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 VI.

BANKING IN PORTUGAL, 1750 TO 1891.

CHAPTER I.

THE FIRST GREAT BANKS.

BANK OF LISBON—ORIGINAL BANK OF PORTUGAL.

PORTUGAL has always been a badly financed country. In 1750, at the end of the reign of King John V., who had spent enormous sums on costly buildings, on the clergy, the nobility and courtiers, there existed a debt of 23,380,000 cruzades (about $374,080,000). The Marquis of Pombal succeeded, by measures which were often unjust and vexatious, in bringing Portugal’s finances back to something approaching order; but, when he fell, abuses began anew. The privileged classes succeeded in evading taxation, and the numerous wars into which the country was dragged through its alliance with England completed the ruin of the exchequer. Thus embarrassed, the Government, in 1797, resorted to the deplorable expedient of issuing paper money. In 1807, at the time of the French invasion, 22,500,000 of paper cruzades (equal to $360,000,000) were in circulation, which lost twenty to twenty-five per cent. in exchange, and the depreciation reached thirty per cent. in 1821. Then the Government contemplated the creation of a bank of issue to take its place in the circulation of paper money. The Bank of Lisbon was established in 1822. Its career was a troubled one, and in 1828 it suspended payments.

The crisis of 1846-47, which had shaken France, England, and Spain so badly, did not spare Portugal. At that time the Government owed the Bank of Lisbon large sums without security; the course of interior politics became threatening, and the Bank lost all credit. The holders of the Bank’s notes demanded their redemption; the Bank could not comply, and on May 23d the Government decreed forced currency for three months. In vain were the most rigorous measures proclaimed against those who should refuse the notes. The premium on gold rose to 37½ per cent., and a reorganization of the Bank became necessary.

THE BANK OF PORTUGAL ESTABLISHED.

With the remnants of the Bank of Lisbon and those of another establishment, styled “Confiança Nacional,” which had been almost ruined by the Government, an institution was organized under the title of the “Bank of Portugal.” Its capital was 10,000 contos, divided into shares of 100 milreis; half from the Bank of Lisbon and half from the Confiança Nacional, whose respective assets and liabilities the Bank of Portugal assumed. By decree of November 19, 1846, the latter institution received, for thirty years, the exclusive privilege to issue bank notes in the kingdom proper, without interfering with the privilege granted in 1835 to the Commercial Bank of Oporto. The new bank had also the right to open savings-banks. Its issue of paper money was limited to 5000 contos de reis, and its notes were made a legal tender. Its transactions consisted of discounts of commercial paper at three months or above, bearing three signatures; discounts of Treasury certificates at twelve months; to loan on deposits of gold or silver up to four-fifths of their value; on precious stones to two-thirds of their value; on merchandise to three-fourths of its value; and on Government bonds to two-thirds, and stock of the Bank to the extent of half of its current market quotation. These loans were made for three months at five per cent. interest. The Bank also received deposits on current account and made loans on mortgages.

This establishment rendered genuine services. It took a large share of the old paper money of the Bank of Lisbon and the Confiança out of circulation: but it did not understand how to resist the State’s demands, and soon the Government was in debt to the Bank for considerable sums. At first the Government showed some good will toward the Bank. A law of December 19, 1846, had established a sinking fund on behalf of the Bank; assessments from the revenues of the national domains and the Lisbon custom-house were set aside for that purpose. A loan of 4000 contos which the Bank had made to the State should be repaid, principal and interest, in installments of 800 contos a month, for which the company holding the Soap and Tobacco Monopoly was made responsible. But, unfortunately, the embarrassments of the Treasury did not leave the Bank long in the enjoyment of these guaranties. A decree of August 30, 1852, deflected the sinking fund from its original purpose and turned it over for the use of public works. The only compensation which the Bank received was that the sums which it was obliged to devote monthly to the withdrawal of old bank notes was cut down one-half. On the 9th of October of the same year, the Government seized also the monthly installments which the Bank received from the Tobacco Monopoly, and, finally, on March 15, 1854, an arrangement was made by the terms of which the Bank had to relinquish the contributions toward its sinking fund absolutely. It received three per cent. consols at par, and the Government took the redemption of the old paper money up to the amount of 108 contos (108,000,000 reis) upon itself.

Meanwhile banking had been considerably modified. A decree of April 16, 1850, had reduced the capital of the Bank of Portugal to 8000 contos, (about equal to $8,640,000); the exclusive privilege of issue had been restricted to the district of Lisbon, and the creation of other banks of issue was allowed upon the sole condition that the legislative body should authorize them. The Bank of Portugal had the privilege to establish savings-banks in the whole kingdom; this was taken away by the law of May 6, 1857, and the Bank did not remonstrate, as the privilege was more onerous than profitable.

