, till long after its foundation. Historians inform us that the republic being hard pressed for money, was obliged, upon three different occasions, in 1156, 1480, and 1510, to levy forced contributions upon the citizens, giving them in return perpetual annuities at certain rates per cent. The annuities due under the forced loan of 1156 were, however, finally extinguished in the 16th century; and the offices for the payment of the annuities due under the other two loans having been consolidated, eventually became the Bank of Venice. This might be effected as follows :—The interest on the loan to Government being paid punctually, every claim registered in the books of the office would be considered as a productive capital; and these claims, or the right of receiving the annuity accruing thereon, must soon have been transferred, by demise or cession, from one person to another. This practice would naturally suggest to holders of stock the simple and easy method of discharging their mutual debts by transfers on the office books, and as soon as they became sensible of the advantages to be derived from this method of accounting, bank-money was invented. It will, however, be seen that the establishment thus described was at first no more than the transfer office of a National Debt, transfers of which were accepted at par in discharge of private debts, and it is indeed said that the funded debt transferred sometimes commanded an agio or premium above the current money of the republic. This establishment was ruined, after passing through many changes, by the invasion of the French in 1797.

The origin of modern banking may be traced to the money-dealers of Florence, who were in high repute as receivers on deposit and lenders of money in the 14th century; and banking was indeed practised at Florence in the 13th if not in the 12th century. Mr Macleod writes (Banking, vol. i 289)— “The names of the Bardi, Acciajuoli, Peπιzzi, Pitti, and Medici were famous throughout Europe. In 1345 the Bardi and the Peruzzi, the two greatest mercantile houses in Italy, failed. Edward III. owed the Bardi 900,000 gold florins, which his war with France prevented him paying; and the king of Sicily owed them 100,000 gold florins. The deposits of citizens and strangers with the Bardi were 550,000 gold florins. The Peruzzi were owed 600,000 gold florins by Edward III., and 100,000 by the king of Sicily, and the deposits they owed their customers were 350,000 gold florins. The fall of these two great pillars of credit involved that of multitudes of other smaller establishments, and, says Villani (Istor. Florent., xii. 55), the community of Florence had never been thrown into such ruin and disorder before. And thereupon he breaks out against the folly of his fellow-citizens entrusting their ιħoney to the care of others for the love of gain. The city, however, recovered from this terrible disaster, and we find that between 1430 and 1433 seventy-six bankers at Florence lent 4,865,000 gold florins. At one time Florence is said to have had eighty bankers, but not any public bank.”

The business of banking was not introduced into England till the 17th century, when it began to be undertaken by goldsmiths in London, who appear to have borrowed it from Holland. It was attacked as innovations commonly are. Mr Gilbart, in his History and Principles of Banking, quotes, from a pamphlet published in 1676, entitled The Mystery of the New-Fashioned Goldsmiths or Bankers Discovered, a passage that may be reproduced,— “Much about the same time—the time of the civil commotion— the goldsmiths (or new-fashioned bankers) began to receive the rents of gentlemen’s estates remitted to town, and to allow them, and others who put cash into their hands, some interest for it if it remained but a single month in their hands, or even a lesser time. This was a great allurement for people to put money into their hands, which would bear interest till the day they wanted it; and they could also draw it out by one hundred pounds or fifty pounds, &c., at a time as they wanted it, with infinitely less trouble than if they had lent it out on either real or personal security. The consequence was that it quickly brought a great quantity of cash into their hands, so that the chief or greatest of them was now enabled to supply - Cromwell with money in advance, on the revenues, as his occasion required, upon great advantages to themselves.”

Sir Josiah Child also attacked “that innovated practice of bankers in London” in his New Discourse of Trade, though he subsequently became himself a banker; and his house, Messrs Child <t Co., of Temple Bar, and the house of Messrs Hoare, in Fleet Street, still survive as the only private banks now in existence in London which were established previous to the Bank of England.

Foundation and Early History of the Bank of England.

The Bank of England, which has long been the principal bank of deposit and circulation in Great Britain, and indeed in Europe, was founded in 1694. Its principal projector, Mr William Paterson, an intelligent Scotch gentleman, was afterwards engaged in the ill-fated Darien enterprise. Government being at the time much distressed for want of money, partly from the defects and abuses in the system of taxation, and partly from the difficulty of borrowing because of the supposed instability of the Revolutionary establishment, the bank grew out of a loan of £1,200,000 for the public service. The subscribers, besides receiving 8 per cent, on the sum advanced as interest, and £4000 a year as the expense of management, in all £100,000 a year, were incorporated into a society denominated the Governor and Company of the Bank of England. The charter is dated the 27th of July 1694. It declares, amongst other things, that they shall “be capable, in law, to purchase, enjoy, and retain to them and their successors, any moneys, lands, rents, tenements, and possessions whatsoever; and to purchase and acquire all sorts of goods and chattels whatsoever, wherein they are not restrained by Act of Parliament; and also to grant, demise, and dispose of the same.

“That the management and government of the corporation be committed to the governor and twenty-four directors, who shall be elected between the 25th of March and the 25 th day of April each year, from among the members of the company duly qualified.

“That no dividend shall at any time be made by the said governor and company, save only out of the interest, profit, or produce arising by or out of the said capital, stock, or fund, or by such dealing as is allowed by Act of Parliament.

“They must be natural-born subjects of England, or naturalized subjects; they shall have in their own name, and for their own use, severally, viz., the governor at least £4000, the deputy-governor £3000, and each director £2000, of the capital stock of the said corporation.

“That thirteen or more of the said governors and directors (of which the governor or deputy-governor must be always one) shall constitute a court of directors, for the management of the affairs of the company, and for the appointment of all agents and servants which may be necessary, paying them such salaries as they may consider reasonable.

“Every elector must have, in his own name and for his own use, £500 or more capital stock, and can only give one vote. He must, if required by any member present, take the oath of stock, or the declaration of stock in case he may be one of the people called Quakers.

“Four general courts shall be held in every year, in the months of September, December, April, and July. A general court may be summoned at any time, upon the requisition of nine proprietors duly qualified as electors. The majority of electors in general courts have the power to make and constitute bye-laws and ordinances for the government of the corporation, provided that such bye-laws and ordinances be not repugnant to the laws of the kingdom, and be confirmed and approved according to the statutes in such case made and provided.”

The corporation is prohibited from engaging in any sort of commercial undertaking other than dealing in bills of exchange, and in gold and silver. It is authorised to advance money upon the security of goods or merchandise pledged to it, and to sell by public auction such goods as are not redeemed within a specified time.

It was also enacted, in the same year in which the bank was established, by statute 6 William and Mary, c. 20, that the bank “shall not deal in any goods, wares, or merchandise (except bullion), or purchase any lands or revenues belonging to the Crown, or advance or lend to their majesties, their heirs or successors, any sum or sums of money, by way of loan or anticipation on any part or parts, branch or branches, fund or funds of the revenue, now granted or belonging, or hereafter to be granted, to their majesties, their heirs and successors, other than such fund or funds, part or parts, branch or branches of the said revenue only on which a credit of loan is or shall be granted by Parliament.” And in 1697 it was enacted, that the “common capital or principal stock, and also the real fund, of the governor and company, or any profit or produce to be made thereof, or arising thereby, shall be exempted from any rates, taxes, assessments, or impositions whatsoever during the continuance of the bank; that all the profit, benefit, and advantage from time to time arising out of the management of the said corporation, shall be applied to the uses of all the members of the said association of the governor and company of the Bank of England, rateably and in proportion to each member’s part, share, and interest in the common capital and principal stock of the said governor and company hereby established.”

In 1696, during the great recoinage, the bank was involved in great difficulties, and was even compelled to suspend payment of itβ notes, which were at a heavy discount. Owing, however, to the judicious conduct of the directors, and the assistance of the Government, the bank got over the crisis. But it was at the same time judged expedient, in order to place it in a situation the better to withstand any adverse circumstances that might afterwards occur,to increase the capitalfrom£l,200,000to £2,201,171. In 1708 the directors undertook to pay off and cancel one million and a half of exchequer bills they had circulating two years before, at 4∣ per cent., with the interest upon them, amounting in all to £1,775,028, which increased the permanent debt due by the public to the bank, including £400,000 then advanced in consideration of the renewal of the charter, to £3,375,028, for which they were allowed 6 per cent. The bank capital was then also doubled, or increased to £4,402,342. But the year 1708 is chiefly memorable in the history of the bank, for the Act previously alluded to, which declared, that during the continuance of the corporation of the Bank of England, “it should not be lawful for any body politic, erected or to be erected, other than the said governor and company of the Bank of England, or of any other persons whatsoever, united or to be united in covenants or partnership, exceeding the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes payable on demand, or in any less time than six months from the borrowing thereof.” This proviso is said to have been elicited by the Mine Adventurers Company having commenced banking business and begun to issue notes. It will be seen on examination that the proviso did not prohibit the formation of associations for general banking business; it simply forbade the issue of notes by associations of more than six partners; but the issue of notes w as regarded as so essential to the business of banking, that it came to be believed that joint-stock banking associations were absolutely prohibited in England, and no such association was founded until after the legislation of 1826 (see p. 322) expressly permitting them to be established. The charter of the Bank of England, when first granted, was to continue for eleven years certain, or till a year’s notice after the 1st of August 1705. The charter was further prolonged in 1697. In 1708, the bank, having advanced £400,000 for the public service, without interest, the exclusive privileges of the corporation were prolonged till 1733. And in consequence of various advances made at different times, the exclusive privileges of the bank were continued by successive renewals till the 1st of August 1855, with the proviso that they might be cancelled on a year’s notice to that effect being given after the said 1st of August 1855.

We subjoin an account of the successive renewals of the charter, of the conditions under which these renewals were made, and of the variations in the amount and interest of the permanent debt due by Government to the bank, exclusive of the dead weight. [table]

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The capital of the bank on which dividends are paid has never exactly coincided with, though it has seldom differed very materially from, the permanent advance by the bank to the public. We have already seen that it amounted in 1708 to £4,402,342. Between that year and 1727 it had increased to near £9,000,000. In 1746 it amounted to £10,780,000. From this period it underwent no change till 1782, when it was increased 8 per cent., amounting to £11,642,400. It continued stationary at this sum down to 1816, when it was raised to £14,553,000, by an addition of 25 per cent, from the profits of the bank, under the provisions of the Act 56 Geo. III. c. 96. The Act for the renewal of the charter 3 and 4 Will. IV. c. 98, directed that the sum of £3,671,700, being the fourth part of the debt due by the public to the bank, should be paid to the latter, giving the bank the option of deducting it from its capital. But that has not been done; and after sundry changes, the capital of the bank amounts, as formerly, to £14,553,000.

The Bank of England has been frequently affected by panics amongst the holders of her notes. In 1745 the alarm occasioned by the advance of the Highlanders, under the Pretender, as far as Derby, led to a run upon the bank; and in order to gain time to effect measures for averting the run, the directors adopted the device of paying in shillings and sixpences .' But they derived a more effectual relief from the retreat of the Highlanders, and from a resolution agreed to at a meeting of the principal merchants and traders of the city, and very numerously signed, declaring the willingness of the subscribers to receive bank-notes in payment of any sum that might be due to them, and pledging themselves to use their utmost endeavours to make all their payments in the same medium.

During the tremendous riots in June 1780, the bank incurred considerable danger. Had the mob attacked the establishment at the commencement of the riots, the consequences might have proved fatal. But they delayed their attack till time had been afforded for providing a force sufficient to insure its safety. Since that period a considerable military force occupies the bank every night as a protection in any emergency that may occur.

Progress of Banking in England down to Restriction Order of 1797.

The business of banking had meanwhile been undertaken in several of the country towns of England. The still existing bank of Messrs Smith & Co. of Nottingham, the parent of the London establishment of Messrs Smith, Payne, and Smiths, claims to have been established in 1688 the Bristol Old Bank (Messrs Baillie, Cave, and Co.) dates from 1750; the Hull Old Bank (Messrs Pease and Co.) from 1754; and many other country banks trace back their history to the latter half of the last century. It is believed that all these bankers issued their own notes payable to bearer as part of their business; and they were not very scrupulous in regard to the magnitude of the sums for which they were given. The Bank of England had not issued any notes for less than £20 previously to 1759, when it commenced the issue of £10 notes; but the country bankers put in circulation notes for such small sums that Parliament enacted, in 1775, that none should be issued for less than £1. In 1777 this minimum limit was further raised to £5, but in spite of this restriction the number and the amount of the issues of the country bankers soon become dangerously multiplied. The termination of the American War was followed by a great industrial and commercial development at home. Agriculture, commerce, and still more, manufactures, into which Watt and Arkwright’s inventions had been lately introduced, immediately began to advance with a rapidity unknown at any former period. In consequence, that confidence which had either been destroyed, or very much weakened by the disastrous events of the war, was fully re-established. The extended transactions of the country required fresh facilities for carrying them on, and these were supplied in the utmost profusion. The number of banks, which in 1784 was certainly under 150, increased so rapidly, that in 1792 they amounted to about 350. In consequence, a banking office was opened in every markettown and in most considerable villages. And such being the case, it is needless, perhaps, to add, that the prudence, capital, and connections of those who set up these establishments were but little attended to. The great object of a large class of traders was to obtain discounts: and the bankers of an inferior description were equally anxious to accommodate them. All sorts of paper were thus forced into circulation, and enjoyed nearly the same degree of esteem. The bankers and those with whom they dealt had the fullest confidence in each other. No one seemed to suspect that there was anything hollow or unsound in the system. Credit of every kind was strained to the utmost; and the available funds at the disposal of the bankers were reduced far below the level which the magnitude of their transactions required to render them secure.

The catastrophe which followed was such as might easily have been foreseen. The currency having become redundant, the exchanges took an unfavourable turn in the early part of 1792. A difficulty of obtaining pecuniary accommodation in London was not long after experienced; and, notwithstanding the efforts of the Bank of England to mitigate the pressure, a violent revulsion took place in the latter part of 1792 and the beginning of 1793. The failure of one or two great houses excited a panic which proved fatal to many more. Out of the 350 country banks in England and Wales, when this revulsion began, about 300 were compelled to stop payments, and upwards of 50 were totally destroyed, producing by their fall an extent of misery and bankruptcy till then unknown in the country.

Attempts have sometimes been made to show that this crisis was not occasioned by an excess of paper money having been forced into circulation, but by the agitation caused by the war then on the eve of breaking out. But there does not seem to be any good grounds for this opinion. The symptoms of an overflow of paper—a fall of the exchange, and an efflux of bullion—took place early in 1792, or about twelve months before the breaking out of hostilities.

Suspension of Cash Payments in 1797.

The year 1797 is a most important epoch in the history of English banking. Owing partly to events connected with the war then carried on, to loans to the Emperor of Germany, to bills drawn on the treasury at home by the British agents abroad, and partly, and chiefly, perhaps, to the advances most unwillingly made by the bank to Government, which prevented the directors from having a sufficient control over their issues, the exchanges became unfavourable in 1795, and in that and the following year large sums of specie were drawn from the bank. In the end of 1796 and beginning of 1797, considerable apprehensions were entertained of invasion, and rumours, were propagated of descents having been actually made on the coast. In consequence of the fears that were thus excited, runs were made on the provincial banks in different parts of the country; and some of them having failed, the panic became general and extended itself to London. Demands for cash poured in from all quarters upon the bank, which, on Saturday the 25th of February 1797, had only £1,272,000 of cash and bullion in its coffers, with every prospect of a violent run taking place on the following Monday. In this emergency, an order in council was issued on Sunday the 26th, prohibiting the directors from paying their notes in cash until the sense of Parliament should be taken on the subject. And after Parliament met, and the measure had been much discussed, it was agreed to continue the restriction till six months after the signature of a definitive treaty of peace.

As soon as the order in council prohibiting payments in cash appeared, a meeting of the principal bankers, merchants, traders, &c., of the metropolis, was held at the Mansion-house, when a resolution was agreed to, and very numerously signed, pledging, as had been done in 1745, those present to accept, and to use every means in their power to make bank-notes be accepted, as cash in all transactions. This resolution tended to allay the apprehensions that the restriction had excited.

Parliament being in session at the time, a committee was immediately appointed to examine into the affairs of the bank; and their report put to rest whatever doubts might have been entertained with respect to the solvency of the establishment, by showing, that at the moment when the order in council appeared, the bank was possessed of property to the amount of £15,513,690, after all claims upon it had been deducted. This suspension of cash payments being naturally followed by a withdrawal of gold from circulation, made it necessary to allow of the issue of notes of a smaller denomination than £5, and the statute of 1777 was accordingly also suspended.

