The Online Library of Liberty

A project of Liberty Fund, Inc.

• Banking In the Latin Nations.
• Part I.: Banking In France.
• Chapter I.: Its Status Before the Revolution.
• Chapter II.: The Bank and “system” of Law.
• Chapter III.: The Discount Bank—la Caisse D’escompte.
• Chapter IV.: Assignats—the Basis of Their Issue.
• Chapter V.: The Bank of France.
• Chapter VI.: Banks and Bankers After the Revolution.
• Chapter VII.: Banking In the French Colonies.
• Part II.: Banking In Italy.
• Chapter I.: Primitive Banks.
• Chapter II.: Banking Under the Unification of the Kingdom.
• Chapter III.: Italian Co-operative Banks.
• Chapter IV.: The Bankers of Florence.
• Chapter V.: Banks and Bankers In Sicily.
• Part III.: Banking In Spain.
• Chapter I.: The Earliest Banks.
• Chapter II.: The Bank of Spain.
• Part IV.: Banking In Belgium.
• Part V.: Banking In Switzerland.
• Part VI.: Banking In Portugal, 1750 to 1891.
• Chapter I.: The First Great Banks.
• Chapter II.: The Bank of Portugal.
• Part VII.: National Bank of Roumania.
• Part VIII.: The Latin Monetary Union.
• Part IX.: Dynamics of Circulation.
• Part X.: The Banks of Alsace-lorraine After the Annexation. *
• Banking In Canada.
• Author’s Preface.
• Chapter I.: Currency Expedients.
• Chapter II.: 1817-1841. Banking Under Joint-stock Charters.
• Chapter III.: 1841-1867. Banking In Old Canada.
• Chapter IV.: Banking Under the Dominion.
• Chapter V.: Scope of Existing Laws.
• Chapter VI.: Land Banks—loan Companies.

CHAPTER I.

ITS STATUS BEFORE THE REVOLUTION.

ANCIENT BEGINNINGS.

THE business of banking and loaning money at interest has existed from the earliest forms of civilization, because it responds to an imperative need of society. It was conducted in Athens, probably in Carthage, and certainly in Rome; but, after the establishment of Christianity, it encountered serious obstacles.

Profits derived from loaning capital—which was regarded as including money, whereas money is only a representative of capital—were regarded as illegitimate; which is virtually the position assumed by modern socialists. “Money,” it was said, “is in its very nature sterile, and not reproductive.” Profits accuring from the sale of merchandise or the establishment of a productive industry were held to be just and proper; but it was not conceded that a loan of that capital, which could immediately be transformed into merchandise or instruments of production, entitled the lender to remuneration. This course of reasoning seemed to be supported by the Gospel injunction that we loan to the needy without hope of recompense. These prejudices, which have continued to our own day, cast a shade of suspicion upon all commerce in money and caused it to be carried on clandestinely and by men constituting a distinct caste, such as Jews and Lombards. Lenders at interest, or usurers, being always exposed to the hatred of their creditors and victims of the cupidity of governments, made it their constant care to keep their capital in the form most readily convertible into money and least likely to attract attention.

THE JEWS AS MONEY-LENDERS.