SIX NEW BANKS OF ISSUE.

The law of April 16, 1850, brought the following new banks into existence:

Mercantile of Oporto, established on June 26, 1856.

Union of Oporto, established on December 10, 1861.

Alliance of Oporto, established on July 13, 1863.

Public Utility of Oporto, established on April 21, 1864.

Minho of Braga, established on June 15, 1864.

Ultramarino of Lisbon established on May 19, 1864.

These five banks were permitted to issue notes, on condition of their holding a metallic reserve equal to one-third of the value of the outstanding notes and of the demand deposits. In addition to this restriction, the issue was limited to an amount equal to seventy-five per cent. of the paid-in capital; exception, however, was made against the Bank of Public Utility, which was allowed to issue up to only half of its capital; and in favor of the Ultramarine Bank, which could issue to the amount of twice its capital. The latter bank had the privilege of establishing credit institutions in the colonies, except at Macao; and it was promised a subvention of 30 contos for the establishment of branches and agencies in Portuguese Africa; this was independent of the transactions which it could undertake in Portugal proper.

Senhor Rodrigues de Freitas, in his “Notice on Portugal,” gives the situation of the Portuguese banks of issue on December 31, 1866, as follows, the amounts being stated in contos (millions) de reis:

There were two sets of banks, one at Lisbon, where the privilege of the Bank of Portugal barred the creation of new establishments; the other for the provinces, where banks could be established by legislative sanction, which was never refused.

PRIVILEGE OF THE BANK OF PORTUGAL EXTENDED.

The history of the Bank of Portugal offers no points of prominent interest. Upon solicitation of the Stockholders’ Assembly, the term of existence of the Bank was extended on September 22, 1874, for 50 years. The exclusive right of issue, for the district of Lisbon, was continued; other banks sharing this right in the provinces. In 1875 the Bank desired to obtain the provincial right of issue and elaborated a general plan of agencies. But its capital, which had been largely exhausted by State loans, allowed only slow progress in this scheme. It was, indeed, impossible—unless as a matter of grave recklessness—to pay for the first cost of installation of branches for the sake of circulation. The Bank started with two branches, the first one at Oporto, and took into consideration a plan to transform the agencies of Funchal and Faro into branches.

ATTEMPT TO REFORM THE GOLD COINAGE.

In 1883, the Bank took the initiative for a measure having in view the abolition of the tax on gold coinage. Up to 1837, the exportation of gold in any shape was absolutely forbidden. This prohibition, which had kept Portugal seriously embarrassed, and which constantly raised the rate of exchange, was replaced by an export tax of one milreis per mark (229½ grammes) on gold bullion, and of 500 reis on export of the corresponding weight in foreign coin; the interdict against exportation of national (gold) coin remained in force. In 1852, a new law took the place of the one of 1837; the embargo against the exportation of national coin was raised, and instead an export duty of one milreis per mark in gold bullion or coined gold was levied. This law was gain, at least in principle; but it acted directly counter to its purpose. It brought on a rise in exchange in Portugal, and offered a premium on exports of gold, which it was intended to restrain. The English pound sterling, in sight drafts or gold, is worth at par 4½ milreis, which makes a milreis equal to 53⅓ pence; it costs 2 reis, or 0,1,066 pence, to transfer a pound sterling from London to Lisbon or vice versâ. Therefore, Lisbon gold points were 53.333 + 0,1066 = 537/16d., but with the export duty of 5 milreis per kilogramme of gold and the customs expenses, the gold point fell to 5211/16d.; in other words, sovereigns left an assured and highly profitable margin of the difference between 537/32d. and 5211/16d., i.e., 17/32d. per pound. The Bank urged very effectively these points of disadvantage, and explained the impossibility of protecting its metallic reserve in view of such a considerable adverse premium, and it had the satisfaction of obtaining the repeal of a law which had been made at a period when complete ignorance of economics prevailed, and which had been kept in force in spite of its noxious character and of the persistent efforts of bankers and economists to effect its abrogation.

Closely connected with Portugal’s monetary reforms is an important measure, the withdrawal of old copper coins, which was prescribed by the law of May 31, 1882. The Bank was intrusted with the gathering of this money, for which it paid in scrip, which figures in its balance-sheet as “bank notes representing copper.”

CONSOLIDATION OF THE BANKS OF ISSUE.

In the meantime, Portugal had improved financially; its consols were looked at favorably in Europe, notwithstanding the partial bankruptcy of 1852, and there were indisputable proofs of progress in commerce and manufactures. The inconveniences produced by a plurality of banks of issue began to make themselves felt. Since 1877, public opinion had agitated the question of a single bank of issue. It did not matter whether the Bank of Portugal or any other had charge of the issue; but it was necessary that all bank notes should originate from one and the same source.

