The Online Library of Liberty

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• 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 III.

THE DISCOUNT BANK—LA CAISSE D’ESCOMPTE.

THE failure of Law’s “System” left such a lasting impression upon the public mind that the creation of any new bank of issue was impossible in France for many years. These establishments, having no other earnest of success save the confidence of the people from whom they borrow by means of the bills they issue, cannot thrive in a country where the very name of bank arouses the most intense aversion. Yet the Bank of England, the Scottish banks, the Bank of Amsterdam, and a host of others make manifest the benefits a country may derive from an establishment which confines itself strictly to the banking business and is properly conducted.

“A man of genius,” says Mirabeau, “struck with the astonishing absurdity that Paris alone among the great cities of Europe had no discount bank, proposed to the Government in 1766 that he be allowed to establish such an institution, and he had no difficulty in proving that its necessary results would be an enlargement of commerce, an increase of industry, a quickening and expansion of monetary circulation. He was kept a suppliant for ten full years, and then his project was adopted in a mutilated shape; his plans were contracted to the narrowest limits, and the thing finally set in motion was a very small model of a very large machine. Even then, it was necessary to brave the clamors and persecutions of capitalists, who imagined they saw in the widely diffused relief promised by a discount bank a ruinous competition with that sold by themselves.”

The Discount Bank (La Caisse d’Escompte), to which reference is here made, was established on January 1, 1767. Its capital was fixed at 60,000,000 livres, divided into 60,000 shares of 1000 livres each, of which only 40,000 were offered to the public, the other 20,000 being reserved to the King. It was to discount commercial paper and State securities at four per cent. in time of peace, and in time of war at five per cent.; with a supplementary commission of two per cent.; it was to have also a monopoly of the coinage. This enterprise never developed into full activity; but, after a precarious existence of two years, it was abolished on March 21, 1769, by order of the Council. A second bank of the same kind was proposed during the Ministry of the Abbé Terray, but the attempt was abandoned.

AUTHORIZATION OF A BANK OF ISSUE—THE DISCOUNT BANK UNDER TURGOT’S MINISTRY.

In 1776, under the Ministry of Turgot and inspired by that illustrious economist, a Scotchman named Clonard, and Penchaud, a Genevan, drew up a plan of a bank of issue, which was incorporated under the name of the Discount Bank by a decree of the Council of March 24, 1776. The business of the bank consisted in discounting, at a rate which could in no case exceed four per cent. per annum, bills of exchange and such other commercial paper as the directors should choose to accept; in dealing in gold and silver; in gratuitously receiving and paying out public funds and deposits of individuals. The corporation was forbidden to borrow at interest or to contract any debt not payable on demand; it was expressly forbidden to engage in any commercial enterprise or maritime undertaking, or to enter into any contract of insurance. Its capital of 15,000,000 livres was divided into 5000 shares of 3000 livres each. Five million livres were to serve for its current needs and 10,000,000 to be turned over to the Treasury on June 1, 1776, to constitute a guaranty for all the undertakings of the bank. “His Majesty,” to quote from the regulations as set forth in the charter, “will be urged to accept the 10,000,000 livres as a loan and to give in exchange therefor receipts issued by the Warden of the Royal Treasury to the amount of 13,000,000 livres, payable in thirteen years, to cover principal and interest of the aforesaid sum of 10,000,000 livres; which Treasury receipts shall be redeemed in twenty-six equal installments of 500,000 livres each. And as security for these payments his Majesty will be requested to set apart the income from the postal leases and to direct the Warden of the Royal Treasury to deliver to the cashier of the Discount Bank in payment of the 500,000 livres of Treasury receipts to be redeemed each half-year, a draft on the holder of the said postal leases. The 13,000,000 livres forming the total of the Treasury receipts above mentioned, or such part of them as may remain after the payment of installments from time to time, shall be specifically pledged as security for all the operations of the bank, and that portion of the receipts not redeemed shall not be sold, alienated, assigned, or pledged.”

That part of the plan which proposed thus to tie up two-thirds of the capital was never carried into effect. A decree of the Council under date of September 22, 1776, announced that the shareholders had decided that it was better to have a capital of only 12,000,000 livres, all of it to be devoted to the business of discounting paper and dealing in gold and silver, and that in accordance with this decision the King had agreed to forego the loan of 10,000,000 livres and had authorized the issue of a capital of 12,000,000 livres, in 4000 shares of 3000 livres each. This change was a very important one, because it left the Discount Bank in full control of its capital, which in case of need could be used to repair the losses of its discount business; whereas in possession of the King, it would have been of no use to the bank either for the transaction of its business or as an offset against losses.

REGULATIONS OF THE BANK.