Much difference of opinion has existed with respect to the policy of the restriction in 1797; but, considering the peculiar circumstances under which it took place, its expediency seems abundantly obvious. The run did not originate in any over-issue of bank paper, but grew entirely out of political causes. So long as the alarms of invasion continued, it was clear that no bank paper immediately convertible into gold would remain in circulation. And as the bank, though possessed of ample funds, was without the means of instantly retiring its notes, it might, but for the interference of Government, have been obliged to stop payments,—an event which, had it occurred, might have produced consequences fatal to the public interests.

The error of the Government did not consist in their coming to the assistance of the bank, but in continuing the restriction after the alarm of invasion had ceased and there was nothing to hinder the bank from safely reverting to specie payments.

It had been generally supposed, previously to the passing of the Restriction Act, that bank-notes would not circulate unless they were immediately convertible into cash. But the event showed that this was not really the case. Though the notes of the Bank of England were not, at the passing of the Restriction Act, declared by law to be legal tender, they were rendered such in practice, by being received as cash in all payments on account of Government, and by the vast majority of individuals. For the first three years of the restriction, their issues were so moderate that they not only kept on a par with gold, but actually bore a small premium. But in 1801, 1802, and 1803, they were so much increased that they fell to a discount of from 8 to 10 percent. In 1804 they again recovered their value; and from that year to 1808, both inclusive, they were at a discount of 2 J per cent. In 1809 and 1810, however, the directors appear to have embarked on a new course, and to have entirely lost sight of the principles by which their issues had previously been governed; for the average amount of bank-notes in circulation, which had not exceeded 17∣ millions, nor fallen short of 164 millions, in any one year, from 1802 to 1808, both inclusive, was in 1809 raised to £18,927,833, and 1810 to £22,541,523. The issues of country bank paper were increased in a still greater proportion; and, as there was no corresponding increase of the business of the country, the discount on bank-notes rose from 2⅜ in 1808 to from 13 to 16 per cent, in 1809 and 1810.

This depreciation in the value of bank paper being accompanied by a corresponding fall in the exchange attracted the attention of the public and the legislature. In consequence, the House of Commons appointed, in 1810, a committee to inquire into the subject; and having examined several witnesses, the committee in their report, which was both an able and a celebrated paper, justly ascribed the fall in the value of bank paper, as compared with gold, to its over-issue; and recommended, in the view of correcting the existing evil and of preventing its recurrence, that within two years the bank should be obliged to resume specie payments. But this recommendation not being adopted, the over-issue of paper went on increasing. In 1812 it was at an average discount, as compared with bullion, of 20 per cent.; in 1813, of 23 per cent.; and in 1814, when the maximum of depreciation was attained, it was at 25 per cent.

At the period when the restriction on cash payments took place in 1797, it is supposed that there were about 280 country banks in existence; but so rapidly were these establishments multiplied, that they amounted to abovo 900 in 1813. The price of corn, influenced partly by the depreciation of the currency and the facility with which discounts were obtained, but more by deficient harvests and the unprecedented difficulties which the war threw in the way of importation, rose to an extraordinary height during the five years ending with 1813. But the harvest of that year being unusually productive, and the intercourse with the Contiuent being then also renewed, prices, influenced by both circumstances, sustained a very heavy fall in the latter part of 1813 and the beginning of 1814. And this fall having ruined a considerable number of farmers and produced a general want of confidence, such a destruction of provincial paper took place as has rarely been paralleled. In 1814, 1815, and 1816, no fewer than 240 country banks stopped payment; and eighty-nine commissions of bankruptcy were issued against these establishments, being at the rate of one commission against every ten and a half of the total number of banks existing in 1813.

The great reduction that was thus suddenly and violently brought about in the quantity of country bank paper, by extending the field for the circulation of Bank of England paper, raised its value in 1817 nearly to a par with gold. The return to cash payments being thus facilitated, it was fixed, in 1819, by the Act 59 Geo. III. c. 78, commonly called Sir Robert Peel’s Act, that they should take place in 1823. But to prevent any future over-issue, and at the same time to render the resumption as little burdensome as possible, it was enacted, in pursuance of a plan suggested by Mr Ricardo, that the banks should be obliged, during the interval from the passing of the Act till the return to specie payments, to pay its notes, if required, in bars of standard bullion of not less than sixty ounces’ weight. This plan was not, however, acted upon during the period allowed by law; for, a large amount of gold having been accumulated at the bank, the directors preferred recommencing specie payments on the 1st of May 1821.

The fluctuations, referred to above, in the value of paper were exceedingly injurious. From 1809 to 1815, the creditors of every antecedent contract, land-holders whose estates had been let on lease, stockholders and annuitants of every description—all, in short, who could not raise the nominal amount of their claims or incomes proportionally to the fall in the value of money, were to that extent losers. The injustice that would have been done to the creditors of the state and of individuals, who had made their loans in gold, or paper equivalent to gold, by raising the denomination of the coin twenty-five per cent., however gross and palpable, would not have been greater than was actually done them in 1814, by compelling them to receive payment of their just debts in paper depreciated to that extent.

It is true, that after a currency has been for a considerable period depreciated, as much injustice is done by raising, as was previously done by depressing, its value. But there is good reason to doubt whether the depreciation from 1809 to 1815 (for the depreciation of 2∣ per cent, during the six preceding years is too inconsiderable to be taken into account) extended over a sufficiently lengthened period to warrant the Legislature in departing from the old standard. It is needless, however, to offer any opinion on this rather difficult point, for we have seen that the value of paper was raised in 1816 and 1817 almost to par by accidental circumstances without any interference on the part of Government or of the bank. Sir Robert Peel’s Act, to which this rise had been ascribed, not being passed till 1819, could have nothing to do with what occurred two or three years previously. Its object was twofold, to redeem the pledge given by Parliament to restore the old standard on the return of peace, and to shut the door against any fresh depreciation of paper.

History of Banking from the Resumption of Cash Payments to the Crisis of 1825.

The resumption of cash payments did not, however, put an end to the vicissitudes of banking. Notwithstanding the ample experience that had been supplied by the occurrences of 1792-93 and 1814-16, of the mischievous consequences of the issue of paper by the country banks, and of their want of solidity, nothing whatever was done, when provision was made for returning to specie payments, to restrain their issues, or to place them on a better footing. The consequences of such improvidence were not long in manifesting themselves. The prices of corn and other agricultural products, which had been greatly depressed in consequence of abundant harvests, in 1820, 1821, and 1822, rallied in 1823, and the country bankers immediately began to enlarge their issues. It is unnecessary to inquire into the circumstances which conspired, along with the rise of prices, to promote the extraordinary rage for speculation exhibited in 1824 and 1825. It is sufficient to observe, that in consequence of their operation, confidence was very soon carried to the greatest height. It did not seem to be supposed that any scheme could be hazardous, much less wild or extravagant. The infatuation was such, that even the most considerate persons did not scruple to embark in visionary and absurd projects; while the extreme facility with which discounts were procured upon bills at very long datée, afforded the means of carrying on every sort of undertaking. The most worthless paper was readily negotiated. Many of the country bankers seemed, indeed, to have no other object than to get themselves indebted to the public. And such was the vigour and success of their efforts to force their paper into circulation, that the amount of it afloat in 1825 is estimated to have been nearly 60 per cent, greater than in 1823. The consequences of this extravagant and unprincipled conduct are well known. The currency having become redundant, the exchanges began to decline in the summer of 1824. The directors of the Bank of England having unwarily entered, in the early part of that year, into an engagement with the Government to pay off such holders of 4 per cent, stock as might dissent from its conversion into a 3£ per cent, stock, were obliged to advance a considerable sum on this account after the depression of the exchange. But despite this circumstance, they might and ought to have taken measures, in the latter part of 1824 and the earlier part of 1825, by lessening their issues to stop the efflux of bullion. But not being sufficiently alive to the urgency of the crisis, the London currency was not materially diminished till September 1825. The recoil, which would have been less severe had the efforts of the bank to prevent the exhaustion of its coffers taken place at an earlier period, was most appalling. The country banks began to give way the moment they experienced a considerably increased difficulty of obtaining accommodation in London, and confidence and credit were immediately at an end. Suspicion having awakened from her trance, distrust had no limits. All classes of depositors made haste to call up the sums they had entrusted to the care of the banks. There was also a run upon them for payment of their notes, not in the view bf sending the gold as a mercantile adventure to the Continent, but to escape the loss which it became obvious the holders of country paper would have to sustain. Sauve qui peut was the universal cry; and the destruction was so sudden and extensive, that in less than six weeks above seventy banking establishments were swept off, and a vacuum was created in the currency which absorbed from eight to ten millions of additional issues by the Bank of England, at the same time that myriads of those private bills that had previously swelled the amount of the currency, and added to the machinery of speculation, were wholly destroyed.

It may be worth while, perhaps, to observe that it has been alleged, in opposition to what is now stated, that the difficulties of the bank in 1825 were not caused by any excess either of its issues or of those of the country banks, but by the too great amount of the capital, that is of coin and bullion, it had lent; and in proof of this allegation, we are referred to the increase of nearly eight millions in the amount of securities which the bank held in August 1825 over their amount in August 1822, and to the simultaneous decrease of nearly six and a half millions in the amount of bullion in its coffers. But a little consideration will suffice to show the futility of this statement. No issue of notes can be said to be in itself excessive. Whether it is or is not in excess depends upon its relation to the amount of coin and bullion reserved by the issuing bank in its coffers. The Bank of England enlarged its issues disproportionately and took no steps, or none of sufficient energy, to reduce the amount of notes in circulation till long after the exchange had become unfavourable, and bullion was demanded of it for exportation. The accumulation of securities was the necessary result of this radical error. The currency having become redundant in 1824, the notes of the bank were returned upon it for gold, so that its securities were augmented at the same time that its means of dealing with the unfavourable exchange were impaired. It is to be remembered, that the efflux of bullion showed conclusively that, however issued, and whether greater or less than at former periods, the paper afloat was in excess, and that its reduction had become indispensable. And such being the case, it was the duty of the bank directors, as soon as they felt the drain for gold setting steadily against them, to adopt every means in their power, by raising the rate of interest, selling securities, and otherwise, to reduce their issues, and restore the exchange to par. And had they done this at a sufficiently early period, it is all but certain the bank would not have lost more than two or three millions of bullion; whereas, by their following a different line of conduct, and deferring the adoption of vigorous repressive measures till too late a period, it was drained of about seven millions of bullion, and its safety seriously compromised before it could stop the drain. Legislation of 1826— Suppression of £1 Notes—Joint-Stock Banks of Issue aιιthorized.

Notwithstanding the fact that nations are slow and reluctant learners, the events of 1825-26, taken in connection with those of the same sort that had previously occurred, produced a conviction of the necessity of doing something that should at least improve the system of country banking in England. But the measures adopted with this view were very far indeed from effectually securing their object. The law of 1708, limiting to six the number of partners in banking establishments issuing notes, was repealed; and it was enacted, that banks with any number of partners might be established for the issue of notes anywhere beyond sixty-five miles from London, and that banks not issuing notes might be established in London itself with any number of partners. The circulation of notes for less than five pounds in England and Wales was at the same time forbidden. It was intended to extend the same prohibition to Scotland and Ireland, but the opposition to the proposal excited in these countries was too strong to be overcome. Sir Walter Scott threw himself zealously into the controversy, and by his Letters of Malachi Malagrowther, helped to make the resistance effectual.

The suppression of £1 notes was advantageous in shutting up one of the principal channels by which the inferior class of country bankers got their paper into circulation, to the frequent loss of the poorer classes; but it is now generally admitted that the balance of argument is in favour of the issue of notes of this denomination by the Bank of England or some agency of the state, under conditions ensuring their convertibility.

The second branch of the banking legislation of 1826 was for some time a comparative failure. Those who supposed that joint-stock banks would be immediately set on foot in all parts of England, were a good deal disappointed with the slowness with which they spread for some years after the Act permitting their establishment was passed. The heavy losses occasioned by the downfall of most of the joint-stock projects set on foot in 1824 and 1825, made all projects of the same kind be looked upon for a considerable period with suspicion, and deterred most persons from embarking in them. But this caution gradually wore off; and the increasing prosperity of the country, and the difficulty of vesting money so as to obtain from it reasonable return, generated anew a disposition to adventure in hazardous projects. A mania for embarking in speculative schemes acquired considerable strength in 1834; and during 1835 and part of 1836, it raged with a violence but little inferior to that of 1825. It was at first principally directed to railroad projects; but it soon began to embrace all sorts of schemes, and, among others, joint-stock banks, of which an unprecedented number were projected in 1835. The progress of the system was as follows :— [table]

In point of fact, however, the number of banks created in 1835 and 1836 was vastly greater than appears from this statement. It seems that, at an average, each of the 56 banks established in those years, like those previously established, had from four to five branches; and as these branches transacted all sorts of banking business, and enjoyed the same credit as the parent establishment, from which they were frequently at a great distance, they were, to all intents and purposes, so many new banks; so that, instead of 56, it may safely be affirmed that from about 220 to 280 new joint-stock banks were opened in England and Wales in 1835 and 1836, but mostly in the former year.

In January, February, and March 1836, when the rage for establishing joint-stock banks was at its height, the exchange was either at par, or slightly in our favour, showing that the currency was already up to its level, and that if any considerable additions were made to it, the exchange would be depressed, and a drain for bullion be experienced. But these circumstances, if ever they occurred to the managers of the joint-stock banks, do not seem to have had, and could not in truth be expected to have, any material influence over their proceedings. Their issues, which amounted on the 26th of December 1835 to £2,799,551, amounted on the 25th of June 1836 to £3,588,064, exclusive of the vast mass of additional bills, cheques, and other substitutes for money they had put into circulation. The consequences were such as every man of sensô might have foreseen. In April 1836 the exchange became unfavourable, and bullion began to be demanded from the Bank of England. The directors, that they might the better meet the drain, raised the rate of interest in June from 4 to 4⅛ per cent., and this not being enough sufficiently to lessen the pressure on the bank for discounts, they raised it in August from 4∣ to 5 per cent. But during the whole of this period the country banks went on increasing their issues; and the issues of the joint-stock banks rose from £3,588,064 in June, to no less than £4,258,197 on the 31st of December, being an increase of nearly 20 per cent, after the exchange was notoriously against the country; and the most serious consequences were apprehended from the continued drain for bullion.

It may, perhaps, be supposed that the increased issue of the joint-stock banks would be balanced by a corresponding diminution of the issues of the private banks, and that on the whole the amount of their joint issues might not be increased. This, however, was not the case. Some private banks were abandoned in 1836, and others incorporated with joint-stock banks; and it is further true, that those which went on managed their affairs with more discretion than their associated competitors. But, from the 26th of September 1835 to the 31st of December 1836, the issues of the private banks were diminished only £159,087, whilst those of the joint-stocks were increased during the same period £1,750,160, or more than ten times the falling off in the others.

These statements show the inexpediency of leaving the issue of paper to the unregulated discretion of an indefinite number of competing banks. Its issue ought in all cases to be governed by the state of the exchange, or rather, as already stated, by the influx and efflux of bullion. But previously to 1844, the provincial banks might go on overissuing for a lengthened period without being affected by a demand for bullion, or even for Bank of England paper.

In the end, no doubt, an efflux of the former was sure, by rendering money and all sorts of pecuniary accommodation scarce in the metropolis, to affect the country banks as well as the Bank of England; and then the injury to industry, occasioned by the withdrawal of their accustomed accommodations from a great number of individuals, was severe in proportion to the too great liberality with which they had previously been supplied. This was especially the case in 1836, when the Bank of England, by bolstering up the Northern and Central Bank, averted, though but for a while, the bankruptcy of that establishment, which had no fewer than forty branches, and, by doing so, is said to have prevented the occurrence of a panic that might have proλ^ed fatal to many other joint-stock and private banks. Still, however, the shock given to industrial undertakings, by the revulsion in the latter part of the year, and in 1837, although unaccompanied by any panic, was very severe. All sorts of commercial speculations were for a while completely paralyzed, and there were but few districts in which great numbers of individuals were not thrown out of employment. In Paisley, Birmingham, and most other towns, the distress occasioned by the revulsion was very general and long-continued. And owing to the Bank of England having delayed, in 1838 and the earlier part of 1839, to take efficient measures for the reduction of its issues, despite the unmistakable evidence of their being redundant, the bullion in its coffers was reduced in September 1839 to £2,406,000; and, but for the efficient assistance obtained from the Bank of France, its stoppage could hardly have been averted.

Act of 1844— Objections to and Defence of that Act— Suspensions of in 1847, 1857, and 1866.