THE BANK RECEIVES A MONOPOLY OF NOTE ISSUES.

A Minister who had not always been well inspired, but who in this case showed determination and energy—Senhor Marianno de Carvalho—accomplished the consolidation of the eight banks of issue existing on January 31, 1887, and which had the following circulation:

The vast superiority of the circulation of the Bank of Portugal over the other banks demonstrated that, in the case of a monopoly, it ought to be conferred upon this bank. Accordingly, a law of June 29, 1887, authorized the Government to enter into an arrangement with the Bank of Portugal, or with another credit establishment, in case of refusal by the former. The terms of the law were mutually discussed and accepted by the Bank of Portugal, and they form to-day its charter. If the Bank of Portugal should refuse to meet the Government’s views, it should lose the exclusive right of issue for Lisbon and surroundings; if, on the contrary, it accepted the proposals made, the Government promised to negotiate with the banks of Oporto in order to induce them to relinquish their right of issue. After long conferences, a concordat was signed on June 8, 1891, between the Bank of Portugal and the northern banks by which the latter obliged themselves not to issue new bank notes and to withdraw the old ones through the medium of the Bank of Portugal. The latter should be supplied by the banks with the necessary funds for redemption within fifteen years at most. In the meantime, the Bank of Portugal should advance them 2,000 contos without interest.

The banks were the more ready to surrender their right of issue to the Bank of Portugal because just then the monetary situation had become very critical. The Portuguese Government was heavily in debt, and found it impossible to balance its budget; it maintained itself by Treasury operations, in which the Barings of London were largely engaged. Again, Portugal has a great deal of capital engaged in Brazil, and remittances and returns for that market are made through London channels.

THE BANK IN THE CRISIS OF 1890.

So long as the political condition of Brazil did not change, Portugal had generally more to receive from that country than to remit there; it had therefore exchange on London to dispose of, and could, on the other hand, draw on the banks of that place, especially on the house of Baring. The Brazilian revolution, however, overthrew all commercial relations soon after; the failure of the Barings deprived Portugal of the credit upon which it had been accustomed to count, and a crisis broke out. The economic situation in 1890 was deplorable; the balance of trade showed imports to the amount of 44,623 contos, in which importations of money were not comprised—against 21,589 contos of exports. Public expenses, especially in the Ministries of Public Works and the Navy, had swelled into extravagant proportions, and almost the whole capital of the Bank was tied up in securities which could not easily be turned into cash and in loans to the State. Portugal went into bankruptcy and failed to pay two-thirds of the interest on its debt. In 1891, exchange tightened suddenly, as the following phenomenal schedule shows:

Theoretically a milreis was equal to 53^d28, but in December the loss amounted to 11^d55 or 20.93 per cent. All the coin of Portugal took flight, and, in spite of all the efforts of the Bank to keep the metal, it held at the end of 1891 a metallic reserve in gold, silver, and copper of only 4,348:754, against a bank note circulation of 34,760:637, and 2,254:345 of deposits on current account. The banks of Oporto, which were too numerous for the needs of the population to whom they catered, had thrown themselves unreservedly into speculation, and their depositors made a rush upon them. On March 18, 1892, the director of the Bank of Commerce and Industry disappeared, and the Mercantile, Public Utility, and the Oporto banks suspended payments. The economic crisis passed from the acute into the chronic stage, from which it recovers very slowly; exchange remains at a very high rate, although Portugal has repudiated a great part of its debt. The Bank of Portugal is flourishing enough from the standpoint of earnings; but its condition is extremely precarious, as its credit is merged with that of a ruined government which has never shown the slightest scrupulousness about the observance of good faith in its engagements with creditors.

CHAPTER II.

THE BANK OF PORTUGAL.

ITS CONSTITUTION, MECHANISM, AND MANAGEMENT.

THE Bank of Portugal has held since January 1, 1888, and virtually from 1891 for a term of forty years, the exclusive privilege to issue paper money payable on demand to bearer. Its notes are a legal tender, representing gold in Portugal proper and in its dependencies. The Government has the option of reducing the term of the concession to thirty years upon giving to the Bank five years’ previous notice.

Capital.—The capital amounts to 13,500 contos, which includes 5500 contos contributed by the addition of the capital of the former Bank of Portugal. The law allows an increase of the capital if the circulation rises above 25,000 contos. The stockholders of the old Bank of Portugal have the option on any new issues of shares at 120 milreis. The shares unsold at the time of reorganization were marketed on the Stock Exchange, and the premium obtained was applied to the reserve fund. The capital is divided in 135,000 shares of 100 milreis each. Each share entitles the holder to a pro rata interest in the company’s property and earnings; the stockholders’ liability is limited to the amount of shares they hold. The shares are registered or to bearer; they may be owned jointly by several parties, but the Bank recognizes only one owner to a share.