The by-laws of the bank, approved by a decision of the Council of State promulgated on March 7, 1779, fix the number of directors at thirteen, two of whom are to go out of office at the end of each year and to be ineligible during the two following years; each of them must be the owner of at least twenty-five shares, inalienable during his term of office; and the directors serve without pay. The bank was not expressly authorized to issue bills payable to bearer on demand, but this power followed as a necessary implication from that section of the law which forbade it to contract any debts not payable on demand. Aside from this, the bank enjoyed no special privilege or monopoly, and the circulation of its bills was a purely optional matter; anyone could accept or refuse them at pleasure.

THE BANK IN DIFFICULTIES.

This establishment, answering to a real need of the community, led a quiet existence for some years, gradually expanding and enjoying a fair degree of prosperity; but in 1783 it encountered serious difficulties. At this time, d’Ormesson, Comptroller-General of Finance, borrowed of it 6,000,000 livres, increasing its circulation by that amount. The fact of the loan was at first kept secret, but when it was inadvertently made known the public took alarm, demanded the redemption of their bills, and withdrew their deposits, so that the bank was soon unable to fulfill its engagements. The Government interfered by a decree of the Council of State under date of September 27, 1783, in these words:

Shortly after this, De Calonne, who had succeeded to the Ministry, borrowed 24,000,000 livres in the form of a lottery loan and repaid to the bank the 6,000,000 livres due from the State; at the same time, an official report was issued showing that the bills in circulation aggregated 42,000,000 livres, and that the assets of the bank exceeded its liabilities by 14,140,473 livres.

RECOVERY OF CONFIDENCE AND INCREASE OF CAPITAL.

Acceptance of the bills had previously been made optional again by a decree of December 10, 1783, and confidence soon returned. In view of these facts, the regulations of the bank were amended, and the capital was increased to 15,000,000 livres by the creation of 1000 new shares of 3000 livres each, sold upon their issuance at a premium of 500 livres. In addition to the amount thus secured, the bank had a reserve of 2,500,000 livres, consisting of undistributed profits. The by-laws were altered and the proportion of hard cash on hand to circulation was fixed at twenty-five per cent. as a minimum. Paper accepted for discount was made payable within ninety days, at most, and discount rates are fixed at four per cent. for paper due within thirty days, and at 4½ per cent. for paper running from thirty-one to ninety days. All paper offered for discount was required to bear two good signatures. Two permanent directors were to be chosen by the stockholders to act as managers. Certain precautions provided by the by-laws show that the conditions of a rational distribution of credit facilities were not thoroughly understood by the founders of the institution; but they had at least a very clear conception of the necessity of maintaining a just proportion between resources and liabilities. Thus the amount of credit to be extended in the way of discounts was fixed weekly by the Administrative Council, and once fixed could not be exceeded; but whenever it came to the knowledge of the managers that the cash on hand was less than one-third of the circulation, they were required to curtail their discount operations, and to discontinue them altogether when the cash was reduced to one-fourth of the circulation. Permanent loans and all investments in any permanent form were absolutely forbidden. The capital being the normal security for the bank’s undertakings, it was forbidden to loan upon its own shares, because such loans would in effect amount to a diminution of the capital. Most of these regulations were wise and salutary. The bills of the bank were in denominations of 1000, 600, 300, and 200 livres.

The public very easily forgot the difficulties that had beset the Discount Bank; and, unfortunately, the Government forgot them also. The institution was wisely managed and its shares advanced rapidly in price. In 1784, certain speculators persuaded the public that increased dividends were to be paid, and sold a large number of shares at a premium. At the stockholders’ meeting of January 16, 1785, those who had bought at a premium proposed the declaration of a dividend, based, not upon the profits actually realized and collected, but upon those which were prospective and uncertain, and their proposition was carried. But the more prudent shareholders obtained from the Council of State an order under date of January 16, 1785, commanding that the dividend for the last six months of 1784 should consist only of the profits actually collected up to December 31st, and that from the total of profits carried on the books upon that day there should be deducted as not earned and not available for dividends those arising from the discount of all paper held by the bank at that time; these profits would not be due or payable till after December 31st, and they were to be reckoned as part of the income of the following half-year. In this difference with the stockholders the Government was clearly right; but those who had purchased shares at a premium took advantage of its ignorance to secure the adoption of an unjust measure, and a decree was issued on January 24, 1785, declaring null and void all sales made at a premium; thus, at the expense of the sellers, releasing the buyers from a losing speculation.

THE PROSPERITY OF THE BANK CAUSES ITS RUIN.