This perilous experience having again forcibly attracted the public attention to the state of the banking system, Sir Robert Peel was induced to attempt its improvement. The clause in the Act 3 and 4 Will. IV. c. 9, which renewed the bank charter in 1833, gave Parliament power to revise or cancel it in 1845, and thus afforded a legitimate opportunity for the introduction of the new system. It was indispensable, in attempting to obviate the defects inherent in our currency, to proceed cautiously, to respect, as far as possible, existing interests, and to avoid taking any step that might excite the fears or suspicions of the public; but the measures which Sir Robert Peel introduced and carried through Parliament in 1844 and 1845, for the improvement of the English banking system, were so skilfully contrived as to provoke little opposition, at the same time that they effected most important and highly beneficial changes.

The measures in question consisted of the Act 7 and 8 Vict. c. 32, which refers to the Bank of England and the English country banks; and the Acts 8 and 9 Vict. c. 38, 37, referring to the banks of Scotland and Ireland. These statutes were intended to obviate the chances of over-issue, by limiting the power to issue notes payable on demand, and by making the amount of such notes in circulation vary with the amount of bullion in the possession of the issuers, and this object has been perfectly attained. The statutes have as completely failed to attain a second object contemplated by their author—that of preventing great and rapid fluctuations in the rate of discount; and the truth is now recognized, that the power of over-issuing notes is one of many causes which may conduce to variations in the rate of discount and by no means the most efficient of them. In dealing with the Bank of England, Sir Robert Peel adopted the proposal previously made by Lord Overstone, for effecting a complete separation between the issuing and banking departments of that establishment, and giving the directors full liberty to manage the latter at discretion, while they should have no power whatever over the other.

The notes of the Bank of England in circulation for some years previously to 1844 rarely amounted to twenty, or sunk so low as sixteen millions. And such being the case, Sir Robert Peel was justified in assuming that the circulation of the bank could not, in any ordinary condition of society, or under any merely commercial vicissitudes, be reduced below fourteen millions. And the Act of 1844 allowed the bank to issue this amount upon securities, of which the £11,015,100 lent by the bank to the public was the most important item. Inasmuch, however, as the issues of the provincial banks were at the same time limited in their amount, and confined to certain existing banks, it was further provided, in the event of any of these banks ceasing to issue notes, that the Bank of England might be empowered, by order in council, to issue, upon securities, two-thirds, and no more, of the notes which such banks had been authorised to issue. Under this condition, the total secured issue of the bank has (1875) been increased from £14,000,000 to £15,000,000. But for every other note which the issue department may at any time issue over and above the maximum amount (£15,000,000) issued on securities, an equal amount of coin or bullion must be paid into its coffers. And hence, under this system, the notes of the Bank of England are rendered really and truly equivalent to gold, while their immediate conversion into that metal no longer depends, as it previously did, on the good faith, the skill, or the prudence of the directors. And these important results have been attained without imposing any burden of which any one has any right to complain. Our currency rests on the fundamental principle, that all debts above forty shillings shall be paid in gold. But individuals and associations, including the banking or commercial department of the bank, have the option, if they prefer it, to exchange gold for bank-notes, and to make use of the latter in their dealings with the public. Hence, if A or B goes to the issuers of paper, and gets 100 or 500 notes from them in exchange for an equivalent amount of gold, it is his own convenience he has exclusively in view. He was at full liberty to use gold, but he preferred exchanging it for notes because he could employ the latter more advantageously. This is the way in which paper is issued under the Act of 1844; and such being the case, it is contradictory to say that it is productive either of hardship or inconvenience.

It is alleged that the new system is injurious by shackling the bank in the use of its credit, and the answer is, that it does this in order to prevent the greater injury of overissues of paper. The Act prevents the bank from issuing substitutes for money which do not represent money. It does not absorb or lock up a single sixpence worth of capital, nor does it interfere in any manner of way with its employment. The gold in the issue department of the bank was not purchased by the bank, and does not belong to it. The bank is its keeper, but not its owner. It belongs to the public, or to the holders of bank-notes, who deposited it in the bank in exchange for notes, with and under the express stipulation, that on paying the latter into the bank they should receive back their gold. Any interference with these deposits would be an interference with property held in pledge for others, that is, it would be an act precisely of the same kind with that which exposes private bailees to penal servitude.

But though the bank directors may not lay violent hands on the property of the public, the bank, it is obvious, has at this moment the same absolute command over its entire capital and credit, that it would have were the Act of 1844 non-existent. Apart from the practice of issuing transferable notes, the bank is free from all restraint, and is in precisely the same situation as other banking or mercantile establishments. Its directors may lend or not lend as they please, and may lay down such conditions as they please in regard to the interest and the terms of loans and discounts. In short, they may do whatever they like with their own; but farther they are not permitted to go. They may not substitute shadows for realities. They cannot, whether to assist others, or to relieve themselves from embarrassment, issue a single note except upon a deposit of bullion. But this rule does not operate on the bank only. It applies to all individuals and associations. And to relax it in any degree would be—disguise it as one may—to authorize an issue of fictitious or spurious paper, and consequently to vitiate the currency and to abuse credit in the way that is sure to be in the end the most disastrous.

This statement shows the groundless nature of the charge which is often made against the Act of 1844, that under its operation the bank runs the risk of being brought to a stop, though it may have some five, six, or even eight millions bullion in its coffers. For it is plain that two things are confounded in this charge, which are quite distinct, and have no necessary connection with each other, viz., the proceedings of the bank in the capacity of issuer of notes, and its proceedings in the capacity of a banking company. In the former capacity it is all but impossible that it should be brought to a stop; and if such a thing should happen, there would not then be an ounce of bullion in its coffers. It is not, however, impossible nor even very improbable, that the bank should be brought, in its mercantile capacity, into difficulties, while there may be a large amount of bullion in the issue department. But, though such should be the case, is that any reason why the bank directors should be permitted to draw on funds that do not belong to them, and over which they have no' control? Supposing the bank was in difficulties, is it to be allowed to right itself by setting aside the principle of meum and tuum, and seizing on what belongs to others? The directors would be the first to repudiate such a doctrine, which must be rejected by all men who have any sense of honour or regard for character.

One of the most plausible objections to the Act of 1844 is that it “limits the currency that it makes no provision for the increasing demands of the public; and confines us in 1875, when the exports will probably exceed 220 millions, to the same amount of money as in 1844, when the exports did not exceed 58∣ millions. The simple truth, however, is that the Act allows money to be imported and exported, to be retained or sent elsewhere, just as it is wanted, and what it does limit is the uncontrolled issue of paper representatives of money, which experience proved were too often emitted without any reference to the reserves of money kept to maintain the convertibility of the paper issued, The £14,000,000 (now £15,000,000) issued on securities is the only thing that is limited in the Act; everything else varies with the varying condition and circumstances of the country, including the means by which the use of money may be economized. In the week ending the 7th July 1875, the issue department of the bank had issued notes to the amount of £41,029,955, being no fewer than £26,029,955 over and above the amount authorized to be issued on securities. And if the country had really required a larger supply of money, that is, if more coins, or paper equivalent to coins, could have been absorbed into the circulation without rendering the currency redundant, and depressing the exchange, the additional quantity would have been forthwith supplied. For, under such circumstances, merchants, bankers, and money-dealers, would have realized a certain and immediate profit by carrying bullion to the mint or the bank, that they might obtain coins, or notes, or both, with which to increase the currency. It is one of the chief merits of the Act of 1844, that, under its agency, the supply of money is not to any extent or in any degree regulated or influenced by the proceedings of the bank or the Government. They have nothing to do in the matter, unless it be to coin the bullion which individuals or firms carry to the mint for that purpose, and to exchange, when called upon, notes for coins, and coins for notes. The supply of money, like that of all non-monopolized articles, is wholly dependent upon, and is determined by the free action of the public. It would, indeed, be quite as true to say, that the Act of 1844 limits the amount of corn, of cloth, or of iron produced in the country, as that it limits the amount of money. It maintains the value of the notes issued by the bank on a level with the coins for which they are substitutes; but beyond that its effect is nil. It has nothing whatever to do with the greater or less amount of the coin and notes of trustworthy convertibility put into circulation. That depends entirely on the estimate formed by the public of its excess or deficiency, an estimate which when wrong is sure to be corrected by the exchanges.

We may add, that no inference can ever be safely drawn from the number of notes or coins, or both, afloat in a country, as to whether its currency be, or be not, in excess. That is to be learned by the state of the exchange, or by the influx and efflux of bullion. If the imports of bullion exceed the exports, it shows that the currency is in some degree deficient; while, if the exports exceed the imports, it shows that the currency is in excess, and that no additions can be made to it without farther depressing the exchange and increasing the drain of bullion. When the imports and exports of bullion are about equal, then of course the currency is at about its proper level. These are the only criteria by which anything can ever be correctly inferred in regard to the deficiency or excess of currency. Its absolute amount affords hardly even a basis for conjecture. When there is little speculation or excitement, an issue of 25 or 27 millions bank-notes may be in excess; while, at another time, and with a different state of trade and speculation, an issue of 35 or 37 millions of notes may not be enough. Except in periods of internal commotion, or when we are disturbed by alarms of invasion, the state of the exchange is the only, as it is the infallible, test of the sufficiency and insufficiency of the currency. We may further state, that those who are in the habit of complaining of the limitation of the currency by the Act of 1844, almost uniformly underrate its amount. We have already seen that, in the week ending the 7th July 1875 the notes issued by the issue department of the bank amounted to £41,029,955, and of these £12,453,415 were in the banking department of the bank, leaving a balance of £28,576,540 in the hands of the general public; and this latter sum is, we are told, the real amount of the issues. But this is falling into the rather serious blunder of mistaking a part for the whole. The notes in the banking department of the bank make not only a part, but a most important and active part, of the currency of the country. They constitute the means, along with the bullion in the same department, with which the bank carries on her banking business, and are as evidently a portion of the currency as the notes in the tills of private bankers and the pockets of individuals. The notes in the banking department of the bank must therefore never be omitted in estimating the amount of notes in circulation. The latter, and the notes out of the issue department, are identical; and, in a general point of view, it matters not a straw whether they are in the hands of the banking department of the bank or of individuals.

So far we have dealt with the legislation of 1844 in its bearing on the Bank of England. The desire of Sir Robert Peel reached beyond this, but he was unable to complete his policy. He rightly held that experience had shown that the balance of advantages lay on the side of the suppression of all note issues except that of the Bank of England, as reformed by him, or of some similar supplementary establishments regulated in the same manner. But it was obviously impossible to prohibit, without compensation, the future exercise by country bankers of the rights they had legitimately acquired; and as it was pot easy to buy up the existing privileges of the private and joint-stock banks, Sir Robert Peel allowed them to remain under conditions prohibiting their extension, and he apparently hoped that country isues would gradually disappear before the rivalry of Bank of England notes. The Act of 1844, accordingly, enacted that no new bank for the issue of notes should be established in any part of the United Kingdom; and that the maximum issue of notes by the existing country banks of England should in future be limited to the average amount which they had respectively in circulation during the twelve weeks preceding the 27th April 1844. It was also ordered that the names of the partners in joint-stock and other banks should be periodically published. A provision was also enacted under which an issuing bank could resign its privilege by composition with the Bank of England. The existing law was maintained preventing the issue of any notes other than the Bank of England in London, and the establishment, within sixty-five miles of London of any branch of an English joint-stock bank having the privilege of issue.

The convertibility of the Bank of England notes has been perfectly maintained since 1844, and the management of English banks, whether private or joint-stock, has been sound and judicious, the cases of failure among them being few and contrasting strongly with the recurrent epidemics of insolvency of earlier experience. It must, however, be admitted that the variations in the rate of discount charged by the bank have been much more numerous and violent since 1844 than they were before, and on three occasions— in 1847, 1857 1866—it has been judged necessary to authorize a suspension of the Act so far as to allow the bank directors the power to strengthen the banking department by recourse to the reserves of the issue department. In each case the suspension of the Act arrested and allayed the panic prevailing up to the moment of suspension, and in 1866 it was not, in fact, found necessary to exercise the power to borrow from the issue department which had been conceded to the directors. We must proceed to inquire whether the Act of 1844 is to be blamed for the increase in the number of changes of the rate of discount which has since been experienced, and whether this increase and the suspension of the Act in time of trial constitute a reason for its abrogation or for a modification of its provisione.

In the first place, the increased number of changes in the rate of discount is more apparent than real. The management of the Bank of England has become responsive to the movement in the value of money in the open market in a degree unknown before this generation. The rate of discount outside the bank changed rapidιy and often before 1844, but its fluctuations were to a large extent prevented from affecting the Bank of England. Previously to the modification of the Usury Laws in 1839, the bank could not charge more for loans than 5 per cent., and for some considerable period after the restriction had been removed the directors, influenced, in part at least, by their accustomed habit on several occasions, permitted the bank to be involved in difficulties which might have been averted by their sooner raising the rate of discount. Strict limitation in the number and class of customers with whom the bank would do business, and a refusal to rediscount bills that had been already discounted by money-dealers, made it possible to keep the bank rate below the rates of the open market without exposing the resources of the establishment to an exhausting demand.

Next, it is to be observed that the methods of economizing the use of money by the development of banking have been extraordinarily multiplied since 1844. The Bank Act, as we have shown, in no way operates to diminish the supply of money in the country; on the contrary, it tends to increase it, since it forbids any extension of the use of notes issued on credit as a substitute for money. The effect of the Act has therefore been to neutralize rather than to stimulate the process of economy in the use of money to which we have called attention. But the transactions of bankers—the issue of cheques, the negotiation of bills, &c., &c.—have multiplied out of all proportion to the stock of ready money on which they rest, and the mass of transitory credits being constantly increasing while the reserves of cash suffers little change, there naturally and necessarily follows an increased sensibility in the equilibrium of the money market, with constant oscillations in the rate of interest. But although the increase in the number of changes of discount since 1844 has not been as great as may at first seem apparent, and so far as the increase has been real it must be chiefly attributed to the growing disproportion between the magnitude of transitory credits at any time existing and the reserve of cash kept on hand, yet it may be freely admitted that it is not improbable that changes have from time to time happened that might not have occurred supposing the separation of the banking and issue departments had not been established. It is evident that if the cash in the two departments had been equally accessible to the bank directors, a withdrawal of money which is now thrown upon one department would not have caused so great a change in the proportion between liabilities and reserve as is now exhibited; and if the directors had reason to believe that the withdrawal was no more than a temporary efflux to the provinces or elsewhere, to be followed by a speedy reflux, they might have been bolder in abstaining from raising the rate of discount. But this action or rather inaction would have been indulged in at the price of a certain risk to the convertibility of the note, which is now avoided, and if it should appear in the end that the directors had erred in supposing the movement of money to be but temporary, they would see reason to regret that they had not been forced to stringent action at the beginning of it. The oscillations experienced in the rate of discount, oscillations which after all indicate nothing more than the natural movement in the value of a medium which is the first to be agitated by changes in value of every other commodity, are cheaply purchased as the price of the permanent and perfect equality of the bank-note and the money it represents. The repeated suspensions of the Act of 1844 in time of trial do, prima facie, present a much stronger argument for the repeal of the statute. Legislation which breaks down upon critical occasions discredits the Legislature that decreed it; and it is not to be denied that the mere suspension of the Act has more than once operated as a charm to allay feelings of panic among bankers, money-dealers, and merchants. It must also be admitted that Sir Robert Peel, in common with the earlier advocates of the policy of the Act, believed that it would prevent the recurrence of commercial crises. It is strange that such an anticipation should have been entertained. Whoever will reflect on the nature of the organization of credit in the commercial world, and on the timid and self-protecting instincts of men, especially of capitalists, will be forced to confess that the recurrence of crises must be accepted as inevitable The more highly developed is the economy of money the greater must be the sum which banks and bankers are liable to be called upon to repay on demand or at short notice in proportion to the reserves of money kept in their c0ffer3; and the greater also must be the amount of bills falling due daily, aud largely met as they fall due by the proceeds of bills drawn daily and discounted aβ drawn. The smoothness of action of the commercial machine evidently depends upon the continuance of that confidence which is ordinarily felt by the creditor-class in the solvency of debtors, and any access of distrust may easily produce consequences culminating in a crisis. Bankers who are at once debtors and creditors are necessarily constrained to protect themselves in such periods of defective confidence by declining to meet the applications for loans and discounts which are forced upon them; and a sharp competition ensues for the possession of the ready money that is available in the market. The pressure is concentrated upon the Bank of England, and the publicity of the condition of that institution, consequent upon the weekly issue όϊ its balance-sheet, lets all men know the rate of decline of its cash reserve. At such a time an accident may cause the spirit of caution to pass into apprehension and panic. The fear that the cash balances of the banking department may be exhausted incites bankers to hasten to anticipate one another in withdrawing any reserve they may have kept at the bank, and the rate of diminution of the cash of the department is accelerated. It is obvious that the condition we have described is in its origin independent of any particular regulations adopted with respect to the note-circulation of a community; and it has, in fact, been experienced in Great Britain under all varieties of laws, and in the United States, in Northern and Southern Germany, and in the British coloniee under an equally wide dissimilarity of currencyregulations. Our history previous to 1844 shows that such a condition may be aggravated, if not precipitated, by an antecedent issue of notes increasing the proportion between the volume of transitory credits and the cash available to meet instantaneous demands; and as long as the issue of notes was unrestricted, bankers could never resist the temptation to make up, by an increase in their issues, any diminution in their available cash, a cause directly provocative of a further diminution by its effect on adverse exchanges, and therefore producing a sharper reaction when the necessity was at last recognised of recovering the balance between their cash in hand and their liabilities. The Act of 1844 cannot prevent panic, but it prevents bankers from resorting to causes which aggravate panics, and it moreover supplies a means of allaying the unreasoning terror in which panics culminate. Were it not for the separation of the issue and the banking departments we should be constrained to witness and tolerate periodical suspension of cash payments, as this would be the only means left of appeasing alarm; and this desperate expedient has been, in fact, employed over and over again, under such circumstances, both in England and elsewhere. The Act of 1844 gives us a less dangerous, though by no means a perfectly harmless, power When the minds of creditors are unhinged, and all are competing for money which is not in existence in sufficient quantities to satisfy their demands, the announcement that the Government has authorized the bank directors to suspend the action of the Act and to fall back on the resources of the issue department operates as a charm. The mere announcement is often enough to put an end to the panic previously prevailing, the feverish fit passes away, and the customary temper of confidence is more or lese slowly restored.

