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 II.

THE BANK OF SPAIN.

ITS ORIGIN.

IN pursuance of the conditions above recited, and the determination to reorganize the embarrassed Bank, on January 28, 1856, a law was enacted providing that the institution should thenceforth be known as the “Bank of Spain”; that the franchises of the Banks of Barcelona and Cadiz should be continued for the term for which they were originally granted, and that the Bank of Spain, at the expiration of one year, should establish branches in the capital cities of nine provinces. Notwithstanding the Government’s intention to confer an exclusive franchise upon the Bank, a Deputy secured the adoption of an amendment by the terms of which private banks might be established with the same privileges granted by the law to the Bank of Spain. The effect of that amendment was to confine the business of the Bank of Spain to the city of Madrid. Nevertheless, the scope of its operations was somewhat enlarged, inasmuch as it obtained permission to make loans upon the shares of manufacturing and trading corporations.

The year 1857, which was signalized by a very severe and general crisis, was a critical time for the Bank. It was fairly successful in meeting the difficulties of the year, though for a brief interval it was compelled to suspend the redemption of its notes. During the following years, periods of tranquillity and of anxiety alternated, but there is nothing of special note to be recorded, except a constant increase of the State’s indebtedness to the Bank, and a gradual disappearance of Spanish silver coin; which was melted and exported in consequence of the appreciation of the white metal; which afterwards equally happened to the coins of the countries composing the Latin Union. In its embarrassment, the Government had induced the Bank to discount the obligations incurred through purchases of national property; but these assets had not a high degree of availability, and they did not constitute a strong element of the Bank’s resources. In 1862, the Government conceived the plan of issuing interest-bearing mortgage notes, due at fixed dates, and payable from the proceeds of past and future sales of national property. In 1864, the Government proposed to the Bank that it undertake the issue of these mortgage notes, the payment of interest upon them, and their final redemption; it was to receive as security all the obligations of purchasers of national property, and to enforce payment of them, at a commission of one per cent. The amounts recovered, it was to hold as security for future issues of mortgage notes. The Bank agreed to undertake this service, and as a result of the contract thus formed, a statute of June 26, 1864, provided: (1) That the obligations of the purchasers of national property arising out of mortmain should be delivered to the Bank on and after July 1, 1865, to the extent of 17,000,000 reals; (2) that the Bank should issue 1,300,000,000 reals of mortgage notes, payable to bearer, transferable by indorsement, bearing interest at six per cent., to be drawn for redemption, by lot or otherwise, at the option of the Government. A fund of 200,000,000 reals was to be set apart as security for interest payments and a semi-annual redemption; (3) that the mortgage notes should have the quality of public securities, and after their due dates should be accepted, at their face value, in all payments to public departments; (4) that the Treasury should make good to the Bank all defaulted obligations of purchasers of national property. The Bank received in settlement of its claims against the State 500,000,000 reals in mortgage notes.

In view of the closer relations thus established between the State and the Bank, the capital of the institution was thought to be too small, and, accordingly, it was increased to 200,000,000 reals. In spite of the fact that the union of Bank and State was constantly becoming closer, the Minister of Finance, on April 4, 1866, proposed, in behalf of certain English capitalists, that a bank of issue and discount be established under the name of the Banque Nationale Espagnole. The Bank, seconded by a vigorous public opinion, stoutly opposed this project, and it was abandoned; but the incident furnishes a good example of the dangers and contests to which the Bank was constantly exposed. Once assured of its franchise, however, the Bank showed itself more and more disposed to enter into closer relations with the State; accordingly, by a law of June 29, 1867, to go into effect on July 1, 1868, it was intrusted with the collection of taxes in all provinces and places where the office was vacant, and as fast as other collectorships fell vacant they were to be turned over to the Bank. The original term of the agreement was eight years, but it might be extended or renewed.

In 1868, Queen Isabella II. was dethroned. The new government evinced a friendly disposition toward the Bank, which, on its part, had been of considerable service to the Government. They maintained amicable relations, but the Bank was constantly called upon to furnish supplies to the State under one form or another.

GRANT OF EXCLUSIVE PRIVILEGES TO THE BANK.

The year 1874 marks the starting-point of a thorough transformation and reorganization of the Bank. In a report made to President Serrano on March 19, 1874, the Minister of Finance, M. José Echegaray, expressed himself thus:

This statement ws accompanied by a document containing the proposed regulations of the bank, in eighteen articles, all of which were enacted into law on July 17, 1876. Unfortunately, the new bank, which, as the report of the Finance Minister shows, was founded upon national principles, was not long in becoming a mere servant of the Government. By an agreement made on August 4, 1876, it undertook, for a period of twelve years, the collection of all direct taxes, and during the first year after its organization it came into possession of 200,000,000 reals of State obligations. From this time forth, the confusion of Treasury affairs with the business of the bank constantly increased and became more harmful. In 1882, the bank was intrusted with the payment of arrearages of the public debt in Spain and abroad. Another step much more open to criticism was that which consisted in farming out to the Bank of Spain the revenues arising from the Tobacco Monopoly. True, the bank organized for this purpose a lessee company, the “Compañia Arrendataria de Tabacos”; but the bank itself was the largest shareholder in that company; it held stock of the value of 12,270,000 pesetas, paying for them not out of its capital, but with its circulating notes.

The contract between the Treasury and the bank by which the bank undertook the collection of taxes expired by limitation on June 30, 1888. It had frequently been a source of loss to the bank and it was not renewed. A law of May 12, 1888, placed the seal of approval upon another contract, in accordance with which the bank, through its main office at Madrid and its branches, was to have the custody of all the revenues under control of the Finance Minister and the Treasury; upon the security of these revenues the bank undertook to pay all claims against the Treasury. These receipts and payments made on behalf of the State formed an account current, productive of interest in favor of the bank, but not in favor of the State. By the terms of the same contract, the bank bound itself to purchase gold bullion to the value of 300,000,000 pesetas and to have it coined, the expense being shared equally between the bank and the State.

In 1891 there was a sudden change for the worse in the financial condition of Spain. The Government, heavily in debt as usual, turned once more to the bank, granting in return for the assistance it demanded, an extension of the charter (originally expiring in 1904) to 1921, and an increase of the bank’s circulation to 1,500,000,000 pesetas; on its part the State demanded a permanent loan of 150,000,000 pesetas, without interest, of which 50,000,000 pesetas was to be forthcoming on July 1, 1891, 50,000,000 pesetas on July 1, 1892, and 50,000,000 pesetas on July 1, 1893. The effect of these measures was instantaneous. There was an immediate fall in Spanish exchange, not only as a result of an adverse balance in international demands, but also by reason of an intrinsic depreciation of Spanish paper; and from that date to this, Spanish exchange on foreign countries has remained below par; but this is a subject to which we shall have occasion to return farther on.

ORGANIZATION OF THE BANK.

The Bank of Spain, whose franchise was originally granted for thirty years from March 19, 1874, now has a charter extending to December 31, 1921. It exercises its powers not only upon the Continent, but throughout the neighboring islands, including the Canaries. Its franchise is an exclusive one, for of the eighteen provincial banks in existence in 1874, eleven were absorbed by the Bank of Spain and the other seven have gone into liquidation. Though the Bank of Spain is a private institution, any theft or embezzlement of which it may be the victim is punished as a crime against the State.

Its main office is at Madrid, and throughout the provinces it is represented by branches, subsidiary offices, or correspondents, according to the commercial importance of the place.

Capital.—The capital, fixed at 100,000,000 pesetas by the decree of March 19, 1874, was increased to 150,000,000 pesetas by vote of a shareholders’ meeting of December 17, 1882, approved by royal decree on the 23d of the same month. The capital is divided into 300,000 registered shares of 500 pesetas each; a share being indivisible in its relations with the Bank, which refuses to recognize more than one person as having an interest in any share. The shares may be invested with all the properties of real estate.

Stockholders’ Meetings.—Ordinary meetings of stockholders are composed of those who have been recorded for three months as having legal or equitable title to at least fifty shares. Stockholders cannot be represented by proxy, with these exceptions: Married women, minors, corporations, and public and private associations may appear through their usual representatives, and widows and unmarried women of legal age may be represented by agents appointed for the purpose. Each member of the meeting has only one vote, without regard to the number of shares he may own or represent. Stated meetings are held at some time within the first fifteen days of March, the precise date being announced before the first of February each year by publication in the “Madrid Gazette.” A report of the year’s business is submitted to the meeting, accompanied by a balance-sheet and an account of profits and losses, and the members may inspect the books and documents upon which these reports are based. The meeting passes upon the management of the Bank, chooses the members of its Administrative Council, and votes upon such propositions as may be submitted to it by the Council or by one of its own members. A special meeting of the stockholders may be convened at the request of the Administrative Council, or upon a petition setting forth the grounds upon which it is issued and signed by 100 stockholders who have been in possession of fifteen per cent. of the capital stock for more than three months last past.

The Governor.—The affairs of the Bank are managed by a governor, two under-governors, and the Administrative Council (Conséjo de Gobiérno). The governor is appointed by the King, and is at the same time head of the administration and representative of the State in its relations with the Bank. The duties of the governor are: (1) To preside over meetings of the stockholders and of the Administrative Council, and, when he so elects, over the deliberations of standing and special committees; (2) to supervise all dealings of the Bank, subject to the laws of the State, the regulations and by-laws of the Bank, and the advice of the Administrative Council; (3) to sign, in the name of the Bank, all contracts and agreements, and to manage all judicial and extrajudicial controversies to which it may be a party; (4) to sign all the correspondence of the Bank, or to authorize an under-governor to sign it; (5) to appoint, with the advice of the Administrative Council, all employees of the Bank, and to revoke any appointment, reporting the facts to the Council; (6) to nominate to the Council candidates for heads of departments; (7) to veto all discounts, loans, and other transactions determined upon by the Council or by any committee, when they appear to be contrary to law or to the rules and regulations of the Bank. If the Council persists in its view, it becomes the duty of the governor to refer the whole matter immediately to the Minister of Finance. The governor supervises and directs the work of all employees of the Bank. He acquaints himself with the standing of all business houses, and passes upon the question of loans to them. The governor and under-governors have a deliberative voice in the discussions of the Council and in those of the committees, except when their own acts are under investigation. The governor has a casting vote in the Council and in all committees except the Executive Committee. The governor cannot dispose of the funds of the Bank by drafts, discounts, loans, payments, or any other means. He cannot bind the Bank by any signature given without the consent of the Council or a committee. It is his duty to advise the Council as to the progress of the general business of the Bank, and the final result of all transactions that require to be kept secret until their completion.

The Under-governors are appointed by the King from names submitted by the Administrative Council. They sit in the Council under title of First and Second Under-governor, and succeed to the duties of the governor in the order of their seniority. The governor intrusts to them such of his duties as do not seem to demand his personal attention. In case of the absence or impeachment of the governor and under-governors, they are replaced by members of the Executive Committee in the order of their seniority. The governor and under-governors take an oath of office before the Administrative Council, in the usual form; promising to execute the duties of their office faithfully and loyally, to enforce the law and the rules and regulations of the Bank, and to devote their best efforts toward ensuring its prosperity. The under-governors can be removed from office upon motion of the Council or by the Minister of Finance, acting in his official capacity, with the concurrence of the Administrative Council of the Bank and the Council of State, the accused being always entitled to a preliminary hearing. The governor must be a resident of Madrid, and he cannot leave the city without permission of the King. The governor and under-governors cannot offer bills to the Bank for discount, nor borrow of it upon collateral, nor be accepted as personal security for any debt due to it. The governor is not required to furnish a bond. The under-governors, before entering upon the duties of their office, are required to deposit fifty shares registered in their names. These are not returned to them until all of their official acts have been passed upon and approved by a stockholders’ meeting.

The salary of the governor is 25,000 pesetas at least, and that of an under-governor is 12,500 pesetas, all paid by the Bank.