Thus it is that we find the Jews, in all ages, following the pursuits of money-changer, goldsmith, dealer in precious stones, to which they have added that of lender on pawn. Community of language and of origin and exposure to the same dangers impelled them to seek one another out, to establish the closest relations among themselves, though dwelling far apart, and to invent divers means of transmitting money from one to another, the earliest being the bill of exchange. We find an indubitable instance of the bill of exchange in 1246, that by means of which the Pope, Innocent IV., sent 25,000 marks of silver to the pretender, Henri Raspon, an amount which was paid to him at Frankfort by a Venetian banking house. Even earlier than this, in 1202, the Crusaders had given to Henri Dandolo, Doge of Venice, bills payable to order as security for 85,000 marks, in silver, demanded of them by the Venetians in return for vessels furnished to carry them to Syria. It was to pay this immense debt that the Crusaders aided Dandolo to recapture the city of Zara in Dalmatia. In France, the Jews, though contemned and despised, lived in comparative security until the time of the Crusaders, trafficking in money with a fair degree of impunity. They were, indeed, persecuted from time to time, but the persecutions were never of long duration. Under Philip Augustus, their situation grew worse. In 1182, the King became convinced that the Jews were too numerous in Paris and throughout the kingdom, and that they were amassing great wealth. They were accused of having Christian servants, whom they seduced from the true faith, and of despoiling nobles and commoners of their goods under pretence of having loaned them large sums of money. To these accusations the populace added fabricated accounts of divers misdemeanors, and the King issued a decree banishing the Jews, allowing them to take their personal property with them, or to sell it, but confiscating their real estate. Philip the Fair, on the contrary, was very kindly disposed toward the Jews at the beginning of his reign. With that fiscal genius which he afterward put to such evil use, he appreciated the value of money-dealers; and while he extorted heavy taxes from them, he forbade that they be any longer subjected to imprisonment at the behest of the first monk who might demand it; this was in 1288. Rendered over-confident by the protection which Philip thus accorded them from interested motives, the Jews became less cautious than they had previously been. Their indiscretion was severely punished; for, in 1306, the King ordered the arrest of all Jews in his dominions, confiscated their goods, and ordered them to leave the kingdom under pain of death.

But the lender at interest is too important a wheel in the machinery of the commonwealth to be destroyed with impunity. The absence of the Jews very soon made itself felt, and there was such a general desire to have them back that, in 1315, Louis X. recalled them for twelve years, restored to them such of their houses and synagogues as had not been destroyed, and gave them permission to sue in the courts for those debts which the agents of Philip the Fair had not been able to discover, on condition that two-thirds of all amounts recovered should be paid over to the King.* During the following reigns, persecutions against the Jews were renewed upon the most absurd pretexts. Every ridiculous charge brought against these unfortunates found ready credence not only among the common people, but among the more enlightened classes as well, all of whom being more or less indebted to the Jews, hoped by persecuting them to escape payment of their debts. The Jews were alternately banished and recalled. In 1361, the Duke of Normandy, destined to a glorious reign as Charles V., persuaded his father, John the Good, to allow the Jews to take up their residence, for a period of twenty years, in the provinces of Langue d’Oil, for the sake of the heavy taxes that might be wrung from them, and the quickening of monetary circulation and industrial activity. The Comte d’Etampes, a prince of the blood, was appointed guardian of the unreasonable and excessive privileges thus sold to the Jews, and to him was given exclusive jurisdiction of all their suits at law. They were allowed to charge interest at the rate of 6 deniers per livre per week, or 130 per cent. per annum; and the oath of any Jew touching the amounts due him was accepted as final unless the debtor could establish the contrary by affirmative evidence. No class of Christians was so zealously protected against arbitrary exactions and prosecutions. Upon the death of Charles V. the persecutions were renewed. During the troubled reign of Charles VI., Jews and Lombards were robbed and butchered by the people of Paris at their will. But, in spite of tyranny and extortion, the Jews remained in France, exercising always secret but powerful influence in public and private affairs alike.

Their archives have never been published, and it is not easy to learn the exact nature and extent of the business to which they devoted themselves. Loaning on pawn was the occupation in which they most commonly engaged; but it is probable that their transactions took on a much wider range, including at least the transfer of funds throughout France and to foreign countries, and probably loans to the King. The persecutions to which money-dealers were subjected resulted, unfortunately, in the destruction of those documents which it would be indispensable to consult in order to arrive at the extent and importance of the commerce in money during the Middle Ages; we are confined, therefore, at least in dealing with the subject in France, almost wholly to conjecture. In Italy, on the contrary, the documentary evidence is full and complete; and that we shall freely use when we come to treat of banking in that country. The influence of the Jews and their competitors, the Lombards, was of necessity merely local. It was most potent, however, because by means of loans frequently and skillfully renewed they held within their power a large part of the population. But their business was carried on in secret. They employed a language and modes of procedure known only to themselves; and their transactions were not such as to familiarize the people with the true nature of credit and the services it is capable of rendering under wise and honest management.

JACQUES COEUR.