We conclude that the existence of the Act of 1844 is justified even when it is suspended, for it provides, in the maintenance of the cash reserves of the issue department, a stock of money, the unlocking of which furnishes the means of arresting panic which would otherwise have to be sought in a periodic suspension of cash payments. It has naturally been asked whether the law might not be saved the apparent discredit involved in its being set aside by an act of the Executive Government, acting on the faith of a subsequent indemnity from Parliament, by the embodiment in it of a power authorizing its suspension under circumstances that provoke its suspension. Mr Lowe, as Chancellor of the Exchequer, introduced into the House of Commons, in 1873, a bill having this object. He proposed that the Bank Act might be suspended by order of the Government of the day when the minimum, rate of discount had reached 12 per cent., when the exchanges were favourable to England, and when the governor and deputy-governor of the bank certified that panic had caused a large portion of the bank notes nominally in circulation to be locked up and withdrawn from circulation. The authority of Mr Gladstone’s administration had declined when this bill was introduced, and it was not well received. It was contended that the conditions proposed by Mr Lowe had not always existed when the Act had been suspended, and they would be so rarely satisfied that the power of suspension promised by the bill could never be exercised. It was further contended that Mr Lowe’s attempt was necessarily impracticable. In seeking to define beforehand the conditions of suspension of the Bank Act, he tried to define the conditions of a panic; and to attempt to define the conditions of that which is in its essence unreasonable was a logical contradiction. A panic has no laws: it has no fixed shape. It is precipitated we know not how; and we are in the midst of it before we are aware. As it is thus impossible to prescribe beforehand the - conditions of panic, it may reasonably be thought that it is better to leave to the Government of the day the responsibility of acting when a panic has demonstrated its existence. Mr Lowe’s bill, assailed from many quarters, was withdrawn without the opinion of Parliament being taken on its merits, and no attempt has been since made to bring the subject before the Legislature.

We have already said that Sir Robert Peel contemplated an ultimate extinction of all note issues save that of the Bank of England; and he probably expected that the substitution of Bank of England notes for all others would not be long delayed. The progress actually achieved towards this end has been very slow. Out of 204 private banks in England and Wales left by the Act of 1844, with total privileged issues of £5,153,407, no more than 85 have ceased to issue; and the amount they issued which is now withdrawn was £1,283,041. Of joint-stock banks 18 have ceased to issue £842,453, out of 72 having privileged issues of £3,495,446. Only one Scotch bank has ceased to issue notes since the Scotch Act of 1845, and no alteration whatever has taken place in the fixed issues of the Irish banks. It may be added that the provisions of the Act of 1844, relied upon by Sir Robert Peel for bringing about by arrangement a substitution of Bank of England notes for those of privileged bankers, have been for many years entirely neglected. With these facts before us it is not surprising that, in 1865, Mr Gladstone, as Chancellor of the Exchequer under Lord Palmerston, should have submitted to the House of Commons a bill dealing with the subject. By it, it was proposed that private banks of issue in England and Wales should be released from the existing restriction that the numbers of partners must not exceed six, and that joint-stock banks should be allowed to come within the circle of sixty-five miles from London upon their undertaking to pay annually to the Exchequer a duty at the rate of 2 per cent, (altered in committee on the bill first to 1∣∙ and then to 1 per cent.) on their average issues, and that thereupon their privileges of issue should be assured to them until 1890 (altered in committee to 1875 and 1880), after which these privileges should cease and determine. The bill was purely permissive; but it was thought by its author that a large proportion of the English banks of issue would place themselves under its operation, and further legislation would be practicable with respect to the rest. The bill, however, was less and less approved as it became better known, and it was ultimately withdrawn. From that time no legislation on the subject has been contemplated until the session 1875, when the action of the Scotch banks in establishing head offices in London was followed by an agitation, described in the section on Scotch banks (p. 332), which has resulted in the appointment of a select committee on the law of banking and of note issues.

The Select Committee thus appointed has received a vast mass of evidence on the law and practice of banking and of the issue of notes, but the session has been allowed to close without any attempt being made to report on the subject of the committee’s inquiries, and no practical action is expected to follow the termination of its labours. It must be admitted that the obstacles to legislation, supposing legislation to be desirable, are considerable. The bankers of the kingdom are largely represented on both sides of the House of Commons, and they are on the whole well contented w ith the present state of the law, while the great body of the public are profoundly ignorant and uninterested in it. The inaction to be overcome is so great, and the force available is so limited, that nothing will be done except under the influence of a commercial crisis, when almost anything may be done. The aim of economists and statesmen should be to produce a body of authority that may command respect even in the midst of universal agitation; and the inquiries of the Select Committee to which we have referred might be useful for this purpose, if they had been pursued with any discrimination. As it is,the evidence received by the committee will probably serve as a quarry to which wisdom and unwisdom may equally resort for facts and arguments.

At the risk of stating something that may appear too obviously true to require statement, we would submit that the question, whether bankers should be permitted to issue notes, must be determined upon a balance of opposing considerations of expediency. Many of the advocates and supporters of Sir Robert Peel’s legislation of 1844 have said, apparently with a conviction that they were expressing an axiomatic truth, that the issue of notes was no part of the business of a banker. Mr Gladstone has, within the past session, spoken in this sense. The force of assertions of this kind cannot be admitted. There is no law of nature limiting the action of a banker within the bounds sought to be prescribed; and if we accept as the definition of a banker a person whose business it is to borrow and lend money, we cannot but recognize in the issue of transferable notes a most convenient process of carrying on this business. A banker who issues notes borrows so much from the persons from time to time holding them, and this money he has lent to the customers indebted to him. The reasons of convenience which justify a prohibition of the liberty of issue are, first, that experience has shown that this process of borrowing is too potent and too easily abused to the precipitation and aggravation of commercial crises; and, secondly, that the great and almost insuperable difficulty of refusing to receive notes which have obtained general currency makes it most desirable that such notes should possess some better guarantee than can be always forthcoming of the solvency of private issuers. These are the reasons which prevail to uphold Sir Robert Peel’s legislation, and which impel us to consider what means may be discovered of perfecting his policy by the unification of issues throughout the kingdom.

We believe the propagation of clear ideas on the subject of the note currency, and the acceleration of the time when one currency only shall be in circulation, would both be greatly facilitated by a mechanical and local separation of the issue department from the Bank of England. Much confusion of thought still prevails by reason of the fact that the Bank of England is used as the agent for managing whatsis now a state' -issue, resting, so far as it is uncovered by specie, upon state security. If the business of issuing notes were removed bodily from the Bank of England and located in a Government office, and the name of the notes at the same time changed, it could not fail to be seen that the business left behind in Threadneedle Street differed in no essential particular from that of any other banker in Lombard Street, and much of the superstitious regard of the City for the Bank of England, and trust in its assistance in time of trouble, would be rapidly destroyed. It would then be understood that the cry for ministerial interference at the time of crises and of incipient crises was nothing more than a claim for the nation to cover with its credit those who had not been prudent enough to maintain adequate reserves for their own defence; and, as this would be understood beforehand, it would induce the consequence of greater circumspection on the part of dealers in money and a less temptation to rely on extraneous aid. The purely mechanical act of removing the issue of notes from Threadneedle Street would make the facts of the situation plain, and would bring about an alteration of conduct among London bankers, so that it should conform to the facts thus perceived. It has for some time past been clearly perceived that the delicacy of the condition of the money market in London has been much exaggerated, and the feverish tendency to crises materially excited, because the cash reserves kept by the London bankers are disproportionately small compared with the amount of their instantaneous liabilities. Competition has, of course, been a considerable element in causing this attenuation of cash reserves. Each joint stock bank has struggled after that increase of credit which follows an increase of dividends; and the unproductive cash balances on hand have been kept down to the lowest limit. They would, however, never have been reduced to such narrow dimensions but for the reliance placed on the assistance of the Bank of England in the last extremity; and if it were made plain that the Bank of England is itself nothing more than a big joint-stock bank, this reliance would disappear. Many schemes, equally ingenious and chimerical, have been recently put forth for compelling bankers to keep larger reserves of cash in proportion to their deposits. The true way to remove the danger always threatening us under the system that exists is to produce a conviction.among bankers that they must not expect help elsewhere if they become distressed through a default in their own reserves of cash.

If the separation of the issue department from the rest of the Bank of England was completed by its transfer to a Government office under the management of State agents, the unification of the issues of the kingdom might be accomplished by legislation akin to that adopted by the United States in relation to the national banks. Each bank of issue might be required to withdraw its own notes and to receive and put out in exchange for them notes emanating from the State establishment, but bearing a statement on their face of the banks through which they were issued. Government securities should be deposited by tlιe issuing banks for the amounts thus put into circulation, which must not exceed the amount of their existing authorized issues; and the interest on these securities would be paid to the banks, less a fixed charge to defray the cost of preparing and issuing the notes delivered to them. The notes thus issued would be payable at the central State office, and would circulate throughout the kingdom; but as often as they were brought back to the central office they would be cleared again by the several issuing banks for reissue, unless the latter desired to retired from the arrangement, in which case the issuing bank would redeem the notes it issued, which would be cancelled, and the securities deposited, or a corresponding part of them, would be handed back. It would not be improper to force this plan on the acceptance of the privileged banks υf issue, although we believe it would be freely accepted, inasmuch as their notes would at once acquire currency throughout the kingdom without discrimination of locality in exchange for the deposit of security, and the gain they now realize from the issue of notes would be left undiminished. We must, however, repeat the expression of the conviction that neither this nor any other change of the present system can be regarded as practicable until the impulse of agitating circumstances has stirred up Parliament to face the question.

Different Species of Banks—The Clearing-house—Authorization of Banks with Limited Liability.

We have elsewhere hinted at the subdivision of the business of banking which has accompanied the development of commerce. A banker borrows and lends money, but the conditions under which money is borrowed or lent may be extremely various, and the different classes of bankers are distinguished from one another by differences in the rules which they observe in borrowing or lending. Bankers may borrow money on call, at deposit, on debentures, at iuterest, or without interest, and they may lend on open credits, by discounting bills, by advances on mortgage repayable in instalments or otherwise, <fcc., &c.

Banks of Deposit.— These banks receive money on deposit, that is to say, on conditions that a certain prescribed notice shall be given of the time of withdrawal. They allow interest, and they usually lend a large proportion of their money on securities which are not at any moment immediately capable of being realized.

Land Mortgage Banks may be classed with banks of deposit, but they are also accustomed to borrow on debentures repayable at the end of one, two, three, or a larger number of years, at rates of interest varying with the period of the debenture. These institutions were first started for the purpose of granting facilities to the mortgagers of land. The money received on debentures was lent out again to proprietors and purchasers of land, who repaid their debts by annual instalments. It was in this way that the legislation of Stein was facilitated in Germany; the peasant being able to obtain at once from the Land Mortgage Bank the capital necessary to redeem the feudal rights of his lord, a debt which he repaid by a series of annual payments often corresponding to what he had previously paid as rent, until he became an absolute unincumbered owner of the fields he cultivated.

Credit Companies, such as the Crédit Fonder, the Crédit Mobilier, <tc., àc., are strictly analogous to land mortgage banks, except that they invest their funds in loans on the security of general industrial undertakings, to which business they have added the function of negotiators of direct loans between companies formed for the conduct of such undertakings and the capitalist public.

Discount Banks and Discount Agencies borrow money on call or deposit, and lend it exclusively in the discount of bills and negotiable securities, which they often rediscount with capitalists desirous of investing their money in forms capable of being speedily realized.

Trust Associations borrow money on debentures and invest it in the loans of foreign states or similar securities,— the principle of such an association being that the original investor can be secured against the default of any one borrower by the receipt of a high average rate of interest and the general solvency of the rest.

Savings-Banks are institutions established for the receipt of the smaller savings of the poor. As at present existing they are divided into two classes, the Trustees’ Savings-banks and the Post Office Savings-banks; but it seeme probable that some rearrangement of their machinery will be made in the next session of Parliament. For further particulars see Savings-banks.

Allusion has already been made (ante, p. 316) to the Clearing-house. This institution was established, just a century ago, as a place where the clerks of the bankers in the City of London could assemble daily to exchange with one another the cheques drawn upon and bills payable at their respective houses. Before the Clearing-house existed, each banker had to send a clerk to the places of business of all the other bankers in London to collect the sums payable by them in respect of cheques and bills; and it is obvious that much time was consumed by this process, which involved also the use of an unnecessary quantity of money and corresponding risks of safe carriage. In 1775 the common centre of exchange was agreed upon. Its use was confined to the bankers,—at that time and long afterwards exclusively private bankers,—doing business within the City, and the bankers in the west end of the metropolis used some one or other of the City banks as their agent in clearing, a practice which still continues. When the joint-stock banks were first established the jealousy of the existing banks was powerful enough to exclude them altogether from the use of the Clearing-house; and some years elapsed before this feeling was removed so as to allow them to be admitted.

At first the Clearing-house was simply a place of.meeting, but it came to be perceived that the sorting and distribution of cheques, bills, <fcc., could be more expeditiously conducted by the appointment of two or three common clerks to whom each banker’s clerk could give all the instruments of exchange he wished to collect, and from whom he could receive all those payable at his own house. The payment of the balance settled the transaction, and an analysis of the statistics of the Clearing-house by the late Mr Babbage (Jour. Statist. Soc., March 1856), shows that the amount of cash that passed was often less than 4 per cent, of the total sums cleared. Latterly, ħow ever, the arrangements of the Clearing-house have been further perfected, so that neither notes nor coin are now required. The Clearing-house, as well as each banker using it, has an account at the Bank of England; and the balances due at the close of each day’s transactions are settled by transfers from one account to another at the bank.

The use of the Clearing-house was still further extended in 1858, so as to include the settlement of exchanges between the country bankers of England. Before that time each country banker receiving cheques on other country bankers sent them to those other bankers by post (supposing they were not carrying on business in the same place), and requested that the amount should be paid by the London agent of the banker on whom the cheques were drawn to the London agent of the banker remitting them. Cheques «were thus collected by correspondence, and each remittance involved a separate payment in London. In 1858 it was proposed to set up a country clearing-house in London; but it was suggested by Sir John Lubbock that the existing establishment could accomplish what was desired, and this was eventually done. A. country banker now sends cheques on other country banks to his London correspondent, who exchanges them at the Clearing-house with the correspondents of the bankers on whom they are drawn. (Sir John Lubbock, Jour. Statist. Soc., Sept. 1865.) It will be easily understood that an extraordinary economy in the use of coin has resulted from these arrangements; and in the paper by Sir John Lubbock to which we have referred, he gives statistics showing that out of the sum of a million paid into the bank in which he is a partner, only £21,500 consists of bank notes and £6210 of coin. An ordinary weekly clearing varies from 100 to 130 millions; in 1868 the weekly average was, however, no more than £65,397,075, from which it rose continuously to an average of £116,254,717 in 1873. There was a little falling off in 1874, which is now being recovered.

Up to the year 1858 banking companies could not be constituted with limited liability of partners except by way of privilege under special Acts of Parliament, Royal Charters, or Letters Patent; and although the Bank of England, and the three oldest established banks in Scotland, were thus favoured without any consequent deterioration in the character of their management, abundant arguments were adduced in deprecation of a general law on the subject. In 1858, however, an Act was passed authorizing the formation and registration of banking companies with limited liability, and also enabling existing unlimited companies to register as associations with a limited liability of partners, subject to a proviso that, if the bank was a bank of issue, the liability of its partners should remain unlimited in respect of such issue. Several banks have been established and registered under this law, and no evil results have been observed to follow.

