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.

THE EARLIEST BANKS.

SPAIN shares with Italy the honor of having established the earliest banks of deposit and circulation. The Bank of Barcelona was certainly in existence in 1401, and probably at a very much earlier date. Originating from causes similar to those to which the Italian banks owe their existence, and called upon to meet the same requirements, the Bank of Barcelona must have resembled those institutions very closely; on this point, however, we are confined to conjecture, for we have no really trustworthy information concerning this bank.

From the experience of the Netherlands, Spaniards were enabled to appreciate the value of banks of issue; and, in 1617, the Cortes demanded the establishment of such an institution. Accordingly, in 1621, Philip IV. issued letters patent authorizing it; but political events intervened to prevent its establishment at that time.

THE BANK OF ST. CHARLES.

It was a Frenchman, François Cabarrus, who furnished to Spain her first bank of issue. Consulted by the Spanish Minister of Finance, in 1779, as to the best means of ending a monetary crisis caused by the war which France and Spain were then waging against England, Cabarrus advised the issue of State bills, to be made a legal tender, to bear interest at four per cent., and to be redeemable in twenty years. The tobacco and salt duties were pledged as a guaranty for payment of the interest and for final redemption of the bills. These notes were fairly well received by the public, but they never reached par. The idea then occurred to Cabarrus of establishing at Madrid a national bank of discount and issue. In a memorial addressed to the King, under date of October 22, 1781, he thus sets forth his plans:

“It appears to me, in the first place, that in a country in which a large part of the lands are inalienable it is expedient, and even necessary, to furnish to the wealthy a means of investment to take the place of the real estate they lack. It seems to me also that they ought to be partners in the enterprise, and not mere lenders to it, that is to say, that they ought to be allowed to reap the full benefit of their investment. I think, furthermore, that inasmuch as the aim of this company and bank is to encourage and assist the commerce and industry of the nation, it ought to scrupulously abstain from all commercial undertakings on its own behalf, so as not to injure any individual merchant. In order to identify the interests of his Majesty’s treasury with those of the bank, and at the same time to furnish to shareholders a sufficient inducement for making the investment, the new institution ought to have the privilege of furnishing all army and navy supplies at a commission of ten per cent. The supplies would then be procured more economically and with greater certainty and promptness, and the profits, which are now shared by only three or four contractors, would be divided among a large number of citizens, thus furnishing a reasonable support for many persons without unduly enriching any. The bank must be hampered by as few restrictions as possible, for otherwise it will not gain the confidence of the public. Upon the basis of these fundamental principles, I propose to his Majesty the foundation of an institution which shall do a banking and general discount business; which shall advance money against bills of exchange, State bills, etc., at an interest of four per cent. per annum; which shall furnish all the supplies required for his Majesty’s fleets and armies, or for any other branch of his service at home or abroad, at a commission of ten per cent.; which, finally, shall pay all claims against the Crown at a commission of one per cent.”

This document contains some views that are very sound, especially that relating to the independence of the bank; but it takes too little account of the proper division of labor; and the proposition that the new institution furnish supplies for the army and navy was a morbid germ destined to develop. Likewise, the confusion of State affairs and the banking business involved in the proposed method of paying the debts of the Crown was a reversion to the scheme of Law, and tended to an unfortunate interdependence between the credit of the bank and that of the State. The regulations of the bank, in details covering forty articles, drafted by Cabarrus, contain little that is of interest. The royal memorandum of June 2, 1782, establishing a national bank, with general powers, under the title of the Bank of St. Charles, adopted all the propositions of Cabarrus.

