Front Page Titles (by Subject) CHAPTER III.: PRIVATE BANKS. - A History of Banking in all the Leading Nations, vol. 4 (Germany, Austria-Hungary, Netherlands, Scandinavian Nations, Japan, China)
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CHAPTER III.: PRIVATE BANKS. - A History of Banking in all the Leading Nations, vol. 4 (Germany, Austria-Hungary, Netherlands, Scandinavian Nations, Japan, China) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 4 A History of Banking in all the Leading Nations, (Germany, Austria-Hungary, Netherlands, Scandinavian Nations, Japan, China).
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SURVEY OF BANKING SINCE 1850.
WE have already mentioned that, until 1846, there was only one bank in Denmark, namely, the National Bank; though this had founded two provincial branches in 1837 and 1844. As in relation to the vigorously growing commercial activity, the Bank had acquired ample available means, and yet operated rather sluggishly, on the whole, and so rendered but moderate service to trade; a few private banks were started, from 1846 forward, both in Copenhagen and in the provinces. The first of these private banks was the Discount Bank of Fyen (Fionia, or Funen), founded in 1846; and from 1854 to 1857, thirteen other provincial banks were established. Furthermore, two private banks were opened in Copenhagen in 1857—the Private Bank, and the Private Loan Bank of Copenhagen. The former had an original capital stock of 4,000,000 crowns; the latter, a capital of 1,000,000 crowns. Shortly after these banks were started, the great commercial crisis of 1857 became felt, even in Denmark. The private banks of Copenhagen almost wholly escaped disaster, but many provincial banks incurred heavy losses, from which they recovered only after several years. However, the effects of the crisis were so palpable in the period 1858-69, that people were afraid to engage in fresh operations of banking; and in those years only two new banks were started—the Industrial Bank, in Copenhagen (1862), and a provincial bank (1866). The Industrial Bank was designed to aid mechanics and manufacturers, and, in general, to promote industry. At first, this bank had a very inconsiderable capital stock; but in 1871 the stock was increased to 1,000,000 crowns.
Banking in Denmark took a great stride forward after 1870. An active market in the domain of trade and industry fostered fresh zeal for economic enterprises; occupation was provided for new financial organizations, and the old ones enlarged their business. Early in the seventies, four new banks were started in Copenhagen, namely: the Danish Labor Bank, the Loan Bank of 1873, the Farmers’ Bank, and the Commercial Bank. The two first named were of modest scope; and the Danish Labor Bank, as its name imported, had a special object and a limited province. The Loan Bank (Forskudsbanken) was at no time an extensive concern as such; and, in 1880, it was reconstructed as a loan and savings company for employees. But the Farmers’ and the Commercial Banks soon covered a wide business territory, and they still act a prominent part in the Danish mercantile world, both within and beyond the metropolis. The Farmers’ Bank was founded in 1871, though not opened for business till January, 1872. It operated as a mortgage and exchange bank. Its capital stock was 12,000,000 crowns, fully paid in by 1874. Its transactions, as above indicated, were, on the one hand, to develop agricultural credit by granting redeemable and unredeemable loans on real estate, and to transact a general banking business. As a mortgage bank, it issued mortgage bonds, the amount of which was not to exceed twelve times the capital stock. The Farmers’ Bank introduced the Scotch system of loans on personal security, given for one year at a time. This system, however, though adopted by nearly all the Danish banks, has never attained the same importance and complete application in Denmark as in Scotland and Sweden. A savings-bank was instituted as a separate department of the Farmers’ Bank, and has gradually grown into considerable magnitude. The Commercial Bank was organized in 1873, with an original capital stock of 16,000,000 crowns; but only 12,000,000 crowns were paid in. Both the Farmers’ and the Commercial Banks have started provincial branches.
The Private Bank, mentioned earlier, was founded in 1857, for the purpose of relieving the immediate need of a credit instrument that should be both expeditious and readily available. The National Bank, partly by reason of its peculiar constitution and fundamental object, and partly because of its rather unfortunate administration, was much hindered in its transactions. So it very soon became evident that the Private Bank had been opened at a most opportune time; for its deposits, within half a year from its inauguration, had reached the same amount as the capital stock. Some few years later, the deposits amounted to six times the capital stock, which was then doubled, in 1864. After a further increase, it amounted in 1871 to 12,000,000 crowns. In consequence of the good returns realized by the Bank, the new shares brought 140, or forty per cent. above par; and when the forty per cent. was added to the surplus fund, the latter rose to 2,000,000 crowns; which considerable sum was lost, however, in the following years. In the early seventies, the Bank engaged in various industrial undertakings, with high profits at the start (eleven per cent. in 1871); but certain railway constructions turned out so disastrously that the whole surplus fund, in 1874, was needed to retrieve the losses.
BANKS OUTSIDE COPENHAGEN.