The Administrative Council is chosen by the shareholders, subject to approval of the King. No one is eligible to the Council except residents of Madrid who have owned 100 shares of the Bank’s stock for three months before the date of their election. These shares are inalienable during their continuance in office and until their administration has been approved by a stockholders’ meeting. The following are not eligible to the Council: Aliens, insolvents, bankrupts who have not been rehabilitated, persons who have been condemned to imprisonment or any corporal punishment, and those who owe any overdue debt to the Bank. The Council cannot contain more than one member of the same firm or special partnership, or more than one director of the same corporation, the single exception being that in favor of the directors of the Compañia Arrendataria de Tabacos. Neither can there sit in the same Council those related within the fourth degree by consanguinity or marriage. The councilors are eighteen in number, of whom twelve are regular and six alternate members. The latter are called upon, in the order of their seniority, to replace any regular members who may be absent. The term of office is four years; one-fourth of the members go out of office each year, but they are re-eligible.

Attendance Fees.—The governor, the under-governors, and the councilors are entitled to attendance fees, the total amount so payable being fixed at 375 pesetas per meeting, to be divided among those who are present. There is no other remuneration except such as may be voted by a meeting of the shareholders.

The duties of the Administrative Council are: (1) To determine the order and form in which the books of the Bank are to be kept; (2) to fix the amount, the number, the denomination, and the form of notes to be issued; (3) to decide how much money is to be devoted to discounts and loans, the rate of interest, and the formalities to be required of borrowers; (4) to establish branches and subsidiary bureaus and appoint their managers; (5) to supervise all the business of the Bank and its branches, and especially transfers of funds; (6) to examine the semi-annual accounts of the Bank, and determine the dividends to be paid and the amount to be added to the reserve; (7) to see that the rules and regulations of the Bank are enforced; (8) to determine the number, classification, and salaries of the employees engaged by the governor, and to nominate candidates to the places to be filled by appointment of the King; (9) to fix the dates for the regular stockholders’ meetings and for such special meetings as the by-laws provide for; (10) to appoint provincial and foreign agents and correspondents; (11) to approve the report and the statement of profits and losses submitted to the stockholders at their stated meetings; (12) to bring before those meetings all questions requiring their attention; (13) to draft the Bank’s by-laws, and to amend them in such manner as may meet the approbation of the Government.

Aside from their duty as a body, the councilors may, individually, proffer such advice and make such suggestions as seem to them likely to further the interests of the Bank. The Council holds a stated meeting each week, and may be called together in special meeting by the governor as often as necessary. The Council is divided into four committees—an Executive Committee, a Committee on Branches, an Administrative Committee, and an Auditing Committee. The Executive Committee and the Committee on Branches consist of three members each, chosen by the Council, renewable by thirds every four months, and indefinitely re-eligible. The Council also appoints an alternate to replace any absent member of these committees. The other committees consist of three members each, chosen from month to month. It is the duty of the Executive Committee to examine paper offered for discount, pass upon requests for loans on collateral, and to supervise all contracts and undertakings directly connected with transfers of specie or securities. The Committee on Branches superintends the management and the transactions of the various branches of the Bank. The Administrative Committee attends to the management of the different departments of the Bank, the printing of the notes, the expenditures of the Bank, and its suits at law. The Auditing Committee inspects all the accounts of the Bank, and looks to the safe-keeping of its funds and securities. The Administrative Council is empowered to appoint special committees in case of need. The committees are heard upon all questions coming before the Council, except in matters requiring haste, and they give advice upon all propositions submitted to them by the governor; they may also initiate such measures as seem to them expedient or for the best interests of the Bank.

Branches and Subordinate Offices.—The Bank, with the approval of the Government, may establish branches or subordinate offices wherever the needs of commerce or industry seem to require them. They are an integral part of the Bank itself, and can only undertake such business and establish such relations among themselves as are authorized by the Council. The administration of each branch includes a manager and a number of directors to be fixed by the Administrative Council, provided, however, that there shall in no case be more than eight regular directors and four alternates. The number, classification, and salaries of all employees are also determined by the Administrative Council.

The Manager is appointed for three years by the Council, subject to approval of the King, and is re-eligible; he furnishes security for the proper performance of his duties, consisting of shares of the Bank. The manager is the chief executive officer of the branch; he opens the correspondence and executes the orders of the governor.

The Directors are appointed for three years by the Administrative Council, are re-eligible, and are required to furnish security. Whenever any branch has at least thirty registered stockholders, each having been in possession for more than three months of at least ten shares, they are called together in a stockholders’ meeting, the manager of the branch presiding, and they draw up a list of candidates for the directorship, containing three times as many names as there are directors to be chosen; this list is submitted to the Administrative Council, which chooses directors from among the names upon it.

The manager and the directors make up the Governing Council of the branch, determining all questions over which the regulations of the Bank give them jurisdiction and all such as are submitted to them by the Administrative Council. The Governing Council appoints an Executive Commission, having the same duties with regard to the business of the branch that the Executive Committee has in matters affecting the central bank.

Agents.—From nominations made by the Committee on Branches, the Administrative Council appoints agents (comisionádos) to represent the Bank in Spain or abroad. The agents attend to such business as the governor may intrust them with. They furnish security consisting of shares of the Bank, and they are personally responsible for all paper they accept in behalf of the institution; they are paid by commissions fixed by mutual agreement.

BUSINESS OF THE BANK.

Accounts Current.—The governor opens accounts current with all individuals and associations who demand the privilege and fulfill the conditions required by the Council. The first deposit, in Madrid, must be of at least 2500 pesetas, or 1000 pesetas at any of the branches; subsequent deposits must not be less than 250 pesetas each. No interest is paid upon accounts current. Holders of accounts current dispose of the amounts standing to their credit by means of cheques or transfer slips, and can make their notes payable at the Bank. The Bank furnishes to them gratuitously blank cheques, with stubs attached, which can be made payable to any person by name, or to bearer. No cheque can be drawn for less than 125 pesetas, except to close an account. Anyone who makes an overdraft may be required to withdraw his account. Deposits and withdrawals in accounts current may be made by correspondence. The following statement, expressed in millions and hundreds of thousands of pesetas, will be found of interest:

Discounts.—The Bank draws up a list of those to whom it is willing to grant discounts, and indicates upon it the maximum credit to be allowed to each. It discounts notes payable to order and bills of exchange drawn in legal form, provided they bear the signatures of two persons, of whom one at least must be upon its credit list and must live in the neighborhood of the place of presentation. It discounts also coupons of the public debt and bonds drawn for redemption. Usually the term for which the paper is to run must not exceed ninety days, and the amount must not exceed that shown upon the credit list; but if the paper bears three signatures, two of which are upon the Bank’s credit list, it may be accepted though not due for 120 days, and though the amount is greater than that inscribed upon the list. The total of these latter discounts must not exceed the funds remaining available to the Bank after covering with its cash and ninety-day bills all of its demand liabilities; that is to say, its circulation, accounts current, and specie deposits. Public securities taken as collateral for a loan may replace one of the required signatures. The Bank is sole judge as to the acceptance or refusal of paper offered for discount, and it is not bound to state the grounds of its decision.

The Discount Rate.—The discount rate is fixed monthly or oftener; it is the same for all persons, but not necessarily the same at Madrid and at the branches. Spain, being a country with no large accumulations of capital, maintains a rate of discount distinctly higher than that of France, Belgium, or Switzerland; but it has a double standard, the Bank will not pay out its gold, and silver pesetas cannot be exported; and from these facts it results that the rate of discount, notwithstanding the unfavorable situation of exchange and the premium on gold, remains within reasonably moderate limits.

Collections.—The Bank undertakes the collection of any paper left with it ten days before the due date. Those having accounts current with the Bank, but not living in its vicinity or in that of any of its branches, may forward by mail any paper they wish to have collected. The Bank will present the paper for acceptance or for payment, and will protest it if necessary. Proceeds of collections cannot be withdrawn until a week after the due date of the paper.

Exchange Operations.—The Bank is authorized to deal in exchange, either for the purpose of transferring to the central office any funds it may have in the provinces, or in foreign countries, or for the purpose of transferring funds from the main office to any place where they may be needed. The rates of exchange are fixed daily, and a list of them is made, to which the public has free access. Bills of exchange signed by the governor and payable wherever the Bank has funds are sold to all who ask for them. In order to make a transfer of funds upon its own account, the Bank is authorized to purchase domestic or foreign bills.

Loans.—The Bank makes loans on public securities, exchequer bills, mortgage bonds, railroad bonds, and other industrial and commercial securities; but it cannot loan upon its own shares. The maximum amount of a loan is eighty per cent. of the value of the security on the day the money is advanced; the minimum term is ten days, and the maximum ninety, except that loans may be made for 120 days under the same conditions that would justify the discount of paper having that number of days to run. The least loan made by the Bank is 500 pesetas; if the collateral loses ten per cent. of its value the borrower must deposit additional collateral or reduce his loan proportionately. The loaning rate is usually the same as the discount rate.

Loans on Bills of Lading.—To persons whose names are upon its credit list the Bank makes loans on bills of lading accompanied by invoices, and upon storage receipts issued by legally authorized warehouses. The merchandise must be insured, and the loan cannot exceed fifty per cent. of its current market value.

Special Deposits.—The Bank accepts on special deposit Spanish and foreign coin, gold and silver bars, precious stones, State funds, and all securities quoted on the Bourse. The receipts delivered by the Bank are or are not transferable by indorsement, at the will of the depositor. The minimum deposit of gold or silver or precious stones is of the value of 250 pesetas, and the maximum 75,000 pesetas. The commission for the first year is one-half of one per cent. per quarter, or two per cent. for the year; for the following years it is one per cent.; a whole quarter’s commission is charged for any period less than a quarter. The only obligation assumed by the Bank is that of returning the deposit intact. It undertakes to collect coupons of bonds deposited. No commission is charged upon deposits of specie unless the depositor demands a return of the identical coin deposited.

Accounts Current of Securities.—We find at the Bank of Spain one very interesting class of business (though it is there transacted in a somewhat rudimentary manner), the counterpart of which is not to be found elsewhere, except in Germany and Austria in those private establishments known as “Giro und Kassen Verein.” We refer to accounts current of securities. Any depositor who wishes may open such an account; he can withdraw his securities by means of cheques or drafts, but a separate account current must be opened for each different kind of security, and this necessitates a very complicated system of bookkeeping.

On December 31, 1894, the Bank had in its possession, including special deposits, pledges, securities belonging to the State and those in the custody of the courts, a mass of securities estimated to be worth 5,651,848,503 pesetas. This is one of the largest amounts, if not the very largest, to be found in any European bank of issue.

The Bank also deals in gold and silver.

ADMINISTRATION OF THE COIN AND PAPER CIRCULATION.

By decree of 1874, the Bank of Spain acquired the right to issue paper money to five times the amount of its capital; but its metallic reserve had to represent one-fourth the outstanding sum of the circulation. The law of July 14, 1891, modified those regulations. It authorized the Bank to carry its circulation to 1,500,000,000 pesetas upon a metallic reserve equal to one-third of that issue; the reserve must be at least fifty per cent. in gold, whilst the remainder or any part of it may be in silver. In no case can the amount of the circulation, together with the current accounts and deposits of securities, exceed the total of the coin on hand together with the aggregate of advances and commercial paper; included in the latter item there must be no bills receivable which have more than ninety days to run. Bonds of the four per cent. Public Debt, shares of the Tobacco Monopoly, Treasury bonds which are issued upon the security of the Tobacco Monopoly, and also bills of exchange and Treasury bonds of the floating debt are constituents in the guaranty fund for the issue of circulating notes.

In authorizing the increase of the circulation, the State had its eye primarily upon a permanent loan of 150 million pesetas, and it looked forward to advances which grew gradually upon the security of Treasury pay orders. The public was not deceived; it became convinced that the scrip was badly guaranteed, and the provisions of the law brought about a considerable increase in the rate of exchange. The premium on gold had remained, in 1890, between a maximum of 4½ and a minimum of 1½ per cent.; the variations of 1891 were significant, as will appear from the following comparison of the fluctuations in the gold premium.