In spite of this incident, the affairs of the bank continued to prosper, and this prosperity proved its ruin. Its success was in such violent contrast with the wretched failure of the Government finances as to suggest to the Minister of Finance the advisability of seeking aid from a bank which was growing rich in the midst of the general decay. At a special meeting of the stockholders, held on February 5, 1787, a plan was outlined for furnishing greater facilities to trade and greater security to the public by making the bank useful to all classes of citizens, by providing for a circulation of its bills in the provinces, by dispersing its shares more widely, and by perfecting the details of its management. The basis of the plan was an increase of the capital to 100,000,000 livres, of which the State should hold 80,000,000 as security for the bank’s circulation. The stockholders fell into the trap, and drew up a petition to the King requesting such a change in the regulations of the bank as would produce the results outlined above. A decree of the Council, dated February 18, 1787, enacted into law the stockholders’ proposals. The Discount Bank was authorized to issue 20,000 new shares, of which 10,000 were offered to the old shareholders, in the proportion of two of the new shares to one of the old ones, at 3400 livres each; the remaining 10,000 shares were sold in the open market at 3600 livres each. The salutary rule limiting discounts to paper not having over 90 days to run was changed so as to allow discounts of paper due at any time within 180 days; the rates were 4 per cent. up to 60 days, 4½ per cent. for 61 to 120 days, and 5 per cent. for 121 to 180 days. The question of setting aside a reserve fund was left to the discretion of the directors, whose number was increased to eighteen. The privilege of issuing bills payable on demand was granted for fifty years. The bank was to pay 70,000,000 livres to the Treasury and receive interest upon it at the rate of five per cent.; the interest being made a charge upon the total revenues of the State, and specifically upon those arising from farms of the general revenues.

Under pretext of furnishing to the public a sufficient guaranty for the circulating notes, amounting to 98,000,000 livres, these provisions placed substantially the whole capital of the Discount Bank in the hands of the Government, thus offering as security to its note-holders and depositors nothing but a credit already seriously impaired. Naturally, the first effect of the scheme was to involve the bank from the beginning in the ruin of the public finances. In the month of August, 1787, there broke forth suddenly a panic, caused mainly by the distrust engendered by this arrangement. Holders of the bills demanded their redemption, and 33,000,000 livres were paid out. Then, unfortunately, the Government felt called upon to interfere, and it drew up a decree making the notes a legal tender. The administrative council of the bank, which had not even been consulted, vigorously opposed the issuance of this decree; it was in position to pay all the outstanding bills from the proceeds of its loans as they fell due, and it demanded a return of the 70,000,000 livres deposited with the State, to meet current demands. The Government so far yielded to the just demands of the bank as to forego the promulgation of the decree suspending specie payments. It also turned over to the bank from its various collection bureaus all the money it could spare, but it did not return the 70,000,000 livres, because the whole of that sum had been used up long before.

Inasmuch as the note redemptions had never ceased, the bank soon regained the confidence of the public, but it did not retain it long. We have now reached the period at which, to use Taine’s phrase, “spontaneous anarchy broke forth.” The desperate condition of public finance bred new distrust of the bank’s solvency; another panic began among its bill-holders in August, 1788, and its cash reserve was reduced from 50,000,000 livres to 25,000,000. The Government had recourse once more, and again without consulting the managers of the bank, to the legal-tender expedient. A decree of the Council, bearing date of August 18th, was posted at the entrances of the building authorizing redemption of the bills in discounted commercial paper. The Discount Bank then had 19,000,000 livres in specie, which was sufficient for its needs, but the twofold object of the Government in making its notes a legal tender was to prevent its demanding a repayment of its 70,000,000 livres and to deprive it of any excuse for curtailing its discount operations. The situation of the Treasury constantly grew worse. Necker, recalled to the Ministry, frankly made known the situation of affairs to the directors of the Discount Bank, and declared to them that the public service would be brought to a standstill unless he could raise a loan of 15,000,000 livres. The exigency left no room for discussion, and the loan was made in bills guaranteed by Treasury bonds and the personal pledge of the King. This loan was frequently renewed. At the stockholders’ meeting of January 8, 1789, it was decided that the bank should make a further advance to the King of 25,000,000 livres. One of the first matters to which the National Assembly turned its attention was the condition of the Discount Bank. Mirabeau made a violent attack upon it in a pamphlet distributed among his colleagues in the Assembly on September 21, 1789. The bank found an advocate in Lavoisier, who contented himself with simply setting forth the actual condition of its assets and liabilities.

NECKER PROPOSES TO MAKE THE DISCOUNT BANK A NATIONAL BANK.