Toward the end of the Middle Ages, there arose a man who transacted his business openly and who probably would have made clear the true nature and value of credit if he had confined himself to his rôle of merchant. Jacques Coeur, son of a furrier of Bourges, after spending part of his youth in the shop of his father, became assistant, about 1427, of the Mint-Master of Bourges. Implicated with the Master in a prosecution for issuing coin below the legal standard, Coeur made a thorough study of the nature of money—a subject which Nicolas Oresme, Bishop of Lisieux under Charles V., had already analyzed with great clearness. He studied with special care and imitated the business methods by which the Italian republics had enriched themselves. A bold and clear-sighted man, he established branch houses along all the shores of the Mediterranean; he obtained permission to trade with “infidels” without incurring the censure of the Church, and he became very rapidly one of the richest merchants and ship-owners in Europe. In 1435, Coeur returned to Bourges and secured the position of Mint-Master of that city and of Paris. He put an end to the debasement of the coinage, and all coins were kept at full weight and fineness throughout the reign of Charles VII. Having become a member of the Council of the King, he was appointed King’s Treasurer, meanwhile continuing his private business. His public office gave him a monopoly of money-changing; meanwhile, his commercial and banking transactions, carried on upon a scale hitherto unknown, brought him a very large fortune, which he devoted to the most worthy uses. It was he who supplied Charles VII. with the resources needful for driving the English out of France and bringing to an end the Hundred Years’ War. Jacques Coeur’s title of “King’s Treasurer” does not mean that he exercised the functions of a finance minister; his duties were those of steward of the royal palace. His fortune was such that he was enabled to make large loans to the King; but this was not, properly speaking, a banking operation. He was, first of all, a merchant, and his banking operations consisted simply in exchanging foreign moneys (which he could dispose of through his numerous branch establishments), and especially in purchasing copper and silver coins, which he exchanged for gold in Egypt. The immense fortune of Coeur and a desire to share his spoils created enemies against him. He was accused of poisoning Agnes Sorel, mistress of Charles VII., who had died in childbirth after appointing him to act as her executor. He was placed on trial, threatened with the rack, and finally condemned to death. Remembering his former services, Charles VII. refused to have the sentence executed, but commuted it to imprisonment for life. With the aid of one of his former clerks, and after a series of romantic adventures, he finally made his escape. He took refuge in Rome, where he was received with great cordiality by the Pope, Nicholas V., and the latter’s successor, Calixtus III., made him commander of a squadron which he was fitting out against the Turks. Worn out by sorrows and hardships, Jacques Coeur died at Scio in November, 1456. Louis XI. ordered a re-examination of the case against him and cleared his memory of the stain upon it. History does not record the name of another merchant of like calibre. After his time, bankers confined themselves more and more to the business of loaning on collateral and exchanging money, and this latter transaction must have been a source of great profit. It may be cited in illustration of the profits made by money-changers, that, a few years ago, there was found and published the diary of one De Gouberville, a country gentleman who had lived in the neighborhood of Cherbourg. In this diary, which extends from 1553 to 1562, mention is made of thirty-five coins differing in origin, value, and name. One Spanish coin, the “ecu pistolet,” often mentioned in the diary of De Gouberville, varied in value between February and December, 1555, from 43 to 49 sous. A German coin, the “angelot,” was even more unstable, and the smaller coins were often counterfeit. Under date of July 16, 1556, De Gouberville writes: “I sent Lajoye to Cherbourg to exchange one crown. Jean Simon, son of Gabrielle, changed it for him, keeping one sou for the service, and he gave him six sous counterfeit money, wherefore I sent back the said Lajoye to return them to him.” This passage brings out very clearly the need there was of money-changers and the extent of their profits. In the case we have cited the commission was twice as great as that which an ordinance of 1565 made lawful.

REVENUE FARMERS AS BANKERS.