Present Management of the Bank of England.

When the charter was renewed in 1833, the notes of the Bank of England were made legal tender everywhere in England except at the bank. Of the wisdom of this regulation no doubt can be entertained. Bank-notes are necessarily always equivalent to bullion; and by making them substitutes for coin at country banks, the demand for the latter during periods of alarm or runs is materially diminished, and the stability of the bank and of the pecuniary system of the country proportionally increased.

Since 1826 the bank has established branches in some of the great commercial towns. The mode and terms of conducting business at these have been described as follows :— “The branch bank at Swansea [and the same is true of those established in other places] is to be a secure place of deposit for persons having occasion to make use of a bank for that purpose; such persons are said to have drawing accounts: to facilitate to the mercantile and trading classes the obtaining discounts of good and unexceptionable bills, founded upon real transactions, two approved names being required upon eveτy bill or note discounted; these are called discount accounts. The applications of parties who desire to open discount accounts at the branch are forwarded to the parent establishment for approval, and an answer is generally received in about ten days. When approved, good bills may be discounted at the branch without reference to London. Bills payable at Swansea, London, or any other place where a branch is established, are discounted under this regulation. The dividends on any of the public funds, which are payable at the Bank of England, may be received at the branch by persons who have opened ‘drawing accounts,’ after signing powers of attorney for that purpose, which the branch will procure from London. No charge is made in this case, except the expense of the power of attorney and the postages incurred in transmitting it. Purchases and sales of every description of Government securities are effected by the branch at a charge corresponding to that made by the local bankers where the branch is situated. A commission, including brokerage in London, and all expenses of postage, is charged on paying at the Bank of England bills accepted by persons having drawing accounts at Swansea, such bills to be advised by the branch; also for granting letters of credit on London, or on the other branches. The branch grants bills on London, payable at seven days’ date, without acceptance, for sums of £10 and upwards. Persons having drawing accounts at Swansea may order money to be paid at the bank in London to their credit at Swansea, and vice versa, at a charge of 6d. in lieu of postage. The branch may be called upon to change any notes issued and dated at Swansea; but they do not change the notes of the bank in London, nor receive them in payment, unless as a matter of courtesy where the parties are known. Bank post bills, which are accepted and due, are received at the branch from parties having drawing accounts, and taken to account without any charge for postage; but unaccepted bank post bills, which must be sent to London, are subject to the charge of postage, and taken to account when due. No interest is allowed on deposits. No advance is made by the branch upon any description of landed or other property, nor is any account allowed to be overdrawn. The notes are the same as those issued by the parent establishment, except being dated Swansea, and made payable there and in London. No note issued exceeds the sum of £500, and none are for a less amount than £5.”

The Bank of England transacts the whole business of Government. “She acts not only,’’ says Adam Smith, “as an ordinary bank, but as a great engine of state. She receives and pays the greater part of the annuities which are due to the creditors of the public; she circulates Exchequer bills; and she advances to the Government the annual amount of the land and malt taxes, which are frequently not paid till some years thereafter.”

The Bank of England rarely discounts bills that have more than two, or at most three months to run, and it were well were this rule generally observed by other establishments. The discounting of bills at long dates is a powerful stimulus to unsafe speculation. When individuals obtain loans which they are not to be called upon to pay for six, twelve, or, perhaps, eighteen months, they are tempted to adventure in speculations which are not expected to be wound up till some proportionally distant period; and as these not unfrequently fail, the consequence is that, when the bills become due, there is commonly little or no provision made for their payment. In such cases the discounters, to avert an imminent loss, sometimes consent to renew the bills. But, while a proceeding of this sort is rarely productive of ultimate advantage to cither party, the fact of its having taken place makes other adventurers reckon that, in the event of their speculations proving to be less successful than they anticipated, their bills will be treated in the same manner, and thus aggravates and extends the evil.

In other respects, too, the discount of bills at long dates, or their renewal, or the making of permanent loans, is altogether inconsistent with sound banking principles, for it prevents the bankers from having that command over their resources which is advantageous at all times, and indispensable in periods of difficulty or distress.

In the discounting of bills, a great deal of stress is usually laid, or pretended to be laid, on the distinction between those that arise out of real transactions and those that are fictitious or that are intended for accommodation purposes. The former are said to be legitimate, while the latter are stigmatized as illegitimate. But Mr Thornton has shown that the difference is neither so well marked nor so wide as many suppose. A notion seems to be generally entertained that all real bills are drawn against produce of one sort or other, which (or its value) is supposed to form a fund for their payment. Such, however, is not always, nor even most commonly, the case. A, for example, sells to B certain produce, for which he draws a bill at sixty days’ date. But prices are rising, trade is brisk, or a spirit of speculation is afloat, and, in a week or two (sometimes much less), B sells the produce at an advance to C, who thereafter sells it to D, and so on. Hence it may, and, in fact, frequently does happen, that bills amounting to four, five, or even ten times the value of a quantity of merchandise, have grown out of its successive sales, before the first bill of the series has become due. And not only this, but bills are themselves very frequently rediscounted; and in this case the credit of the last indorser is generally the only thing looked to; and there is not, perhaps, one case in ten in which any inquiries are made in regard to the origin and history of the bills, though they are often of the most questionable description.

On the whole, therefore, it would seem that the real or presumed solvency of the parties signing a bill, and responsible for its payment, is the only safe criterion by which to judge whether it should or should not be discounted. But the fact of a merchant or other trader offering accommodation bills for discount ought unquestionably to excite a suspicion that he is trading beyond his capital. Inquiries of the most searching description should forthwith be instituted; and unless satisfactory explanations are given, his paper should be rejected. On the same principle, the offering of bills for rediscount ought to awaken suspicions of the bankers and others who resort to so questionable a mode of carrying on business. But, except in so far as a feeling of distrust may be thus very properly excited, there does not appear to be anything in an accommodation bill per se to hinder it from coming within the pale of negotiability. It is a mode of obtaining a loan from a bank; and when the character of the bill is known to the banker, or is openly declared, it does not appear to be an objectionable mode.

Besides bills avowedly intended for accommodation purposes, another and a different variety of such bills is drawn by parties at a distance from each other, often men of straw, and made to appear as if they were bottomed on real transactions. Bills of this sort are, it is greatly to be regretted, always current, and often to a large extent. Of course no person of respectability can be knowingly connected with such bills, which are almost always put in motion either to bolster up some bankrupt concern, or to cheat and defraud the public. But despite the mischief of which they are productive, it appears to be pretty generally supposed that the currency of these bills is an evil which cannot be prevented. There can, however, be no real doubt that it may, at all events, be very greatly diminished; and this desirable result would be effected were it enacted that all bills shall henceforth bear upon their face what they really are; that those that are intended for accommodation purposes shall have at their head the words “Accommodation bill;” and that those only shall bear to be for “value received” that have grown out of bona fide transfers of property. An enactment of this sort could not be felt as a grievance by any one unless he had a fraudulent purpose in view. And were the impressing of a false character on a bill made a criminal offence, punishable by several years’ imprisonment, there is every probability that a formidable check would be given to the issue of spurious bills, and to the manifold abuses to which the practice gives rise.

Bill-discounters who have got fictitious paper on their hands and attempt to get rid of it by concealing its character or representing it in a favourable light make themselves parties to the fraud. Such conduct is so very flagitious, that when it can be fairly brought home to the parties it should subject them to the severest penalties.

The rates of discount charged by the bank, since its establishment in 1694 down to 1845, were as follows [table]

Since 1845 the changes of interest have been, for reasons already given, much more numerous. We give the number of changes in each year— [table]

The dividends on bank stock, from the establishment of the company to the present time, have been as follows: — [table]

The Bank of England does not allow, either at the head office in London, or at its branches, any interest on deposits, and many plausible reasons have been advanced in defence of this rule. They are well stated in the following extract from the evidence of Mr Weguelin, formerly governor of the bank, before the Committee of 1857 :—

“We,” saidhe, “at the Bank of England, have always considered that the proper functions of a banker were to keep the spare cash of his customer, such cash as his customer required for his daily expenditure, for the sudden demands of his business, and any accidental accumulation which might happen before the customer had occasion to invest it. That is contrasted with the system pursued by the joint-stock banks. The joint-stock bank invites a large deposit by offering a certain rate of interest for the deposit; in point of fact, the joint-stock bank becomes the investor of the money instead of the customer. The customer of a joint-stock bank does not himself invest his own money, but he employs the joint-stock bank to do it, taking the guarantee of the joint-stock bank, and taking, possibly, a lower rate of interest. Now, that system, if applied to the Bank of England, would be, I think, very prejudicial to the public interests. It would, in the first place, force upon the Bank of England to invest its reserves much more closely than it does now. If it had to pay interest upon its deposits, it could only do 60 by investing them in some securities that would pay a higher rate of interest than that which it pays. Its deposits also are of that particular character which would render it still more inexpedient that they should be closely invested. They consist, in the first place, of Government deposits, which rise from a low rate at one period of a quarter up to five or six millions higher at another period of a quarter, and again collapse to a very low rate at another period. Again, the private deposits consist, to a certain extent, of the deposits of the bankers and the joint-stock banks of London. Those deposits are the amounts which those bankers require to work their own business. Consequently, they are not deposits which should be very closely invested by the Bank of England. In times when there is a great accumulation of deposits in the Bank of England, it is because the public are not able at those times to find investments to their mind to employ those deposits; and consequently, it is not at all likely that the Bank of England, if that is the case with the public generally, will be able to find investments which the public themselves have not been able to do. All these reasons combined would lead me to think, that to force a system upon the Bank of England by which it should be obliged to employ its deposits very closely—much more closely than it does at present—would be not only prejudicial and unsafe as regards the Bank of England, but would be prejudicial to the public interest.”— Quest. 159.

It is, however, obvious that this reasoning is quite inconclusive. Mr Weguelin shows clearly enough that the directors of the bank would be bound to exercise great caution in the choice and extent of their investments, but he says nothing to explain "why they should not, as the managers of a joint-stock company, use every means of profitably extending their business, and it is incontestable that if the bank directors offered to receive deposits at interest, the reputation of the bank would enable them to defy the competition of the other joint-stock banks. The truth is, that the non-allowance of interest is a tradition, of no authority in itself, and operating injuriously in keeping up the delusion that the banking department of the Bank of England is an institution differing essentially in the character of its business from other banks.

Previously to 1786 the bank received an allowance for paying the dividends, superintending the transfer of the stock, &c., of the national debt, at the rate of £562, 10s. a million on its amount. In 1786 this allowance was reduced to £450 a million, the bank being, at the same time, entitled to a considerable allowance for its trouble in receiving contributions on loans, lotteries, &c. This, though long regarded as a very improvident arrangement on the part of the public, was acquiesced in till 1808, when the allowance on account of management was reduced to £340 per million on £600,000,000 of the public debt, and to £300 per million on all that it exceeded that sum, exclusive of some separate allowances for annuities, <fcc. The impression, however, was still entertained that the allowances for management should be further reduced, and this has been effected in the interim.

Exclusive of its functions as public banker and manager of the public debt, the Bank of England is connected with Government through the circulation. We have seen that it is entitled to issue the sum of £15,000,000 upon securities, that is, on the credit of the funds lent to Government. But for these the bank receives about 3 per cent, interest, and such being the case, the public is clearly entitled to a portion, if not to the whole amount of the profits realised by the bank on the issue of these £15,000,000. It is difficult to say how much this ought to be. The issue department of the bank seldom reissues notes, but for the most part destroys them as soon as they are returned to it. This practice is said to be necessary to enable the bank to obviate fraud, by keeping a proper account of the numbers of the notes afloat. An opinion is, however, pretty generally entertained that this might be effected by a less expensive process than that which is now resorted to. And certainly, it seems to be a very wasteful proceeding, that a quantity of newly manufactured notes issued by the bank in the forenoon, and returned to her in the afternoon, should not be re-issued, but consigned to the flames. The Scotch banks are justly censurable for keeping their notes too long afloat, but this is running with a vengeance into the opposite extreme.

In 1861 a fresh arrangement was made between the Government and the bank, to endure for 25 years. Under this agreement the bank receives £300 per million on £600,000,000, and £150 per million on the amount of debt above that sum; but from these allowances are deducted £60,000 for exemption from stamp duties and the whole allowance out of profit of issue, making together nearly £200,000.

It should be observed that the responsibility and expense incurred by the bank, in managing the public debt, are very great. The temptation to the commission of fraud, in transferring stock from one individual to another, and in the payment of the dividends, is well known; and notwithstanding the skilfully devised system of checks adopted by the bank for preventing this, it has frequently sustained very great losses by forgery and otherwise. In 1803 the bank lost, through a fraud committed by one of the principal cashiers, Mr Astlett, no less than £340,000; and the forgeries of Fauntleroy, the banker, cost it a still larger sum. At an average of the ten years ending with 1831, the bank lost, through forgeries on the public funds, £40,204 a year.— {Report on Rank Charter, Appen, p. 165.)

Besides the transactions alluded to, the bank entered, on the 20th of March 1823, into an engagement with Government with respect to the public pensions and annuities, or, as they have been more commonly termed, the dead weight. At the end of the war, the naval and military pensions, superannuated allowances, <tc., amounted to above £5,000,000 a year. They would, of course, have been gradually lessened, and ultimately extinguished, by the death of the parties; but it was resolvedin 1822 to attempt to spread the burden equally over the whole period of forty-five years, during which it was calculated the annuities would continue to decrease. To effect this purpose, it was supposed that, upon Government offering to pay £2,800,000 a year for forty-five years, capitalists would be found who would undertake to pay the entire annuities, according to a graduated scale previously determined upon, making the first year a payment of £4,900,000, and gradually decreasing the payments until the forty-fifth and last year, when they were to amount to only £300,000. This supposition was not, however, realized. No capitalists were found willing to enter into such distant engagements. But in 1823, the bank agreed, on condition of receiving an annuity of £585,740 for forty-four years, commencing on the 5th of April 1823, to pay, on account of the pensions, <fcc., at different specified periods, between the years 1823 and 1828, both inclusive, the sum of £13,089,419.— (4 Geo. IV. c. 22.) This annuity has, in due course of time, expired.

Formerly the business transacted at the bank was so much encumbered with forms and conditions, that the generality of merchants and ordinary people rarely thought of employing it to keep their money or make their payments. But in this respect an entire change has been effected. Cheques, the minimum amount of which was formerly £10, may now be drawn of any amount, great or small; and all sorts of banking business is conducted with facility and despatch, and, it may be added, with perfect security.

The bank opens banking accounts, or, as they are called, “drawing accounts,” for the safe custody, and the receipt and payment of cash, not only with merchants and traders, but with all persons who choose to keep their money at a banker’s and to draw cheques against it. The bank also takes charge of its customers’ bills of exchange, Exchequer bills, and other securities, and does all that is needful either in the collection of bills of exchange, the exchange of Exchequer bills, the receipt of dividends, and so forth, free of any charge. Plate chests, and deed and security boxes, may be deposited free of expense, by customers, for safe custody. The bank looks to the average balance of cash on each account to compensate for the trouble and expense of keeping it, and in this respect the requirements of the bank are certainly not greater than those of ordinary bankers. No particular sum is required to be lodged on opening an account; it is only necessary that the party should be known as respectable, and in a condition to require a banking account. But the bank receives and holds sums of money for safe custody for parties who have no current accounts.

The following are the regulations under which accounts are conducted :—

1. All letters should be addressed to the chief cashier. '

2. It is desirable that drafts should be drawn upon cheques furnished by the bank.

3. Cheques upon city bankers, eastward of King Street, Cheapside,—

Paid in by 12 o’clock may be drawn for after 1.

Do. ∙ 2 o’clock ,, ,, after 3. ∣

4. Cheques paid in after 2, and before 3 o’clock, and cheques upon all other London bankers paid in before 12 o’clock, may be drawn for on the following morning.

5. Cheques paid in after 3 o’clock are sent out at 9 the following morning, and may be drawn for as soon as received.

ι 6. Dividend warrants are received at the drawing office until 4 o’clock in the afternoon for all persons having accounts at the bank.

7. It is requested that notice be given at the drawing office of bills accepted payable at the bank, with the date of their maturity.

8. Persons keeping a drawing account with the bank (although not having a discount account) may tender bills for discount through the drawing office. Application for discounts or for advances on stock, Exchequer bills, &c., must be made before 2 o’clock.

9. Bills of exchange and notes not paid when due, will be noted.

10. The bank will make purchases or sales of British or foreign securities upon an order in writing addressed to the chief cashier; and dividends on stock may be received under powers of attorney granted to the cashiers of the bank.

11. Exchequer bills, bonds, railway debentures, or any other securities may be deposited, and the interest, when payable, will be received and placed to account.