General Assembly.—The stockholders are represented by 240 principal stockholders, who meet once a year in ordinary general assembly. Extraordinary general assemblies are composed of the holders of at least fifty shares, who vote for modifications of the by-laws, and to decide—if necessity should arise—on the dissolution and liquidation of the Bank. Each shareholder is entitled to one vote only, independently of the number of shares he may hold; but he may be represented by a member of the Assembly, who, in that case, has two votes—his own and his proxy vote.

Directors and Censors.—The General Assembly elects a directorate of ten regular and five supernumerary members from the native or naturalized Portuguese shareholders, besides a Censors’ Council (Conselho fiscal) composed of seven regular and three supernumerary members taken from the shareholders of the Bank, which must fill the same conditions as to nationality as the directors. The directors are elected for a term of two years; the censors are elected for the same period, and alternate in batches of three and four members. The supernumeraries of the directorate and the Censors’ Council have a term of office of one year and are re-eligible. Each member of the directorate must possess at his free disposal shares of the Bank to the amount of five contos, in order to qualify him for election, and upon his taking office ten contos in shares of the Bank must be deposited as a guaranty of his faithful administration.

Governor and Vice-governor.—The governor is appointed by the State for a term of five years, and can be re-elected. He must deposit as a guaranty of his administration ten contos of shares of the Bank or in Government securities with a margin of ten per cent. of the rate of the day. The vice-governor acts for the governor whenever necessary, and assists him in his functions; he is appointed for one year by the Government from a list of three candidates which the General Council submits. The governor represents the Bank in business and court transactions; he attends to all current business, signs the correspondence with the State and administrative authorities, as well as all other documents of the Bank, but he may delegate these functions to the vice-governor or a director. He supervises all details of the Bank, attends to its internal service and the development of affairs; he examines the books except those over which the General Assembly has like authority. He appoints and discharges the directors of the branches and the agents; he regulates the duties of the Administrative Council and the departments of the General Council, and presides at meetings. He can suspend execution of the decisions of the committees of the Administrative Council, and submit them to revision by the General Council, which is summoned at once, and he notifies the Government of all decisions which the Councils might have passed contrary to the laws, by-laws, or the interests of the Government. The governor may address himself to the King through the medium of the Ministers in all matters which interest the Bank and in which it is dependent upon the Government.

Council of Administration.—The Council of Administration directs and supervises the general business of the Bank in accordance with the laws and by-laws. Its special duties are to transact the business which the by-laws and regulations authorize; to regulate and supervise all departments, and to maintain prompt business discipline; for this purpose two directors must be on duty every day; to appoint and discharge employees and fix their salaries; to manage and control the business of the branches and agencies; to inspect them in person or by deputies; to elaborate for the General Council the rules for the branches and agencies; the General Council submits these rules to the Government for approval; to supply the Censors’ Council and the secretary-general with all documents necessary to give them an insight into the Bank’s condition; to submit important and extraordinary business to the General Council; to propose to the General Council the establishment, transformation, or abolition of branches, agencies, and Lisbon offices; to propose to the General Assembly, after conference with the Censors’ Council, all measures for the benefit of the Bank’s development and safety; to present the annual statement to the General Assembly; to summon the extraordinary general assemblies. The Council is obliged to hold two sessions per week, and minutes of its resolutions must be kept.

The council for the Bank’s business management divides itself into as many committees as it deems necessary. Each committee consists of three directors and the governor as ex-officio president. The following committees are obligatory: Committee on discount and miscellaneous business; committee on Treasury and State transactions; committee on bank note issue; committee on branches, agencies, and correspondents, and committee on litigations. These committees supervise directly the transactions within their sphere of competency and refer all useful measures to be taken to the Council of Administration.

The Censors’ Council (Conselho fiscal) is on duty throughout the year. Its functions are to examine the weekly balance-sheets and the accounts which are presented to the Council of Administration; to supervise the internal business of the Bank, and to attend to the carrying out of laws, by-laws, and rules; to inspect the cash whenever it deems it proper, and to make a report upon the result of its supervision to the General Assembly; to demand the calling of extraordinary assemblies.

General Council.—The General Council consists of the governor, president of the Council of Administration, and the Censors’ Council. It meets regularly once a month and decides specially on the rate of discount, the Bank’s state of affairs, the budget of expenses, and the appointment of the staff. Further, it selects the places where the Bank should keep representatives; it has the power of appointing and discharging the managers of branches and agencies; upon proposal by the Council of Administration, it authorizes business relations with foreign banking houses, and it considers and approves the regulations of the Bank, branches, and agencies. Finally, it has control of the distribution of profits, and it decides upon questions submitted to it by the Council of Administration.