During these years, not a few banks were founded outside Copenhagen. In addition to eleven branches of the Farmers’ and the Commercial Banks in provincial towns, no less than twenty-two independent provincial banks were established from 1870 to 1876. This prosperous period was followed by a very adverse experience for Danish banks midway in the same decade. The Industrial Bank suffered heavily, and was obliged, in 1877, to divert half its capital stock to cover the losses. At the same time, two provincial banks failed; and these events reacted so unfavorably on banking operations, that there was a decided lull in the business of starting new banks. Nevertheless, the National Bank and the Commercial Bank organized a few provincial branches. The decade beginning with 1880 witnessed greater activity in Danish banking. Five provincial banks were founded; and the Farmers’ Bank, in Copenhagen, doubled its capital stock (to 24,000,000 crowns, the present amount). Since 1890, some new provincial banks have been opened and some of the old ones have either ceased operating or else joined forces with new banks. To give the exact number of provincial banks in Denmark at present would be difficult, for the reason that many of the Danish financial organizations do both banking and savings-bank business, and it is not always easy to decide under which head to class them. At all events, it would not be correct to put the number so high as fifty. Two new metropolitan banks were started in 1895—the Exchange and Discount Bank of Copenhagen, with a capital stock of 2,000,000 crowns, and the Retail Traders’ Bank, with a capital of 250,000 crowns.
BANKING ACTIVITY DURING THE LATTER HALF OF THE CENTURY.
We have already shown that the National Bank is the only bank of issue in Denmark. The emission of bank notes has therefore at all times constituted that phase of the Bank’s utility which most invites public attention. Let us now consider a few principal features of the National Bank’s transactions, in their chronological order. It will be apparent from what has been said of the regulations touching the redemption of bank notes, that the proportion of unprotected notes grows less as the issue of notes increases. In the long course of time, this unprotected portion had best be measured per capita. We find it as follows, from 1849 to 1881:
The final increase is due to an exceptional year, 1877; the subsequent issue per individual constantly decreases. On the other hand, the aggregate issue of bank notes has gradually increased considerably. The legal maximum limit of 24,000,000 rix-dollars was repealed in 1859; though, as a matter of fact, it was observed until 1864, and even for several years from this date, it rarely exceeded 24,000,000 rix-dollars. Not till after 1868 was the issue of notes allowed to fluctuate exactly in accordance with the demands of trade; and all in all, it has had an upward course. In 1872, the minimum issue was 54,000,000 crowns; the maximum, 67,000,000 crowns. Thenceforward, the minimum was seldom below 60,000,000 crowns. The average issue, which pretty nearly reflects the annual demand for currency, was as follows, from 1867 to 1894:
The most significant portion of the foregoing increase belongs to the period 1872-76, as in those years there was also a general decline in the value of the currency. Making due allowance for fluctuations in current rates of value, we find that the increasing issue of bank notes has been fairly regular, and in proportion to two motive forces, growth of population and the expansion of trade. We subjoin a table of the amount of notes issued per capita:
In addition to this upward movement from year to year, we notice a pretty regular variation, from month to month, in any separate year. The monthly maximum occurs about the two pay terms, or in December and June; the amounts then fall, and the monthly minimum generally appears in February and August. We may illustrate by the following table:
The main reason for this monthly variation is that by far the heaviest sums of money are turned over in June and December; while it is also to be considered that the payment of wages and house-rent likewise occurs at regular terms, which somewhat precede the general pay terms. As these periodic increases in the circulation of bank notes are based on a legitimate demand for currency, it is obviously superfluous to increase the coin reserve in the same ratio. But the Bank’s charter is explicit on this very point; and so, at every pay term, the Bank is obliged to procure a considerable sum of coin or bullion, which is again sent away when the term has expired.
Let us next consider the National Bank’s transactions in borrowing or loans received. At the middle of the century, this part of its business was quite insignificant, and it was conducted from an irrational point of view. A fee was charged for keeping bank accounts; but in 1860 the National Bank began to open current accounts free to all parties, and not alone to the mercantile class. That the bank accounts rapidly grew to considerable volume will appear from the following survey of their average status at the annual settlements:
It will also be seen that the accounts greatly vary in different years. In the same way the total yearly transactions through bank accounts underwent large fluctuations. In 1860-61 the total was 79,000,000 crowns; about 325,000,000 crowns in 1870-71, some 600,000,000 crowns in 1880-81, and 650,000,000 crowns in 1890-91.
The Bank’s operations in granting loans have been subject to wide variations, both as to the extent and as to the nature of the loans. We subjoin a comparative statement:
Here we should bear in mind, however, that the amount held by the Bank in stocks and bonds, as also the amount of its accounts credit in foreign countries, has risen considerably. These items were as follows for the designated years:
As to any deductions that may be drawn from the preceding statistics, we shall simply remark that the National Bank, in all its operations, has been very decidedly affected by the continual opening of private banks in Copenhagen and the provinces. A true notion of financial affairs in Denmark may be best obtained by reviewing the activity of all the banks combined; and as a survey of this kind is greatly hindered by the mixed methods formerly used by the provincial banks in balancing their accounts, we shall still principally confine ourselves to the banks of Copenhagen; the more because the latter, by virtue of their magnitude, are absolutely foremost in importance.