The deterioration of exchange was too closely parallel with the working of the new law to preclude the conclusion that it was the simple relation of cause and effect. The protective measures which France took against Spanish exportations, and vice versâ, have still further aggravated the evil, as Spain is heavily indebted to France, through her having constructed the larger part of the Peninsular railroads with French capital, while France, moreover, holds a considerable amount of Spanish Government bonds. There is no doubt that the credit of the bank notes has suffered thoroughly from these commitments. Meanwhile, the Bank’s metallic reserve has grown continually, as the following statement of the metallic coin stock on hand on December 31st will show:

The coin stock consists of gold and silver, the latter being on an equal legal status with gold; but as Spain is not in the Latin Union, she cannot export her white metal. Consequently, she has a large store of money which is absolutely deceptive; for the duro, the 5-pesetas piece, is intrinsically lower in value than the paper money at the present price of silver. The Bank is always ready to pay out the duro, but refuses, absolutely, to pay in gold, as the paper is preferred to silver, which is not as much in use as the paper. Spain, although theoretically a free-currency country, is practically under the régime of forced currency. Besides, the legal prescription that the metallic reserve should consist of at least fifty per cent. in gold is not observed.

We give the composition of the coin stock of the Bank on December 31st, for seven recent years:

The variations of the metallic stock are not of wide range, as virtually only silver is to be found in circulation.

The fluctuations in the Bank’s stock of coin are not abnormally wide, as will appear from the following comparison:

THE CIRCULATION OF THE BANK.

The amount of the circulation of paper swells from year to year, on account of the incessant wants of the Government. Each business year means to the Bank an added weight to the burden which it carries in the paper of the State; which is the principal, if not the veritable guarantor, of the Bank’s notes. The following statement shows the steady augmentation of the issues for the twenty years ending with 1894:

DENOMINATIONS OF THE NOTES.

The denominations are of 25, 50, 100, 125, 250, 500, and 1000 pesetas. The distribution of the circulation, as to denominations, stood, in December, 1894, as follows:

A peculiar circumstance is that the only denominations which are virtually useful in Spain are those of 1000 and 100 pesetas.

LIABILITIES VERSUS ASSETS.

Spain may be taken as a type of the countries “whose exchange is wrecked,” to use an expression of M. Leroy Beaulieu. The bad condition of the exchange is easily understood, if we consider that the credit of the Bank and of the State are merged into one. An examination of the balancesheet of December 29, 1894, will show that the Bank has neither capital nor reserves; thus—

These are absorbed by

On the other hand, the debts payable on demand consist of:

To meet these obligations, the Bank owns the following assets, which are, indeed, realizable funds, or supposably so:

Consequently, the Bank owes demand debts to the amount of 438,022,522 pesetas, which are represented purely by State scrip, which is rather difficult to turn into cash. The State securities so held are:

There is no doubt that if Spain had not its system of bimetallism, which allows it to pay its debts in silver which nobody wants, she would have been long ago under a forced currency régime. The 482,400,000 pesetas of Treasury securities which the Bank holds are a genuine asset; but they represent obligations of a State heavily in debt; and it can hardly be considered that a bank note which is secured by 275,000,000 of silver worth fifty per cent. of its face value and by 482,000,000 of securities whose value is far from being unquestionable, is equal to its face value in gold. The public understand the situation; and therein lies the principal cause of the unfortunate condition of the paper and coin circulation and of the Spanish rate of exchange.

RELATIONS BETWEEN THE BANK AND STATE.

The law of March 19, 1874, stipulates that the Bank can only negotiate public securities or make advances to the State upon substantial guaranties which can be readily turned into funds. This principle has been clearly violated by the law of July 14, 1891, by which the Bank was compelled to loan the Treasury 150,000,000 pesetas without interest. Reimbursement of this loan cannot be demanded before the expiration of the Bank’s privilege. The payment of debts owed to the Bank by the State, the provinces, and municipalities cannot be delayed in any case and the debtors cannot refuse settlement. Originally, the Bank had charge of the tax collections; but now it is released from this service. According to a law of May 12, 1888, however, it must undertake the State Treasury business for five years upon the following terms: It must gather the product from all sources of revenue of the State and centralize it at Madrid and the provincial branches. For this purpose, all administrations under the Ministry of Finance, who are in charge of the management and collection of revenues, must pay their receipts into the Bank. As in former contracts, the Bank paid the interest and assessments for the redemption of the four per cent. debt, and for the foreign two per cent. debt, by taking the necessary funds out of the taxes and revenue paid in. If necessary, the Bank may make advances, and if a balance in its favor appears it is entitled to interest at one per cent. less than the discount rate; this rate of interest, though, cannot exceed three per cent. The debit balance of the Treasury is guaranteed by three months’ paper which can be renewed until expiration of the agreement. In case of grave, exceptional events, the maximum of interest is subject to change. The Treasury has a current account at the Bank, in which payments are credited and drafts by the Treasury debited. This account is settled every three months. The Treasury pays interest on debit balances as stated above; the Bank pays no interest on credits in favor of the Treasury. Such credits serve for the settlement of disbursements made by the Bank. If the balance due the Bank exceeds 165,000,000 pesetas, the Treasury must issue certificates at three, six, or nine months’ maturity and hand them over to the Bank, which can negotiate them in order to reduce the open debt of the Treasury to 165,000,000 pesetas. The Bank redeems these certificates for account of the Treasury and charges them to its debit. It also collects funds due the Treasury in foreign places, and supplies the funds for the payment of the public debt and other obligations of the State wherever this may be necessary. The Treasury is charged with the expense of such transactions. The agreement, which expired on June 30, 1893, was extended until June 30, 1894, since when it runs on from year to year by tacitly implied acknowledgment.

In order to meet a deficit of about 750,000,000 pesetas, and the extraordinary expenses of the Carlist War in 1876, the Minister of Finance transferred to the Bank the proceeds of the ground and manufacturing taxes, as guaranty of an issue of 580,000,000 pesetas in pagarés (promissory notes), and a reserve fund of 70,000,000 pesetas set aside to ensure the payment of interest, and the gradual redemption of these obligations. This agreement was made by virtue of a law dated June 3, 1876. This issue was made at eighty-five per cent., which netted only 493,000,000 pesetas, and the Government entered into a new arrangement with the Bank, by which the Treasury certificates which were paid and returned to the Treasury were again applied to guaranty the floating debt, which, consequently, cannot decrease.

In order to regulate the service of the floating debt the Bank has had a current account with the Treasury since July 1, 1888. All remittances of Treasury certificates are placed to its credit, and negotiations of these securities by the Bank for State account are charged to the debit of this account.

It is interesting to watch the distribution of the Spanish debt abroad. The places of payment, as judged by the currency, are scarcely a precise guide in the matter, but they help to give a fair estimate:

The above table shows very clearly the effect of the deterioration of exchange on Spanish finances. The expenses caused by increased rate of exchange may be estimated at about 2,000,000 pesetas, for the period of July 1, 1888, to December 31, 1890. In 1891, they amounted to 800,000 pesetas; in 1892 they were 1,200,000 pesetas; in 1893, the cost was 2,400,000 pesetas; and the expenses of 1894 amounted to 2,200,000 pesetas. Still, it must be noted that, through the circumstance of the high Italian and Portuguese exchanges, Spain’s chances were essentially favorable for the payment of interest due in those countries. We speak here only of payments made for Government account, but, if we consider that the bonds of Spanish railroads are principally held in France, it becomes evident what a formidable increase in expenses these enterprises have to pay in consequence of the depreciation of the Spanish circulating medium. Hence, we can understand how certain railway companies considered French money too dear, and paid their interest obligations in depreciated pesetas, in violation of contract.

It is rather difficult to determine the amount of taxes which the Bank pays. The statements mention the following: First, ground tax and stamp duty; second, the tax on the profits, which seems to amount to about 16.50 per cent. of the dividends.

PROFITS AND EXPENSES OF THE BANK.

If the Bank of Spain is seriously embarrassed by the defective credit of its notes, which is due to its too intimate relations with a Treasury whose administration is utterly faulty, it makes, nevertheless, very considerable profits. We know of no other establishment which earns such an income for its shareholders.

The statistics of the profit and loss account can be established in a positive manner only since 1881.

The high proportion of the profits accruing on investments is the most palpable proof of the bad condition of Spain’s finances. A similar situation prevails in the Bank of Portugal and the National Bank of Greece. All States with “wrecked” finances use their principal credit establishment for the marketing of their signature, and pay very dearly for this dangerous service. The country suffers not only from the exorbitant sums which it pays to the banks, but still more so from the increased rate of exchange. A candid examination of these conditions warrants the conclusion that it would have been better to establish a State bank pure and simple. Such a bank would at least show merit in lending its signature gratis. A bank whose credit depends absolutely upon the State, and which stands responsible while it cannot offer opposition to the Government’s prodigality and bad management, has all the drawbacks of a State bank, with hypocrisy added.

RUNNING EXPENSES.

The running expenses of the Bank are considerable, as will appear from the subjoined statement covering fourteen years:

DIVIDENDS.

The dividends of the Bank are very favorable, and the Bank’s shares are quoted high, as will appear from the subjoined data:

REPORTS AND BALANCE-SHEET.

The Bank of Spain publishes annually a statement of its transactions. That document is rather explicit and well arranged; it contains numerous figures, some of which, though, are not sufficiently explained. The statement is a valuable source of information, which is extensively sought. Moreover, an abridged balance-sheet is published weekly, one of which we here reproduce:

The two first items of the assets give the amount of gold and silver which constitute the metallic reserve of the Bank. The third item represents outstanding debts of the Bank owed by foreign correspondents who buy exchange for the Bank and pay the interest on the public debt. In item 4 we have the foreign paper owned by the Bank. The fifth item represents the stock of commercial paper, and the sixth shows the loans made. Item 7 concerns commercial paper out for collection. From 8 to 13 the statement recapitulates the securities held by the Bank; we have already spoken of these in detail. Item 14 shows the amount of copper coin; the Bank receives this for Treasury account and does not carry it under the head of coin on hand. Item 15 gives the amount of the loans granted by the Bank for payment of interest on the floating debt; and No. 16 shows the expenses which the Treasury has to pay back to the Bank. The permanent loan of 150,000,000 pesetas, which resulted from the stipulations of the law of July 14, 1891, appears as the seventeenth item; while No. 18 declares the value of the Bank’s buildings. Finally, No. 19 consolidates the accounts of the Bank, which are not mentioned in detail.

In the liabilities, items 20 and 21 correspond to capital and reserve. The profit and loss account which follows indicates the profits of the running year, and the statement distinguishes between profits actually made and those which will be realized only after maturity of the engagements from which the profits are derived. Item 23 gives the paper circulation; next come current accounts and deposits in coin; then dividends of the Bank and interest on the public debt which has matured but not been called for as yet. Under item 27 we find the reserves made up from taxes which are set aside for the payment of the public debt; we explained this in detail before. Item 28 represents the current account of the Treasury; and the statement closes with the balances of open credits which the Bank has established against deposit of public securities.

CONCLUSION.

The Bank of Spain is one of the strangest institutions of issue in Europe. On the ground of the amount of its business and the high figure of its profits, it occupies one of the first places among banking establishments of its class; but this apparent prosperity conceals an incurable weakness. The Spanish financial administration leaves much to be desired. The budget is never made up in a thorough and responsible manner; deficits are the rule, and the floating debt, which widens the chasm between expenses and receipts, grows steadily. The Bank absorbs all Treasury certificates and orders for the redemption of its own notes, and so sells its credit very dearly to the State. The public is not duped by this transaction, and its misgivings find expression in the fact that the people are always ready to give 117 or 118 pesetas paper for 100 pesetas in gold. The old traditions of the Bank of San Carlos and the Bank of San Fernando are still extant, and the same faults cause the same calamities.