Secretary-General.—The Government keeps an agent at the Bank under the title of “Secretary-General.” This official watches over the correct observance of the by-laws and regulations, and looks into the situation of the establishment from the standpoint of public interest and the security of the paper currency. The secretary-general is present at the meetings of committees, the Council of Administration, and the General Council. He takes part in the debates and makes such motions as he may deem useful for the relations of the Bank and State. He has a consulting vote. He can examine both documents and accounts of the Bank, which must furnish him full opportunity to carry out that portion of his function. He must be given access to all documents which the governor issues, and countersign the correspondence with the State. The governor receives a salary of 3600 milreis, and the secretary-general 2000 milreis; both are paid by the Bank. There are certain bars to the selection of governors, directors, and censors. Managers or partners of banking houses are ineligible to such offices. No two members of a firm, father and son, two brothers, uncle and nephew, two cousins, father-in-law and son-in-law, can be simultaneously members of the General Council of the Bank. The members of the General Council cannot obtain loans or advances either individually or as members of a firm, but they can procure discount commercial paper.

BRANCHES, AGENCIES, AND CORRESPONDENTS.

The Bank is obliged, by the law which conferred its concession, to establish branches and agencies in the capitals of the administrative districts of the kingdom and dependencies. These establishments should be opened within four years from January 1, 1888. The Bank was liable to a fine of one conto for each three months’ delay. If the Bank had failed to establish branches or agencies in four districts at least within five years, the Government would repeal the exclusive privilege of issue of legal-tender bank notes. In 1894, the Bank had one branch at Oporto, and eighteen agencies. The Bank is responsible for the administration of the branches, which are managed by a director, whom the Government nominates, and a Managing Committee appointed by the General Council of the Bank. The directors of branches supervise all business transactions, take part in the Managing Committee’s deliberations, and see to the observance of the laws, by-laws, and regulations. The administrations of the branches are responsible for their acts; full liberty of action rests with them as long as they conform themselves to the requirements of the by-laws and regulations.

If circumstances allow, a local Discount Committee is attached to each branch or agency. This committee is appointed by the General Council, and the director or one of the agents presides over it. The correspondents which the General Council appoints in concurrence with the Government transact the business with which the Bank intrusts them. There are also city branch offices of the central bank at Lisbon; these are simply city bureaus. Agencies are promoted to branches if the development of their business warrants such change, and branches may become agencies, or even simple correspondents, on authorization by a vote of the Shareholders’ Assembly, upon the proposition of the General Council and the approval of the Government.

TRANSACTIONS OF THE BANK.

Discounts.—The Bank discounts bills of exchange and other commercial paper; due bills backed by collateral, vouchers and certificates of the Public Treasury, and of the naval stations and colonies, if they are duly indorsed by the Ministries of the Navy and the Colonies. It discounts current interest and coupons of the National debt and bonds of the General Portuguese Crédit Foncier Company, which are guaranteed by the State. It buys and sells bills of exchange. Discounted commodities must not mature later than in three months and must bear three signatures of persons of acknowledged solvency. Bills of exchange are allowed under the guaranty of the signatures of the acceptant and drawer with one indorsement only so long as the drawer is safe and there is no reason to suspect the legitimacy of the draft.

The discounts of 1894 were constituted as follows:

The rate of discount is relatively high, as in all countries where capital is scarce and exchange impaired. Yet, by reason of the forced currency of the paper money, it is remarkably stable. The rate is the same at Lisbon as at Oporto, and at the agencies it cannot run higher than two per cent. above the Lisbon standard. The following statement shows the steadiness of the bank rate:

Buying and selling bills of exchange is one of the most important services which the Bank renders to commerce; for, through these transactions, funds are transferred at small expense throughout every part of the kingdom. During the last two years the sales of paper in the kingdom reached the following figures:

Loans.—The Bank grants loans on the following collateral: Gold, silver, precious stones, and bonds of the Portuguese public debt. Non-assessable stocks and bonds of banks, companies, societies, municipalities, districts, and other administrative corporations with established credit which are quoted on the Lisbon Bourse. It lends also on its own stock, on foreign Government bonds, foreign shares, and bonds of banks, companies, administrative corporations guaranteed by governments, and finally on bills of lading and merchandise warrants for goods stored in the customs warehouses or in general storage warehouses. It opens current loan accounts on the collateral of Government bonds, Treasury certificates, and bonds of the General Portuguese Crédit Foncier Company, which are guaranteed by the State. The ratio for loans is ninety per cent. of the actual value on gold, fifty per cent. on precious stones, ninety per cent. on Government bonds, eighty-five per cent. on stock of the Crédit Foncier Company, seventy-five per cent. on shares of other companies, bank stock, and foreign securities, and fifty per cent. on storage warrants and bills of lading. Loans must not exceed the face value of the pledged securities even if they are currently quoted above par. No more than sixty per cent. of the Bank’s capital can be applied to loans; but this limit may be extended with the consent of the Government. The loans on the Bank’s own stock must not be for more than five per cent. of the capital.