Though the royal memorandum makes no mention of the circulating notes of the Bank, the right to issue such is assumed in a prospectus addressed to those whom it was desired to interest in the new institution. In this prospectus we read: “The outstanding State bills, whose existence makes the Bank necessary, have increased the difficulty of establishing it, for how can we put its notes in circulation and keep them at par like those of the Bank of England and the Discount Bank of Paris, while interest-bearing bills of the State are in circulation? How can we hope to exchange the barren notes of the Bank for the productive bills of the State?” It was to compensate for this restraint upon the circulation that Cabarrus demanded a monopoly in furnishing army and navy supplies. This bank, against which Mirabeau wrote a violent pamphlet, did not succeed in establishing a circulation, and could not find in Madrid a supply of commercial paper commensurate with its discount facilities, but it did succeed in one direction. It raised to par the State bills, or váles, from a discount of twenty per cent. Its capital, however, was immediately locked up by the redemption of this paper and by the purchase of shares of the Compagnie des Philippines, a sort of copy of Law’s Compagnie des Indes in France. At the same time, it launched out into all kinds of undertakings contrary to its powers, including the canalization of Spain, beginning with the Guadarrama. The affairs of the Bank fell into the greatest confusion; but, by leaning upon the Treasury, which was as badly disorganized as itself, it managed to survive, and was even able in 1807 to announce, not only that its capital was intact, but that its resources were very much greater than its liabilities. This was true on the assumption that it could realize upon its assets; but such was far from being the fact. They consisted of loans upon its own shares and upon depreciated securities, which could not be collected; of foreign credits of very doubtful value; of debts due from the State, now insolvent; of State paper, and of a small specie reserve and a few good commercial securities.

At this time the French had invaded Spain, and the whole country was one vast field of battle. At one time there were two banks, one at Madrid with King Joseph, and the other at Seville and later at Cadiz. On the return of peace, in 1814, the Bank demanded of the State repayment of 320,000,000 reals; but a decree of the Cortes, rendered on November 9, 1820, made the claim of the Bank part of the ordinary public debt. Fortunately for the Bank, the restoration of absolute power annulled all the acts of the Cortes. A report was demanded of the Bank setting forth its history and actual situation, and when this had been furnished a royal decree was issued, on February 4, 1824, ordering a liquidation of all the State debt not represented by Crown bonds. A second royal decree of the 8th of the March following ordered a reopening of the great book of the public debt, and that there be entered therein, in addition to the debt of 600,000,000 reals, a further sum of 200,000,000, half of which should be immediately delivered to the Bank, at an interest of five per cent., on condition that it could show an equal amount of interest-bearing claims in its own possession. This condition the Bank could not fulfill, and finally, in 1829, it received a subsidy of 40,000,000 reals. If there was any loss involved in this transaction the State was the victim, but the unfortunate situation of the Bank was generally attributed to the Government, and this grant of 40,000,000 reals was no more than a just indemnity.

“The Bank of St. Charles,” says Don Ramon Santillan, “created for certain purposes, some of which were foreign and others diametrically opposed to the elementary principles upon which institutions of this kind should be based, found itself from the very first involved in a network of difficulties and hindrances, which was merely drawn tighter by the efforts of the managers of the Bank to escape from it. The losses naturally resulting from a discount of Crown obligations and from the complications involved in furnishing army and navy supplies, could not fail to be further increased by speculation in the public funds of France, then in the throes of a woful revolution. The participation of the Bank, as a very heavy stockholder, in the affairs of the Compagnie des Philippines, and its losses through worthless securities, completed its ruin. Its capital of 300,000,000 reals was far too great, and it had been able to employ only a small part of it in commercial loans. An attempt was made to secure a profit out of the capital by placing it at the disposal of a treasury whose condition was growing worse every day, and, as a matter of fact, the Government kept the Bank alive until a common shipwreck, in the early part of the present century, overwhelmed all institutions, public as well as private. Since 1814, the Bank had really been dead, and it required a mighty effort of the Government to resuscitate it.”

THE BANK OF ST. FERDINAND.