Of course, Spain has formally no forced currency; but while she boasts of exchanging her paper for hard money over the counter, she only bandies words. She proposes to pay for bank notes in a clumsy money which does not circulate abroad and which, instead of being preferable to paper, offers only drawbacks; she neither takes in nor pays out gold. According to the Gresham law, bad silver and paper have systematically driven away good money, and to-day not a single twenty-peseta gold piece can be found in Spanish circulation. Consequently, the Bank gives only the choice between paper or money which is worth still less, and yet forced currency is not acknowledged.

Nevertheless, the Bank’s signature lends a certain additional value to its paper money. Although the bank note is only redeemed in silver which has lost fifty per cent. of its metallic value, the paper is worth eighteen to twenty per cent. below par. In calculating the loss, two elements must be taken into consideration. First, the absolute depreciation of the paper money on account of the insufficient guaranty which it offers; and then the increased exchange owing to the ugly situation of Spain’s balance of trade. The country has no large capital and has to place Government loans with its neighbors. Spain depends upon them for her railroads, port and canal improvements, etc. The extremely large amount of interest which she owes abroad could only be counterbalanced by large exports of merchandise and products of the soil, and she needs a very severe control over her imports. Yet, in spite of an almost prohibitive customs tariff, which is often intensified by harsh interpretations of the officers in charge, Spain’s imports are constantly higher than her exports. Again, Spain’s wines, which constituted the main staple for export, are kept out of France, as the French vineyards which were destroyed by the phylloxera have recovered; and, moreover, France inaugurated a protective tariff in 1892. Thus there seems to be little hope for an improvement in Spanish exchange.

The bimetallist school has built quite a framework of theories to demonstrate that a high exchange against a country is favorable to the sufferer; that it develops its industries and foreign commerce; but such reasoning has scarcely been applicable in the case of Spain. She struggles with genuine courage against all kinds of difficulties caused by her bad economic conditions. The high exchange against her is its most striking symptom, and credit, which plays such an important part in the capital of a nation, is seriously compromised to the detriment of Spain. The Bank is accused—we think wrongly—of aggravating the evil by squeezing the Government.

If Spain does not resolve to issue paper money on her own account—which would seem to be advisable—and if she has not the wisdom or rather the opportunity to bring her expenses upon a level with her revenues, she is compelled to call upon the principal credit establishment of the country for discounts and for the disposal of Treasury bonds. It is natural, and even necessary, that the Bank should demand good compensation; for therein lies the only means for moderating the Government’s exactions. Spain suffers from the mistake which economists fight in vain—the error that the Government can do as it pleases with the money and credit of the country. Laws do not change the nature of affairs, and if matters are handled contrary to nature, immediate and sudden countershocks show that mistakes have been made, and those who danced must pay the piper.

Virtually, Spain is under forced currency rule. She has misused her Bank; she has deflected the bank note from its natural purpose; she has harvested as she has sown, and suffers from her errors the same as Italy, Portugal, Greece, and many others in the past and present. The decline of credit and the depreciation of the national money are the natural disastrous consequences which result from her course.

PART IV.

BANKING IN BELGIUM.

THE BANK OF BELGIUM.

ITS EARLY VICISSITUDES.

THE National Bank of Belgium is of comparatively recent origin. It was founded under an act of May 5, 1850, the first article of which provided: “A bank which shall be known as the National Bank is established.” Its purpose was declared to be to regulate the issue of paper currency, and secure uniformity in the bank note circulation of Belgium.

Four banks had previously been in competition—the Société Générale, the Bank of Belgium, the Bank of Flanders, and the Bank of Liege. The last two were local institutions; the first two had charge of the Government service. The Société Générale, founded in the beginning of the century, was a powerful establishment, which, under the Dutch régime, attended to the collection of public revenues. In 1830, when Belgian independence was proclaimed, the new government could not dispense with the co-operation of the Société Générale. The latter, taking advantage of the circumstances, caused the State much embarrassment by refusing to agree to any supervision over its administration of public moneys. The Government, deciding to put an end to the vexation, authorized in 1835 a new bank of issue, and gave it the name of Bank of Belgium. The privilege of performing cash transactions for the State was taken away from the Société Générale and conferred upon it. The two banks did not get on well together. The Société Générale even endeavored to force the Bank of Belgium into bankruptcy, by suddenly demanding the redemption of a large amount of currency. This rivalry weakened and greatly embarrassed both, when the crisis of 1836 came on. Neither the Société Générale nor the Bank of Belgium had obtained the experience necessary for properly regulating the paper circulation. Both had done a large business in commercial and industrial transactions at long maturity. The public holding the notes of the Bank of Belgium took fright, and to avoid a suspension of payments the Bank was obliged to appeal to the Treasury for assistance. The years 1837, 1838, and 1839 were disastrous for the Belgian banks. The Société Générale was able to retrieve its position, but the Bank of Belgium was so distressed that, in 1842, it had to resign its function of State depository, which reverted to the Société Générale. The Government, however, did not forgive the Société Générale. It felt keenly the humiliation of being obliged to return to that institution after striving to do without its services, and devised a plan for a new bank of issue which it purposed carrying into execution at the earliest opportunity. In 1843, the concession of the Société Générale as a chartered company expired. The shareholders desired to prolong their agreement for twenty-five years, but the Government reserved the right to require changes in the regulations before the end of 1849. In 1848, the shock of the revolution that had just broken out in Paris was felt in Belgium, and the Société Générale suspended payments. The Government embraced this opportunity to carry out its project. At the beginning of 1849, the President of the Ministry demanded various reforms and modifications which, if accepted, would have compelled the Société Générale to wind up its affairs at the sacrifice of very important business. The Société Générale declined to preserve at such a price the right of issue, which was thereupon transferred to the new National Bank of Belgium.

The National Bank is not formally granted a monopoly of issue, but possesses it in practice. The law appears to permit the coexistence of several banks, prescribing that “no bank of issue can be established on shares except under the form of a stock company and by a statute.” Out of this proviso arises the monopoly of issue. M. Pirmez, referring to this subject in his report to the Chamber, said: “De facto, we have in Belgium only one bank of issue. De jure, liberty to create banks of issue is accorded to individuals, partnership concerns, and companies which have no stock on the market; but there is no such liberty for open and joint-stock companies. The latter owe their existence to law, which can enforce its own terms. By stipulating that banks of issue must be stock companies the Government reserves the right to grant or refuse authority to issue paper money.”

The Bank had a struggling beginning, and the support of the Government did not strengthen it much. To offset the somewhat dubious advantages bestowed, the State had imposed upon it exceedingly heavy burdens, which will be considered in detail under the head of the relations of the Bank with the Treasury. Moreover, the Bank had to contend against the antagonism of the Société Générale, which, with the experience of age, understood better the art of distributing credit. But it gradually obtained education, and its transactions grew. During the crises of 1857 and 1863, it rendered all the services naturally to be expected of a well-regulated bank of issue. The year 1870 was a time of trial for the Bank of Belgium, as for the Bank of France; and the difficulties in store for banks of issue having too intimate connection with the State received ample illustration. Belgium, contiguous to both France and Germany, was obliged to equip her army to assure respect for her neutrality, and became at the same time a market in which the two belligerent countries procured a part of the financial resources requisite for maintaining their armaments. The discounts of the Bank swelled rapidly, and, as always happens in troublous periods, the merchants and bankers made extraordinary calls, while the holders of bank notes, seized with apprehension, clamored for their redemption. The State itself had demanded the transfer to Antwerp of an amount in coin equal to the account current of the Treasury, and meantime had instructed its officers not to pay anything but paper to the Bank. The Minister of War went so far as to observe to the Chief of Corps that the military treasurers would do well to exchange the bank notes in their possession for gold and silver. As a matter of course, all these State performances intensified the fear of the public. The Bank had only one recourse for reassuring the people—to keep right on paying over the counter. In order to be able to do that, it raised the discount rate and placed restrictions upon the acceptance of commercial paper. These measures cost much both to commerce and the Bank, but payments were not suspended even for a day.

RENEWAL OF THE BANK’S CHARTER.

Upon emerging from this crisis the Bank moved for a reaffirmation of its charter, which, granted in 1850 for twenty-five years, was to run out in 1875. The negotiations with the Minister began in the first months of 1872, and they were speedily brought to conclusion. An act was framed extending the privilege for thirty years from 1873; but on very hard terms for the Bank, aggravating those of the 1850 contract, which had been considered sufficiently oppressive. The act was voted by the Chamber after much fulmination about monopoly and the unwisdom of giving over rights belonging to the State into the keeping of a private concern; which are always favorite themes when the subject of privileged banks is under debate. The law was promulgated May 20, 1872. Since that date, the history of the Bank of Belgium has had no very conspicuous aspects. There were bad days in 1873; and, more recently, the Bank has felt the effects of crises that have disturbed Europe, but it has never found itself in very serious straits.

ORGANIZATION OF THE BANK.

As has already been indicated, the Bank operates under no formal monopoly, but it has a substantial one, which will expire in 1903. The capital, which was fixed at 25,000,000 francs by the Act of May 5, 1850, was advanced to fifty millions by that of May 20, 1872. It comprises 50,000 shares of 1000 francs each. The shares provided for by the law of 1872 were allotted preferentially to the old shareholders, and were issued at 1100 francs, 1000 francs to go into the capital of the Bank and 100 francs into the reserve. The reserve is formed by a levy of fifteen per cent. on the net yearly profits above six per cent., and is intended to make good any losses that the Bank may suffer, and to complete, if necessary, the amount required for a 2½ per cent. half-yearly dividend to the shareholders. The capital and reserve are invested in consols; but that mode of investment is not obligatory. The Bank is prohibited from acquiring any real estate except what is strictly needful for its own business. The shares, of 1000 francs par value, 50,000 in number, are registered or to bearer, according to the preference of the holder. Changes from one form to the other are made free of charge. The Bank recognizes but one sole owner for each share. Dividends are payable every six months. The shareholders are liable only for the amount of their shares. They exercise their rights through the findings and decisions of the Shareholders’ Assembly.

The Shareholders’ Assembly represents the total body of shareholders. All persons owning at least ten shares are entitled to take part in its proceedings. Every member of the Assembly may be represented through the proxy of any other member of the Assembly. Ten shares entitle the owner to one vote. No person may cast more than five votes, either as a shareholder or a proxy. The ordinary meetings of the Assembly are held on the last Monday of February and the last Monday of August. Extraordinary meetings may be called upon the demand of the censors whenever the Council judges it useful to hold them. The February meeting receives the statement of transactions for the year, and certifies the balance-sheet. The August meeting selects persons to take the places of retiring members of the Council. Every proposition signed by five shareholders who are members of the Assembly is communicated to the Council ten days before the meeting and brought under deliberation. The regulations of the Bank cannot be modified except by General Assembly meetings called for the purpose.

MANAGEMENT OF THE BANK.