The enormous decline of the loans on securities was the natural consequence of the bankruptcy of the Government and of the convenio (covenant) of the Portuguese railroads for the restriction of credits.

Accounts Current.—The Bank opens current accounts and undertakes transfers by cheques and drafts from one account to another. The following is a statement of these transactions from 1869 to 1894:

The decline in deposits on current accounts was due to the withdrawals made by depositors when the Bank stopped paying out gold. People who had money to invest would no longer pay it into the Bank, and they began to take advantage of the exchange which favored its export. The years 1893 and 1894 showed a slight gain upon 1892, but still they remained much behind preceding years.

Miscellaneous Services.—Amongst other business details, the Bank issues circular letters of credit on Portugal and foreign countries; it allows first-class foreign banking houses to draw upon the Bank against exchange business, which serves to maintain its metallic reserve. These very important transactions figured at the following amounts before the crisis; they subsequently fell off considerably, as the appended table will show:

In 1894 the Bank drew the following amounts: On London, £168,888 8s.; on Paris, 271,843 francs; on Madrid, 5638 pesetas; on Berlin, 11,970 marks. It bought bills of exchange on London for £298,275 12s. 10d.; on Paris, 570,679 francs; on Madrid, 27,510 pesetas; on Berlin, 1569 marks. To these figures must be added 9220 contos of miscellaneous business; so that the total exchange business for 1894 amounted to 12,085 contos. The Bank also undertakes collections for its customers and renders them all services which the by-laws allow.

Deposits.—The Bank receives for safe deposit precious stones, jewelry, securities, and valuable documents. These deposits represented a yearly aggregate according to the table following:

Finally, the Bank can deal in the precious metals, buy and sell Government bonds and other public securities, as well as bonds of the Portuguese Crédit Foncier, which are guaranteed by the State. The following transactions are not allowed: The Bank must not deal in its own stock; it cannot rediscount its commercial paper on hand; stock exchange speculation—even for account of third parties—is disallowed. The Bank cannot pay interest on demand accounts; it is debarred from taking share in other banking establishments, or commercial or industrial enterprises; it must not act as broker in either guaranteed or hazardous business, and it cannot own real estate besides the buildings devoted to its own service or such as it may acquire by foreclosure of mortgages. Such acquisitions must be disposed of as early as possible.

ADMINISTRATION OF THE METALLIC AND PAPER CIRCULATION.

As mentioned above, the Bank holds the exclusive right of issuing bank notes payable to bearer on demand for a term of forty years from January 1, 1888. These notes are legal tender wherever the Bank has branches and agencies and within a radius of five kilometres of these establishments. Should the Bank ever cease to redeem its notes on demand at any of its offices or dependencies, it will lose the legal-tender advantage for its paper. The Bank, however, on May 7, 1891, was authoritatively released from paving for its paper money in gold. The decree of that date reads as follows:

Although this decree does not express it in so many words, it means practically forced currency; because the creditors of the Bank have only the choice between paper money and silver, which is even more depreciated than the notes of the Bank. The metallic reserve, in contos de reis, was as follows on each December 31st of 1891-2-3-4:

Before 1891, the balance-sheet makes no distinction between the Bank’s paper money and the coin reserve which constitute the cash on hand.

This little item of importations had been far from filling the wide gap between the exports and imports of gold from the kingdom. The exports of 1891 were 29,705 contos, and only 3721 contos were imported, leaving an export balance of 25,984 contos.

Although the Portuguese Government has stopped payment on the major part of its foreign debt, even the settlement of that part which remains unrepudiated is an onerous burden to the kingdom, on account of the adverse balance of trade. The bank pays very dearly for the gold which it purchases. In 1892, it paid an average premium of 1227 reis per pound sterling, which brings the sovereign, nominally worth 4500 reis, to 5727 reis. The premium fell to 1045 reis in 1893, but it reached 1142 reis in 1894. The make-up of the metallic reserve is ruinous for the Bank, and the country derives no benefit from it, as all gold bought is locked up and the Bank will not part with it at any price. If a Portuguese merchant needs gold, he must resort to France, England, or Germany to buy it; he would not find a single gold piece in circulation or to be obtained at the Bank.