The Italian wars of Charles VIII., Louis XII., and Francis I. directed toward France the attention of Italian bankers. Having a knowledge of finance and credit far superior to that of the French ministers, they were well received, and little by little they came to fill a very important place in the economic organization of France. In addition to the domanial dues, the Royal Treasury, since the fourteenth century, had been in the habit of levying, for temporary needs, a variety of dues, sanctioned by the States-General, under the name of “aids.” Continual wars, and more especially a very loose administration of the finances, had increased these aids and made them permanent. It was at this juncture of affairs that the Italian financiers conceived the idea of farming out these “dues”; and, after the battle of Pavia and the capture of Francis I., when it became necessary to pay the ransom demanded by Charles V., the “Traitants,” as the farmers of the revenue were called, became persons of great importance. There are, unfortunately, very few original documents relative to French finance, all those in existence at the time of these usages having been destroyed when the offices of the Finance Minister were burned by the Paris Commune in 1871. We are compelled, therefore, to rely very largely upon information more or less fragmentary and second-hand. For this reason, it is impossible to follow step by step the improvement in the various methods of tax collection; but, leaving the details aside for the most part, we can at least trace the general outlines of these operations. During the reigns of the later Valois, rendered so sadly famous by religious wars, the financial affairs of the kingdom fell into the most grievous confusion. The remedy was applied by Sully, the firm and able minister of Henry IV. In a memoir drawn up at the beginning of his ministry, Sully estimated the total of the taxes levied upon the people in the King’s name at 47,000,000 livres; of which about 20,000,000 livres remained in the hands of the receivers and farmers of taxes. Out of the salt taxes and certain temporary dues which had been granted to him through the intervention of the revenue farmers, the Grand Duke of Tuscany was in receipt of an annual revenue of about 2,000,000 livres. The sub-contractors were the bane of the system, because they were compelled to make a profit out of the collection after paying large sums to their immediate grantors. Sully’s remedy was a very simple one; he compelled the sub-contractors to show their contracts and to turn over their collections directly to the Treasury; by this means the Government could learn the exact product of the taxes, and it had a sound basis upon which to treat. Sully brought together, in a single lease, all the taxes of the same general nature, adopted a new form of award, introduced competitive bidding, and thus obtained better prices for the concessions. After the death of Henry IV, and the removal of Sully from office, financial confusion reigned again; but, finally, under the ministry of Colbert, the tax leases took on the form which they preserved for a hundred years. The principal business of revenue farmers was the collection of the taxes; but they were also bankers in the sense that it was to them that priests, nobles, and commoners intrusted their money to gain them favors at Court, either because the sums were too small to be offered in the form of a direct loan or because the owners shrank from proffering a loan directly to the King.

TREASURY BANKERS.

Side by side with the farmers of the revenue, or even among them, was always to be found a person who, under one title or another, and sometimes with no title at all, was in reality the King’s banker. Such had been Jacques Coeur under Charles VII., and such under Louis XIII. was Barthelemy d’Herwart. This Barthelemy d’Herwart, whose name is little known to-day, loaned very large sums to the Treasury, by way of furnishing supplies for the army, of which he was commissary. At the death of Bernhard of Saxe-Weimar (July 18, 1639), his army, left without means of subsistence, would probably have taken service under some foreign power had not d’Herwart retained it for France by supplying a considerable part of its needs. The famous Superintendent of Finance, Fouquet, was also a banker whose duty it was to settle with the farmers-general and to make advances to the King. Among the various persons who acted as bankers of the Treasury, that is to say, who advanced the funds necessary for the public service while the taxes were being collected, there was one singular individual known as Samuel Bernard. Born in 1651, he was received as master in the guild of jewelers, gold-wire-drawers, and dealers in cloth of gold. Apparently, his fortune was chiefly made in various foreign ventures.* It was to him that application was made whenever the State had need of funds. We find him in 1697 sending 200,000 crowns to Dantzic bankers in an attempt to ensure the throne of Poland to the Prince of Conti. Thirty-six years later, in February, 1733, he was once more busied with an election to the Polish throne, when he loaned 4,000,000 livres to Stanislas Leczinski, who was elected, but retained the dignity for only two years. Everyone is familiar with the anecdote that Saint-Simon tells of Bernard. When the Minister Chamillard solicited a loan from him in the name of the King, he received this reply: “When anyone has need of others, the least he can do is to make the request himself.” Minister Desmarets remembered this reply, and in 1708 he persuaded Louis XIV. to receive Samuel Bernard at the Chateau of Marly and show him the honors in person; in return for this act of condescension, Bernard advanced all the money that was demanded of him. In the following year, during the month of April, 1709, Bernard, who then had large business interests in Lyons, met with severe reverses. He suspended payments with liabilities amounting to between 37,000,000 and 38,000,000 livres. Desmarets, who had a high appreciation of the banker’s services, rendered him all the assistance in his power; the greater part of his debts were paid, and, strangely enough, the credit of Bernard was hardly dimmed, and his business affairs were soon in prosperous shape once more. Notwithstanding the aid he had frequently extended to the State, Samuel Bernard fell under the condemnation of the Chamber of Justice in 1716 and was fined 5,000,000 livres. Under the Regency and during the existence of Law’s system, he was kept in the background, and though, up to the time of his death, which occurred in 1739, he was often appealed to for assistance, he never regained his former prominence.†