The management of the Bank is in the hands of a governor and six directors, who form the Administrative Council. A council of censors, consisting of seven members, acts as the body of comptrollers. The governor is nominated, suspended, or discharged by the King. He is appointed for five years, and may be reappointed indefinitely. His regular salary, fixed by the King, is paid by the Bank, which also provides him with a residence and furnishes it. He cannot be a member of the legislative body or draw a State pension. He presides in all councils and meetings, executes their decisions, and looks to the enforcement of the laws and regulations. He has the right to suspend the taking effect of decisions made by the Administrative Council, in order to submit them to the General Council, which he calls for urgent emergencies. It is his duty to suspend and denounce to the Government every act of the Council that is contrary to the statutes or adverse to the interests of the State. If the Government, having considered the conclusions reached by the governor, fails to come to a decision within a fortnight after his protest, the act can be carried out. The governor has the casting vote in meetings of the Administrative Council. He signs all documents making engagements for the Bank after they have received the signatures of the secretary and treasurer, or one director in lieu of either. He represents the Administrative Council in the courts, and also has authority over all the agents of the Bank, and can suspend them without reference to the Administrative Council. He must own fifty shares of the Bank’s stock, as security for his administration of the Bank. The King selects a vice-governor from among the directors, who acts instead of the governor in case of the latter’s absence, incapacity, or suspension. The General Assembly chooses the six directors, who must be Belgian citizens (native-born or naturalized), and reside in Brussels. They are appointed for six years, and may be re-elected. Each director must own at least twenty-five shares, and none of them can belong to the Administrative Council of any other bank. Besides their general functions, each is intrusted with the control of one department or more of the Bank, and has authority over the employees under him. Every director receives a salary of 6000 francs, and has a share in the profits. The director filling the office of vice-governor has an extra allowance of 3000 francs. The Administrative Council, consisting of the governor and directors, holds regular meetings three times a week, and special meetings whenever necessary. It considers all the concerns of the Bank, especially the rate on credits and advances, and discount affairs in general, and gives particular attention also to the purchasing of securities and to cases at law. Finally, it appoints and discharges the employees, and determines their salaries. In all matters it advises with the censors. The censors are named by the Shareholders’ Assembly for terms of three years. They retire in different years—three going out the first year, two the second, and two the third. Each censor must have ten shares. They get also a portion of the profits. The Censors’ Council meets at the call of the governor whenever the business makes it desirable, and at least once a month. It cannot adopt any decisions unless at least four members are present. It has control over all transactions, audits the books, and votes the budget of expenses prepared by the Administrative Council. It is responsible for all plans of modification affecting discounts and advances.

The governor, directors, and censors constitute the General Council, which meets on the last Saturday of each month. The General Council keeps under its cognizance the situation of the Bank, and acts on all questions submitted to it which relate to its laws and routine regulations. It apportions the divisions of profits, and passes upon everything affecting the production and issuance of the Bank’s notes. It selects a Discount Council from among the merchants, or old clients, which examines the paper presented for discount, and determines what to accept and what to reject. The State designates a Government Commissioner (whose salary the Bank pays), to exercise the functions of a comptroller, especially with regard to discounts and the note circulation. He has the right to look into the business condition of the Bank, and to inspect its books. In cases where he deems it proper, he has an advisory vote in the assemblies and councils.

BRANCHES, AGENCIES, AND BUREAUS.

Under the provisions of an act of July 17, 1872, the Bank has branches and discount offices in the principal cities of the provinces, and in other localities, where the usefulness of such establishments has become manifest. Article 3 of the same act obliges it to conduct agencies in all the principal judiciary districts, and in other places where the Government considers it convenient for the interests of the public and the Treasury to have them maintained. The branches are operated for the account and at the expense and risk of the Bank, under the general direction of three administrators, named by the Administrative Council. The officers and agents of the branches are nominated by the administrators, subject to the approval of the Administrative Council. The transactions of the branches are the same as those of the Bank, excepting that the former are under restrictions established by the General Council, with the sanction of the Minister of Finance. There is only one branch proper, that at Antwerp; but a great many agencies are in existence; which make advances on securities, lend cash services, open current accounts, issue trust orders, etc. The principal object of the agencies is the accommodation of the Treasury. The agents have also the character of State receivers and disbursers, and, consequently, are appointed by the King from a double list presented by the Administrative Council. They are also dismissible by the King; but the Bank may suspend them from office for the term of one month. Their salaries range from 5000 to 15,000 francs, according to class. The agents have power to choose their employees. Though dependent upon the State, the agents have extra-official relations with the officers of the Government. They keep regular accounts, which are inspected by the representatives of the Bank.

The Bank discounts only paper with three signatures. To perform its discount transactions, and bring them reach of all, it has adopted a most ingenious machinery, which, in many respects, might be advantageously imitated in other countries. Under the name of Comptoirs d’Escompte (Discount Bureaus), associations of persons are permitted by the General Council, which discount such paper as is specified by the regulations of the Bank, at rates and under conditions prescribed by the General Council. The paper admitted by the comptoirs is indorsed to the Bank direct. Each comptoir is held responsible; so that bad paper is returned to the bureau from which it emanated, and which has to make good the amount. The individuals associated in the comptoir receive a commission on paper that they discount, to remunerate them for their trouble and reward them for the risk they take. The commissions are determined by special arrangements. In general, the discount bureaus are located at the agencies of the Bank, the agents lending them half of their offices for their discount business and their bookkeeping.

TRANSACTIONS OF THE BANK.

The Bank discounts or buys commercial paper on Belgium and foreign countries, besides vouchers on the Belgian Treasury. Commercial paper must be for commercial business; must be made to order; must have three good signatures, and must not have longer than 100 days to run. The discount bureaus that vouch for the paper they accept can take paper with but two signatures. In Brussels and Antwerp, paper with two signatures is received, but under quite peculiar conditions. In place of the third signature, a warehouse receipt may be given, sufficient to cover the total of the debt. Besides ordinary commercial paper, the Bank discounts warehouse receipts with two signatures up to a fixed percentage of their value. If the warrant bears more than two signatures, or if the two signatures are of unquestionable character, the Administrative Council may increase the amount of the loan, or admit warrants which do not figure in the Bank’s regular list of those taken as collateral. The Bank makes periodical examinations to ascertain the condition of goods in storage and to see that storage fees are regularly paid. When a warehouse voucher is paid before maturity, the Bank makes allowance for the interest of the days it has to run. If the value of the merchandise given as collateral falls more than ten per cent. in market value, the Bank may ask for settlement or for increased collateral. The discount terms for commercial paper, both as to rate and period of maturity, apply equally to Treasury vouchers. But the Bank cannot carry more than 10,000,000 francs of Treasury vouchers at a time.

RATE OF DISCOUNT.

The Bank of Belgium has two rates of discount—one for accepted drafts, the other for non-accepted commercial paper. The rate applicable to non-accepted paper is one-half per cent. higher than that fixed for accepted drafts. The following comparison shows the Bank rate for a series of years:

The Bank is authorized to deal in gold and silver bullion and moneys at money rates, deducting refining charges, if any. The bullion must be accompanied by an assayer’s certificate acceptable to the Bank, and the seller is held responsible for the fineness shown in the certificate. Sellers have the right to redeem the bullion within eighteen days. The statement following shows the transactions in the precious metals from 1873 to 1890:

ADVANCES UPON COLLATERALS.

The Bank makes advances direct or for current account on deposits of Belgian national securities and other securities guaranteed by the State, within limits and at terms fixed periodically by the Administrative Council. The securities are not accepted for more than four-fifths of their current market value. Loans are made for ten days at least and four months at most. They may be taken up before maturity. In case of non-payment at maturity, the collateral is sold on the Bourse. No more than one extension of maturity is allowed unless specially authorized by the Council. The annual amounts of the Bank’s advances for a series of years compare as follows:

CURRENT ACCOUNTS.

The Bank opens current accounts on written applications addressed to the governor. The application must give surname, Christian name, profession, and domicile. The current accounts bear no interest but are carried without charge. The current account holders may make or receive payments, without charge by the Bank, at all the Bank’s agencies, and draw on their credits by cheques or transfers. The annual amounts of this kind of business transacted by the Bank are stated in the following figures:

COLLECTIONS FOR ACCOUNT-HOLDERS AND TRUST ORDERS.

The Bank undertakes for account-holders the collection of local paper, indorsed and deposited three days before maturity. A special service of the Bank of Belgium, which has had considerable development during the last few years, is that of “trust orders.” Any person, by simply paying in the amount at an agency or office of the Bank, may have an order, executed without commission, at any other designated agency or office. The Bank is thus called upon to perform, gratuitously, all transfers of money for the whole country. It accounts for its policy of executing trust orders without charge by explaining that it is compensated for these transactions by the lessened use of bank notes. The “trust order” system may some day, however, prove dangerous for the coin stock of the Bank, as will be pointed out later. From 1866 to 1894, these “trust orders” transactions have amounted to the following annual aggregates:

TRUST DEPOSITS.

The Bank takes deposits in trust. Deposits for joint account, or by persons not having free disposal of their property, are allowed only by special authority. The deposit is made in a locked metallic box, sealed by the depositor. The capacity of the box must not exceed ½ cubic metre, and each box counts as a separate place of deposit. This very rudimentary deposit system does not offer the facilities and advantages that the public finds in the French, German, and Austro-Hungarian banks; and the service of the Bank of Belgium in this departments is of minor importance.

COIN AND PAPER CIRCULATION.

Belgium has the same monetary policy as France—the double standard. Gold and silver are identical in current value, but the silver coinage, which was first limited in 1874, has been totally stopped, so that bimetallism, although prevailing nominally, is much attenuated practically. In common with Italy, Switzerland, and Greece, Belgium is associated with France in a monetary convention, called the Latin Union, which obligates the public officials of the five countries to accept on equal terms the coins struck by each of them, with the proviso that, at the expiration of the agreement, each nation will exchange the coins of the Union circulating within its dominions for an equal amount of its own coins circulating in the other States of the Union, and that half of the balance remaining after that adjustment shall be settled in gold or equivalent values, and the other half, not to exceed 200,000,000 francs, shall be restored through the channels of commerce and exchange.

These terms bear rather severely on Belgium, which, profiting by the low price of silver before the discontinuance of the coinage, issued large amounts of five-franc pieces that are to-day in extensive circulation in France. The Latin Union and the “trust order” system permit Belgium to send her five-franc coins into France at pleasure. When a Belgian debt is due in France the debtor draws an order at some agency payable at Tournay or Courtrai (frontier places in Belgium). There, coin is asked for, and forwarded to the branch of the Bank of France at Roubaix or Tourcoing. The transfer charge is very light, so that money leaves Belgium when the exchange is but 2 per 1000, under the circumstances explained. The rate would have to reach 4 to 5 per 1000 to make it a matter of advantage to transfer actual coin instead of using orders. Belgium is thus more exposed than any other country to a drainage of coin.

Article 35 of the regulations of the Bank of Belgium directs that it shall have a coin stock equal to one-third of the combined amount of its bank note circulation and other sight obligations, although the Minister of Finance may, at his discretion, set aside this requirement and authorize the Bank to operate below the one-third limit. The coin stock and the outstanding circulation of the Bank, from 1873 to 1894, has ranged as follows, the amounts being stated in millions and hundred thousands of francs:

The metallic stock carried is smaller, in proportion to the note circulation, than in most of the other great banks of Europe—smaller even than in the Bank of Spain—yet the notes of the Bank of Belgium suffer no depreciation. The reason for this favorable factor is, that the Bank possesses a great deal of foreign paper payable in gold or equivalent values that serves to render part of its coin productive. The following table gives the figures for the last five years of coin on hand, foreign paper, and note circulation:

The proportion of metallic or equivalent values reaches fifty per cent., and is therefore eminently satisfactory. The surplus of note circulation and the current accounts is protected by a most solid supply of commercial paper, and by capital, reserve, and high-class securities. The notes are taken by the State in payment. They are redeemed at sight at the Bank, and also by the provincial agents, although the latter may delay payments until they can procure the necessary funds. Belgium displays a tendency toward the single gold standard, as indicated by the composition of the coin stock of the Bank, shown in the following statement of the Bank’s coin on hand at the end of the business year:

The increasing preponderance of gold is due to the parsimony of the Bank in distributing the yellow metal. Likewise, the public is reluctant to give up gold, fearing that it may not come back.

The small amount of silver in the Bank of Belgium contrasted with the formidable aggregate in the Bank of France, is convincing proof that Belgium is not over-supplied with silver coin. Yet the five-franc piece is worth in Belgium as much as gold, for it is an article of export always accepted at face value in France. France, besides, is called upon to supply gold to Belgium when needed for gold payments. The embarrassments induced by the depreciation of silver will not be felt in Belgium until the day arrives for the dissolution of the monetary convention that joined her to France, and the French and Belgian coinages now in circulation are made independent of each other.