In connection with the banks of Copenhagen, we should mention two large savings-banks, which partly engage in a general banking business; namely, the Savings-Bank of Copenhagen (Kjöbenhavns Sparekasse) and the Beehive (Bikuben). Their deposits, from 1870 to 1894, reached the following amounts:
We next present a statement of loans and other business for the banks of Copenhagen.
Perhaps a better and more perspicuous idea of the nature of this banking activity may be gained by combining our data, as follows (grouping columns three, four, five, and six under the single head of loans; and similarly combining columns seven and eight). The sums are stated in millions of crowns.
We now add a few remarks on discounts, as these are fixed by the leading Danish bank (the National Bank) for the best bills. In earlier times, the Bank deemed it a matter of the highest importance to keep the rate of discount as steady as possible, so that the course of business should not be disturbed by vacillations in the money market. Not until the beginning of the fifties was the truly rational plan adopted of allowing discounts to vary according to the law of supply and demand. Yet, prior to 1860, there were not many changes in the prevailing rate, which was generally four or five per cent.; but from 1861 to 1870 it was altered forty-six times, and ranged between three and seven per cent. From 1871 to 1880, it was altered forty-eight times, with an upward limit of six and a half per cent. Conditions were steadier from 1881 to 1890, and the rate was changed only twenty-three times, with a maximum of five per cent. Some brisk changes occurred in the early nineties, but the maximum rate did not exceed five per cent. These various alterations may be more fully illustrated by the following table:
To repeat once for all, there is only one bank of issue in Denmark; namely, the National Bank. By the grant of 1818, this was vested with the monopoly of issuing bank notes for a term of ninety years; but apart from this grant, there is no special Bank Act in Denmark, nor any particular legislation concerning bank shares. Every private individual and every jointstock association is, therefore, free to found banks; except that no such banks are allowed to issue notes. The legal status of Danish banks is thus perfectly simple and unequivocal; since outside the Bank charter of 1818, the principal features of which we have above sketched, there is no general definition of their status whatever.
BANKING IN SWEDEN.
STATE AND PRIVATE BANKS.
SWEDISH banking has had a somewhat peculiar development, differing in several respects from financial conditions in Denmark and Norway. The Swedish system of issuing banks calls for special attention; and in the following sketch we shall dwell particularly on that topic. Sweden was the first country to open a bank of issue. In 1656, John Palmstruch submitted a petition to the Government for authority to organize a loan and credit bank. The Government, which had itself desired to start a bank, but without success, readily granted the petition, conveying to Palmstruch and the Merchants’ Guild, whose chief he was, a monopoly for thirty years. The Bank’s charter contained the following principal regulations:
REGULATIONS OF THE FIRST BANK OF ISSUE.
Loans should be granted only against security; and whether the guaranty were mortgaged property or pledges in hand, the loans should not exceed two-thirds the value of the mortgage or pledge. Loans might not be granted for a longer term than a year and six weeks; and if not paid back within that time, both principal and interest, the mortgage or pledge was to be sold, and any surplus should be paid to the borrower. According to the extent of the loan, interest varied from six to somewhat over ten per cent. a year. Whilst it was intended that loans should be paid before the lapse of the prescribed term (a year and six weeks), yet the Bank was not allowed to realize on the security of lapsed loans, so long as the borrowers duly paid their interest. There were detailed provisions respecting the amount of deposits and charges for transportation, which was not gratuitous. By the original charter, profits should belong to the Bank alone; but subsequent ordinances ruled that the net proceeds should be shared with the Crown, the town of Stockholm, and the Bank, in such proportions that the Bank received only one-fourth of the total net gain. The Government having through these and other dispositions acquired an interest in the Bank, there was appointed a superior inspector, named by the King, for the office of supervising the Bank’s directors and making sure that they heeded and executed the royal patent in its practical administration.
DIFFICULTIES OF THE BANK; RELIEF SOUGHT IN NOTE ISSUES.
Though the opening of the Bank had been hailed with joy by both Government and people, and though it must be said that most of the original regulations for the conduct of its affairs were exceedingly happy and adequate, only a few years passed before it began to lose ground. A whole succession of causes contributed to this deterioration, but we shall enumerate merely the main ones. It has been a fruitless task to ascertain the extent of the original capital stock; though some suppose that Palmstruch and his associates put up no great amount to begin with, and that the entire business may have been carried on almost exclusively with outside means. When we remember that borrowers were authorized to demand that their security should not be realized so long as their interest was duly paid, we shall easily understand that the Bank was placed in a difficult position for procuring ready capital. Then came the very serious time when the value of the standard coin, which was copper, appreciated year by year, with the result that coin flowed out of the Bank faster than the Government could send mint copper in. So, in 1661, the Bank began to issue so-called notes of credit, a form of certificates of deposit. These notes were based on copper, but since the Bank had no coin reserve of its own, the redemption fund really consisted of outside resources, or other people’s deposits. The Bank’s charter contained no warrant for the issue of such notes, and we may therefore assume that the Government tacitly consented, by way of rewarding the service which the Bank had rendered it by granting State loans without requiring the legal security. During the war with Denmark and Poland, there was a grave scarceness of money in the public treasury, so that we need not be surprised if the Government was tempted to issue its own paper. Such expedients are not unknown in the history of other countries.