12. Credits paid in to account are received without the bank-book, and are afterwards entered therein without the party claiming

13. Notes of country bankers, payable in London, are sent out the same day for payment if paid in before 3 o’clock.

14. The pass-books should be left at the drawing office, at least once a month, to be written up. *

15. Where post-bills are required, or a payment is to be made to any office of the bank by cheque on the Bank of England, the cheque must be presented at the office upon which it is drawn, and exchanged for an order on the post-bill office, or on the office at which the payment is to be made.

16. Cash-boxes taken in, contents unknown, for such parties as keep accounts at the bank.

17. A person having a drawing account may have a discount account; but no person can have the latter without at the same time having the former. When a discount account is opened, the signatures of the parties are entered in a book kept for that purpose, and powers of attorney are granted empowering the persons named in them to act for their principals. Bills of exchange having more than 95 days to run are not eligible for discount.

N.B. — All changes in the residence of persons keeping cash at the bank are requested to be made known at the drawing office; and it is particularly requested that no gratuities be offered to the clerks, of the banking offices, such gratuities being strictly forbidden.

Scotch Ranks.

The Act of 1708, preventing more than six individuals from entering into a partnership for carrying on the business of banking, did not extend to Scotland. In consequence of this exemption, several banking companies, with numerous bodies of partners, have existed, for a lengthened period, in that part of the empire.

The Bank of Scotland was projected by Mr John Holland, merchant, of London, and was established by Act of the Scotch Parliament (Will. III., Pari. 1, § 5) in 1695, by the name of the Governor and Company of the Bank of Scotland. Its original capital was £1,200,000 Scotch, or £100,000 sterling, distributed in shares of £1000 Scotch, or £83, 6s. 8d. sterling, each. The Act exempted the capital of the bank from all public burdens, and gave it the exclusive privilege of banking in Scotland for twenty-one years. The objects for which the bank was instituted, and its mode of management, were intended to be, and have been, in most respects, similar to those of the Bank of England. The responsibility of the shareholders is limited to the amount of their shares. The capital of the bank was increased to £200,000 in 1774, and was enlarged by subsequent Acts of Parliament, the last of which (44 Geo. III. c. 23) was passed in 1804, to £1,500,000, its present amount. Of this sum £1,000,000 has been paid up. The last-mentioned Act directed that all sums relating to the affairs of the bank should henceforth be rated in sterling money; that the former mode of dividing bank stock by shares should be discontinued; and that, for the future, it should be transferable in sums or parcels of any amount. On the union of the two kingdoms in 1707, the Bank of Scotland undertook the recoinage, and effected the exchange of the currency in Scotland. It was also the organ of Government in the issue of the new silver coinage in 1817.

The Bank of Scotland is the only Scotch bank constituted by Act of Parliament. It began to establish branches in 1696, and issued notes for one pound as early as 1704. The bank also began, at a very early period, to receive deposits on interest, and to grant credit on cash accounts, a minute of the directors with respect to the mode of keeping the latter being dated as far back as 1729. It is, therefore, entitled to the credit of having introduced and set on foot the distinctive principles of the Scotch banking system, which, whatever may be its defects, is perhaps superior to most other systems hitherto established. Generally speaking, the Bank of Scotland has been cautiously and skilfully conducted; and there can be no doubt that it has been productive, both directly and as an example to other banking establishments, of much public utility and advantage.

It may be worth mentioning, that the Act of Will. III. establishing the Bank of Scotland, declared that all foreigners who became partners in the bank should by doing so become, to all intents and purposes, naturalised Scotchmen. After being for a long time forgotten, this clause was taken advantage of in 1818, when several aliens acquired property in the bank in order to secure the benefit of naturalization. But after being suspended, the privilege was finally cancelled in 1822.

We subjoin an official abstract of the constitution and objects of the Bank of Scotland, printed in 1857 for the use of the proprietors;—the terms and model of transacting business are, of course, sometimes altered, according to circumstances:—

1. The Bank of Scotland is a public national establishment, erected and regulated by the Legislature alone, and expressly as a public bank in this kingdom,—for the benefit of the nation, and for the advancement of agriculture, commerce, and manufactures, and for other objects of public policy.—(Will. Pari. 1, § 5; 14 Geo. III. c. 32; 24 Geo. III. c. 8; 32 Geo. III. c. 25; 34 Geo. III. c. 19; 44 Geo. III. c. 23.)

2. The statutory capital is at present £1,500,000 sterling. It is raised by voluntary subscription, and has been subscribed for. £1,000,000 has been called for, and paid in.—(44 Geo. III. c. 23.)

3. Subscribers, if not under obligations to the bank, may, at pleasure, transfer their right. If under obligation to the bank, the obligation must be previously liquidated; or the proceeds of the sale, at a price to the satisfaction of the directors, must be applied towards such liquidation. Transfers are made by a short assignment and acceptance thereof, both in a register appointed for that purpose. The expense, besides the Government stamp, is 11s.— (Will. Pari. 1, § 5.)

4. Bank of Scotland stock may be acquired, in any portions, by any person, community, or other lawful party whatsoever, without selection, exclusion, or limitation of numbers.—(Will. Pari. 1, § 5; 44 Geo. III. c. 23.)

5. Bank of Scotland stock may be conveyed by will, and, if specially mentioned, without expense of confirmation. It cannot be arrested; the holder’s right may be adjudged. Dividends may be arrested.—(Will. Pari. 1, § 5.)

6. The Bank of Scotland is a public corporation by Act of Parliament. The bank’s transactions are distinct from those of the stockholders; and theirs from those of the bank.—(Will. Pari. 1, §5.)

7. The establishment is expressly debarred from any other business than that of banking.—(Will. Parl. 1, § 5.)

8. The management is vested, by statute, in a governor, deputygovernor, twelve ordinary, and twelve extraordinary directors. They are chosen annually, on the last Tuesday of March, by the stockholders having £250 of stock or upwards. Those above £250 have a vote for every £250, to £5000, or 20 votes. No person can have more than 20 votes. The governor must hold, at least, £2000 of stock.; the deputy-go vernor £1500; and each director £750 [now £1000]. They swear to be equal to all persons, and cannot hold any inferior office in the bank.—(Will. Pari. 1, § 5; 14 Geo. III. c. 32; 44 Geo. III. c. 23.)

9. The executive part is conducted by a treasurer, secretary, and other public officers, all sworn. All the officers of the Bank of Scotland find due security.—(Will. Pari. 1, § 5.)

10. The board of directors sits, for the general administration of the bank, at the bank’s public head office in Edinburgh. The local business of that district is also conducted at that office. For the local business in the other parts of the kingdom, the bank has its regular public offices in the principal towns. At each of these offices there is the bank agent or cashier, who gives due security, and conducts the bank’s business for that district in the manner aftermentioned.—(Will. Pari. 1, § 5.)

11. The bank takes in money at all its public offices, on deposit receipts or on current deposit accounts. At the head office drafts on the branches, and at the branches drafts on the other branches and on the head office, are granted. Both at the head office and branches drafts are granted on the London, Dublin, and English and Irish provincial correspondents of the bank. All receipts and drafts are on the bank’s engraved forms, and bear to be granted “For the Bank of Scotland,” or “for the Governor and Company of the Bank of Scotland.” At the head office official documents are signed by the treasurer, and at the branches by the agents, and all are countersigned.

Remittances can be made to the principal colonial and continental towns; and bills, payable in the colonies, and in foreign countries, can be negotiated through the bank.— (Resolution of Court, 1793, as since modified.) N.B. — The bank has always allowed interest on deposits, at a rate varying according to circumstances.

12. Bills on London, Edinburgh, or any town in the United Kingdom, are discounted at all the bank’s public offices. The bank’s agents judge, in ordinary cases, of the bills presented, so that parties meet with no delay. The bank does not re-issue the bills which it has discounted.— (Fixsolution of Court, 23d Feb. 1789, and subsequent modifications. )

13. Government stock and other public funds may be purchased or sold, and. dividends thereon may be received through the bank.

14. The bank gives credit on cash accounts at any of its offices, on bond, with security. The security may be personal co-obligants, or such other security as may be specially agreed on. Applications for cash accounts are given in to the office where the cash account is wanted, and must specify the credit desired, and the security proposed; and the individual partners, where co-partneries are proposed. Cash accounts are granted by the directors only, and are not recalled unless by their special authority. It is understood that these credits are not used as dead loans, to produce interest only. In the fair course of business, the advantage of the bank is consulted by an active circulation of its notes, and by frequent repayments to it in a way least affecting that circulation.— (Resolution of Court, 6th Nov. 1729, and 23d Feb. 1789.)

15. The bank’s dividend has been for some time 8 [it has risen till it is now (1875) 14] per cent, per annum on its paid-up capital of £1,000,000 sterling. The dividends are paid regularly twice a year, without expense. They may' be drawn either at the bank’s head office, or at any of its other offices, as most agreeable to the stockholder.

The above may suffice as a general outline of the mode in which the business of banking is conducted in Scotland.

The Royal Bank of Scotland was established in 1727. Its original capital of £151,000 has been increased to £2,000,000.

The British Linen Company was incorporated in 1746, for the purpose, as its name implies, of undertaking the manufacture of linen. But the views in which it originated were speedily abandoned, and it became a banking company only. Its capital amounts to £1,000,000.

None of the other banking companies established in Scotland are chartered associations with limited responsibility, the partners being liable, to the whole extent of their fortunes, for the debts of the firms. The number of partners is in every case considerable. The affairs of the banks are uniformly conducted by a board of directors, annually chosen by the shareholders.

The Bank of Scotland began, as already stated, to issue £1 notes so early as 1704, and their issue has since been continued without interruption. “In Scotland,” to use the statement given in the Report of the Committee of the House of Commons of 1826 on the Promissory Notes of Scotland and Ireland, “the issue of promissory notes payable to the bearer .on demand, for a sum of not less than 20s., has been at all times permitted by law; nor has any Act been passed limiting the period for which such issue shall continue legal in that country.”

All the Scotch banks receive deposits of as low a value as £10, and often lower, and allow interest upon them.

The interest allowed by the banks upon deposits varies, from time to time, according to the variations in the current rate of interest. The aggregate amount of the sums deposited with the Scotch banks in 1874-5 is stated to be £78,401,070.

A witness, connected for many years with different banks in Scotland, and who had experience of their concerns at Stirling, Edinburgh, Perth, Aberdeen, and Glasgow, being examined by the Commons’ Committee of 1826, stated that more than half the deposits in the banks with which he had been connected were in sums from £10 to £200. Being asked what class of the community it is that makes the small deposits, he gave the following answer,—from which it appears that the mode of conducting this branch of the bank business in Scotland has long given to that country most part of the benefits derivable from the establishment of savings-banks:—

“Question.— What class of the community is it that makes the smallest deposits?

“Answer.— They are generally the labouring classes in towns like Glasgow; in country places like Perth and Aberdeen, it is from servants and fishermen, and that class of the community who save small sums from their earnings, till they come to be a bank deposit. There is now a facility for their placing money in the Provident Banks, which receive money till the deposit amounts to £10. When it comes to £10 it is equal to the minimum of a bank deposit. The system of banking in Scotland is an extension of the Provident Bank system. Half-yearly or yearly those depositors come to the bank, and add the savings of their labour, with the interest that has accrued upon the deposits from the previous half-year or year, to the principal; and in this way it goes on, without being at all reduced, accumulating (at compound interest) till the depositor is able either to buy or build a house, when it comes to be £100, or £200, or £300, or till he is able to commence business as a master in the line in which he has hitherto been a servant. A great part of the depositors of the bank are of that description, and a great part of the most thriving of our farmers and manufacturers have arisen from such beginnings.”

The following Table exhibits an account of the different Scotch Banks, their Partners, Branches, Authorized Circulation Actual Circulation, Coin, dec., in 1874-5 (from Oliver de Boyd , s Almanac and Banks of Issue Report). [table]

* The capital of banks marked with an asterisk is in shares:—The Aberdeen Town and County Bank, £7 paid; North of Scotland Bank, £4 paid; Caledonian Bank, £2, 10s. paid. + Dividend and bonus.

The loans or advances made by the Scotch banks are either in the shape of discounts, or upon cash-credits, or, as they are more commonly termed, cash accounts.

A cash-credit is a credit given to an individual by a banking company for a limited sum, seldom under £100 or £200, upon his own security, and that of two or three individuals approved by the bank, who become sureties for its payment. The individual who has obtained such a credit is enabled to draw the whole sum, or any part of it, when he pleases, replacing it, or portions of it, according as he finds it convenient, interest being charged upon such part only as he draws out. “If a man borrows £5000 from a private hand, besides that it is not always to be found when required, he pays interest for it whether he be using it or not. His bank credit costs him nothing, except during the moment it is of service to him, and this circumstance is of equal advantage as if he had borrowed money at a much lower rate of interest” (Hume’s Essay on Balance of Trade). This, then, is plainly one of the most commodious forms in which advances can be made. Cash-credits are not, however, intended to be dead loans; and they are not granted except to persons in business, or to those who are frequently drawing out and paying in money.

The system of cash-credits has been very well described in the Report of the Lords’ Committee of 1826 on Scotch and Irish Banking. “There is also,” say their lordships, “one part of their system which is stated by all the witnesses (and, in the opinion of the Committee, very justly stated) to have had the best effects upon the people of Scotland, and particularly upon the middling and poorer classes of society, in producing and encouraging habits of frugality and industry. The practice referred to is that of cash-credits. Any person who applies to a bank for a cash-credit is called upon to produce two or more competent sureties, who are jointly bound; and after a full inquiry into the character of the applicant, the nature of his. business, and the sufficiency of his securities, he is allowed to open a credit, and to draw upon the bank for the whole of its amount, or for such part as his daily transactions may require. To the credit of the account he pays in such sums as he may not have occasion to use, and interest is charged or credited upon the daily balance, as the case may be. From the facility which these cashcredits give to all the small transactions c f the country, and from the opportunities which they afford to persons who begin business with little or no capital but their character to employ profitably the minutest products of their industry, it cannot be doubted that the most important advantages are derived to the whole community. The advantage to the banks that give these cash-credits arises from the call which they continually produce for the issue of their paper, and from the opportunity which they afford for the profitable employment of part of their deposits. The banks are indeed so sensible that, in order to make this part of their business advantageous and secure, it is necessary that their cash-credits should (as they express it) be frequently operated upon, that they refuse to continue them unless this implied condition be fulfilled. The total amount of their cash-credits is stated by one witness to be £5,000,000, of which the average amount advanced by the banks may be one-third.

The expense of a bond for a cash-credit of £500 is 12s. 6d. stamp duty, and a charge of from 5s. to 10s. 6d. per cent, for preparing it.

There have been, on the whole, comparatively few failures among the Scotch banks. In 1793 and 1825, when so many of the English banks were swept off, there was not a single establishment in Scotland that gave way. This superior solidity appears to have been owing to various causes,—partly to the banks having, for the most part, large bodies of partners, who, being conjointly and individually bound for the debts of the companies to which they belong, go far to render their ultimate security all but unquestionable, and partly to the facility afforded by the law of Scotland of attaching a debtor’s property, whether it consist of land or movables, and making it available for the payment of his debts. This last-mentioned circumstance was referred to as follows, in the Report already alluded to :—

“A creditor in Scotland is empowered to attach the real and heritable as well as the personal estate of his debtor, for payment of personal debts, among which may be classed debts due by bills and promissory notes; and recourse may be had, for the purpose of procuring payment, to each description of property at the same time. Execution is not confined to the real property of a debtor merely during his life, but proceeds with equal effect upon that property after his decease.

“The law relating to the establishment of records gives ready means of procuring information with respect to the real and heritable estate of which any person in Scotland may be possessed. No purchase of an estate in that country is secure until the sasine (that is, the instrument certifying that actual delivery has been given) is put on record, nor is any mortgage effectual until the deed is in like manner recorded.

“In the case of conflicting pecuniary claims upon real property, the preference is not regulated, by the date of the transaction, but by the date of its record. These records are accessible to all persons; and thus the public can with ease ascertain the effective means which a banking company possesses of discharging its obligations; and the partners in that company are enabled to determine, with tolerable accuracy, the degree of risk and responsibility to which the private property of each is exposed.”