The figures below of average circulation according to note-denominations of the Bank of Belgium for the past five years show that, as in France, the 1000 and 100 franc bills are preferred, and that there is little request for the 500-franc note:

RELATIONS OF THE BANK WITH THE STATE.

The National Bank of Belgium, as we have already shown, was created chiefly with a view to serving the State as a depository. Its relations to the State are very comprehensive. It performs, without charge, cash services for the Government. It meets all the running expenses for material and for transferring and forwarding funds; and, in addition, it pays to the Treasury a yearly fee of 175,000 francs. This fee is taken by the State in recompense for the advantages that the Bank is supposed to derive from the handling of the Treasury’s money; which, as a matter of fact, is but a problematical advantage. The cash services for the State consist in receiving all amounts in money or equivalents paid in by the Department of Finance, discharging the general expenses of the State and provincial governments, and carrying credits for the Ministry of Finance. The accounts of receipts and payments are audited by Government agents and submitted for the approval of the Auditing Court.

Aside from its obligation to make public debt payments as they come due (which belongs to the regular cash service department), the Bank receives the consols intended for conversion into registered securities and delivers State securities on transfers and to bearer (unregistered bonds). It collects, if ordered to do so, the amounts on coupons of securities which it has in keeping, and also the amounts past due on consols registered at the Treasury for the account of the public departments. The disposable funds of the Treasury in excess of current needs are invested by the Bank upon its responsibility. These disposable funds are held to be the balance of the Treasury’s account current after deducting the drafts of the Bank plus five millions of francs. It has always been understood that the arrangement with the Bank to invest idle Government money is not intended to obtain from the Bank productive interest on sums temporarily unproductive on account current. The available Treasury funds are ordinarily invested in foreign paper. Belgium paper is selected for investment only in exceptional cases. This plan is designed to prevent the State from acting in opposition to the Bank. Whenever the Bank is persuaded to invest State funds in Belgian paper, it takes such paper out of its own supply; but the Bank has exclusive right to determine as to the convenience of the transaction. The profits and expenses of investment go entirely to the account of the State.

THE BANK’S SERVICE TO SAVINGS-BANKS.

The Bank attends gratuitously to services on account of the Caisse d’Epargne et de Retraite (Savings and Pension Institution), established under State authority by the Act of March 16, 1865. It invests the assets of the fund, maintains separate accounts, and does discounting for the Institution. At all the agencies of the Bank, deposits for the account of the Savings Institution are received and payments are made.

TAXES ON THE BANK.

Notwithstanding the numerous and burdensome services for the State, the Bank is heavily taxed. In the first place, it pays an annual fee of 175,000 francs to defray the expenses of the Treasury in the provinces. Then it is subjected to all the general taxes, particularly the license tax, to which are added municipal and provincial taxes. Its bank note circulation is taxed fifty centimes per thousand, with an extra one-fourth per cent. on all notes outstanding above 275,000,000 francs. Whenever the discount rate exceeds five per cent., the profits resulting from the difference between that figure and the rate in force go to the State. Lastly, if the profits of the Bank amount to more than six per cent. of the capital, the State takes one-fourth of the surplus.

PROFITS AND DIVIDENDS.

Thanks to Belgium’s density of population, the abundant means of easy communication, and the commercial activity of the country, the Bank prospers and yields substantial dividends to its shareholders, despite the crushing charges which the State lays upon it. The dividends are paid semi-annually. In calculating them, the general and running expenses of all kinds, the sinking fund, and the payments to the State are deducted from the gross profits. The net profits thus ascertained are distributed in the following manner: 1. The shareholders are given a dividend of three per cent. every six months. If the profits do not admit of a minimum dividend of two and one-half per cent., the deficit is made up out of the reserve, which, as far as practicable, is reconstructed from the profits of the ensuing half-year. 2. Fifteen per cent. of the surplus is applied to the reserve, and twenty-five per cent. is turned over to the State. The Administrative Council receives four per cent. of the profits in excess of five per cent. of the capital, and the censors receive one per cent. of such profits; but these allowances cannot be more than 80,000 francs for the Administrative Council and 17,500 francs for the censors. The remainder goes to the shareholders as a second dividend, after deducting an amount not to exceed twenty-five centimes per share, which is applied semi-annually to charitable purposes. The dividend of the first half-year is distributable on September 1st, and that of the second half-year on March 1st.

Sources of Bank’s Receipts.

The following table shows the receipts of the Bank from different sources:

BALANCE-SHEET.

At the end of each week, the Bank issues a balance-sheet showing its condition on the date of publication and that of the agencies, etc., on the preceding Thursday.

The metallic stock on hand of the assets includes both gold and silver, but the proportions of each are specified only once a year—in the annual statement of December 31st. The Bills receivable comprise Belgian and foreign paper. Practically, the foreign paper might be carried in the account of coin on hand, as is done in the Banks of Austro-Hungary and Italy; for this collateral is payable in gold or silver coin of the Latin Union, which is equivalent to gold. Paper out for collection in current account is a special account, representing paper having no more than three days to run, handed in by current account holders to the Bank for collection. The items, Public funds and Reserve securities stand for consols bought by the Bank for the use of its capital and reserves. They show that the Bank of Belgium, like the Bank of France, considers its capital and reserves as a guaranty, and carries them in securities instead of cash. Advances on Belgian funds gives the amount of loans in force on consols and other national securities. Often the item Advances on precious metals appears. Instead of selling gold and silver outright, the parties concerned prefer at times to speculate on the rise, and the Bank allows such proceedings. The account Buildings in use and furnishings gives the estimated value of the Bank building in Brussels, the branch concern in Antwerp, and the buildings of the agencies, with their furnishings. Guaranteed sureties or available securities are liabilities to the Bank for which it holds liens on collateral.

Turning to the liabilities of the Bank, we find the first item to be Capital, 50,000,000 francs. It has stood at that figure since 1872. The Bank notes in circulation constitute the principal indebtedness of the Bank of Belgium. The Current accounts are subdivided into: (1) Current account of the Public Treasury, which has already been explained. The sums embraced in this account generally about balance the debts that the Treasury has to settle at short terms; but there is a credit of 5,000,000 francs added. This surplus is in the custody of the Bank, and is separately itemized under Paper on hand for the Public Treasury. (2) Individual current accounts, representing the credits of the Bank’s customers on the day of publication of the statement. The remaining accounts of the statement are miscellaneous accounts in the assets and liabilities. Paper on hand for the Public Treasury is the amount of investments of the disposable funds of the State. This item represents only a deposit at the Bank, and is entered in the books only as a matter of reference. It is balanced in the liabilities by the item, Account of Public Treasury holdings. Deposits of public funds has reference to the consols sent to the Bank for registry under the head “Deposits in coin or public funds.” Voluntary deposits appear in the assets for their declared value. This item is offset in the liabilities by “Depositors.” The same applies to Holdings of the Savings and Pension Fund, for which the Bank of Belgium is the depository. Divers accounts, both in the assets and liabilities, include specially unimportant items.

Besides the weekly statements, the Administrative Council issues half-yearly balances on June 30th and December 31st, which are submitted to the Censors’ Council. At the February meeting, the shareholders receive a communication of the statement of transactions for the year, and also the report of the censors concerning their control of the institution.

CONCLUSION.

The National Bank of Belgium, under its organization, vouchsafes to the State extraordinary services. No other bank in the world assumes, gratuitously, equal responsibilities, or surrenders to the Government so large a portion of the profits. It has been very appositely described as an “acting State bank”; but it is a State agent of a peculiar kind, since it pays for the opportunity to perform duties. The too close union of the Bank and the State is a danger a priori. Attention has been called to the trouble provoked in 1870, when the balance of the Treasury account was most inopportunely withdrawn. On the other hand, it may well be considered whether Belgium, though a neutral nation, could, in the event of invasion by either warring Power, have enforced her neutrality. Would she not have been constrained to side with one or the other? In that event, would not the Power discriminated against have deemed itself justified in levying upon the public funds in the occupied territory? It is extremely doubtful whether the Bank, which is practically a fief of the State, would have been entitled to protection by the droit des gens. In 1870, the branches of the Bank of France were able to prove that they were attached to a private establishment, and accordingly the Germans showed full respect for their property. The Bank of Belgium, of course, belongs to shareholders; but it is the State depository, and on that ground the enemy might stop its operations and even seize its resources, awaiting the restoration of peace before giving an accounting. To conclude: Though, favored by exceptional national conditions, the Bank prospers despite the State’s exactions, it certainly pays for the privilege much more than it is worth and brings in. The Bank of Belgium is the truest type of State-harassed institutions.

PART V.

BANKING IN SWITZERLAND.

BANKS OF ISSUE.

THEIR RECENT ORIGIN.

THE history of Swiss banks of issue is a short one. Before 1834 none were in existence. The difficulty of communication between place and place and the slight development of commerce had not permitted broader credit facilities other than those afforded by the numerous private banks, which had important establishments, principally at Geneva and Basle, which fairly satisfied all needs. The advent of the railroads, however, changed the economic conditions; and Switzerland felt the necessity of large and united capital and a freer circulation of its credit representatives, and banks of issue were the outcome.

The first establishment of the kind was the Cantonal Bank of Berne. Its establishment was soon followed by the Bank of St. Gall and the Bank of Zurich. The years from 1840 to 1850 saw the birth of five new banks, and their number continued to increase from 1850 to 1860. The by-laws of all these banks were, as a rule, submitted to the approval of the State Council; and they therefore present a close resemblance in the nature of their transactions. The founders of the banks were manifestly largely guided by the statutes of the Bank of France. Sometimes the capital is entirely furnished by shareholders; in some cases partially by shareholders and partly by the canton where the bank has its main office. The range of transactions is strictly prescribed by law; it takes in, as a rule, the discounting of bills of exchange and commercial paper on Switzerland and other countries; collections of such documents for account of individuals or establishments; the opening of accounts without interest and the payment of cheques and drafts against credits; and finally the issue of bank notes.

The volume of notes was primarily limited to a multiple of the capital and sometimes to a multiple of the metallic stock on hand. The administrative organization varied. At first, the issue of paper money was of but slight importance; the people had to become educated to its appreciation, as the Swiss were rather ignorant in the matter of credit instruments. The general diffusion of the bank note dates from 1864, when a syndicate of French capitalists established the Eidgenossische Bank.

THE FEDERAL BANK.

The Eidgenossische Bank established nine branches in the principal Swiss cities, and the public became educated to value paper money as the sure equivalent of coin. In order to prevent the inconveniences which might arise in the use of bank notes in other cantons than those in which they were issued, and to avoid exchange charges, the Eidgenossische Bank made an arrangement with the Banks of Basle, Zurich, and St. Gall by which they would mutually accept each other’s paper money. The Cantonal Bank of Berne and the Bank of Commerce of Geneva joined in this agreement and the smaller banks soon followed; and thus the general circulation of the paper medium was greatly helped.

DISTURBANCE FROM THE FRANCO-GERMAN WAR.

Matters thus ran smoothly until the Franco-German War of 1870 threw Switzerland into serious embarrassments. France had declared an extension of maturities for commercial paper, and Switzerland consequently could not collect its holdings of commercial bills on France. Ordinarily, Switzerland obtained the hard money of which she stood in need by these collections. The closing of this channel of supply brought about a general crisis. Everybody knew that Switzerland depended absolutely upon France for its supply of coin, and the banks’ clients, who feared a forced circulation of the paper issue, rushed upon the banks for redemption of their notes in coin. The bank’s strongest interest lay in the protection of their metallic reserve, and therefore they cut down discounts and loans. As a natural consequence, credit facilities were wanting, and the whole country—eastern Switzerland especially—suffered cruelly. The memory of these times is still painfully fresh in the minds of the Swiss people.