THE NOTES BECOME UNREDEEMABLE.
The Bank had then become a bank of issue; and its intimate relations with the Government were soon destined to draw it into the perils which at all times have threatened such institutions. Before long, the amount of outstanding notes exceeded the available funds, and when this fact became generally known, a panic ensued, which had the immediate effect of depreciating the market value of the notes. A committee of inquiry reached no conclusion which occasioned any positive change in the situation; and in 1664 the Bank was obliged to declare the notes unredeemable. Of course this disaster was highly inconvenient to the Government, which had been no indirect agent in bringing it on, and which sorely needed the Bank’s financial support. Sundry expedients were employed to quiet public alarm and raise the depreciated notes. Thus it was promised that the notes should be redeemed, if only the Bank’s debtors would pay back their loans; and again and again orders were given that the notes must be received at their full legal value, both between man and man and in public transactions. At the same time, silver currency was introduced, and a definite ratio fixed between silver and the old copper coins. None of these measures availed, however, and popular confidence was still further weakened by accusations lodged against Palmstruch for various irregularities in his management of the Bank’s affairs. He was especially accused of having combined the resources of the two banking departments of loans and bills of exchange, in violation of a prohibition expressly contained in the charter. These charges were followed by a sentence of condemnation.
CREATION OF THE ROYAL SWEDISH BANK—1668.
Here ceased the activity of the first bank of issue. Its business was transferred to the State bank, founded in 1668, the Rigets Stænders Bank, or Bank of the States of the Kingdom. We shall call this, more briefly, the Royal Swedish Bank; or simply the Royal Bank.
The new bank, in its general methods of business, pretty closely followed the lines marked out by Palmstruch’s Bank, and was likewise divided into the two departments of loans and bills of exchange. In the exchange department, anyone who had deposited money might draw on the Bank to the like amount, either personally or by authorized cheques. For the latter accommodation, the Bank charged an extra fee. The loan department received deposits on interest, and loaned them out for terms of six months, or, perchance, a full year, against either pledges in hand or mortgaged security. Not until much later (in 1803) did the Bank begin to grant loans on personal security.
Originally, the Royal Bank was not a bank of issue. With the experience of the Palmstruch credit notes still in view, people were afraid to risk a new system of bank notes. Yet, the possible advantage of such facilities had become obvious, and in 1701 the States Deputies resolved that bank notes might be issued, on condition of precautionary measures against the event of a misuse of the privilege. These were the so-called “transport,” or transferable, notes, which were to constitute a separate section of the department of bills. Everyone should be free to deposit, in this section of the Bank, amounts not less than one hundred rix-dollars in silver, and receive a corresponding certificate, to be current only in individual transactions. At the start, however, these transferable notes were not circulated as general bank notes, even in private business, as the law expressly required that they should be passed only by written indorsement.
We find in the “transfer” notes, as well as in the credit notes issued by Palmstruch’s Bank, the rudiments of Swedish bank notes; but, manifestly, both the earlier forms were neither more nor less than certificates of deposit. The transfer notes first became real bank notes when the Bank ceased to hold their cash equivalent; and even then they continued for a long time to be strictly regarded as certificates of deposit. The full cash protection of transfer notes soon fell short. The war at the beginning of the eighteenth century brought the State finances into sorriest extremity, and money was taken from the Bank for Government needs. This operation was secret, and no real security was furnished for the borrowed amount. The current coin of Sweden at the beginning of the eighteenth century was still copper, a very bulky sort of currency; so that there was all the greater need for the Bank’s transfer notes. There being, moreover, a widespread confidence in the good management of the Bank, we are not surprised that the notes were exchanged at a premium approaching three per cent. In view of all these circumstances, there was no opposition to the Government’s resolve that after 1726 the notes should become legal tender.
LOANS TO THE GOVERNMENT LEAD TO UNCOVERED ISSUES OF NOTES—DISASTROUS DEPRECIATION OF PAPER MONEY.
From this period, loans to the Government grew so extensive that the Bank perceived the necessity of issuing a considerable amount of unprotected notes; and as it had never owned any capital stock, and yet was constantly increasing its business in private loans, the time must surely come when the redemption of notes would have to stop. Authority for this step was obtained through the King’s patent, in 1745; in which connection the Bank was also permitted to issue very small notes. Originally, the lowest denomination of transfer notes was 100 rix-dollars, in silver; but in 1726 the minimum was lowered to 50 rix-dollars in copper; and in 1745 it was proposed to issue notes of 6 rix-dollars in copper, to be legal tender in private transactions. At first, the unredeemableness of the notes did not materially affect their market rate; and this in spite of the fact that the Bank’s debt, at the close of 1745, was thirteen times the amount of its coin reserve. But in the following years, the issue of notes kept steadily increasing, and from the middle of the century their value rapidly declined. In 1765, 208⅓ marks in paper were worth only 100 marks in copper. For the moment, indeed, it seemed as though the Bank was to be spared the threatening fate of bankruptcy, as the powerful Government, which took charge of the situation in 1765, immediately discontinued granting loans, and used every device to call in the large amount of outstanding notes. There was even a temporary improvement in their market value; but in the long run, it was impossible to stay the catastrophe. There were new financial demands on the Bank, nor was it feasible to refuse private loans forever. The consequences could be no longer averted. First, there occurred a further depreciation in the notes; and then, for once, King and Estates were unanimous in a matter of legislation, for the sake of definitely regulating the currency. Their plan was called the “realization scheme”; and, in fact, it amounted to bankruptcy. The decree was published in 1776 that only bank notes based on silver should be issued thenceforth, and that the old copper notes should be redeemed by the new transfer notes, at the rate of fifty per cent. of their nominal value. This was the Royal Swedish Bank’s first failure; but we shall see that it was not the last, if we follow history sixty years further.