But, on the whole, we are inclined to think that the long familiarity of the inhabitants with banks and paper money, and the less risk that has attended the business of banking in Scotland, have been the principal causes of the greater stability of the Scotch banks. This stability was not, however, everywhere exhibited in the crisis of 1857, when two of the principal Scotch banks, the headquarters of which were in Glasgow, were compelled to stop payments. They had very large capitals, the Western Bank £1,500 000, and the City of Glasgow Bank £1,000,000, with a great many branches, large amounts of deposits, and very numerous and wealthy proprietary bodies. Had the management of the Western Bank displayed anything like ordinary skill and prudence, it might have gone triumphantly through a far more serious trial. But having advanced immense sums to a few firms that never were entitled to any considerable credit, it was so crippled that, for a lengthened period before its stoppage, it was reduced to the expedient of sending up the bills it had discounted in Glasgow to be rediscounted in London; and when this resource failed it, and the other banks declined to come forward to its assistance, nothing remained for it but to shut its doors. On the affairs of the bank being investigated by a committee appointed for the purpose, it was found that they were in a much worse state than any one could have anticipated. The losses exceeded two millions, and were directly attributable to the carelessness and negligence of directors, and the incompetence of the managers appointed by them.

We have already explained the nature of Sir Robert Peel’s Act of 1845 (following that of 1844) dealing with Scotch banks. It allowed the Scotch banks then exercising the privilege of issuing notes to continue to exercise it, without limitation of amount, but subject to the condition, that for every note issued by a bank above its average circulation the year preceding the 1st May 1845 an equal amount in coin should be kept in its coffers. No bank established after the passing of the Act was allowed to issue notes. No change was effected by the Act in the denomination of notes issued, which remained, therefore, of £1 and upwards. Many theorists have urged that £1 notes should be forbidden in Scotland, just as others have argued in favour of their being again put into circulation in England. This question cannot be settled upon abstract arguments. We have no doubt that the balance of reasoning is in favour of the issue of £1 notes, provided they are issued under regulations securing their convertibility at all times and under all circumstances, but these regulations are wanting in Scotland. Legislation on the subject should not take the form of suppressing £1 notes entirely, but of withdrawing the privilege of issuing them from the existing banks, and vesting it in a public institution governed by fixed rules analogous to those of the issue department of the Bank of England. When the convertibility of notes is thus made certain, the single valid objection against the issue of those of £1 denomination disappears. It may be added that more than one-half the total issues of the banks established in the Australian colonies consists of £1 notes.

A complaint has been often raised that the Act of 1845 gave the existing Scotch banks a practical monopoly of the business of banking in North Britain, and it must be admitted to be the fact, that only one new bank has been established in Scotland since the passing of the Act, and that bank carried on business for a short time only. It is, however, true that legislation precisely the same has not prevented the establishment of new banks in Ireland, and it is doubtful whether the observed fact is rightly attributed to the cause assigned to it. With the exception of London, and some of the larger provincial towns, there have been very few banks established in England since 1836, eight years before the Bank Charter Act; and of the banks established in 1835 and 1836, very many were formed by the conversion of pre-existing private banks into joint-stock associations. The truth appears to be that the natural obstacle's to the establishment of a new bank in a district already occupied by banks and bankers are almost insuperable. A bank cannot be successful unless it commands credit; and those who want a place of safe keeping for their money select establishments that have been tried and tested through long years. Hence it happens that, though private banks of long standing continue in esteem, the attempts to set up new private banks are most rare; and, unless the wealth and prosperity of a neighbourhood have rapidly developed, so that capitalists have risen to prominence in it who are not connected as shareholders or directors with existing banks, it is not easy to form joint-stock associations of weight enough to compete with the institutions in possession of the field. It is not necessary to refer the absence of new banking companies in Scotland or elsewhere to the legislation of Sir Robert Peel. Though he allowed the Scotch banks to increase indefinitely the issue of their notes, it was upon condition of keeping in hand cash to represent every note above fixed limits; so that the amount of profit derivable from their issues is not capable of increase, and the value of their privileges will have been strictly included in the selling price of shares in these banks since 1845. As far as the privilege of issue goes, capitalists preparing to start a new banking association in Scotland would be in the same position as in buying shares in an established company; and if they do not start an association of their own, it is from the difficulty of attracting confidence, rather than because they would not enjoy the profits of a privileged circulation for which they would have to pay a full value. It must also be observed that the competition among the existing banks is sufficiently active to have caused them to increase the number of their branches 40 per cent, since 1845.

Another question has been raised in relation to Scotch banks, which was the subject of a keen parliamentary discussion during the past session (1875). It has been mentioned (ante, p. 322) that English joint-stock banks of issue are debarred from setting up branches in London, or within sixty-five miles of it, a prohibition originally imposed on them in the interest of the Bank of England as a bank of issue. There is no such prohibition affecting Scotch and Irish banks, which can set up offices in London or elsewhere in England subject to the single condition affecting all banking establishments set up in England since 1844, that notes other than Bank of England notes are not issued at such offices; and it is obvious that a Scotch or Irish banking company establishing a head office in London would be able to give it at once a large agency business, and would be able to feed it continuously with new connections owing to the flow of immigration from Scotland and Ireland to London. Accordingly, the directors of the National Bank of Ireland began to conduct the general business of banking at their head office in London in 1854, and they have subsequently set up seven or eight branches in the metropolis, each of which is understood to be the centre of much business. This example was so far followed, that the National Bank of Scotland started an office in London in 1864; the Bank of Scotland did the same in 1867; and the Royal Bank in 1874, having obtained a private Act for the purpose. The Clydesdale Bank also opened three branches in Cumberland in 1874. In consequence of this action Mr Goschen brought into Parliament a bill, the object of which was to disable Scotch banks from coming into England, as English joint-stock banks of issue are disabled from coming to London. The bill did not extend to Irish banks, as they were held too firmly settled in the metropolis to be expelled from it. Two arguments were advanced in favour of this measure: the first, that it was hard that Scotch banks should be permitted to do that which is denied to English joint-stock banks; but it is an easy, and, as it would seem, a conclusive answer to this argument, that English joint-stock banks of issue should be freed from the disability now imposed upon them. Now that an increase in its issue is not a measure of profit to the Bank of England, there is no reason why these country banks of England should not be allowed to set up head offices in London, subject to the law forbidding the issue of their notes in London. The second argument in favour of Mr Goschen’s measure was, that something ought to be done to hasten that unification of issues which Sir Robert Peel contemplated; and if the Scotch banks had come to Parliament asking for a liberty they did not possess, there would have been some plausibility in this argument. It is to be feared that the whole strength of the support to Mr Goschen’s bill sprang from the jealousy of the existing bankers of London of any intrusion into their domain. Unworthy as this source of opposition was, it prevailed so far as to cause the appointment of a Select Committee of the House of Commons to consider the law and practice of banking, and this Committee’s report has just appeared as these sheets are passing through the press (August 1875).

Banking in Ireland.

“In no country, perhaps,” says Sir Henry Parnell, “has the issuing of paper money been carried to such an injurious excess as in Ireland. A national bank was established in 1783, with similar privileges to those of the Bank of England in respect to the restriction of more than six partners in a bank, and the injury that Ireland has sustained from the repeated failure of banks may be mainly attributed to this defective regulation. Had the trade of banking been left as free in Ireland as in Scotland, the want of paper money that would have arisen with the progress of trade would in all probability have been supplied by joint-stock companies, supported with large capitals and governed by wise and effectual rules.

“In 1797, when the Bank of England suspended its payments, the same privilege was extended to Ireland; and after this period the issues of the Bank of Ireland were rapidly increased. In 1797 the amount of the notes of the Bank of Ireland in circulation was £621,917; in 1810 £2,266,471; and in 1814, £2,986,999.

“These increased issues led to corresponding increased issues by the private banks, of which the number was fifty in 1804. The consequence of this increase of paper was its great depreciation; the price of bullion and guineas arose to 10 per cent, above the mint price; and the exchange with London became as high as 18 per cent., the par being 8⅜. This unfavourable exchange was afterwards corrected, not by any reduction in the issues of the Bank of Ireland, but by the depreciation of the British currency in the year 1810, when the exchange between London and Dublin settled again at about par.

“The loss that Ireland has sustained by the failure of banks may be described in a few words. It appears, by the Report of the Committee on Irish Exchanges in 1804, that there were, at that time, in Ireland fifty registered banks. Since that year a great many more have been established, but the whole have failed, one after the other, involving the country from time to time in immense distress, with the following exceptions—First, a few that withdrew from business; secondly, four banks in Dublin; thirdly, three at Belfast; and, lastly, one at Mallow. These eight banks, with the new Provincial Bank and the Bank of Ireland, are the only banks now (1827) existing in Ireland.

“In 1821, in consequence of eleven banks having failed nearly at the same time, in the preceding year, in the south of Ireland, Government succeeded in making an arrangement with the Bank of Ireland, by which joint-stock companies were allowed to be established at a distance of fifty miles (Irish) from Dublin, and the bank was permitted to increase its capital from 2 j to 3 millions sterling. The Act 1 and 2 Geo. IV. c. 7 2, was founded on this agreement. But ministers having omitted to repeal in this Act various restrictions on the trade of banking that had been imposed by 33 Geo. II. c. 14, no new company was formed. In 1824 a party of merchants of Belfast, wishing to establish a joint-stock company, petitioned Parliament for the repeal of this Act of Geo. IL; and an Act was accordingly passed in that session, repealing some of its most objectionable restrictions (5 Geo. IV. c. 73).

“In consequence of this Act, the Northern Bank of Belfast was converted into a joint-stock company, with a (nominal) capital of £500,000, and commenced business on the 1st of January 1825. But the restrictions of 33 Geo. II., and certain provisions contained in the Acts 1 and 2 Geo, III., and 5 Geo. IV., obstructed its progress, and they found it necessary to apply to Government to remove them; and a bill was accordingly introduced, which would have repealed all the obnoxious clauses of the 33 Geo. II., had it not been so altered in the committtee as to leave several of them in force. In 1825 the Provincial Bank of Ireland commenced business with a (nominal) capital of £2,000,000; and the Bank of Ireland has of late established branches in all the principal towns.”

Since Sir Henry Parnell published the pamphlet from which we have taken the foregoing extract, several joint-stock banking companies have been founded in Ireland. The Provincial Bank, to which Sir Henry alludes, has a paid up capital of £540,000, and has been well and profitably managed. But others have been less fortunate. The Agricultural and Commercial Bank of Ireland, established in 1834, with 2170 partners, a paid up capital of £352,790, and many branches, stopped payment during the pressure in November 1836, and by doing so involved many persons in great distress. It appears to have been extremely ill-managed. The auditors appointed to examine into its affairs reported—“Its book-keeping has been found to be so faulty, that we are convinced no accurate balance-sheet could at any time have been constructed.” And they significantly added—“the personal accounts at the head office require a diligent and searching revision.”

The Tipperary Joint-Stock Bank, which was established in 1839, and stopped payments in 1855, appears to have been little, if at all, better than a mere swindling engine. Luckily it did not issue notes; and the sphere of its operations was not very extensive. But, so far as its influence went, nothing could be worse, being ruinous alike to the majority of its partners and to the public.

We have in the previous section on Scotch banks mentioned the fact of the establishment bv the National Bank of Ireland of a head office and of several branches in London. This example has been so far followed by the Provincial Bank that it has also set up a head office in London, without, however, competing for general business in the metropolis. An addition was made to the number of Irish banks in 1864 by the establishment of the Munster Bank (Limited), having its head office in Cork. It has established upwards of 40 branches, and pays a dividend of 12 per cent, to its shareholders.

We borrow principally from Thom’s Irish Almanac, the most valuable publication of its class, the following details with respect to the Irish banks in 1875 :—

Account of Joint-Stock Banks existing in Ireland in 1875, their Branches, Capital, Fixed Issues, Ac. [table]

Bank of Amsterdam.

The Bank of Amsterdam was founded in 1609, on strictly commercial principles and views, and not to afford any assistance, or to intermeddle with the finances of the state. Amsterdam was then the great entrepôt of the commerce of the world, and of course the coins of all Europe passed current in it. Many of them, however, were so worn and defaced as to reduce their general average value to about 9 per cent, less than their mint value; and, in consequence, the new coins were immediately melted down and exported. The currency of the city was thus exposed to great fluctuations; and it was chiefly to remedy this inconvenience and to fix the value or par of the current money of the country, that the merchants of Amsterdam established a “bank,” on the model of that of Venice. Its first capital was formed of Spanish ducats or ducatoons, a silver coin which Spain had struck in the war with Holland, and with which the tide of commerce had enriched the country it was formed to overthrow. The bank afterwards accepted the coins of all countries, worn or new, at their intrinsic value, and made its own bank-money payable in standard coin of the country, of full weight, deducting a “brassage” for the expense of coinage, and giving a credit on its books, or “bank-money,” for the deposits.

The Bank of Amsterdam professed not to lend out any part of the specie entrusted to its keeping, but to retain in its coffers all that was inscribed on its books. In 1672, when Louis XIV. penetrated to Utrecht, almost every one who had an account with the bank demanded his deposit, and these were paid off so readily that no suspicion could exist as to the fidelity of the administration. Many of the coins then brought forth bore marks of the conflagration which happened at the Hôtel de Ville, soon after the establishment of the bank. This good faith was maintained till about the middle of last century, when the managers secretly lent part of their bullion to the East India Company and Government. The usual “oaths of office” were taken by a religious magistracy, or rather by the magistracy of a religious community, that all was safe; and the good people of Holland believed, as an article of their creed, that every florin which circulated as bankmoney had its metallic constituent in the treasury of the bank, sealed up, and secured by oathβ, honesty, and good policy. This blind confidence was dissipated in December 1790, by a declaration that the bank would retain 10 per cent, of all deposits, and would return none of a less amount than 2500 florins.

Even this was submitted to and forgiven. But, four years afterwards, on the invasion of the French, the bank was obliged to declare that it had advanced to the States of Holland and West Friesland, and the East India Company, more than 10,500,000 florins, which sum it was, of course, unable to make up to the depositors, to whom, however, it assigned its claims on the states and the company. Bank-money, which previously bore an agio of 5. per cent, immediately fell to 16 per cent, below current money.

This epoch marked the fall of an institution which had long enjoyed an unlimited credit and had rendered the greatest services. The amount of treasure in the vaults of the bank, in 1775, was estimated by Mr Hope at 33,000,000 florins. The Bank of France.

This bank, second in magnitude and importance to the Bank of England only, was originally founded in 1800, but was not placed on a solid and well-defined basis till 1806. Its capital, which was originally fixed at 45,000,000 fr., was raised in the last-mentioned year to 90,000,000 fr., divided into 90,000 shares or actions, of 1000 fr. each. Of these shares, 67,900 have passed into the hands of the public; the remaining 22,100, having been purchased up by the bank out of its surplus profits, were subsequently cancelled. Hence its capital amounted, down to 1848, to 67,900,000 fr. (£2,716,000), with a reserve fund, first of 10,000,000 fr., and more recently of 12,980,750 fr. Since 1806 the bank has enjoyed the privilege of being the only institution in Paris entitled to issue notes payable on demand; and, as will be afterwards seen, it is now the only authorized issuer of such paper in France. Its charter and exclusive privileges have been prolonged and varied by laws passed at different periods.

The bank has established, at different periods since 1817, offices or branches {succursales) in different parts of the country. They are managed nearly in the same way as the parent establishment; but their operations were long on a comparatively small scale. These are exclusive of the departmental banks united, as will be immediately seen, to the bank in 1848.

Notwithstanding the skill and caution with which its affairs have generally been conducted, the revolution of 1848 brought the bank into a situation of extreme danger. It had to make large advances to the Provisional Government and the city of Paris. And these circumstances, combined with the distrust that was universally prevalent, occasioned so severe a drain upon the bank for gold, that to prevent the total exhaustion of its coffers, it was authorized, by a decree of the 16th March 1848, to suspend cash payments, its notes being at the same time made legal tender. But to prevent the abuse that might otherwise have taken place under the suspension, the maximum amount of its issues was fixed at 350 millions. The bank was then also authorized to reduce the value of its notes from 500 fr. to 200 and 100 fr.

Previously to 1848, joint-stock banks, on the model of that of Paris, and issuing notes, had been established in Lyons, Marseilles, Bordeaux, Rouen, and other large cities. And it was then determined that these banks should be incorporated with the Bank of France, and made branches of the latter. This was effected by decrees issued on the 27th April and 2d May 1848, by which the shareholders of the banks referred to (nine in number) were allowed, for every 1000 fr. nominal value of their shares, a share of 1000 fr. nominal value of the stock of the Bank of France. And, in consequence of this measure, 23,351 new shares, representing a capital of 23,351,000 fr., were added to the stock of the Bank of France, making the latter consist of 91,250,000 fr. divided into 91,250 shares. In 1851 the bank resumed specie payments.