This crisis aroused the Swiss Federal Council. The Government looked for the causes, and, not without reason, saw them in a bad system of issue and circulation, and in the insufficiency of guaranty which certain banks offered. In order to effect an improvement in the system of issue, the Federal Council asked the Legislature for a constitutional act which should define the general principles to which the banks should be subject. Thereupon, the Legislature passed a general resolution to this effect: “The Federation shall establish by legislation general rules relating to the issue and circulation of bank notes. The Federal Council will not seek a remedy in extreme measures, as, for instance, by a monopoly of the right of issue at the hands of the Federal authorities.”

The resolution allowed that it would be sufficient to establish general obligatory rules for the issue and circulation of bank notes. That much was done to satisfy the clamorings of the opponents of the liberty that had been enjoyed by the banks. Upon this decision, the Federal Council, in a message of June 16, 1874, proposed to the Legislature a law on the issue and redemption of bank notes. “Long ago,” said the message, “and notably in the crisis of 1870, it became evident that the bank note circulation in Switzerland, as conducted between the various independent institutions which are established in the different cantons, according to district legislation or by special ordinances, and which at times are unrestricted by regulations, is absolutely at fault and lacks the elements of safety.” After demonstrating that the Federal constitution gives the Federation absolute authority in legislative matters; that the constitution prohibits a monopoly of the right to issue and of making bank notes legal tender, the message declares that the Federal Council desires such an improvement of the paper currency system as will make it strong enough to cope with critical conditions. In fact, there ought to be a means to instil into the people’s mind a sentiment that paper money was as good as any amount of coin which it represented. To accomplish this, the Federal Council proposed to build up a reserve fund which should meet the requirements of a guaranty, and which would suffice, at any time, to ensure the ready exchange of paper against coin, and which would bring about a uniform parity of bank notes. Further, statements of the banks’ accounts were called for; their transactions were to be confined to discounts, collections of commercial paper, current accounts with interest or without, and secure deposits of securities and the precious metals. If the banks desired to undertake other transactions, they had to set aside, out of their capital, a separate guaranty fund for discount or the issue of notes, and keep separate books for such special business. After a lapse of ten years, banks doing a miscellaneous business should either confine themselves to transactions consisting of bank note issue and other authorized operations, or abandon the issuing of notes. The banks should be held to exchange each other’s notes free of charge.

ENACTMENT OF THE NEW BASIS.

This plan became a law, with some amendments, on September 18, 1875. The rule of mutual acceptance of the various banks’ paper money was established by an arrangement which was entered into on July 8, 1876, and which is known as the “Concordat.” By the terms of this compact, each bank engaged itself to accept notes of fifty francs and under, issued by banks in the agreement, from all who presented such at their main offices, and to redeem them in coin without cost. If a bank had not the ready resources for the redemption of the notes, it had to give a receipt and cash them free of charge within three days. The banks engaged to undertake, free of commission, and only against reimbursement of actual expenses, the mutual collection of their commercial paper wherever they had offices. They could also draw upon each other at three days; no charge was made for such accommodation.

BANK CLEARINGS AT ZURICH.

The Bank of Zurich took upon itself to direct and supervise a Central Bureau at which each bank should have an account, and where the clearing of reciprocal credits should be effected. Settlements of accounts were to be made in the following manner: Bank notes received or cashed by one bank for account of another were sent to the bank which issued them, after previous advice by letter or telegram. If the bank which had made the disbursement so desired, it could cover itself for such remittance by drawing upon the Central Bureau, where all banks had to maintain a credit account current. The bank could also demand that such settlements be made in coin. When one bank received another’s scrip for redemption, notice was wired to the indebted bank, which had to remit immediately an equivalent amount of coin to the bank in credit. The Central Bureau settled the accounts of the banks by transfers amongst each other. In addition, the Central Bureau had charge of the consolidation and publication of the balancesheets of the banks included in the concordat.

NOTE ISSUES UNDER THE LAW OF MARCH, 1881.

Although the law of 1874 was an improvement upon the former state of affairs, yet it did not give the holders of paper money all the guarantees they desired.

Complaints were made that the capital of many of the banks was too limited; that there were no adequate legislative ordinances as to their transactions; that the guaranty of the paper issues was insufficient, and that there was no precise legislation relating to the amount of issue of each bank, nor any stipulation as to the denominations of bank notes; in short, that there was no serious Government control whatever. Another complaint was that the paper money was inadequate, both in quantity and quality. The bad condition of the circulation arose from the diversity of the banks’ origin, from the differences in the constitution of the banks of issue, and from the limited field which each of them controlled. Moreover, the quantity in circulation did not meet the needs of Switzerland’s manufacturing and mercantile interests.

The law of March 8, 1881, was brought out as a remedy against these defects in the law of 1874. Thenceforth the following regulations were recognized in the control of the banks:

The Federal Council had the right to authorize the issue of bank notes. Such authority cannot be withheld if it is shown that the banks have filled the conditions which the law prescribes. The Federation assumes no guaranty for the notes of the banks of issue. Each bank is responsible only for its own paper. No one is obliged to receive bank notes in payment. The authority to issue bank notes gives the banks no right to indemnity in case of the cancellation of such authority either in whole or in part, or in case of restriction of the issue by Federal decree. The banks which may be authorized to issue scrip must be domiciled in Switzerland; and their firm name must be distinctly acknowledged by the Federal Council. They must be legally constituted as cantonal establishments or stock companies, and must publish regular statements of their transactions. Their capital must not be less than 500,000 francs, fully paid in, and the whole of it must serve in full as a guaranty of their transactions. Each bank shall accept the others’ notes in payment, at par. The amount of the issue of a bank cannot exceed twice the sum of its paid-up available capital. The Federal Assembly has the right to regulate, at any time and as circumstances may demand, the amount of the total issue of Switzerland, and to fix according to that aggregate, the portion accruing to each bank. Forty per cent. of the current circulation of a bank must always be covered by a metallic reserve, which has to be kept separate and independently from other coin on hand; a distinct account must be kept for this item. This coin guaranty is exclusively devoted to the redemption of the paper money, and cannot be used for other transactions of the banks. It is a special surety fund for the holders of bank notes. This guaranty consists of gold and silver coins which are legal tender in Switzerland; fractional coins are not admissible for this purpose; but gold coins which are legal tender in foreign countries, and for which a rate is legally established in Switzerland, are allowed. The remaining sixty per cent. of the note issues must be covered either by a deposit of securities or by the guaranty of the canton in whose territory the main office of the bank is established. The guaranty may also be supplied by commercial paper. The securities must be deposited in trust, and the canton in which the bank is located guarantees for their safe deposit; the guaranty securities may also consist of Federal, cantonal, or foreign listed bonds. Commercial paper intended for guaranty of bank note circulation must consist of bills of exchange of a maximum maturity of four months, and be signed by two solvent parties, one of whom must be a resident of Switzerland. Collateral having one signature may be accepted if sufficient in amount. Bank notes of other banks of issue, cheques, and Treasury vouchers and Government vouchers running no longer than four months, also coupons of Government bonds, may form part of the guaranty funds.

Banks of issue are forbidden to give open credit; to speculate for their own account, or to guarantee for others speculation in stocks or merchandise; they cannot buy buildings except such as are intended for their own accommodation. They must do no insurance business; they must not undertake the negotiation of loans other than State, cantonal, or municipal, and they must not be interested in houses who do a loan business, from which the banks are debarred. The bank notes are supplied by the Federal Government at the expense of the banks. Each bank is bound to redeem its notes on demand at par in legal-tender coin, when presented at the central office or within two days at the branches. The bank at whose counter notes of other banks are presented must lend its free service for their redemption within three days from the day of presentation. No allowance or indemnity is made for lost or destroyed bank notes. If bank notes are not redeemed within the legal period of grace they are protested, and such protest is published by order of the Federal Council. The holder of such protested bank note can demand that the delinquent bank be declared bankrupt. Banks which do not meet the conditions of the law forfeit their right of issue. The Federal Council supervises the banks, and has them inspected whenever it deems proper, but not less frequently than once a year. The banks must pay the Federation a control tax of one per cent. on the amount of their issue. The cantons can charge no higher tax than six per cent. on the circulation of the banks whose main office is located in their territory. If a bank maintains branches in several cantons, the share of the taxable issue for which the bank is liable to each canton is calculated pro rata of the circulation of the branch compared to the bank’s total circulation. The Department of Finance exercises the Federal control over the banks. The head of the control has the title of Inspector of Banks of Issue.

Such is the régime which rules at present the legally authorized banks of issue of Switzerland. The statistics which they publish, aside from their regular statements, are rather incomplete. They show only balances and omit the movement of transactions. We give on following pages the figures as reported to the Bank Inspectorate.

GRAVE DISCONTENT WITH THE LAW OF 1881.

The law, as analyzed above, did not stop the complaints about the banks. The Bank Inspector has again and again called attention to the dangers of a too small metallic reserve in proportion to the circulation and other demand engagements. In his report of 1886 he says: “If we add to the amount of bank notes in circulation the short-term engagements, which might be estimated at 80,000,000 francs at least, we obtain a figure which does not inspire us with confidence in the solvency of the banks in case of crisis. To meet a debt of 200,000,000 francs payable on demand, we find only 15,000,000 francs of ready coin, and for hundred thousands of francs of liabilities but a few thousand francs cash could be found in several places. It is truly incomprehensible, we must say, that some banks jeopardize their own existence through neglect of taking into account the essential and unavoidable demands which a bank of issue must obey if it wants to work prudently and safely. Instead of this, they compromise themselves and, at the same time, the more prudent institutions. We do not doubt for a moment that, if misfortune should compel one or another bank to suspend payments, the consequences would be felt by the other banks, in a measure which might inspire anxiety even for the solvency of establishments which have the strongest cash resources.”

In the course of 1887, the Société Suisse du Commerce et de l’Industrie published a detailed statement showing the necessity for reform of the bank note system, in which the banks were invited to make proposals for a revision of the law of March 8, 1881. After preparatory studies on the subject, a message was addressed by the Federal Council to the Federal Assembly on June 23, 1890, stating that the system of paper money, as then operated, was dangerous, and that far-reaching reforms were necessary. The principal defects, according to the Federal Council, lay in the general weakness of available metallic reserve, which could not cope with extraordinary needs; also in the fact that the banks could not touch the obligatory coin reserve; in the continuous growth of short-term engagements running alongside of the circulation, and also in the lack of uniform measures to fix the rate of discount. The Federal Council was well aware that, even with a reform of the multiple bank system (i. e., where several banks issued paper money), it would not be possible to bring about a fundamental readjustment and reach a definite result on the question of banks of issue. The Council leaned toward a policy of centralization, by creating a Swiss bank which would have a monopoly of note-issuing. But from fear of seeing its proposals rejected, on account of the attachment of the Swiss to the idea of “liberty” of banking, it confined itself to amending the law of 1881. The authority to issue paper money was not given any more as a right, and several new regulations concerning the guaranty fund for the redemption of bank notes were adopted.

NOTE-ISSUING FINALLY RESTRICTED TO A NATIONAL BANK.

This plan was not discussed, but on September 24, 1890, the National Council adopted, by seventy votes against seven, the following proposition of National Councilor Keller of Fischenthal:

“The Federal Council is invited to bring in as quickly as possible a report, and to make propositions that the Federation should have the monopoly of issuing paper money. This monopoly could be intrusted to a central bank to be established.”

This motion met the views of the Federal Council very generally, and that body made the following statement, in a message of December 30, 1890:

“No law can prescribe to the banks that they should take measures to regulate the money market; that depends upon their management, their justness of appreciation, and their skill. Where the system of multiple banks of issue prevailed, it was not possible to ask establishments whose interests are at variance and partly running counter to each other to adopt uniform and effective measures to regulate the money market. We should not even expect that they could do this. One sole bank of issue which does a restricted line of business and has few engagements; a bank with simple management which can easily be controlled by anybody; a bank imbued with the sentiment of its own responsibility, can alone succeed in inspiring a degree of confidence which will enable it to live through crises and forced currency, as experience has proved. One exclusive bank of issue offers still another advantage which, although less weighty, is very important to commerce. Such a bank can gauge its issue in accordance with the needs of commerce, and will, therefore, be provided with the means to meet extraordinary necessities without being obliged to draw upon its metallic reserve, because people will not ask to have the paper reimbursed in metallic money. A strong paper circulation offers no dangers as long as it is strongly secured. With a plurality of banks, each of which must accept the others’ notes in payment, it is indispensable to confine the issue within fixed limits.”