AFTER THE “REALIZATION SCHEME.”
The notes of the Royal Bank were “solvent” until 1810; but in the next succeeding years the process of redemption was so variously hindered that we may virtually account it suspended. In close relation to this fact, we may consider the new kind of circulating medium which was put forth by the Royal Funding Office,* as organized in 1777. We refer to the Royal bonded notes, or Government bonds, which at first bore interest. The interest, however, soon ceased to be paid, and the Royal bonds are simply to be regarded as paper currency. At first they stood quite high in comparison with the bank notes; but, by 1803, the Bank was ordered to redeem the bonds at two-thirds of their nominal value. This order seriously taxed the Bank’s meagre coin reserve; and as at the same time the Exchequer required no small amount of ready money to defray costs of war, the Bank found itself unable, from 1810, to redeem notes in silver. This insolvency was not formally announced, however, until 1818.
REORGANIZATION OF THE CURRENCY—CAPITALIZATION OF THE BANK.
There was, nevertheless, an improvement in the Bank’s affairs from this time forward. The silver reserve was increased from year to year, so that by 1830 conditions were favorable for a new partial resumption of specie payments and a thorough reorganization of the national currency. The plan was undoubtedly indicative of another failure; but some such compromise was essential to the success of any practical reform. This partial redemption consisted in retiring the notes at 37.5 per cent. of their nominal value. Since 1834, however, the notes of the Royal Swedish Bank have constantly been redeemable, and the means thereof have been supplied in steadily increasing proportions by the Bank’s proper coin reserve. As elsewhere stated, the Royal Bank had not originally owned any capital stock; such an acquisition came about by slow degrees. According to the original charter, the annual surplus should be divided between the State budget and the Bank itself. In 1830, the capital stock was fixed at 25,000,000 crowns, of which 5,000,000 should constitute a surplus fund. The appointed capital, however, was not actually realized until 1864; the amount available after the resumption of specie payments in 1834 being only 7,500,000 crowns. In 1893, as a result of repeated enlargements, the capital stock reached 50,000,000 crowns, or double the sum prescribed in 1834. The surplus fund has remained fixed at 5,000,000 crowns.
With reference to the redemption of bank notes, it was ordained in 1830 that the Bank should hold a coin reserve to two-thirds the amount of the notes in circulation. It was not possible to comply with this regulation at once, and as late as 1843, there were outstanding notes to the amount of 35,000,000 crowns, while their protection in coin was only about 12,000,000 crowns. Influenced by the example of England, the authorities now adopted new and more flexible rules on this point; the issue of bank notes should be limited to 20,000,000 Bank rix-dollars (about 30,000,000 crowns) in excess of the coin reserve, and the latter should be at least 10,000,000 crowns. The other protection of the notes might include two months’ bills on Hamburg, and three months’ bills on other foreign banks. Moreover, the Bank was allowed to contract a foreign debt to the extent of 12,000,000 crowns, guaranteed by the State. These regulations, indeed, were not always satisfactory; and the comparison with circumstances in England was far from being fundamentally true. In the first place, the Swedish Bank had not observed the complete separation, which was prescribed for the Bank of England, between the department of bank notes and ordinary bank business. It was, therefore, continually possible for the Swedish Bank to transgress the statutory limits of issue; and, in fact, this thing did happen in 1873, though not in any considerable measure, and only for a single day. Still, the incident attests the danger of such mixed arrangements.
VICISSITUDES OF THE BANK CIRCULATION.
Another defect in the regulations of 1845 was the extraordinary latitude given to the term “coin reserve.” That is to say, the Bank might include in its note protection foreign bills of exchange—a liberty which gave rise to a downright evasion of the legal requirements during the commercial crisis of 1857. Not to dwell on the matter at great length, we may summarize it as follows: From June, 1856, till June, 1857, the coin reserve had decreased by forty per cent., or 18,000,000 crowns (the decrease from December, 1856, to June, 1857, being from 52,000,000 crowns to 25,000,000 crowns); and, accordingly, the Bank felt obliged to restrict its operations in discounts and loans. In order, at the same time, to swell its coin reserve and thereby increase the issue of bank notes, it appears that an association of Stockholm merchants actually drew bills of exchange on Swedish merchants in Hamburg; and that the Bank discounted these bills and reckoned them in with the legal coin reserve.
