The history of the growth and expansion of Scottish banking since 1826 is, as far as can be traced, as follows:—
Date.
Deposits.
Number of Offices.
1826
£
21,000,000
167 = 1
to every
13,170
inhabitants.
1841
27,000,000
380 = 1
"
6,600
"
1856
brace
63,000,000and capital
brace
585 = 1
"
5,230
"
1872
brace
92,000,000including allliabilitiesand capital
brace
790 = 1
"
4,250
"
1906
brace
135,042,000including allliabilitiesand capital
brace
1,180 = 1
"
3,790
"
Against every note issued in excess of the limit allowed by the acts of 1844-1845, gold has to be held at the offices of the issuing banks in Scotland and Ireland. The amount of the specie to be thus held was, as explained by Sir Robert Peel in his speech of the 25th of April 1845, to be ascertained by the average amount of the note-issue for four weeks preceding. The object of the holding of this amount of specie by the bank which issued the notes was designed by Sir Robert Peel to cause the circulating medium of the country, being partly of notes and partly of specie, to fluctuate in the same manner as if it had been a metallic circulation only. The specie held in Scotland and Ireland against the note-issue is not a special security for the note circulation, but is placed in the banks there for this purpose. The influence ascribed to the working of the note circulation in the earlier part of the 19th century accounts for this legislation, which, as Sir Robert Peel stated in his speech of the 6th of May 1844, was intended to "ensure the uniform equivalency of bank notes to coin." It is not applicable to the present position of the circulating medium of the United Kingdom, which now consists mainly of a circulation of cheques. This differs absolutely from what was contemplated by Sir Robert Peel; no attempt is or can be made to cause such a paper circulation to fluctuate as if it were one of specie only. One result of the limitation of the power of note-issue to the banks in Scotland which possessed that power in 1845 has been that no important bank has been established in that country since. Notes are so largely employed in ordinary business in Scotland that a bank which does not possess the power, practically cannot carry on business and supply the needs of its customers. This limitation in the number of the banks has, however, not been accompanied by any deficiency in the supply of banking accommodation to the people. There is a larger number of banking offices in proportion to the population in Scotland than in England and Wales or Ireland.
The large number of branches must, however, be a cause of great expense, and in several other respects it is obvious that a business carried on in such thinly peopled districts as are found in many parts of Scotland, must be conducted at a disadvantage in comparison with those banks which deal with more active centres of commerce. Although the profit derived from their large issue of notes may be thought to be considerable, yet, when we consider the many expenses incurred in conducting a large note circulation, the cost of printing, stamp duty, and the charges on importing gold from London when the circulation exceeds the limit fixed by the act of 1845. no small deductions must be made from the apparent profit to be derived from this head, if there is any direct profit at all.
On the other hand, the great number of branches possessed by the Scottish banks tends beyond doubt to their stability and prosperity. The network of banks on the surface of Scotland is as important to the development of the prosperity of the country as the network of the railways. It has caused a great economy of capital, as the universal practice of people, even of the most moderate means, is to lodge their money with the banks.
The early history of banking in Ireland was marked byIrish banks.legislation even less favourable to the formation of a steady and dependable system than in England, and in 1695 several of the principal merchants in Dublin met together for the purpose of forming a public bank for Ireland on the model of the Bank of England. For many years this proposal met with no favour. It was not till 1783 that the Bank of Ireland was established and commenced its business. The first governor was David La Touche, junior, and two other members of his family were amongst the first board of directors. The bank met with very great success, but the jealousy against rival establishments was extreme. By the act forming the Bank of Ireland it was enacted that no company or society exceeding six in number, except the Bank of Ireland, should borrow or take up money on their bills or notes payable on demand. In the year 1821 the act was so far modified as to permit the establishment of banking companies exceeding six in number at a distance of 50 m. from Dublin. In 1824, in consequence of the ambiguity of that act, an act had to be passed to explain it. It was not till 1845 that the restriction as to the 50-m. limit was withdrawn.
The establishment of any other bank but the Bank of Ireland was for a long time hindered by the legislation on the subject. Some of the restrictions were so extraordinary that it will be interesting to refer to three of the more important acts.
1741, 15 Geo. II.—Partnerships authorized for the purpose of trade and manufacture; but such partnerships were not to exceed nine in number, nor was the capital stock of such co-partnership to exceed, atanytime, the sum of £10,000.
1780-1781, 21 and 22 Geo. III.—"Anonymous Partnership Act,"—limited liability not to exceed £50,000, but "business of banking or discounters of money" expressly excluded.
1759, 33 Geo. II.—By this act a person while he continued a banker could not make a marriage settlement on a son or daughter, a grandson or granddaughter, so as to be good against his creditors, though for a valuable consideration, and though such creditors were not creditors at the time the grant was made. This act gave power to creditors over all conveyances by bankers affecting real estates; and all dispositions after the 10th of May 1760 by bankers of real or leasehold interest therein to or for children were made void as against creditors, though for valuable consideration and though not creditors at the time. No banker to issue notes or receipts bearing interest after the 10th of May 1760. Some of these enactments appear to be in force at the present day; suggestions have been made, though apparently unsuccessfully, for their repeal.
So extraordinary were the views of the common people that a banker in Dublin of the name of Beresford having made himself very unpopular, a "large assemblage of ignorant country people having previously collected a quantity of Beresford's notes, publicly burnt them, crying out with enthusiasm while the promises to pay on demand were consuming, 'What will he do now; his bank will surely break.'"
The number of banks which failed in Ireland in earlier times was extraordinary; thus Sir Robert Peel in his speech of the 9th of June 1845 on the Bank Act of that year, made a quotation "from the report of the committee of Irish exchanges, which sat in 1804. At that period there were fifty registered banks, but they all failed, and their failures, I know personally, led to the most fearful distress." Since the legislation of 1845, however, the business has been carried on with equally extraordinary steadiness and success, and at the present time is on a footing fully equal to that of any other part of the United Kingdom.
The earlier history of banking in Ireland pursued very closely the same process of development as in England. Circulation preceded and fed deposits. The credit which the banks obtainedby the ready acceptance of their notes brought customers to their counters, and thus the existing system, fortunate in excellent managers, was built up gradually and surely.
Alone in the three kingdoms, Ireland maintains the same limit of authorized circulation as that established by Peel's Act of 1845. Not one of the six banks which had the privilege of issue at that period has lost it since.