As the question of a monopoly of issue was decided upon affirmatively in principle, it remained to determine whether it should be practised by a private bank, whose capital should be supplied by shareholders, or whether the bank should be a strictly State institution. Considering that all the great centralized banks of Europe, with or without monopoly of issue—with the sole exception of the Imperial Bank of Russia—are private establishments, and that their credit can be kept independent of the State credit, while in a State bank both credits are joint interests; considering, further, that political interests which bear upon State banks may become fatal, and that in case of war a private bank would be protected by the principle of popular rights, which would not apply to a State bank, the Federal Council recommended that the monopoly should be conferred upon a private bank. The delegates of the Swiss Commercial and Industrial Union seconded the propositions of the Federal Council in a session of May 9, 1891, by a strong resolution, with the proviso that the monopoly of issue could be given only to a central private bank, which should be under Federal supervision, and that the cantons should receive an equitable share of the profits. Five months later, on October 18, 1891, a popular vote decided that “the right of issuing bank notes, or other circulating scrip, belonged exclusively to the Federation; that the Federation can exercise the monopoly of issue by means of a State bank, under special management, or to give a concession of the same; that the State, in the latter case, reserves the right to buy back the concession from such central bank, which would be established on shares; and that this bank should be managed with the concurrence and under the control of the Federation.”

The Finance Department, which set to work at the instance of the Federal Council to elaborate a law to put the above vote into execution, studied the subject thoroughly and collected a vast amount of pertinent material from various specialists on banking. Professor Dr. Hilty expressed himself upon the question of the responsibilities of banks in times of war—a question about which the Federal Council was particularly anxious. He stated: First, the movable property of a State bank proper can be seized. Ordinary deposits, which are the depositors’ property, are also considered prizes of war; but the bank must indemnify the depositor later, unless it can set up the plea of force majeure. Second, the enemy can collect and keep the matured outstanding debts of a State bank; but he cannot sell the unmatured outstanding debts, although he can enjoy the revenues therefrom. The enemy can use the State bank’s buildings as he may deem proper. Third, in the case of a national bank, the enemy can levy at most upon State property if he can discover it in the bank; for instance, he can demand the handing over of the State’s current account, or collect the dividends on bank stock belonging to the State. All other property of a national bank is exempt from seizure.

National Councilor Forrer gave his opinion on August 2, 1892, and concurred approximately in the conclusion of Professor Hilty. He said: “In principle, the property of a private bank will not be seized, while the invader would levy upon the property of a State bank. The victorious army would capture the coin and the paper money of the State bank, and the enemy would also seek to realize upon the commercial paper, cheques, and other personal outstanding debts as far as this could be done during the duration of the war. Neither are the assets of a private bank completely exempt from seizure in case of war. It is possible, even according to modern rights of war, that the enemy might empty the coffers of a private bank. In such case, the enemy would only give a voucher with a view to entitling the bank to put in a claim against the Power which, according to the final treaty of peace, would have to bear the burden of indemnity. This possibility becomes a probability, even a certitude, in cases where the State has an interest in a private bank. First, the enemy will declare the State’s share confiscated and will endeavor to liquidate it. If such share had been protected, the enemy could yet convert it into cash, even if he should not obtain possession of the original securities. Practically, matters would come to pass in the following manner: The invader would levy upon the bank for the amount which represents the bank’s interest. And if the bank objected to a similar interpretation of the Prize Law, the enemy would show but small consideration for a bank in which the State was strongly interested; he would have only slight scruples in proceeding against it; he would seize all in sight and give vouchers therefor. Indeed, a State bank, pure and simple, or a private bank in which the State is largely interested, will be treated on the same level.”

These opinions are of great weight, in the present actual condition of Europe, and must be seriously considered when the establishment of a new privileged bank, or the renewal of the privileges of old banks, comes into question.

From an economic standpoint, M. Max Wirth* recommended the creation of a State bank. M. Schweizer, Inspector of Banks of Issue, elaborated a plan of a bank on shares. The Cantonal Bank of Vaud pronounced itself energetically against the State bank. It acted in the name of a certain number of banks which were styled “mixed banks,” i. e., whose capital was made up in part by the cantons and partly by stockholders. Dr. Escher, former president of the Cantonal Bank of Zurich, supported the State bank plan, and he was seconded by M. Keller, who had brought about the adoption of the principle of the monopoly of issue.

After a thorough study of all documents, the Federal Council reversed its former opinion and declared itself in favor of a State bank. The Council could not be induced to decide on formulating an organization for the future bank of issue monopoly. Such constitution ought to deal with the administrative authority and the Federal Government’s supervision. It feared to cope with the decisions of the General Assembly; where the caprices and the brutality of a coalition majority might compel the Federation to attack the decisions of the Assembly. But the true motive of the change in the Federal Council’s opinion lay in the desire to reserve for the cantons and the Federal Government the total revenue from the bank’s profits. This idea is not formally expressed, but it clearly permeates the Council’s statement of its reasons.

FEATURES OF THE LAW OF 1891.

The law which came from the deliberations of the Federal Council may be summarized as follows: Under the title of Banque de la Confédération Suisse, a State bank is established under a special administration. This bank has the exclusive right of issuing bank notes. The principal mission of the bank is the regulation of the money market and to facilitate transactions of payment; it does the service of the Federal Treasury free of charge. The central office of the Bank is at Berne; each canton can demand the establishment of a branch or an agency of the Bank within its territory. The Federal Government supplies the capital of the Bank by an issue of consols; it is responsible for all the engagements of the Bank. The Bank and its branches are exempt from all cantonal taxes. Its administration consists of the Bank Council and of local committees, which have charge of the supervision and control. There is also a Managing Committee and local managing committees, who have charge of the administration. The Bank Council consists of twenty-one members, who are appointed by the Federal Assembly. The various parts of Switzerland must be equitably represented in this body. This Council selects, out of its own members, a president, vice-president, and a Select Committee of five members, whose duty is the supervision and control of the Bank. The president and vice-president are, ex-officio, members of the Select Committee. At the branches, the supervision is in the hands of local committees, of five members at least or ten members at most, who are appointed by the Bank Council for a term of four years. The Managing Committee has charge of the administrative and executive departments of the Bank; it represents the Bank in business dealings and has authority over the employees and the branch directors. The Federal Council appoints the president and vice-president of the Managing Committee. The branch management consists of two persons, at least, whom the Federal Council appoints. They have charge of the business at the branches. The members of the Bank Council and the local committees receive gratuities for attending meetings and are paid mileage. The Federal Assembly may also grant a fixed salary to the members of the Select Committee or to some special members. The Federal Assembly exercises supreme supervision over the Bank on behalf of the Federation; and the two councils appoint each a commission of five members for a term of three years for this purpose. The two commissions audit the annual accounts and business statements and prepare the reports, which must be submitted to the Federal Assembly for approval.

POWERS AND OPERATIONS OF THE BANK.

The Bank of the Federation is authorized to issue bank notes within the limits of its business in denominations of 50, 100, 500, and 1000 francs. At least one-third of the circulation must be covered either by gold bullion or legal-tender coin; the remaining two-thirds must be guaranteed by commercial bills on Switzerland or foreign countries. The Bank must redeem its notes at par, in legal coin, when presented in any amount at Berne; redemption at the branches is made so far as the metallic reserve on hand permits, and settlement in full is made after the necessary delay to procure coin from the main office. The notes are accepted at par by the Bank, by its branches, and at all public Federal offices. Forced currency of the notes to private parties can be decreed only in times of war.

The Bank can transact only the following business: (1) Discounts of commercial paper on Switzerland at three months’ maturity at the outset; such paper must bear two solvent signatures. (2) It buys and sells bills of exchange on foreign countries at the terms and guarantees which are prescribed for discounts. (3) It makes advances on securities for three months at most, but does not loan on stocks. (4) It can buy for its own account, for temporary investment, bonds of the Federal Government and cantonal bonds. (5) It can receive deposits on current account, either at interest or without. (6) It can issue gold and silver certificates. (7) It can issue cheques, make collections, receive securities for safe-keeping, and attend to the collection of coupons. (8) The Bank performs the Federal Treasury service free of charge.

Out of the net earnings, as shown in the profit and loss account, fifteen per cent. are set aside for the reserve. The balance of profit goes in a share of one-third to the Federation and two-thirds to the cantons.

The reserve fund is invested in Swiss and foreign securities.

The Bank publishes a weekly balance-sheet, and at the end of each year an account of its transactions.

The foregoing project of law has not yet been voted by the Federal Assembly, so that the old system of multiple banks of issue is still in force.

CONCLUSION.

Switzerland is under a free régime of banks of issue, as the authority to issue paper money can only be refused in very rare cases; and establishments which do not fulfill the legal conditions would certainly not ask for the right of issue.

Although this system has not given such bad results as in some other countries, it is decidedly condemned. It has demonstrated its inadequacy in all crises which befell the country, and in normal times it does not even ensure a cheap rate of discount. Notwithstanding the autonomy of the cantons, their representatives have readily come around to the idea of a central bank, which alone can have the strength to hold out in times of crisis, and to regulate paper money circulation. Yet it is a question whether Switzerland has been wise in adopting the State bank. Doubtless a State bank can be conducted with much prudence and be as well managed for general service as a private bank; but this presumes a self-control, a loftiness of view, a practical wisdom, and a disinterestedness on the part of the State which ordinary experience fails to afford. In the case of a State bank, borrowers are disposed to consider the rate of discount and of loans in the light of a tax and they are easily persuaded to claim relief. Moreover, the intrusion of political influences must be apprehended. These might warp the decisions of the management; and accusations might arise that unjustified favors were shown to some, while adversaries were vigorously dealt with. Neither is it certain that discounts, when regulated according to administrative and bureaucratic methods, can be obtained as rapidly and on such good terms as if the bank were only guided by personal interest and the desire to earn dividends. However, this is only a minor aspect of the question. Leaving aside the question of the risks of war, which jurists, by common accord, declare to be higher for a State bank than for a private bank, there is no doubt that through the diffusion of Socialistic doctrines, the Government might easily become hard pressed to assume new functions and new attributes.

Equally, a State bank stands exposed to inflated issues of its notes. Every service which the State is called upon to render costs money, and the State is generally loath to obtain this by taxation. Sophisms will not fail to be urged for forcing the issue of paper money on the theory that the State bank only needs to print notes from plates. With the obligation to redeem the bank notes in coin, the danger in ordinary times, no doubt, is not great, as the surplus of paper flows back to its source; but the inevitable consequence of an inflation of circulation is forced currency, and possibly a temptation to reach this goal quickly. This is the great drawback of State banks.

Finally, the credit of a State bank becomes involved with the Government credit. In times of political crisis, the bank’s signature adds no value or new guaranty to the State’s, and we might repeat here the famous sentence of Thiers: “The Bank of France has saved us because it is not a State bank.” In the critical phases in the life of a nation, the need of a powerful establishment under firm management is felt. An institution is needed which can discuss matters freely with the State, so that, charter in hand, it may say to the Government: “You ask us for such and such service, which we consider compromising and dangerous for our credit; we cannot render you this service.” The welfare of a nation may easily depend on such wise and patriotic resistance; and it is the height of imprudence to break down safeguards which may sometimes be inconvenient but are always salutary.

PART VI.

BANKING IN PORTUGAL, 1750 TO 1891.

[* ] Mr. Wirth is the author of the treatises in this work on the History of Banking in Germany and in Austria-Hungary.—Editor.