It may be asked, What was the exact nature of the banking operations of Samuel Bernard and other bankers of the time? So far as we can judge, they consisted largely of speculations in the paper issues of France and foreign countries, in supplying funds for business enterprises, in opening credit accounts, and in discounting paper; but the chief business appears to have been that of making loans directly to the Government. That also was the most dangerous and aleatory of their ventures, and the one which most frequently resulted in their ruin; for the King’s minister never hesitated to break faith with financiers, assured as he was that his course would meet with the approval of the public. The people regarded the bankers as leeches living upon the blood of the State; the fact being, on the contrary, that they were always coming to its aid in the most disinterested manner and supplying it with means which it could not have secured from any other source. The farmers-general suffered most severely from popular ignorance and governmental dishonesty. On May 7, 1794, the Revolutionary Tribunal rendered the following judgment, which had previously been drawn up by the Committee of Public Safety:

“Inasmuch as it is incontestable that a plot has been formed against the French people tending to further the success of the enemies of France in every way, and especially by the practice of all manner of extortion and peculation; by mixing with the tobacco water and other adulterants dangerous to the health of those who use it; by taking six or seven per cent. of interest both upon the security which the revenue collectors must furnish to the State, and also upon the money needed to carry on their business; by robbery; by plundering the public treasury in all possible ways in order to deprive the nation of large sums needful to wage war with the despots now in arms against the French Republic: all so offending are condemned to death and their goods shall become the property of the Republic.”

Not one of these charges had any foundation in fact, yet it was under such a judgment as this that twenty-eight farmers-general were executed on May 8, 1794, one of them the creator of modern chemistry, the illustrious Lavoisier. Though French bankers strove in every way, during the Revolution, to avoid publicity, and though commerce was dead, speculation was carried on upon a very extensive scale, the dealings being most active in assignats, public securities, and army supplies.

GABRIEL JULIEN OUVRARD.

One of the most interesting characters of these times was the financier Gabriel Julien Ouvrard. Born in 1770, he received a good education and established at Nantes a business in colonial products. When the Revolution began and the liberty of the press was declared, he bought all the printing paper from the paper mills of Poitou and Angoumois, and sold it two months later to the editors at a profit of 300,000 livres, with which he enlarged his dealings in colonial products. In 1793, he was brought before the bar of Carrier, and in order to escape the fate reserved for all “suspects,” he enlisted in the army. He was aid-de-camp of several generals, and he exerted himself vigorously in behalf of the accused citizens of Nantes, many of whom he saved by securing a postponement of their appearance before the Revolutionary Tribunal until after the fall of Robespierre, when they were set at liberty. Upon his return to civil life, Ouvrard married the daughter of one of those he had befriended, and embarked in vast business enterprises. In 1797, he was appointed Commissary-General, in which capacity he procured supplies for the French and Spanish navies at a profit to himself of about 15,000,000 livres, of which he loaned 10,000,000 to the Directory. When Bonaparte had become First Consul he applied to Ouvrard for a loan of 12,000,000 francs, but was refused.