The names of the banks carrying on business in Ireland, the years when they were established and their position in 1906, are as follows:—
Capital of Irish Joint-Stock Banks in 1906
Name of Bank and Yearwhen established.
Capitalpaid-up.
Rate ofDividendper annum.
Bank of Ireland
1783
£2,769,230
11
Hibernian Bank*
1824
500,000
10
Provincial Bank
1825
540,000
20
Northern Banking Co.
1825
500,000
18½
Belfast Banking Co.
1827
500,000
36
National Bank
1835
1,500,000
8
Ulster Banking Co.
1836
500,000
18
Royal Bank*
1836
300,000
12
Munster Bank, Ltd.*
1864
200,000
8
* Thus marked are not banks of issue.
Banking, like every other business, has to pass through periodsBanking crisesof difficulty. The severity of these in the case of banking is intensified by the vast number of interests affected. These, on the one hand, are world-wide in their scope, on the other they touch every home in the country. The stringency of such a time in England has since the passing of the act of 1844 been greatly enhanced by a doubt being sometimes felt as to whether a relaxation of the act of 1844 would be allowed. In any case, some little time must elapse before the assent of the ministers of the crown to the request of the Bank of England can be known. Since 1844 there have been five periods of pressure,—during 1847, 1857, 1866, 1870 and 1890. Of these in three, 1847, 1857 and 1866, the difficulties reached panic.
The crisis of 1847 was brought on by the speculation in railway enterprise which had gone on since 1845. So little had the anxieties of the autumn been anticipated that the bank rate of discount was 3% on the 1st of January. It was raised to 3½% on the 14th and to 4% on the 21st. It became 5% on 8th April, 5½% on 5th August, 6% on 30th September and 8% on 25th October. This was the highest. It was lowered to 7% on 22nd November, on 2nd December to 6% and on 23rd December to 5%. An announcement was made on the 1st of October that no advances would be made on public securities. This was followed by general anxiety and alarm.
The reserve of the bank was rapidly reduced to a very low ebb.
Bank of England Reserve of Specie.
1847,
16th October
£3,070,000
"
23rd October
1,990,000
"
30th October
1,600,000
Meanwhile the anxiety and alarm prevailing were causing a general hoarding of coin and bank notes, and it really appeared not unlikely that the banking department of the Bank of England might be compelled to stop payment while there was more than £6,000,000 of specie in the issue department. The chancellor of the exchequer (Sir C. Wood, afterwards Lord Halifax) was urged by many deputations and remonstrances to relax the Bank Act, but he declined. At last, on the 22nd or 23rd of October, some of the leading city bankers had an interview with the prime minister (Lord John, afterwards Earl, Russell), and on their explaining the necessities of the position, the desired relaxation was given. The official letter (25th October) recommended "the directors of the Bank of England, in the present emergency, to enlarge the amount of their discounts and advances upon approved security." A high rate, 8%, was to be charged to keep these operations within reasonable limits; a bill of indemnity was promised if the arrangement led to a breach of the law. The extra profit derived was to be for the benefit of the public. The effect of the government letter in allaying the panic was complete.
The crisis of 1857 was the last occasion of an official inquiry. This is contained in theReport and Evidence of the Select Committee of the House of Commons on the Bank Acts(1857, 1858). The evidence given by Mr Sheffield Neave, the governor, and Mr Bonamy Dobree, deputy-governor of the bank in 1858, gives a vivid picture not only of what occurred, but of what might be expected to recur on such occasions. The wildest alarm prevailed, exchequer bills were scarcely saleable, and the bank itself sold £3,000,000 government securities at a considerable loss.
The extreme pressure was relaxed by the letter issued by the government on the 12th of November 1857, signed by Lord Palmerston, then premier, and Sir G. C. Lewis, which allowed a temporary relaxation of the Bank Act of 1844. The public alarm, however, was so great that it was not until the 21st of November that the severity of the pressure was in any way diminished. On the 20th of November the notes issued to the public on securities beyond the statutory limit (then £14,475,000) reached the sum of £928,000. By the next week the issue was almost down to the limit, and in the week following it was within the limit. On the 1st of January 1858 the bank rate was lowered to 8% and the anxiety gradually passed away. Had the treasury letter been issued earlier, the pressure might not have been so severe, and the governor of the bank expressed a strong opinion that, if it had been later, it would not have been sufficient. November 1857 was the only occasion when the limits of the Bank Act as to issue were actually passed.
During the crisis of May 1866 £4,000,000 left the bank on one day in notes and coin, and the reserve of the bank was reduced in the return of the 1st of June of that year to £415,000. The bank rate was raised to 10% and permission was given by the government to suspend the act. This, however, was not done. Tradition says that the bank asked the bankers, during the period of heaviest pressure of that terrible crisis—pressure more severe than anything that had taken place before or that has occurred since, to pay in every night the notes they had drawn out in the morning which were still in their tills at the close of the day, and that hence the legal limit was never exceeded. But it was not till the 6th of August that the rate was reduced to 8%.
The effect of the crisis of October 1890 was far less severe. This was due to the judgment and skill displayed by the governor (Mr Lidderdale) and the directors of the bank, who imported £3,000,000 in gold from Paris. The reserve in that year never dropped below £10,000,000, and before the end of November the anxiety had greatly passed away. "Caution prevailed, but not panic, and the distinction is a very clear one." (See arts. on "Crises,"Dictionary of Political Economy, vol. i.)
The most important requirement of banking in the United Kingdom is still the establishment of an efficient specie reserve. The reserve in the banking department of the Bank of England averaged:—
£8,500,000 in 1845.
£11,600,000 in 1875.
8,400,000 in 1855.
15,100,000 in 1885.
8,000,000 in 1865.
29,900,000 in 1895.
£23,500,000 in 1906.
This provides but a narrow basis for the whole businessThe "Reserve" question.requirements of the country. Though much larger than in several previous years, it cannot be regarded as adequate. The figures fluctuate more severely than these decennial averages show, and the progress has not been one of uniform increase. Thus the £15,100,000 in 1885 was followed by £12,700,000 in 1888. The £29,900,000 of 1895 was followed by £34,600,000 in 1896 and £21,200,000 in 1899.
Beyond, or side by side with, the reserve of the Bank of England there are the reserves held by the other banks. Part of these are held in the form of balances at the Bank of England, part in specie and bank notes in their own tills. The latter, hence, are not unlikely to be estimated twice over. The published figures on this point are meagre.