The suppression of the local issues of the departmental banks was, no doubt, a judicious measure, and was indispensable, indeed, to secure the equal value of the paper circulating in different parts of the country. This, however, might have been effected by the mere stoppage of the issues of the departmental banks, without consolidating them with the Bank of France. The latter measure is one of which the policy is very questionable; and there are, as already seen, good grounds for thinking that the banking business of the departments would have been more likely to be well conducted by local associations, than by branches of the Bank of France. Constant additions have been made to the number of branches, which now exceeds seventy

Owing to the war with Russia, and still more to the rage for speculation, and the drain for silver to the East that followed it, the Bank of France became exposed to considerable difficulties. And in the view of strengthening its position, and also, it may be presumed, of providing a loan for Government, a law was passed (9th June 1857), by which the capital of the bank was increased from 91,250 sharee of 1000 fr. each to 182,500 shares of 1000 fr. each. The new shares were assigned to the existing proprietors at the rate of 1100 fr. per share, producing a total sum of 100,375,000 fr., of which 100 millions were lent to Government at 3 per cent. Hence the measure, though it added to the credit and security of the bank, made no addition to the means directly at its disposal.

Down to the passing of this law, the bank could not raise the rate of interest on loans and discounts above 6 per cent. But this impolitic restriction was removed, and the bank authorized to charge any rate of interest which she reckoned expedient, except upon advances to Government, the maximum interest on which was limited to 3 per cent. The bank was farther authorized to issue notes of the value of 50 fr., to make advances on railway shares, &c., and the charter was extended to 1897.

The management of the Bank of France was severely tried in the latter part of 1864 by the occurrence of a financial crisis at Paris; and in January 1865 a commission of inquiry was appointed to examine into the principles and practice of banking. There was, however, nothing mysterious or exceptional in the experience of 1864. Speculation had been much stimulated in France by the establishment of companies (Crédit Foncier, Crédit Mobilier, <fcc., J⅛c∙) for the undertaking of public works, and much capital was locked up and more pledged towards the completion of enterprises supposed at first to be highly profitable, but in reality offering a distant and doubtful promise of remuneration. The crisis of 1864 was the dissipation of these delusions, and the voluminous publications of evidence and opinion by the commission of inquiry pro duced no practical consequences.

The war of 1870-71 could not but have an important influence on the operations of the bank. Successive Governments resorted to it for assistance, which was obtained by increasing the issue of its notes and by giving them a forced currency. The rate of interest, which had been 2j per cent, from May 1867, rapidly rose to 6 and 6∣, at which it remained with scarcely any variation from 9th August 1870 till late in the year 1872. The rate would probably have risen much higher, but on the 13th August a law was approved suspending the liability of the acceptors of bills current to meet them at maturity, and this suspension was renewed until it was finally withdrawn in July 1871. The amount of unpaid bills held by the bank reached a maximum of 368 millions of francs, but the ultimate loss was extremely small. On the 23d June 1870 the metallic reserve at the bank was 1318⅛∙ millions of francs, which was reduced to a minimum of 505 millions on the 24th December of the same year. The notes in circulation before the war had been about 1400 millions of francs; but before the end of the year 1870 their volume had increased to 1700 millions; and this again rose to 2000 millions before July 1871, and to 2400 millions before the end of 1871. A law of the 29th December 1871 fixed the maximum at 2800 millions, which was finally raised on 15th July 1872 to a maximum of 3200 millions. The debt of the state to the bank increased concurrently with this increase of issues, which was, indeed, authorized for the purpose of enabling the bank to assist the treasury. On the 26th December 1870 the bank held treasury “bons” to the extent of 174,800,000 francs only, but on the 30th November 1871 it held 1,193,600,000 of these “bons,” and in August 1872 the amount reached 1,363,100,000 francs. A law of the 21st June 1871, followed by an agreement between the bank and the Government, provided for the repayment of this debt in annual payments of 200 millions, but up to this time (August 1875) the income of the state has never been large enough to provide the whole of this sinking fund. The bank has, however, been able to increase its metalhc reserve through the liquidation of securities and the accumulation of deposits; so that, after having been reduced..

as we have said, to 505 millions in Decemb≡r 1870, and not attaining to more than 634 millions in December 1871, it rose in the same month of 1872 to 793 millions, in 1873 to 820 millions, and in 1874 to 1331, or just the amount at which it stood before the declaration of war. Its volume has, however, continued to increase, and on the 25th March of this year (1875) it stood at 1528 millions; and the forced currency of the notes of the bank might be at any time withdrawn. It must be admitted that the management of the bank throughout these years of difficulty has been eminently prudent and successful.

The bank is obliged to open a compte courant for any one who requires it, and performs services, for those who have such accounts, similar to those performed for their customers by the banks in London. The bank does not charge any commission on current accounts, so that its only remuneration arises from the use of the money placed in its hands by the individuals whose payments it makes. It is probable, therefore, as has been alleged, that this part of the business is but little profitable. The bank also discounts bills with three signatures at variable dates, but not having more than three months or ninety days to run. Besides discounting bills, the bank makes advances on stocks and pledges of various kinds, and undertakes the care of valuable articles, such as plate, jewels, title-deeds, <fcc., at a charge of ⅜ per cent, on the value of the deposit for every period of six months and under.

The administration of the bank is vested in a council of twenty-one members, viz., a governor and two sub-governors, nominated by the chief of the state, and fifteen directors and three censors, nominated by the shareholders. The bank has a large surplus capital or rest. In 1848 the dividends only amounted to 75 fr. per share. In 1855 and 1856 they were 200 and 272 fr. on each share. In 1870 they fell to 114 fr., but rose again to 300 fr. in 1871, and to 320 fr. in 1872. In July 1856 the 1000 fr. share of bank-stock was worth 4075 fr.; in July 1857 it had sunk to 2880 fr. It is now (1875) worth about 3850 fr.

Banking in the United States.

Before the late Civil War it had been the uniform practice of the different States of the Union to allow banks to be established for the issue of notes, payable in specie on demand. In cases where the liability of shareholders in banks was to be limited to the amount of their shares, they had, previously to 1838, to be established by Acts of the local legislatures; but, in general, these were easily obtained, and it may be said that banking was quite free, and that, practically, all individuals or associations might issue notes, provided they abided by the rules laid down for their guidance, and engaged to pay them when presented.

Under this system the changes in the amount and value of the paper currency of the United States were greater than in any other country, and it produced an unprecedented amount of bankruptcy and ruin.

Between 1811 and 1820, about 195 banks, in different parts of the Union, became bankrupt; and it is said, in a report by the Secretary of the Treasury of the United States, dated 12th May 1820, that these failures, which mostly happened in 1814 and 1819, produced a state of distress so general and severe that few examples of the like had then occurred.

But bad as this instance was, it was nothing to that which took place subsequently to 1834. The accounts of the aggregate issues of the banks differ a little; but the following statement is believed to be very nearly accurate, viz :— [table]

Now observe, that this sudden and enormous increase took place under the obligation which we are told is quite enough to prevent all abuse of paying notes on demand. The result was what most men of sense must have anticipated, viz., that a revulsion took place, and that every bank within the Union, without, it is believed, a single exception, stopped payment in 1837.

In 1838 such of the banks as had been best managed and had the largest capitals resumed payment in specie. But in 1839 and 1840 a farther crash took place; and the bank-notes afloat, which, as has been seen, amounted to $149,185,890 in 1837, sunk to $83,734,000 in 1842, and to $58,563,000 in 1843. It is supposed that in this latter crash nearly 180 banks, including the Bank of the United States, were totally destroyed. And the loss occasioned, by the depreciation which it caused in the value of stocks of all kinds and of all sorts of property, was quite enormous. And yet, vast as that loss was, it was really trifling, as a writer in the American Almanack has stated, compared with “the injury resulting to society from the upheaving it occasioned of the elements of social order, and the utter demoralization of men by the irresistible temptation to speculation which it afforded, ending in swindling to retain ill-gotten riches.”

The evils of the American system were aggravated by the lowness of the notes which most banks issued. This brought them into the hands of retail traders, labourers, and others in the humbler walks of life, who always suffer severely by the failure of a bank.

After 1838 and 1842 various measures were taken in nearly all the States, but principally in New York, to restrain the free action of the banks, and to prevent a repetition of the calamities referred to.

In New York, for example, banks were divided into two great classes—the Incorporated and the free banks. The former, incorporated by a State law, had to conform to certain regulations, and to contribute a half per cent, annually upon their capital to a security fund, which was devoted to the payment of the notes of defaulting banks. But this was a most objectionable plan; for, in the first place, it did not prevent bankruptcies, and, in the second place, it compelled the well-managed banks to contribute to a fund which went to pay the debts of those that were mismanaged. It consequently declined in favour, and soon become rarely acted upon.

In the other or free banking system, all individuals or associations who chose to deposit securities (minimum amount, $100,000)[for their payment were allowed to issue an equal amount of notes. And this was certainly by far the more efficient as well as the more popular of the two plans. It was, however, not free from objection; because, lsi, A longer or shorter, but always a considerable, period necessarily elapses after a bank stops before its notes can be retired; and, 2d, The securities lodged for the notes were necessarily at all times of uncertain and fluctuating value, while, in periods of panic or general distrust, they became all but inconvertible. The Sub-Secretary of the Treasury of the United States animadverted as follows on this plan, in a letter dated 27th Nov. 1854 :—

“The policy of many of the State Governments has of late years consisted in encouraging the issue of small notes, by sanctioning the establishment of what are popularly called ‘ free banks,’ with deposits of stocks and mortgages for the ‘ ultimate ’ security of their issues. This ‘ ultimate’ security is, it may be admitted, better than no security at alb The mischief is, that it is least available when most wanted. The very causes which prevent the banks from redeeming their issues promptly, cause a fall in the value of the stocks and mortgages on ‘ the ultimate security ’ of which their notes have been issued. The ‘ultimate’ security may avail something to the broker who buys them at a discount, and can hold them for months or years; but the labouring man who has notes of these ‘ State security banks ’ in his possession, finds, when they stop payment, that ‘ the ultimate security ’ for their redemption does not prevent his losing twenty-five cents, fifty cents, or even seventy-five cents in the dollar.

“In a circulating medium we want something more than ‘ ultimate security.’ We want also ‘ immediate ’ security; we want security that is good to-day, and will be good tomorrow, and the next day, and for ever thereafter. This security is found in gold and silver, and in these only.” 1

The Report of the Superintendent of Banking for the State of New York for 1856 showed that the securities he then held in trust amounted to $39,359,071, which were almost wholly lodged by banking associations and individual bankers.

During the year the securities held in trust for the undermentioned banks that had become insolvent in 1855 were disposed of. But the sums realized by their sale did not in any case suffice to pay the notes at par; while a period, varying from two to four years, would have to elapse before the affairs of the insolvent banks were finally settled. [table]

This statement set the defective nature of the security system, as administered in New York, in the clearest point of view. It might, no doubt, have been improved by increasing the proportion of securities to notes. But, owing to the variety of securities that were taken (viz., all manner of bonds and mortgages, state, canal, and railway stocks, &c., &c.), and the uncertainty of their value, a great deal of risk was always incurred in accepting them, and they could never form a proper foundation on which to issue notes.

In 1857 another crash took place, and all the banks in the Union, from the Gulf of Mexico to the frontiers of Canada, again stopped payments.

There had been a rapid increase of discounts since 1851, and that increase was especially great in 1856, and went on augmenting down to August 1857. On the 8th of that month the discounts and advances by the New York banks amounted to $122,077,252, the deposits in their possession being, at the same time, $94,436,417. This was the maximum of both. On the 24th of August the Ohio Life and Trust Company, which carried on an extensive banking business in New York, stopped payments, and by so doing gave a severe shock to credit and confidence, which the suspension of two or three more banks turned into a panic. Notes being in a certain degree secured, the run upon the banks was principally for deposits. And to meet it they so reduced their discounts and advances, that, on the 17th October, they amounted to only $97,245,826. This sudden and violent contraction necessarily occasioned the suspension of many of those mercantile houses that had depended on the banks for discounts. And it did this without stopping the drain for deposits, which had sunk, on the 17 th October, to $52,894,623, being a decrease of $41,546,784 in about two months. The universal stoppage of the banks was a consequence of these proceedings.

The Civil War had as one of its consequences the introduction of a general banking law in the United States, conformable in many respects to the principles of what wβ have described as the free banking law of New York. At the beginning of the war in 1861, the amount of paper money in circulation was about $200,000,000, of which $150,000,000 had been issued in the loyal States; and the coin in circulation was estimated at $275,000,000. The necessities of the Treasury very soon compelled the Government to borrow from the associated banks of New York, Philadelphia, and Boston, and to issue demand-notes to the extent of $50,000,000,—which, however, were not at first made legal tender. In February 1862 an Act was passed by Congress authorizing the issue of $150,000,000, in Treasury notes of not less than $5 each, out of which, however, $50,000,000 were in lieu of the notes already issued; and this issue was declared to be legal tender except in discharge of customs’ duties, and of the payment of interest by the United States on the national debt. It will be easily understood that coin went out of circulation, and a premium on gold was established, which increased as the amount of the Treasury notes was increased by successive legislation, and as national bank-notes came to be issued in pursuance of the law we must proceed to describe. This is the Banking Law of the 25th February 1863, which, as amended by the Act of the 3d June 1864, now continues in force. By this law a Currency Bureau and Comptroller of Currency were appointed in the Treasury Department, with the power to authorize banking associations of not lese than five persons subscribing, except in very small towns, a minimum capital of $100,000, 50 per cent, to be paid up at once, and the remainder within six months. It was enacted that any such association, before commencing business, must transfer to the Treasurer of the United States any United States interest-bearing bonds not less than one-third of the capital stock, and should thereupon receive from the Comptroller of the Currency circulating notes of different denominations in blank, registered and countersigned, equal in amount to 90 per cent, of the current market value of the bonds so transferred, but not exceeding their par value. The whole amount of notes thus issued was not to exceed $300,000,000, one-half to be apportioned among the States according to their representative population, and the other half to be apportioned with regard to the existing banking capital, resources, and business of the States.

The banks already existing in. the several States were rapidly transformed into national banks under the operation of this law, and their previous notes withdrawn in exchange for the new national bank issue. The currency of the Union thus came to consist of the demand-notes of the Treasury, which rose in 1865 to about $450,000,000, and of the notes of the national banks, which rapidly approached the limit of $300,000,000,—the latter notes passing throughout the Union, whatever the bank through which they were issued, as freely as the former, since the ultimate payment of them was secured by the deposit under the law we have stated, of an adequate amount in United States’ bonds at the Treasury. It is not our purpose to trace the subsequent financial history of the States, but the experience of 1873 must be referred to for the instruction it affords. As no sufficient steps were taken after the termination of the war to reduce the swollen value of the 1 The above statements are taken from a paper read by Lord Overstone to the Committee on Banks.

currency, gold remained out of circulation, though with the growth of business the premium on it declined to an average rate of 12 per cent.; but no inconvenience was felt from tne existence of a pure paper circulation, and the opinion, in fact, arose that the currency thus established was a sure preventive of recurrent panics and exaggerated rates of discount. But in September 1873 the financial house of Jay, Cooke, & Co., having locked up a large amount of capital in railway enterprises not immediately if ever likely to be productive, suspended payments; other financial houses were forced to take the same step, several banks closed their doors, and a severe panic set in. The holders of the notes in circulation of the banks that failed were protected by the deposit of bonds at the Treasury, and the notes were never discredited; but the financial distress throughout the Union was excessive, and continued for many months. It was practically demonstrated that the national bank law protected the holders of national banknotes from loss, but afforded no immunity against the occurrence of financial crises.

Banking in Germany.

Banking in Germany, up to the close of the Franco-German War, presented no peculiar features requiring attention. The Bank of Hamburgh was established in 1619, on the model of that of Amsterdam, as a purely deposit bank for the transfer of sums from the account of one individual to that of another; and its management appears to have been uniformly good. In the several German States banks were authorized under laws peculiar to each; and most of them were allowed to issue notes according to regulations varying from State to State. It followed that the notes of each bank were confined to its own neighbourhood; but the establishment of German unity was followed by a demand for a general banking law, and the establishment of a note currency that might circulate throughout the empire. After some discussion the Act of the 30th January 1875 was passed to satisfy these demands. Under this law an Imperial Bank was established, with an uncovered issue of 250 millions of marks (= £12,500,000); and thirty-two banks were recognized as possessing rights of uncovered issue to the extent of 135 millions of marks (£6,750,000). The Imperial Bank is, however, allowed to increase its issue, subject to the condition that at least one-third is represented by cash in hand, and the remaining two-thirds by bills not having more than three months to run; while the other banks may also exceed their authorized issues subject to the payment of 5 per cent, interest on the excess above the authorized limit, plus the cash in hand, and weekly returns are required of the amount in circulation. No note is to be less than 100 marks (£5), and no new right of issue can be conceded except by a law of the empire. The State itself, however, under a law of April 1874, has the right to issue 120 millions of marks in State notes of small denominations. The working of this law has not yet been tested; but, if we may judge from our own experience, it will not produce any rapid withdrawal of local issues, and the unification of the note currency of the empire will not be accomplished. (l. h. c.)