On July 19, 1829, with its indemnity of 40,000,000 reals and a right to issue new shares to the extent of 20,000,000 reals whenever it should need to do so, the Bank was reorganized. It gave up its old name, “Bank of St. Charles,” and became the “Bank of St. Ferdinand.” The business of the new bank was small at first, being largely confined to speculation in public funds; but a few notes were put in circulation in Madrid, where alone the Bank was permitted to issue; though it was authorized to open offices and establish agencies wherever it chose to do so. The sluggishness of commerce and industry in Spain, and more especially the narrowness of the Bank’s sphere of activity arising from its inability to circulate its notes beyond the limits of Madrid, made it impossible for the institution to gain any valuable result from its own proper business; and it could not survive except as an essentially governmental enterprise. During the first three years of the Bank’s existence no special attention was paid to commercial discounts, and in its reports it groups together under one heading that important branch of its business and its dealings with the Treasury. As a matter of fact, the Bank was merely speculating in rentes and in its own shares. One peculiar fact in the situation was the reluctance of the Bank to issue notes; the Government was constantly urging it to make such issues, and it was constantly refusing. Its wish was to act merely as agent of the Treasury; to make advances to it on good security, and to utilize its capital in speculation; it did not even comprehend the utility of loans on collateral, and against being compelled to publish reports it protested in the following language, which merits a reproduction: “The vaults of the Bank ought to conceal the mystery of credit, which its books reveal alone to the initiated. To publish this mystery is to destroy its value.” And yet, though it fulfilled but imperfectly the duties of a bank of issue, the Bank of St. Ferdinand rendered valuable services to Spain. The scarcity of its bills and the care with which it watched over them kept them at par with specie; moreover, it maintained correspondents abroad, through whom it negotiated the drafts of the Government upon its colonies, thus furnishing to Spain available funds in Paris and London, with which to replenish her gold supply and conduct her exchange operations.

Meanwhile the King, Ferdinand VII., had died, leaving his throne to his daughter Isabella, in derogation of the Salic law and to the prejudice of his brother, Don Carlos. The latter, supported by the Absolutists, began a war which ravaged Spain for the next six years. The Bank was compelled to make many large advances to the Government to enable it to withstand the insurrection. These loans were constantly renewed and never repaid, and the Bank of St. Ferdinand followed precisely in the footsteps of the Bank of St. Charles. Foreseeing the danger to which it was exposed, the Bank began to scrutinize the security offered by the Treasury and to restrict its credit. The Government retaliated by disowning the Bank of St. Ferdinand and raising up a formidable rival against it.

BANK OF ISABELLA II.

A decree of January 25, 1844, established a new bank of issue, to be known as the Bank of Isabella II. The Bank of St. Ferdinand then recognized the necessity of abandoning its ancient methods and appealing to the public. It offered to discount paper and to loan more freely than in the past, and solicited the opening of accounts current. At the same time, it managed to have the limit of its circulation increased from 24,000,000 reals to 60,000,000, and it refused to accept the notes of the Bank of Isabella II. It aimed a more dangerous blow at the new institution by establishing a clearing-house for bourse operations; a device from which the Bank of Isabella II. had hoped to reap some advantage. Two years later, however, the Bank of St. Ferdinand closed its clearing-house, because it had resulted in serious losses. The rivalry of the two banks gave a decided impetus to speculation. The Bank of Isabella II. placed all of its resources at the disposition of a small number of speculators; one of them in the course of three years obtained loans aggregating 188,000,000 reals, and another 116,000,000. Of the 1,019,000,000 reals loaned during that time, 786,000,000 were borrowed by thirty-two persons. The natural effects of such management soon made themselves felt. The crisis of 1847, which was so severe in France and England, did not leave Spain unscathed. The two banks, which had been mutually harmful, had fallen into the most deplorable condition; and the Minister of Finance, Don Ramon Santillan, was upon the point of compelling them both to go into liquidation when he quitted the Ministry.

THE TWO BANKS CONSOLIDATED—REPEATED RECONSTRUCTIONS OF THE CONSOLIDATED INSTITUTION.