On November 16th following, Necker proposed to transform it into a national bank and to fix the limit of its issues at 240,000,000 livres. He thus supported his proposal:

Necker’s plan was to convert the Discount Bank into a national bank; to confer upon that institution a monopoly for a longer or shorter period; to place it under the management of men chosen by the shareholders and subject to the supervision of commissioners appointed by the National Assembly; and to authorize it to issue 240,000,000 livres in bills guaranteed by the State. The capital was to be increased by 50,000,000 livres and would then amount to 150,000,000; a loan of 170,000,000 livres was to be made to the State at four per cent. interest. This scheme was opposed by Mirabeau, and defended by Dupont de Nemours. In order that it might be in a position to decide between these opposite opinions, the National Assembly called for a report upon the matter, and this was made by the Duc du Châtelet on December 4th. The report sets forth the facts to which we have already called attention and declares that having once begun to advance money to the State, the bank could not refuse to make further loans except at the risk of causing a panic, which would ruin the State and destroy the value of the guaranty on which the bank relied. There was the less ground upon which to criticise its conduct, because it had not neglected the interests of commerce, even when it was doing most to aid the State. The report then shows the condition of the bank’s affairs as of November 22, 1789; which, briefly, was as follows:

Thus it appears that the assets exceeded the liabilities by 31,177,711 livres. Its available capital was intact, but the 70,000,000 livres turned over to the State as security were in a very precarious situation.

The Duc du Châtelet adds to his report the following statements:

Upon the reception of this report, Talleyrand, Bishop of Autun, delivered a remarkable address in which the proper business of a bank of issue and the limitations with which it should be surrounded are set forth with the greatest clearness. The theories advanced by Talleyrand are so sound that they have now become universally accepted, but at that time they were practically unknown, and comparatively few persons were capable even of understanding them. Talleyrand proposed that the project of a national bank be abandoned, and that the Discount Bank be allowed to continue in business and be gradually brought back to the principles upon which it was founded. Its loans to the State were to be returned at the rate of ten per cent. per annum.

PLAN ADOPTED BY THE NATIONAL ASSEMBLY.

After a violent discussion, the National Assembly adopted a plan the basis of which was that the Discount Bank should advance 80,000,000 livres of its bills to the Government and that the Government should sell church lands to the extent of 400,000,000 livres in order to provide for all its debts to the bank. From the moment this decision became effective the doom of the Discount Bank was sealed. Decrees of December 19 and 21, 1789, provided for the issuance of “assignats” (a form of paper money issued against the lands of the clergy), and made them legal tender. The amount which the bank had advanced to the Treasury in the form of its own notes was repaid in these assignats, but this did not prevent the State from afterward borrowing of it 70,000,000 in three loans. The institution barely managed to keep itself alive in the midst of a general stagnation of business and the increasing anarchy in political affairs.

THE COMMITTEE OF PUBLIC SAFETY EXTINGUISHES THE BANK.

On June 13, 1793, when the French people had become a prey to unreasoning madness, a decree of the Committee of Public Safety directed a member of the Convention, clothed for this purpose with the most absolute powers, to seek out such frauds as might have been committed by the Discount Bank in its dealings with the public treasury. This, says Laffon Ladébat, was the odious prelude to its extinction; the custom then was first to brand with disgrace the thing to be destroyed. Finally, on August 4, 1793, the Convention voted the suppression of the Discount Bank, and ordered it to pay on demand the 19,000,000 livres held by it in accounts current; to pay, in several installments, 905 livres tournois in assignats upon each of its 29,000 shares, and the balance, if any, in State rentes. Thus the Discount Bank was destined to extinction amidst the throes of a popular uprising, as many another useful institution has perished; for demagogism has an instinctive hatred of all credit institutions, understanding none of them, and seeing in them all nothing but instruments of speculation and fraud. And yet the Discount Bank, while it was guilty of weakness in its dealings with the State, was never false to its true mission, and was managed with scrupulous honesty. The following is a statement of the accounts of the Discount Bank at the close of each year, in millions and hundreds of thousands of livres:

LA CAISSE DES COMPTES COURANTS.

When the revolutionary madness had abated, a need of credit institutions made itself felt once more. On the 11th Messidor, Year IV (June 29, 1796), Augustin Monneron, a merchant who had grown rich in the colonial trade, founded a share bank under the name of the “Caisse des Comptes Courants” (Bank of Accounts Current), to discount commercial paper, receive deposits, and issue bills. This bank suffered a very serious loss through the defalcation of Monneron. As soon as the theft became known, the company declared its dissolution, and then reorganized on the same day. Its existence was always precarious; it discounted hardly any paper except that of its shareholders; and it would have no interest for us except for the fact that it has been called, but erroneously, the original of the Bank of France. The truth is, that the Bank of France could very well have begun its business in competition with the Caisse des Comptes Courants, but a fear of unsettling the money markets by dividing up their resources moved the managers of the Bank to direct their best efforts toward a consolidation of the two institutions, whose rivalry might have been a source of danger. The advantages of consolidation were realized by the shareholders of the Caisse des Comptes Courants, and they voted for it. At the time of the consolidation, the Caisse des Comptes Courants had, either outstanding or held in reserve, bills aggregating 20,780,327.20 francs, the bills being expressed in terms of livres tournois. These constituted the circulation of the Bank until it could make arrangements to put out an issue of its own. The Bank established its offices in the building of the Caisse des Comptes Courants, and took over all of its employees.