Notwithstanding such manifest irregularities, the statutes long remained unchanged, and the foregoing ordinance respecting the protection of bank notes is still to be found in the Bank Act of 1871. The Act of 1872, however, contains important modifications, to the effect that the coin reserve shall include all the Royal Bank’s gold and silver coin, both Swedish and foreign, as well as gold and silver bullion. Upon the introduction of a gold standard in 1873, there was added a clause directing that the newer silver coin should be estimated at nine-tenths of its nominal value. Furthermore, it was provided that not only gold and silver deposited abroad, but also other funds of the Bank which were credited with foreign banks and commercial houses, might be reckoned in with the coin reserve. The latter provision was again qualified, after 1887, in the sense that the Bank’s foreign credit, apart from gold and silver, might be included in the coin reserve only in so far as it was entered in current accounts.
On another side, it may be remarked that the term “amount of notes” was also construed quite freely, being made to include both bank notes actually in circulation and other matured liabilities, such as moneys payable on demand and the amount of remittances due by post. In regard to the latter item, it was especially prescribed that sums thus due should in no case whatsoever be used for discounts, loans, or credit business. The provisions just mentioned were in force till 1887, when the term “amount of notes” again became restricted to bank notes actually in circulation.
From 1880, the sum of unprotected notes was raised to 35,000,000 crowns, and at the same time the minimum limit of the coin reserve was fixed at 15,000,000 crowns. In 1887, the amount of uncovered notes was further increased to 45,000,000 crowns, with the proviso that that portion of the coin reserve which consisted of gold coin or bullion, together with Scandinavian silver coin, should constitute at least 18,000,000 crowns. The absolute minimum limit of the coin reserve is 15,000,000 crowns, but when the amount of unprotected notes exceeds 35,000,000 crowns, the coin reserve shall be increased by at least thirty per cent. of the given excess. For instance, when the amount of uncovered notes reaches 50,000,000 crowns, the coin reserve shall be raised to at least 20,000,000 crowns. As a rule, the Bank seldom utilizes the full rights of issue, according to the status of its coin reserve at any particular time. The smallest legal denomination of Swedish bank notes is at present five crowns.
ADMINISTRATION OF THE ROYAL BANK.
The Royal Swedish Bank, as already mentioned, is a State bank, though not directly administered by the Government, but by officers appointed by the Diet. The latter body annually chooses a board of commissioners, the so-called “Bank Committee,” which consists of eight members from each legislative chamber. This committee then exercises a general supervision over the administration of the Bank, and submits to the Diet an annual proposal in regard to the distribution of the surplus fund. The Diet further appoints, every year, seven so-called “bank attorneys,” who choose two of their own number as “deputies,” and these deputies become the actual directors, or executive officers, of the Swedish Bank. One of them especially manages foreign bills of exchange and the other attends to business within the kingdom. Besides the pair of deputies, at least two of the Bank attorneys shall be daily in touch with the Bank’s transactions in discounts and loans; also examining new applications for credit. To this end, the attorneys shall meet once a week and consider measures pertaining to the Bank’s business in general. The Government thus has no influence upon the conduct of the Bank, nor does it even inspect the Bank’s accounts, which likewise belong to the province of the officers appointed by the Diet. In sundry Swedish provincial towns, the Royal Bank has branch houses, the present number of which is twelve.
Note.—The terms “Government” and “Diet” are used as though the latter had no close connection with the former.
We shall next speak of Swedish private banks, which may be divided into three principal classes, namely: the now abolished provincial banks, which were private joint-stock banks, without the right of issuing notes; the “detached” or private banks proper, which are authorized to issue notes, and the so-called joint-stock banks. The provincial banks were founded about the middle of this century, to satisfy the wants of provincial towns for local facilities of banking. At that time, public sentiment was so largely in favor of a monopoly for the issue of bank notes, to be vested in the Royal Bank alone, that these provincial banks were not empowered to issue notes directly, though they might issue a strictly limited amount of money orders on the Royal Bank, and these orders then circulated just the same as the regular bank notes. Two such provincial banks were opened in 1852; and in the decade following, their number was increased to twenty-two. The monopoly plan of issue was disallowed by the Bank Act of 1864; howbeit, from 1875 the provincial banks altogether vanished from the business world.
PRIVATE BANKS OF ISSUE.
The right of opening private banks of issue had been granted as far back as 1824, and the first so-called “detached” bank was founded in 1831; though not until after the royal proclamation of 1846 was the status of the private banks definitely determined. As indicated above, people were generally disposed to reserve the rights of issue in behalf of the centralized Royal Bank; but when the centralizing principle was later abandoned, many of the provincial banks became reorganized as “detached,” or private, banks, and at the same time, new private banks were started. There are no less than twenty-six banks of this class in Sweden at present. The existing regulations concerning private banks of issue rest upon the ordinances or letters patent of 1864 and 1874. We may specify the following provisions:
(a) The Government grants a charter for only ten years at a time, but lapsed charters may be renewed.