The expectations expressed by Sir Robert Peel in his speechon the bank charter and the currency of the 6th of May 1844 have not yet been fulfilled. "I rejoice," he said, "on public grounds, in the hope that the wisdom of parliament will at length devise measures which shall inspire just confidence in the medium of exchange, shall put a check on improvident speculations, and shall ensure the just reward of industry and the legitimate profit of commercial enterprise conducted with integrity and controlled by provident calculation."
The extreme measures which have been required since the act af 1844 point out for themselves the necessity for reform. Three times since the date of the Bank Act of 1844 it has been needful to give permission for the suspension of that act which forms the very foundation of the monetary system of Great Britain. This, whenever it has occurred, has exercised a very injurious effect on credit abroad, as well as on prosperity at home.
The British money-market, the clearing-house of the world, is, in consequence of the smallness of its reserve, exposed to greater fluctuations than that of any other country. These fluctuations may arise from the need of meeting the requirements of other countries for specie or those arising from domestic trade. The recorded excess of imports over exports, £147,000,000 in 1906, though the difference is eventually balanced by the "invisible" exports, gives foreign nations at times a power over the British money-market greater than has ever previously been the case. The current must always have a tendency to flow outwards; this is enhanced by the great increase in the number of foreign banks which have branches in England. The need of providing sufficient reserves to meet requirements thus occasioned is obvious.
As regards the banks in which British interests are concerned inBritish banking abroad.British colonies and other countries we can only speak briefly. It must not be overlooked that in the Dominion of Canada there are 29 banks, many of them large, managed much on the Scottish principle with capitals of nearly £19,000,000 and deposits of about £140,000,000. These banks have more than 1200 offices. In Australia and New Zealand there are 24 banks with capitals of nearly £18,000,000 and deposits of about £130,000,000. The number of offices is nearly 1700. There are, including the three Presidency banks, about 15 banks doing business mainly in India—in some cases connecting neighbouring countries and places like Bangkok, Hong-Kong and Zanzibar. These banks have capitals of more than £5,000,000 and deposits of fully £36,000,000 and over 210 offices. There are at least 8 banks in South and West Africa with capitals of nearly £5,000,000, deposits of nearly £50,000,000 and nearly 370 offices. There are 5 banks, including the Colonial Bank, in other British territories with capitals of about £1,000,000 and deposits of £3,300,000, and about 25 offices. There are thus, besides many private firms doing very considerable business, more than 80 joint-stock British banks working in the colonies with capitals amounting to £48,000,000, deposits £360,000,000 and offices 3505. Outside British territories there are 6 banks, principally in South America, with nearly £4,000,000 capital, £36,000,000 deposits and about 60 offices. There are 6 large banks doing business principally in the East with more than £6,700,000 capitals, £77,000,000 deposits and 106 offices: and 7 other banks, including Barings, with about £4,500,000 capitals and £22,000,000 deposits There are thus about 20 British banks doing business in foreign countries with capitals amounting to £15,200,000, deposits £135,000,000 and offices 173.
In this statement we have included only the more important banks, which collectively wield about £63,000,000 capital and more than £495,000,000 deposits—in all about £560,000,000 of resources operating at about 3700 offices situated in places as different from each other and as widely separated as California and Hong-Kong, Constantinople and New Zealand.
France.—In France the first bank of issue, originally called theBanque Générale, was established in 1716 by John Law, the author of theMississippi Schemeand theSystème. Law's bank, which had been converted into theBanque Royalein 1718, and its notes guaranteed by the king (Louis XV.), came to an end in 1721; an attempt at reconstruction was made in 1767, but the bank thus established was suppressed in 1793. Other banks, some issuing notes, then carried on operations with limited success, but these never attained any real power. There were many negotiations on the subject of the establishment of a bank in 1796. The financial difficulties of the times prevented any immediate result, but the advice of those engaged in this plan was of great assistance to Napoleon I., who, aided by his minister Mollien, founded in 1800 the Bank of France, which has remained from that time to the present by far the most powerful financial institution in the country. The objects for which it was established were to support the trade and industry of France and to supply the use of loanable capital at a moderate charge. These functions it has exercised ever since with great vigour and great judgment, extending itself through its branches and towns attached to branches over the whole country. At its establishment and for some time subsequently the operations of the bank did not extend over the whole of France. Departmental banks with the privilege of issue had been formed under a law adopted in 1803. At the close of 1847 there were nine of these banks existing in as many of the larger towns. In 1848, however, they were absorbed into the Bank of France, which has since possessed an exclusive privilege of issue, and in 1863 took over the Bank of Savoy after that province was united to France.
The Bank of France has successfully surmounted many political as well as financial troubles both during and since the times of Napoleon I. The overthrow of the government of Louis Philippe in 1848, the war with Germany in 1870, the many difficulties that followed when the Commune reigned in Paris in 1871, the payment of the war indemnity—not completed till 1873—were all happily overcome. Great pains, too, have been taken, especially of recent years, to render services to large and small businesses and to agricultural industry. In 1877 the offices of the Bank of France were 78 in number; in 1906 they were 447, including the towns "connected with the branches"—an arrangement which, without putting the bank to the expense of opening a branch, gives the place connected many of the advantages which a branch confers. The quantity of commercial paper discounted is very large. More than 20,000,000 bills were discounted in 1906, the total amount being £559,234,996. The advances on securities were in the same year £106,280,124. The rate of discount in Paris is as a rule lower and the number of alterations fewer than in London. From May 1900 to January 1906 there was no change, the rate remaining uniformly at 3%. Bills as low as 4s. 2d. are admitted to discount, including those below 8s.; about 232,000 of this class were discounted in 1906. Since the 27th of March 1890 loans of as small an amount as £10 are granted. In most cases three "names" must be furnished for each bill, or suitable guarantees or security given, but these necessary safeguards have not to be furnished in such a manner as to hamper applicants for loans unduly. In this manner the Bank of France is of great service to the industry of the country. It has never succeeded, however, in attracting deposits on anything like the scale of the Bank of England or the banks of the English-speaking peoples, but it held, as stated in the balance-sheet for the 23rd of December 1906, about £35,000,000 in deposits, of which £14,000,000 was on account of the treasury and £21,000,000 for individuals, and the amount held in this manner gradually increases. The report for 1904 says "each year the movement in these increases, and this economical and safe mode of effecting receipts and payments is more and more appreciated by the public." In one respect the Bank of France stands at a great advantage in connexion with this branch of its business. The average amount held in this manner for individuals during 1906 was about £23,000,000. As the accounts numbered 77,159 the average for each account was comparatively small. Accounts so subdivided give a great probability of permanence. The figures of the accounts for 1904 were as follows:—
11,178
current accounts, with power of discount.