THE NOTE CIRCULATION.

The circulation on December 31st of each year, from 1887 to 1894, amounted to the following figures:

A comparison of these figures with the metallic reserve shows very clearly that the Bank does not observe in the least the prescriptions of the decree of May 7, 1891, which fixes the circulation at thrice the amount of the metallic reserve. Virtually, the Government has abandoned the legal limitation of the Bank’s output of paper; it permits any maximum which the needs of the Treasury may seem to dictate. The present maximum of circulation is 54,000 contos. The Bank makes strong efforts to prevent indefinite growth of its circulation; but the State places it constantly between the two horns of a dilemma by either compelling it to grant advances which necessitate new issues of paper or by putting a stop to its State service. From this position the Bank cannot extricate itself. Meanwhile, Portugal seems to recover somewhat from its unfortunate situation. Its credit is lost, and unless it can offer collateral of undoubted value, the foreign market for loans is absolutely closed against it. The country can depend only upon its own resources, and, apparently, it seeks to develop them. The chief condition of its salvation lies in its not exhausting its principal credit establishment, which is its last resource.

THE CONSTITUENTS OF THE BANK’S PAPER.

The circulation of the Bank is very singularly made up. Before the crisis of 1891, Portugal had been from July 29, 1854, under a single gold standard; no creditor was held to accept more than five milreis in silver money; yet it had become common usage to pay two-thirds in gold and one-third in silver, or even copper. The banks had made special issues of notes which were redeemable in silver and copper, and which clearly stated so on their face. These bills were much in excess of the silver and copper metallic reserves of the banks; and, by the letter of the law of 1887, they should be brought within the exact figure of the actual money reserve. Events, however, have not allowed this; and, on December 31, 1895, the Bank of Portugal had the following issue of paper money in circulation:

The 20-milreis denomination, which corresponds approximately to the French 100-francs note, occupies a prominent place in the Portuguese paper money issue.

RELATIONS BETWEEN THE BANK AND STATE.

Annuities and Pensions.—As in all countries with wrecked finances, the Bank of Portugal has the most intimate relations with the State. By the terms of its by-laws the Bank is obliged to pay the running civil and military pensions in force in July, 1887; pensions after that date do not fall within the contract. The Bank, in this case, is not an agent or disbursing medium; it advances the pensions, and the Treasury reimburses it for principal and interest by an annuity of 800 contos. The old debts of the State to the Bank, for the payment of pensions, have been merged in this contract. The rate of interest which the exchequer owes for this service is regulated by the quotation of Portuguese consols on the London Stock Exchange. When they are quoted at fifty-four, the Treasury pays five and one-half per cent.; but for each point of decline the rate rises six centimes; for each point gained the interest is lowered six centimes until it reaches five per cent., which is the minimum rate. At the end of each business year the Bank and the Treasury balance accounts and determine the rate of interest which the State has to pay. The Government can abandon this branch of the Bank’s service at any time; and the Bank, in such event, is not entitled to either compensation or indemnity. The Bank is authorized to issue bonds to be redeemed by drawings (premium bonds) against the Treasury’s debts for pensions. These bonds are guaranteed by the Government. If at any time the Government repays the whole or part of its debts, the Bank must redeem a corresponding amount of bonds. The following statement shows the increase of these obligations:

Cash Service.—The Bank is the State’s banker and the Treasury’s disbursing agent. The branches and agencies act in a like capacity for the Treasury, and become the collectors and disbursers of the public revenues; they are subject to the general rules and accountability applicable to public officials. All expenses for the movement of funds are at the Bank’s charge; it also pays the salaries of the disbursing officials of the Ministry of Finance, the Junta of Public Credit and its clerks, and the district disbursing agents. The Bank can employ the latter as its own agents. Any reforms which may be made in the Treasury service are at the expense or profit of the State. The Government employees are subject to the regulations of the Bank; the provincial directors of finance exercise control over the branch offices and agencies in so far as the State’s business is concerned. In matters for which the Bank is held responsible, the general direction of the Treasury takes up the case, and the Court of Account decides in all such affairs.

In accordance with its by-laws, the Bank has opened an interest account for the Treasury, whose debit may reach a maximum of 2000 contos. By several agreements, the last of which was entered into on February 9, 1895, the Treasury’s account has been raised to 21,000 contos, which it owes the Bank on open account. If the State is debtor, the Treasury pays four per cent. interest; if there is a credit in favor of the Treasury, the Bank pays three per cent.