(b) The founders of such a bank must be Swedish citizens, and at least thirty in number. They must assume unlimited liability for all the bank’s obligations. In addition to the shareholders with unlimited liability, limited shareholders may be admitted, but only for subscriptions up to one-half the amount subscribed by shareholders with unlimited liability. Consent of the General Assembly is required before unlimited liability shares may be transferred.
(c) The capital stock shall be at least 1,000,000 crowns, to be fully paid in within one year from the opening of the bank. At least ten per cent. of the capital stock must be paid in before the bank is opened, and the remaining ninety per cent. shall be fully secured. Before notes may be issued, sixty per cent. of the capital stock shall be deposited, in the form of sound securities, with the authorities.
There are the following regulations touching the redemption of notes:
(1) The aforesaid sixty per cent. of the capital stock constitutes the so-called “capital stock mortgage,” or hypothecated shares. One half of this amount shall consist of readily available, interest-bearing bonds, and the other half of first mortgage bonds on real estate, within one-half its appraised or insurance value.
(2) The total issue of notes shall at no time exceed the amount of hypothecated shares, plus the surplus fund and the bank’s claims to within fifty per cent. of the capital stock (but only in so far as the bank’s coin reserve in legal gold coin amounts to ten per cent. of the capital stock); plus all the bank’s gold coin on hand at the main office, exceeding ten per cent. of the capital stock; together with its foreign gold coin and bullion. The bank is obliged to redeem its notes in gold.
It will be seen that the principal redemption fund consists of the hypothecated shares, composed of first mortgage bonds and available public securities; whereas the gold redemption fund is mostly subsidiary, and very weak. Notwithstanding that the bank is obliged to redeem its notes in gold, there is no legal necessity for the maintenance of a gold reserve. The fact is, that the Swedish private banks are generally very well supplied with gold; and yet it must be acknowledged that there is a weak point in the system, liable to produce disastrous consequences in times of difficulty.
In the history of Swedish banking, our main interest attaches to the banks of issue, though there are not a few private banks without rights of issuing notes. These are the so-called “Joint-Stock Banks” and “Joint-Stock Credit Associations,” together with the popular co-operative societies, which are not organized on the principle of unlimited liability. There must also be mentioned the Mortgage Bank, founded by the State in 1861, for the purpose of supplying mortgage companies with credit, or means for loans on real estate. This bank negotiates large loans both at home and abroad; and the mortgage companies are obliged to procure their funds through its instrumentality.
To illustrate the extent of the working resources of the Swedish banks, and the volume of their business, we subjoin the following data:
BANKING IN NORWAY.
ORIGIN OF THE ROYAL BANK.
PRIMARILY, Norwegian banking started parallel to that of Denmark, since the oldest Norwegian bank was a department of the Danish Royal Bank, founded in 1813, and of which we have elsewhere given a full account. It is true that in 1760, and again in 1770, the question was mooted of establishing a bank for Norway alone; but the matter ended without positive results. In 1814, however, Norway was separated from Denmark, and one of the first projects of the new Government was to reorganize the Norwegian department of the Danish Royal Bank as an independent institution. The Constituent Assembly resolved in 1814 that the total Norwegian circulation (somewhat over 8,000,000 rix-dollars) of Royal Bank notes, together with such assignat notes as were outstanding, should be guaranteed as a public debt. These notes should be taken up by the Royal Norwegian Bank by exchange for new Norwegian Bank notes, at the rate of 375 rix-dollars to 100 silver dollars. Meanwhile, in order to meet the new Government’s heavy expenses, it became necessary to issue a large amount of new notes, and the consequence was a marked depreciation of the paper currency. One rix-dollar, instead of being equivalent to thirty-two Norwegian shillings in silver, had fallen to six shillings in silver.
After the whole situation with respect to the State’s debt had been subjected to a thorough investigation by the Storthing in 1816, it was resolved to undertake a conversion of the debt at the rate of twelve shillings in silver to every nominal rix-dollar. This plan was carried out by the law of 1819, which contained for its main provisions the following stipulations:
NORWAY BANK ACT OF 1819.
The law provided that a new bank should be organized, and the requisite means were to be procured partly through voluntary contributions and partly through compulsory assessments on property. Upon the inauguration of the new bank, the Royal Bank should cease to operate, and its unredeemed notes, amounting to 2,000,000 rix-dollars, should be withdrawn and liquidated by a like amount of new taxes. The remaining circulation of 23,000,000 rix-dollars should be redeemed with notes of the new bank at the rate of one rix-dollar to twelve shillings in silver and in the current small coin. Such cash resources as were needed at once should be furnished by new taxes on property and trade. As for the existing liabilities, it was provided that these should be modified, and the different obligations be adjusted according to the time they had to run. When the voluntary contributions were not forthcoming, the compulsory assessments had to be made up to a total of 2,000,000 specie dollars, the sum needed for starting the bank. The bank was opened under the name, “Bank of Norway,” and it was authorized to issue notes to twice the amount of its silver reserve. As it was obliged to effect the gradual redemption of the Royal Bank notes, it naturally acquired the latter’s rights in property attachments. [Compare “Banking in Denmark.”] By the earliest bank statutes it had been prescribed that from 1819 bank notes should be redeemable in silver; but that ordinance was suspended in 1818, and the notes consequently depreciated from par value in 1818, to the rate of 220 to 100 in 1822. Subject to passing fluctuations, the rate slowly rose again, till in 1841 it got back to par. The silver reserve was augmented year by year through receipts from attached proprietors; and in 1827 it was exceptionally increased through the creation of new shares amounting to 500,000 specie dollars. That the notes, nevertheless, appreciated only slowly was chiefly due to the strange policy of constantly keeping the circulation as large as the law allowed—that is, twice the extent of the silver reserve, without any regard to varying demands of the market.
