The Online Library of Liberty

A project of Liberty Fund, Inc.

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

CHAPTER I.

THE 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.