4,576
simple current accounts.
26,709
current accounts, with advances.
24,106
accounts, deposits.
Total
66,569
accounts, against 59,182 at the end of 1903.
At the present time the Bank of France operates chiefly through its enormous note circulation (averaging in 1906 £186,300,000), by means of which most business transactions in France are carried on.
The limits of the circulation of the Bank of France and the dates when it has been extended are as follows:—
Dates
Millions ofFrancs
Converting theFranc as 25 = £1.
15th March 1848
350
£14,000,000
27th April, 2nd May 1848
452
18,000,000
2nd December 1849
525
21,000,000
12th August 1870
1800
32,000,000
14th August 1870
2400
96,000,000
29th December 1871
2800
112,000,000
15th July 1872
3200
128,000,000
30th January 1884
3500
140,000,000
25th January 1893
4000
160,000,000
17th December 1897
5000
200,000,000
In 1906
5800
232,000,000
Most business transactions in France are liquidated, not in cheques as in England, but in notes of the Bank of France. These, owing to their convenience, are preferred to specie. This is accumulated in the vaults of the Bank of France, which in 1906 held on average £115,000,000 gold and £42,000,000 silver. The gold held by the Bank of France is generally considerably larger in amount than that held by the Bank of England, which in the autumn of 1890 had to borrow £3,000,000 in gold from the Bank of France at the time of the Baring crisis. The large specie reserve of the bank has given stability to the trade of France, and has enabled the bank to manage its business without the numerous fluctuations in the rate of discount which are constantly occurring in England. It is true that the holding this very large amount of specie imposes a very heavy burden on the shoulders of the shareholders of the bank, but they do not complain. The advantage to business from the low rate of interest which has to be paid for the use of borrowed capital in France is a great advantage to the trade and industry of that country.
The mass of the reserve in France is so great that the movements of the precious metals, when they are the result only of natural causes, are allowed to go on without corresponding movements in the discount rate. But it must be remembered that this large reserve is held in part against a gigantic note issue, and also that the trade activity and enterprise of the French people are less intense than in either the United Kingdom or Germany; thus it is much easier for the Bank of France to maintain a steady rate of discount.
Besides the Bank of France, several great credit institutions carry on business in the country; as theBanque de Paris et des Pays-Bas(capital and reserve, £3,729,000; other liabilities, deposits, &c., £14,842,000), theBanque Française pour le Commerce et l'Industrie(£2,450,000; and £3,505,000), theCrédit Lyonnais(£14,000,000; and £82,570,000), theComptoir National d'Escompte de Paris(£6,772,000; and £47,593,000), theSociété Générale pour favoriser le développement du Commerce et de l'Industrie en France(£7,469,000; and £45,800,000), and theSociété Générale de Crédit Industriel et Commercial(£1,600,000; and £10,060,000).
There is also theCrédit Foncier de Francewith a very considerable capital, but the business done is so largely that of mortgages that it can hardly be included among banks, though it carries on in some measure the business of banking.
Besides the six important joint-stock banks mentioned above, there exists in France a large number of banks, principally in the provinces, carrying on a very considerable business. Little is known as to their deposits, but their business appears to be conducted with great prudence and discretion. One hundred and eighty-two of these firms were members of the French Country Bankers' Association in 1898. They carry on business in 66 out of the 86 departments into which France is divided. More than one of these banks has several offices—one possessing 18, including the head office. These branches are situated in the small towns in the vicinity. In this the business follows more the English method of small branches. The French Country Bankers' Association holds its meetings in Paris, where matters of interest to bankers are discussed. (SeeBankers' Magazine, July 1898.)
Germany.—Besides the Imperial Bank of Germany, the "Reichsbank," there are about 140 banks doing business in the states which form the German empire. These credit and industrial banks with their large resources have had an immense influence in bringing about the astonishing industrial development of their country. Five banks possess the right of uncovered note-issue; these are:—
The Imperial Bank of Germany
with right of issue
£23,641,450
The Bank of Saxony
" " "
838,500
The Bank of Bavaria
" " "
1,600,000
The Bank of Württemberg
" " "
500,000
The Bank of Baden
" " "
500,000
£27,079,950
At the Bank of Germany the coin and bullion held is sometimes larger than at the Bank of England. The statement of the specie in the weekly accounts includes silver. The amounts held in gold and silver are only separated once a year, when the balance-sheet is published. The figures of the balance-sheet for the 31st of December 1906 showed in round numbers £24,000,000 gold and £9,000,000 silver. As far as the capital is concerned the £18,000,000 of the Bank of England considerably exceeds the £9,000,000 of the Bank of France and the £12,200,000 of the Bank of Germany. The note circulation of both the other banks is considerably larger than that of the Bank of England, that of the Bank of France being £186,300,000, and of the Imperial Bank of Germany £69,000,000 in 1906.
The capitals and reserves of the German banks, including those of banks established to do business in other countries, as South America and the Far East, and of the Bank of Germany, are about £133,000,000, with further resources, including deposits, notes and mortgage bonds, amounting to fully £414,000,000. The amount of the capital compares very closely with that of the capitals of the banks of the United Kingdom. The deposits are increasing. The deposits, however, are not the whole of the resources of the German banks. The banks make use, besides, of their acceptances in a manner which is not practised by the banks of other countries, and the average note circulation of the Reichsbank, included in the statement given above, is between £60,000,000 and £70,000,000.
A large and apparently increasing proportion of the resources of the German banks is employed in industrial concerns, some of which are beyond the boundaries of the empire. The dangers of this practice have called forth many criticisms in Germany, among which may be quoted the remarks of Caesar Strauss and of Dr R. Koch, the president of the Reichsbank. Dr Koch especially points out the need of the development of powerful banks in Germany unconnected with speculative business of this kind. The object of employing their funds thus is the higher rate of interest to be obtained from these investments than from discounting bills or making loans at home. But such an employment of the resources of a bank is opposed to all regular rules of business and of banking tradition, which abstains from making fixed investments of any large part of the resources of a bank. On the other hand, Dr Koch observes that the risks of the one "reserve system" mentioned by Bagehot are not to be feared in Germany.[5]The recent movement in favour of concentration among the banks has been described by Dr E. Depitre and Dr Riesser, who give particulars of the business done by these banks, which does not correspond with banking as practised in the United Kingdom, being more of an industrial character.
