The Online Library of Liberty

A project of Liberty Fund, Inc.

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

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.

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