The new Minister, M. Salamanca, thought that a more convenient and speedy remedy was to be found in consolidating the two institutions. By a royal decree of February 25, 1847, the two banks were made into one, bearing the name of the older. The fusion was an act of gross injustice toward the Bank of St. Ferdinand. True, its resources were not available; but at least it had the State for chief debtor, while the assets of the Bank of Isabella II. consisted of a mere confused jumble of credits, most of them worthless. The Bank of St. Ferdinand was so completely at the mercy of the State, to which it had delivered up practically the whole of its possessions, that it did not dare to protest against the combination, but was constrained to acquiesce.

The capital of the new bank was fixed at 400,000,000 reals, half of it to be paid in in cash. It was empowered to issue notes to an amount equal to its capital, and to establish branches wherever there was no local bank of issue. Its charter was to run for twenty-five years; it was required to publish a balance-sheet at stated intervals, and was forbidden to issue any note of a less denomination than 500 reals. According to the report of the commission appointed to appraise the securities held by each bank, the assets of the Bank of St. Ferdinand amounted to 372,413,342 reals, and those of the Bank of Isabella II. to 197,197,424 reals. There was not much to be deducted from the assets of the Bank of St. Ferdinand, but against those of the other there were very considerable offsets, the result being that the new institution found itself heavily incumbered from the very first, and that, too, at a time when commercial affairs were steadily becoming more serious. The crisis which began in 1847 had been followed in France by the Revolution of 1848, which disturbed the greater part of Europe. The consequences were distinctly felt in Spain, and her financial embarrassment was greatly increased by it. The cash reserve of the Bank was growing smaller, while its circulation was increasing and the Government was demanding further loans. To complete the Bank’s misfortunes, an investigation showed that it had been a victim of thefts and embezzlements to the extent of 60,000,000 reals. At this juncture, a new Finance Minister, M. Mon, determined to reorganize the Bank upon the model of the Bank of England. By a decree of September 8, 1848, a special issue department was created, distinct from the banking department, to be managed by a council composed of officers of the State, of the Treasury, and of the Bank itself, and two merchants of Madrid. This department was empowered to issue notes to the extent of 100,000,000 reals, guaranteed by State securities and a metallic reserve of 33,000,000 reals. The Bank was required to publish a balance-sheet every week. The new department withdrew about half of the outstanding circulation and thus raised the credit of the notes. But, unfortunately, it soon began to encroach upon the banking department, and each of the two branches of the institution interfered seriously with the work of the other. Nevertheless, some progress had been realized. A monopoly of future circulation had been secured and the practice of allowing the establishment of local banks of issue in the different cities of the kingdom was abandoned in favor of a single bank.

M. Ramon Santillan, appointed governor of the Bank, made it his first duty to look carefully into its actual situation. It was not promising. The assets consisted of 53,726,922 reals in specie and collectible securities, 82,052,885 reals of Government debts, 51,613,451 reals of contested claims, and 205,083,476 reals recovery of which was extremely doubtful, the greater part of this item consisting of loans made by the Bank of Isabella II. To sum up, of a capital of 200,000,000 reals, 110,500,000 might be considered as practically lost. As a first step toward reform, M. Santillan carefully separated the collectible securities from those of doubtful value; he collected all those that were recoverable, and with the 80,000,000 reals thus secured he reduced the capital to 120,000,000 reals; the two departments of the Bank were then united. On February 18, 1852, all of these reforms were enacted into law. Shortly afterward, the Finance Minister determined to take away from the Bank the management of the public debt and the collection of provincial taxes. To this end, he established a deposit office, which undertook to pay interest to depositors, and was required to accept all moneys in the hands of the courts and all bail moneys. This bureau established branches and opened accounts current, but it never paid the interest it promised, and soon fell into discredit. It thus became necessary to have recourse again to the Bank, which advanced money to pay the arrears of interest on the foreign debt, and guaranteed various State loans. From this time forth the Bank accumulated State securities with great profit to itself, if we look merely to the gains appearing upon the face of the transaction, but greatly to the dissatisfaction of its note-holders. A day of settlement was fast approaching, and the Government, having no means with which to meet the demands of the Bank, determined to reorganize it.