There are also many private banking firms in Germany which do a considerable amount of business.
The Reichsbank, by far the most powerful banking institution in Germany, is managed by the bank directory appointed by the chancellor of the empire. The shareholders join in the management through a committee, of which each member must be qualified by holding not less than three shares. The government exercises complete powers of control through the chancellor of the empire. The influence of the Imperial Bank now permeates, by means of its branches, all the separate kingdoms of the empire—the uniformity of coinage introduced through the laws of 1871-1873 rendering this possible. The Imperial Bank assists business principally in two ways—first, through the clearing system (Giro-Verkehr), which it has greatly developed, and secondly, through the facilities given to business by its note circulation. The Imperial Bank also receives deposits, and cheques are drawn against these, but in Germany notes are principally used in payments for ordinary business.
Before the Reichsbank was established, Hamburg was the first, and for a long time the only, example of a clearing in Germany. This was taken up by the Reichsbank when it established its office in Hamburg in the time-honoured building which had belonged to the Hamburg Clearing House. Similar business had long been undertaken by the Bank of Prussia. This was absorbed and developed by the Reichsbank in 1876. Through the "clearing system" money can be remitted from any of the 443 places in which there is an office of the Reichsbank, to any of these places, without charge either to the sender or the receiver. It is sufficient that the person to whom the money is to be remitted should have an account at the bank. Any person owing him money in the remotest parts of the empire may go to the office of the bank which is most convenient to him and pay in the amount of his debt, which is credited on the following day at the office of the bank, without charge, to the account of his creditor wherever he may reside. The person who makes the payment need not have any account with the bank. The impetus given to business by this arrangement has been very considerable. It practically amounts to a money-order system without charge or risk of loss in transmission. From Hamburg and Bremen to the frontiers of Russia, from the shores of the Baltic to the frontiers of Switzerland, the whole of the empire of Germany has thus become for monetary purposes one country only. The amount of these transfers for the year 1906 exceeded £1,860,000,000.
The note circulation is also a powerful factor of the business of the Reichsbank. It is governed by the law of 1875 and the amending law of 1899, corresponding in some degree to Peel's act of 1844, which regulates the note circulation of the Bank of England. An uncovered limit, originally £12,500,000, increased to £14,811,450 by the lapse of the issues of other banks allowed to it, has been extended by these and by the act of the 5th of June 1902 to £23,641,450. Against the notes thus issued which are not represented by specie, treasury notes (Reichskassenscheine, the legal tender notes of theempire)[6]and notes of the issuing banks which are allowed to be reckoned as specie or discounted bills, must be held—maturing not later than three months after being taken—with, as a rule, three, but never less than two, good indorsements. There is also a provision that at least one-third of the notes in circulation must be covered by current German notes, money, notes of the imperial treasury, and gold in bullion or foreign coin reckoned at £69, 12s. per pound fine. The Reichsbank is bound by law to redeem its notes in current German money. It is stated that this may be gold coin or silver thalers, or bar-gold at the rate of 1392 marks (£69, 12s. reckoning marks as 20 = £1) the pound fine of gold. In practice, however, facilities have not always been given by the Reichsbank for the payment of its obligations in gold, though the importance of this is admitted. In the balance-sheet for 1906 the bills held amounted to £67,000,000, and the loans and advances to £14,200,000. The notes issued averaged for the year £69,000,000. The gold held amounted, 30th December 1906, to £24,069,000. If the condition of business requires that the notes in circulation should exceed the limits allowed by the law, the bank is permitted to do this on the payment of 5% on the surplus. In this respect the German act differs from the English act, which allows no such automatic statutory power of overpassing the limit of issue. Some good authorities consider that this arrangement is an advantage for the German bank, and the fact that it has been made use of annually since 1895 appears to show that it is needed by the business requirements of the country. Of late years the excess of issue of the Reichsbank has been annual and large, having been £25,267,000 on the 29th of September 1906 and £28,632,000 on the 31st of December of the same year. The amount of the duty paid on the excess issue in the year 1906 was £184,764, and the total amount paid thus from 1876 to 1906 was £839,052. The increase of the uncovered limit (untaxed limit of issue called in Germany the "note reserve") has not been sufficient to obviate the need for an excess of issue beyond the limit.
In accordance with a law passed in 1906 the Imperial Bank issues notes (Reichsbanknoten) of the value of 20 marks (£1), and 50 marks (£2, 10s.) in addition to the 5, 10, 100 and 1000 mark notes (5s., 10s., £5, £50) previously in circulation. Imperial paper currency of the value of 20 or 50 marks (£1 and £2, 10s.) had previously existed only in the form of treasury notes (Reichskassenscheine); these will in consequence be withdrawn from circulation.
The amendment of the banking law of Germany, passed in 1899, not only affects the position of the Reichsbank, but that of the four other note-issuing banks. The capital of the Reichsbank has been raised by the bill of that year to £9,000,000. The reserve fund has been raised out of surplus profits to £3,240,000. This exceeds the amount required by the act of 1899, which was £3,000,000. The amending act further diminishes the dividend receivable by the stockholders of the Reichsbank and increases the share which the government will obtain.
The arrangement with the four note-issuing banks is designed to cause them to work in harmony with the Reichsbank when the Reichsbank has to raise its bank-rate in order to protect its gold reserves. The official published rate of discount of the Reichsbank is to be binding on the private note-issuing banks after it has reached or when it reaches 4%. At other times they are not to discount at more than ¼% below the official rate of the Reichsbank, or in case the Reichsbank itself discounts at a lower rate than the official rate, at more than ⅛% below that rate. If the Reichsbank discounts below the official rate, it is to announce that fact in theGazette.
The subject being important, we quote from the amending act the sections governing the discount rate:—Gesetz, betreffend die Abänderung des Bankgesetzes vom 14. März 1875; vom 7. Juni 1899, Artikel 7, S. 1. The private note-issuing banks are bound byArtikel 7, S. 2, after the 1st of January 1901:—"(1) Not to discount below the rate published in S. 15 of the bank law, so long as this rate attains or exceeds 4%, and (2) moreover, not to discount at more than ¼% below the Reichsbank rate, published in S. 15 of the bank law, or in case the Reichsbank itself discounts at a lower rate, not to discount at more than ⅛% below that rate."