It is not necessary to here enter into the details of the very confused accounts of the Government’s dealings with the Bank; it may suffice to give the figures of the State’s indebtedness to the Bank on December 31st, for a series of past years:

This shows that the State has absorbed an amount almost three times that of the Bank’s capital.

Taxes and Division of Profits.—The taxes figuring in the profit and loss account of 1894 represent: The stamp tax on the account-books, commercial paper, cheques, and receipts; municipal taxes; income and dividend taxes; an industrial tax on banking transactions. The total taxes in 1894 amounted to the considerable sum of 170:226$756. The annual profits remaining, after deduction of the share set aside for the reserve fund and a dividend of seven per cent. for the stockholders, are divided equally between Bank and State.

PROFITS, RESERVES, AND DIVIDENDS.

Two reserve funds must be provided for out of the annual earnings of the Bank. A permanent fund is built up out of a five per cent. levy upon the net profits and the premium obtained on sales of shares. This fund is intended to bring together a supplementary capital equal to twenty per cent. of the stock capital. A variable fund is made up to the amount of ten per cent. of the stock capital by setting aside seven per cent. of the net earnings. This is a reserve account for losses, and serves as a supplement to make up a dividend of five per cent. for the shareholders if the ordinary funds do not leave enough to allow a dividend at that rate. The variable reserve fund must be completed as soon as it falls below the fixed limit. The permanent fund must be invested in Portuguese consols; its current interest is paid into the variable fund if the latter falls below ten per cent. of the capital; when the variable fund is at its necessary level, the current interest of the permanent fund is carried to profit and loss account. The variable reserve fund is employed in the general business of the Bank, and its product is carried to profit and loss account.

The decline of the variable reserve fund, which appears in 1893 and 1894, arises from the fact that the Bank exhausted it in 1893, for the following purposes:

The 1894 fund was applied entirely to the same purpose, so that the item of variable reserve does not exist any more in the balance-sheet of December 31st; provision for its reconstruction was made for 1895, but, apparently, it will be absorbed again by the end of the year.

The following statement will show that the Bank makes considerable profits:

This table shows that the transactions with the Treasury yield the major part of the profits. Those transactions are, of necessity, very lucrative, because in exchange for a bank note which is unredeemable and costs no more than the price of printing, the Bank receives a well-paying interest. Yet, this confusion of the credit of the Bank and State, this loss of the Bank’s independence, gives rise to great dangers for both the institution and the country. We must do justice, though, to the Bank in stating that, aside from its transactions with the State, it is intelligently and economically managed.

THE BANK’S BALANCE-SHEET.

The Bank must publish each year a statement of its transactions and a balance-sheet of its accounts. These publications are made after examination and approval by the general assembly of stockholders. The balance-sheet, which was originally a mere summary, became gradually more explicit, and to-day it offers a compact and interesting exhibit of the principal events of the business year. Each week, also, the Bank reports to the Government a summary of its assets and liabilities, in which it details the composition of its metallic reserve. The balance-sheet, of which we give an example below, is regularly published in the official Diario.

CONCLUSION.

The situation of the Bank of Portugal shows symptoms such as are observed in all countries afflicted with wrecked finances; the resources are tied up, yet the earnings are considerable. A comparison of the liabilities subject to demand and the assets which can be realized, gives us the following status of the Bank on December 4, 1895:

This shows a deficit of almost 26,000 contos, if the Bank were called upon to settle its demand liabilities. For an ordinary bank, a like position would mean unqualified bankruptcy. If we look at the ways of employment of the capital and the reserves, which amount altogether to 15,212:966 $ 632, we find the following investments:

Deduct therefrom

made up by paper circulation.

Thus the Bank’s paper money is guaranteed by a debt owing to the Bank by the State.

Portugal, like Spain, has failed to profit by the lessons of a pregnant experience. All faults which brought about the ruin of the first banks of issue in either Portugal or Spain are repeated to-day, only on a much larger scale. By declaring forced currency, both governments believe themselves to have acquired the right to drain the banks with impunity; but such assumptions are only illusory and the penalty for the fault must soon follow. There is a treacherous enemy who lays pitfalls for prodigal governments and for the banks which lack stamina to resist the State’s intrusion; this enemy is called Exchange, which is the dial of national decline of credit. This exchange arrests all commerce and makes trading a speculation on the country’s money. This exchange impoverishes day by day whoever receives a bank note; it makes money melt like snow, and like snow it trickles from his hands. Portugal is, on every side, at the mercy of a discredit which is increasingly turning the exchanges against it; these drawbacks keep it aloof from regular contact with the rest of Europe; and although some home industries have been developed as a consequence of the prohibitive action with which the high exchange affects importations, the nation is sorely afflicted in its most vital interests, owing to the misdeeds of its Government and the weakness of its principal credit institution.