NEW CONDITIONS OF REDEMPTION.
The law of 1842 ordained that the Bank should redeem its notes at par, and, at the same time, new regulations were adopted with reference to the terms of redemption. On the basis of the capital stock, which had been raised to 2,500,000 specie dollars (10,000,000 crowns), the Bank might issue notes to the amount of 6,250,000 specie dollars, though this provision was to be merely temporary, in that the Bank should continually buy in silver until the proportion of silver to notes had been brought up to the original status, namely, one to two. Furthermore, in certain various contingencies, the Bank might issue notes to one and a half times, twice, or only once the value of its redemption fund. These regulations have undergone sundry modifications in the course of time; but a detailed account of them would be lacking in general interest. We shall simply add that the present situation is such that, when the Bank has a coin reserve of at least 16,500,000 crowns, the third part of which consisting of claims on Copenhagen, Hamburg, London, and the Swedish Royal Bank, it may issue notes to the amount of nearly 35,000,000 crowns, leaving an uncovered circulation of some 18,500,000 crowns. Any circulation in excess of the legal limit must be fully covered in coin.
The Bank of Norway is governed somewhat like the Swedish Royal Bank. The Storthing, or representative body of the nation, elects all the Bank directors, and appoints a large part of the working force. The board of directors is composed of five members on limited terms of appointment. There is also an elective committee of fifteen; and all these higher officers, together with the directors of the twelve branch banks, serve for six years. The supervision of the Bank of Norway’s accounts devolves upon a board of auditors chosen by the Storthing.
PRIVATE NON-ISSUING BANKS.
Besides the Bank of Norway, which is the only bank of issue in the kingdom, there are private banks, non-issuing. The first of these was founded at Christiania in 1848, and there are now 35 private banks, for which there is no particular legislation. Most of them have but a small capital stock, and only seven show a capital exceeding 1,000,000 crowns. In 1852, the State opened a mortgage bank, whose province should be to furnish loans on landed security. The Mortgage Bank does no general banking business. Its capital stock amounts to 11,500,000 crowns. Some smaller mortgage banks have been started within comparatively recent times, all of which are organized as private joint-stock companies.
The resources and business magnitude of the Norwegian banks will appear from the following table:
In addition to banks proper, savings-banks play an important part in the financial operations of the three Scandinavian countries. They are generally small institutions, but very numerous; and, as a rule, their activity is not simply confined to savings-bank business. To a wide extent they serve as local banks. The benevolent feature, which characterized these banks during the first half of the century, has been only partly retained. In 1894, there were no less than 537 savings-banks in Denmark, and their aggregate resources amounted to 564,000,000 crowns. Of this sum, 93,600,000 crowns appertained to the Savings-Bank for Copenhagen and Suburbs, and 44,400,000 crowns to the Beehive Savings-Bank of Copenhagen. Thirty-three of the Danish savings-banks had available resources exceeding 3,000,000 crowns. In 1893, Sweden had 377 savings-banks, whose resources were 337,000,000 crowns. The number of savings-banks in Norway for 1894 was 367, and their aggregate deposits amounted to 217,000,000 crowns.
The author has made use of the undermentioned works:
V. Falbe Hansen and Will. Scharling, “Danmark’s Statistik,” III. Kjöbenhavn, 1878; and “Danmark i 1890,” Kjöbenhavn, 1891.
Will. Scharling, “Die Banken in den Skandinavischen Staaten” (Handwörterbùch der Staatswissenschaften, vol. ii).
Markus Rubin, 1807-14, Kjöbenhavn, 1892.
A. N. Kiaer, “Om Seddelbanker.” Kristiania, 1877.
J. Gamborg, “Seddelbanken.” Kristiania, 1877.
E. Hertzberg, “En Kritisk Fremstilling af Grùndsaetningerne for Seddelbankers Fudretning og Vioksomhed.” Kristiania, 1877.
C. M. Rosenberg, “Handbok i Bankväsendet.” Stockholm, 1878.
F. A. Leffler, “Die Schwedischen Zettelbanken.” Leipzig, 1879.
“Det Ekonomiska Samhällslifvet.” Stockholm, 1894.
Several treatises in “Nationalökonomisk Tidiskrift.”
Banking in Japan;
secretary and counsellor in the imperial ministry of finance, japan.
BANKING AND MONEY IN JAPAN.
THE BANKING SYSTEM.
[* ] Literally, “debt counter”; a different expression from Statskasse, or “Exchequer.”