It remains to be seen whether the note-issuing banks will find these conditions too onerous, and rather than be bound by them will give up their right of issuing notes. The object of the enactment is apparently to protect the specie reserve of the Reichsbank, but it may be doubted whether, considering the importance of the other banks of Germany—none of which is bound by similar conditions—relatively to the note-issuing banks, the restrictions put on the note-issuing banks will have any practical effect.
Since 1870 banking has made immense progress in Germany, but it may be some time before the habit of making payments by cheque instead of specie or notes becomes general.
Authorities.—Parliamentary Papers: Report, together with Minutes of Evidence and Accounts, from the Select Committee on the High Price of Gold Bullion, House of Commons, 8th of June 1810;Reports, Committee of Secrecy on Bank of England Charter, House of Commons, 1832;Select Committee on Banks of Issue, House of Commons, 1840;First and Second Reports, Select Committee on Banks of Issue, House of Commons, 1841;First and Second Reports, Secret Committee on Commercial Distress, House of Commons, 1848;Report, Select Committee on Bank Acts, House of Commons, 1857;Report, Select Committee on Bank Acts, House of Commons, 1858;Report, Select Committee on Banks of Issue, House of Commons, 1875;Report from Secret Committee of the House of Lords on the Causes of the Distress which has for some time prevailed among the Commercial Classes, and how far it had been affected by the Laws for regulating the Issue of Bank Notes payable on demand, session 1847-1848;Analysis of the Minutes of Evidence taken before the Select Committee of the House of Commons on Banks of Issue, 1875, with a selection from the evidence, by R. H. Inglis Palgrave, London, 1876 (printed for private circulation).
General Information.—Articles on banking, &c.,Dictionary of Political Economy, edited by R. H. Inglis Palgrave (Macmillan & Co., 1894-1906);Handwörterbuch der Staatswissenschaften, edited by Conrad, Elster, Lexis and Löning, 1899;Wörterbuch der Volkswirthschaft, 2 vols. (ed. Elster, 1898);Dictionnaire des finances, edited under the direction of Léon Say, by L. Foyot and A. Lanjalley (1889);Dictionnaire du commerce, de l'industrie et de la banque, edited by A. Raffalovich and Yves Guyot;Bankers' Magazine, commenced 1844, to present time;Journal of the Institute of Bankers, commenced 1879, to present time;Bankers' Magazine(New York);Economistnewspaper, commenced 1843, to present time;Banking Almanac, commenced 1845, to present time;Reports of the Comptroller of the Currency(Washington).
Early.—De Monetarum Augmento, variatione et diminutione, Tractatus varii(1509);A proposal to supply His Majesty with twelve or fourteen Millions of Money (or more if requir'd), by A. D. of Grey's Inn, Esq., and some Others, his Friends (1697); Hayes'Negociators' Magazine of Monies and Exchanges, 1730; Lord King,Thoughts on Bank Restrictions(1804);The Theory of Money with considerations on the Bank of England(1811); William Cobbett,Paper against Gold and Glory against Prosperity, 2 vols. (1815);Circulating Credit with Hints for improving the Banking System of Britain, by a Scottish Banker(1832); W. Leckie,Bank Restriction(1841);Debates in the House of Commons on Sir R. Peel's Bank Bills of 1844 and 1845, reprinted verbatim from "Hansard's Parliamentary Debates," 1875;Gilbart's Works, 6 vols. (1865);The History, Principles and Practice of Banking, by J. W. Gilbart, edited and revised by A. S. Michie, 1882; Thomson Hankey,Principles of Banking(1867); Walter Bagehot,Lombard Street(1873), a brilliant picture of the city at that date (new ed., 1906); A. S. Cobb,Threadneedle Street, a reply to "Lombard Street"(1891); John Dun,British Banking Statistics(1876); R. H. Inglis Palgrave,Notes on Banking; George Rae,The Country Banker(1886), and several editions later (many sound hints on practice); J. George Kiddy,The Country Banker's Handbook, 4th ed. (1903); C. F. Dunbar,Chapters on the Theory and History of Banking(1891); Charles Gairdner,The Making of the Gold Reserves(1891); J. B. Attfield,English and Foreign Banks(1893) (refers to management of banks); T. B. Moxon,English Practical Banking, 10th ed. (1899); A. Crump,The Key to the London Money Market(1872); W. Y. Duncan,Notes on the Rate of Discount in London, 3 vols., 1822-1856, 1856-1866, 1866-1873, privately printed, Edinburgh, 1856, 1867 and 1877; R. H. Inglis Palgrave,Bank Rate and the Money Market in England, France, Germany, Holland and Belgium, 1844-1900 (1903); Ernest Seyd,The Bank of England Note Issue and its Error(1874); Ernest Seyd,London Banking and Bankers' Clearing House System; Ernest Seyd,The Silver Question in 1893; Walter Bagehot,Depreciation of Silver(1877); Ernest Seyd,Bullion and the Foreign Exchanges(1868); Clare,The A B C of the Foreign Exchanges(1895, 2nd ed. 1895);Tracts, by Lord Overstone (1837-1857);Select Tracts on Money, &c., reprinted privately by Lord Overstone, 1856-1859 (containing much valuable and interesting information on early history); A. Crump,A Practical Treatise on Banking, Currency and the Exchanges(1866); Bonamy Price,Currency and Banking(1876) (the interest of this volume to the student of banking is found mainly in the correspondence between Mr Henry Hucks Gibbs (Lord Aldenham) and Professor Bonamy Price on the reserve of the Bank of England); R. H. Inglis Palgrave,On the Influence of a Note Circulation in the Conduct of Banking Business, read before the Manchester Statistical Society, 1877; Edgar Jaffé,Das englische Bankwesen(Leipzig, 1905);A History of Banks(1837); D. Hardcastle,Banks and Bankers(1843); W. J. Lawson,The History of Banking(1850); R. Baxter,The Panic of 1866(1866); F. G. H. Price,A Handbook of London Bankers(1876); Conant,History of Modern Banks of Issue(New York, 1896);History of Banking in all Leading Nations, 4 vols. (New York, 1896); Viscount Goschen,Essays and Addresses on Economic Questions, 1865-1893(1905), (arts. on "Seven per cent," "Two per cent," "Our cash reserves and central stock of gold"); C. F. Dunbar,Economic Essays, edited by O. M. W. Sprague (1904), (containing many articles on banking, particularly in the United States).
Bank of England.—T. Fortune,A Concise and Authentic History of the Bank of England(1802); John Francis,History of the Bank of England(1847); J. E. Thorold Rogers,The First Nine Years ofthe Bank of England(1887); B. B. Turner,Chronicles of the Bank of England(1897); T. A. Stephens,Bibliography of the Bank of England(1897); A. Andréadès,Histoire de la banque d'Angleterre(1904; Eng. trans., 1909); Sir F. Schuster,The Bank of England and the State(1906).