During the early days of the Empire, Ouvrard, in connection with one Desprez. a former bank messenger, and a grain merchant named Vanlerberghe, formed an association under the title of “The United Merchants’ Company,” for the purpose of supplying the needs of the army and navy. Spain, allied with France against England, had promised to Napoleon a sum of money, which she was unable to pay because the English cruisers prevented the arrival of the piastres from Mexico and Peru. Ouvrard proposed to Barbé-Marbois, the French Finance Minister, that he discount the Spanish debt and accept in payment of it supplies furnished by The United Merchants’ Company. His proposition was accepted. At the same time, he offered to furnish to Spain, then threatened with a famine, a full supply of grain, and to take in payment the piastres due from Mexico at the rate of 3.25 francs each, their value in Paris being at least 5 francs. This also was agreed to. As he had no hope of being able to elude the vigilance of the English cruisers, he completed the transaction in this manner: England herself being in need of coin, he sold the piastres to the banking house of Hope, in Amsterdam, who, in turn, transferred them to Baring, in London; the latter had no difficulty in getting the money from Mexico, and nothing remained except to remit from London to the Continent the amount to be paid for them, which was easily accomplished. That transaction was skillfully planned and ought to have redounded to the profit of all concerned; but, unfortunately, The United Merchants’ Company was not only heavily indebted to the Treasury, but it had other pressing obligations to meet before the arrival of the piastres. In this situation, Barbé-Marbois very unwisely turned over to the company certain Treasury claims, which the latter discounted at the Bank of France. These were not always honored at maturity, and by the close of 1805 a very serious crisis had arrivd, and the Bank, having practically exhausted its resources, was on the point of closing its doors. Desprez had put in circulation certain paper known as “notes of M. Desprez,” which were accepted as money by the Treasury and which depended for their value upon the rather doubtful solvency of The United Merchants’ Company; it was this paper that caused the most serious difficulty to the Treasury and the Bank.

When Napoleon returned from the Campaign of 1805 and learned the true state of affairs, he was very angry with Barbé-Marbois and The United Merchants’ Company, which owed the Treasury more than 140,000,000 francs, represented by the “notes of M. Desprez.” He removed the minister and seized the assets of the company, amounting to about 80,000,000 francs in real estate and claims against the Treasury and against individuals. The remaining 60,000,000 francs he recovered in the form of debts due from Spain. The Emperor had a high appreciation of the services of Vanlerberghe, and retained him as commissary; but Desprez was forced into bankruptcy and died in poverty. As for Ouvrard, he also was declared a bankrupt, and in 1809 was arrested and imprisoned, but was afterward set at liberty on condition that he would not go beyond the boundaries of France. Having made a visit to Holland, he was again arrested and kept in prison until October, 1813. During the Restoration he once more entered into contracts on a large scale, but for certain irregularities he was imprisoned, for the third time, in 1825. He was released at the end of five years, but was never again a factor in the business world. He died in London in 1846, completely forgotten. Ouvrard was the last banker of the Treasury, and he marks the transition from the old state of things to the new. By this distinction he is entitled to a place in that series of financial notables the first member of which is Jacques Coeur and the last himself.

[* ] Other money-dealers, who seem to have speculated principally in exchange and in coins, the Templars, were, like the Jews, and to even a greater extent, victims of their wealth. The tragic end of their Grand-Master, Jacques de Molai, and his companions is a familiar story the world over.

[* ] Victor de Swarte, “Samuel Bernard Sa Vie, Sa Correspondance.”

[† ] M. de Swarte has found among the correspondence of Samuel Bernard a very interesting document, rates of exchange dating from 1732, which we reproduce: Paris exchange, on Brussels, 54 per cent.; London, 75 5-8, Amsterdam, 72 1-8; Hamburg, 65; Copenhagen, 64 7-8; Stockholm, 35 3-4; St. Petersburg, 84 11-16; Dantzic, 46 1-2; Berlin, 44; Brunswick, 42; Munich, 37 2-3; Vienna, 40 2-3; Ratisbonne, 42 1-4; Mayence, 43; Geneva, 78; Turin, 25 1-8; Genoa, 80 3-8; Venice, 64 1-4; Rome, 66 1-3; Milan, 70 1-8; Florence, 70 1-8. Nothing could exhibit in a stronger light the wretched state of monetary circulation in France at that time than a simple quotation of these rates of exchange. In our day we could not find such premiums short of the Argentine Republic. These rates cannot have been stable, and bankers must have made large sums from arbitrage transactions, of which only they held the key.