History of Banking Houses.—L. H. Grindon,Manchester Banks and Bankers(1877); J. B. Martin,"The Grasshopper" in Lombard Street(1892); M. Phillips,Banks, Bankers, and Banking in Northumberland, Durham and North Yorkshire(1894); C. H. Cave,History of Banking in Bristol(1899); Bidwell,Annals of an East Anglian Bank(1900); Richardson,Coutts & Co., Bankers, Edinburgh and London; H. T. Easton,History of a Banking House(Smith, Payne & Smiths) (1903); J. Hughes,Liverpool Banks and Bankers, 1760-1837(1906).
Scotland.—W. H. Logan,The Scottish Banker(1847); Robert Somers,The Scotch Banks and System of Issue(1873); W. Mitchell,Scotch Banks and Limited Liability(1879); A. W. Kerr,History of Scotch Banking(1884); A. W. Kerr,Scottish Banking, 1865-1896(1898); Boase,A Century of Banking in Dundee(1867).
Ireland.—Malcolm Dillon,History and Development of Banking in Ireland(1889).
British Colonies.—Edward B. Hamilton,A Manual of the Law and Practice of Banking in Australia and New Zealand(1880);Banking in Australasia(1883);The Canadian System of Banking and the National Banking System of the United States(Toronto, 1890);Journal of the Canadian Bankers' Association(Montreal).
France.—Annuaire-Chaix,Les Principales Sociétés par actions(1905); A. Raffalovich,Le Marché financier(1905).
Germany.—Dr W. Scharling,Bank Politik(Jena, 1900);Die Reichsbank, 1876-1900(a history and description of the operations of the bank); Dr Adolf Weber,Depositenbanken und Spekulationsbanken, Ein Vergleich deutschen und englischen Bankwesens(Leipzig, 1902); Dr Felix Hecht,Die Mannheimer Banken, 1870 bis 1900(Leipzig, 1902); Siegfried Buff,Das Kontokurrentgeschaft im deutschen Bankwerbe(Stuttgart and Berlin, 1904); Dr Riesser,Zur Entwicklungsgeschichte der deutschen Grossbanken mit besonderer Rucksicht auf die Konzentrationsbestrebungen(1905); G. M. Boissevain,Duitsche en Engelsche Deposito-Banken(1905).
Italy.—La Banca Popolare di Milano(1881).
Austria.—Compass,Finanzielles Jahrbuch für Österreich-Ungarn(Vienna).
Japan.—The House of Mitsui(Tokio);The Law and the By-Laws of the Nippon Kogyo Ginko (The Industrial Bank of Japan)(1903).
H. W. Wolff,People's Banks(1893). (On systems worked by Schulze-Delitzsch, Raiffeisen, Luzzatti, Banche Popolari, Dr Wollemborg, Popular Banks in Belgium, Switzerland, France, England).
(R. H. I. P.)
United States
The early history of the American colonies is strewn, like that of most new countries, with many crude experiments in banking and currency issues. Most of these colonial enterprises, however, were projects for the issue of paper money rather than the creation of commercial banks. Speculative banking was checked to a large extent in the colonies by the Bubble Act (6 Geo. I. c. 18), which was passed in England after the bursting of the South Sea Bubble. This act, which forbade the formation of banking companies without a special charter, was in 1740 extended to the colonies.
The serious history of banking in the United States may be said to have begun with the foundation of the Bank of Pennsylvania. This bank originated in the project of a number of the citizens of Philadelphia to supply the continental army with rations. The first bills, issued in 1780, were nothing more than interest-bearing notes payable at a future time. The advances in continental money made by the shareholders were secured by bills of exchange for £150,000, drawn on the American envoys in Europe, but not intended to be negotiated.
A further outgrowth of the needs of the continental government was the Bank of North America, which was authorized by congress on May 26, 1781. The act gave to Robert Morris, the financier, power to create a bank with a capital of $400,000, to be increased if desirable. Morris arranged with the Bank of Pennsylvania to take over its holdings of foreign bills and paid in cash its claims against the Federation. The Bank of North America did not begin business until the 7th of January 1782, and there was so much doubt of the power of the continental congress to charter a bank that it was thought advisable to obtain a charter from the state of Pennsylvania. Under this charter the bank continued to operate until it was absorbed in the national banking system in 1863, and it may be considered the oldest organized banking institution in the United States.
The bank did much, during the first eight years after its organization, to restore order to the chaos of Federation finances. It loaned to Morris, as government superintendent of finance, $1,249,975, of which $996,581 was repaid in cash and the remainder by surrendering the stock in the bank owned by the government.
The Bank of the United States.—A national bank of issue was one of the essential parts of the system built up by Alexander Hamilton in organizing the finances of the Federal government under the constitution of 1789. The first "Bank of the United States" was accordingly incorporated in 1791, with a capital of $10,000,000, divided into 25,000 shares of $400 each. This bank issued circulating notes, discounted commercial paper and aided the government in its financial operations. The government subscribed one-fifth of the capital, but paid for it by a roundabout process which actually resulted in the loan of the amount by the bank to the treasury. Other loans were made by the bank to the government, which gradually carried the obligation by the end of 1795 to $6,200,000. In order to meet these obligations, the government gradually disposed of its bank stock, until by 1802 its entire holdings had been disposed of at a profit of $671,860. The bank did not publish regular reports, but a statement submitted by Gallatin to congress for January 24, 1811, showed resources of $24,183,046, of which $14,578,294 was in loans and discounts, $2,750,000 in United States stock and $5,009,567 in specie.
The expiration of the charter of the bank in 1811 was the occasion of a party contest, which prevented renewal and added greatly to the financial difficulties of the government in the war with Great Britain which began in the next year. Although foreign shareholders were not permitted to vote by proxy, and the twenty-five directors were required to be citizens of the United States, the bank was attacked on the ground of foreign ownership as well as on the constitutional ground that congress had no power to create such an institution.
The government was compelled in the war of 1812 to rely on the state banks. Their suspension of specie payments, in 1814, made it very difficult for the treasury to transfer funds from one part of the Union to the other, because the notes of one section did not circulate readily in another. Gallatin left on record the opinion that the suspension of specie payments "might have been prevented at the time when it took place, had the former Bank of the United States been still in existence."
The financial condition of the government became so bad during the war that the second Bank of the United States was authorized in April 1816. The general project was that of Alexander J. Dallas, who in October 1814 had become secretary of the treasury. The capital of the new bank was $35,000,000, and the government again appeared as owner of one-fifth of the stock, which was paid in a stock note. The president of the United States was authorized to appoint five of the twenty-five directors and public funds were to be deposited in the bank, "unless the secretary of the treasury shall at any time otherwise order and direct." The right of congress to charter the bank came before the Supreme Court in 1819 in the famous case ofMcCullochv.Maryland. Chief Justice Marshall rendered the decision that the right to create the bank was within the implied powers granted by the Federal constitution, and that it was not competent for the states to levy taxes upon the circulating notes of the bank or upon its property except in common with other property.
The second Bank of the United States was not well managed in the early part of its career, but was upon a firmer foundation under the presidency of Langdon Cheves in 1819. Its policy greatly benefited commerce, but invited bitter complaints from the private dealers in exchange, who had been enabled to make excessive profits while the currency was below par, because of its different values in different states and the constant fluctuations in these values. The Bank, in the language of the report of Senator Samuel Smith of Maryland in 1832, furnished "a currency as safe as silver, more convenient, and more valuablethan silver, which through the whole western and southern and interior parts of the Union, is eagerly sought in exchange for silver; which, in those sections, often bears a premium paid in silver; which is, throughout the Union, equal to silver, in payment to the government, and payments to individuals in business."
The bank in 1835 had attained a circulation of $23,075,422; loans of $59,232,445; and deposits of $5,061,456. The institution was ultimately destroyed by the open enmity of President Jackson, who in 1833 had suspended the deposit of public money in its custody. This policy known as the "removal of the deposits," excited a bitter political controversy in which Clay and Webster led the opposition, but Jackson was supported by the public (seeJackson, Andrew). The Federal charter of the bank expired in 1836. Under a charter obtained by President Nicholas Biddle from the state of Pennsylvania, the bank continued its business, but without success, and in 1841 it went into liquidation.
The State Banks.—The Bank of the United States found powerful rivals during its life and successors after its death in the banks chartered by the separate states. In the undeveloped state of the country in the early days there was much unsound and speculative banking. The most successful systems were those of New York and New England, where the surplus capital of the country in the early days was chiefly concentrated. The least successful banking systems were those in the newer and poorer sections of the country, and they grew progressively worse as poverty and inexperience added to the difficulty of setting aside capital for investment in the tools of exchange.
The termination of the first charter of the Bank of the United States was followed by a banking mania. In Pennsylvania a bill authorizing 41 new banks was passed over the veto of the governor, and 37 of them were in operation in 1814. Similar movements in other states increased the number of banks in four years (1811-1815) from 88 to 208. The amount of specie was not adequate to support the mass of credit which these banks created, and what there was in the country drifted to New England, which was upon a metallic basis. A number of banks collapsed in 1814, and business prostration was prolonged for several years.
The banking laws of the states varied considerably. Some states authorized the issue of notes upon state bonds, many of which, especially at the outbreak of the Civil War, proved valueless. In New England, however, a system prevailed which required the prompt redemption of the banks' notes at par. The New England Bank was the pioneer of this movement in 1814. In 1824 what was known as the "Suffolk system" of redemption came into operation. This system provided for the deposit by a bank in the Suffolk Bank in Boston of a redemption fund, from which the notes were redeemed and afterwards sent home by the Suffolk Bank for collection. This system, with slight modifications, continued in successful operation until 1858. The circulation of the New England banks in 1858 was less than $40,000,000 and the redemptions in the course of the year through the Suffolk Bank were $400,000,000. It was the essential merit claimed for the system that it tended to keep the volume of the circulation constantly adjusted to the requirements of business. A branch redemption agency was established at Providence. Legal sanction was given to the system in Vermont by an act of 1842, which levied a tax of 1% upon bank capital, but remitted this tax to any bank which should "keep a sufficient deposit of funds in the city of Boston, and should at that city uniformly cause its bills to be redeemed at par."
The period from 1836 to 1842 was a trying one for American banking. It was preceded by another great expansion in financial ventures, made without sufficient circulating capital or adherence to conservative banking methods. Foreign capital had come into the country in considerable amounts after the English crisis of 1825, the entire debt of the general government was paid off and a tremendous speculation occurred in public lands, which were expected to advance rapidly in value as the result of immigration and the growth of the country. The sales of public lands in 1836, on the eve of the crisis, reached 20,074,870 acres and brought receipts to the treasury of $25,167,833. How essentially speculative was the mass of these sales is indicated by the fact that such receipts declined in 1842 to only $1,417,972. President Jackson pricked the bubble of speculation by the "Specie circular" of July 11, 1836, requiring payments for public lands to be made only in specie or notes of specie value. Practically every bank in the Union stopped payment, and banking capital fell from $358,442,692 in 1840 to $196,894,309 in 1846. As usual in periods of business collapse the shrinkage of capital did not follow at once the outbreak of the panic, but was the result of gradual liquidation. Specie payments were resumed in 1838, but there was another crash in 1842, after the United States Bank finally suspended.
In New York, which was becoming the chief commercial state of the Union, the banks of New York City were generally sound, but several different systems were tried of securing the circulating notes. The "safety-fund system," inaugurated in 1829, provided for a contribution by each bank towards a fund to meet the deficit of any contributing bank which might fail with assets insufficient to meet its liabilities. It was the intention of the act to protect by this fund only the bank-notes, but it was treated as a fund for the payment of all the liabilities of a failed bank and in consequence the fund was exhausted by important failures which occurred in the panics of 1837 and 1857. Before 1843 the issue of notes was not controlled by the state, so that in several cases there were illegal over-issues.
What was called the "free-banking system" was inaugurated in New York by the act of 1838. This system permitted any body of persons, complying with the requirements of the law, to form a bank and issue circulation secured by the deposit of various classes of public bonds. This system was in operation at the outbreak of the Civil War, was imitated in several other states, and became in a measure the model of the national banking system. The state banks of Indiana and Ohio were among the most successful of the state banks, being modelled somewhat on the European plan of a central bank. They held in their states an exclusive charter for issuing notes and had branches at important points throughout the state. Under the management of Hugh McCulloch, afterwards secretary of the treasury, the bank of Indiana weathered the crisis of 1857 without suspending specie payments, and retired its circulation when gold went to a premium in 1862.