VI.FOREIGN BANKING AND FINANCE.

THE BOURSE, PARIS.

Since the establishment of the national banking system 5171 banks havebeen organized, of which 1224 have gone into liquidation, 368 have become insolvent, and 3579 are in operation (February 4, 1899).

There is a marked falling off in the number of new national banks organized in recent years. In 1890 there were 307 organized, but in 1898 there were only 50 organizations reported, and that was the highest number reported since 1893. The capital of the national banks is also decreasing, but the deposits show a large increase.

At present the State banks are gaining in numbers more rapidly than the national banks.

BANK OF ENGLAND, LONDON.

Profit on National Bank Circulation.—Many suppose that national banks make an undue profit on the privilege they have of issuing notes to circulate as money, based on a deposit of bonds with the United States treasurer. Official figures disprove this. The total national bank notes outstanding, February 4, 1899, was $203,636,184.50. The law permits these banks to issue notes to the extent of 90 per cent of their capital. This capital, on February 4, 1899, was $608,301,245. Therefore they might have had notes at issue on that date to the amount of $545,871,120.50, instead of only $203,636,184.50. This is conclusive evidence that there is no substantial profit in the issuing of such notes.

In the figures furnished by the Comptroller of the Currency for 1898, he shows that the profit which a national bank could make by taking out circulation on a deposit of $100,000 of United States bonds, on October 31, 1898, was less than 1 per cent. On that date eight leading banks had no circulating notes at all out. The meagre profits of national banks explain why they do not supply an adequate paper currency. The restrictions on them make it impossible to render any substantial assistance to business in this respect. This is especially true in times of panic. Possessing gigantic strength, they are compelled to see the industries of the country attacked by doubt and distrust, and are unable to go to their aid because of the restraints which forbid them to exercise their legitimate functions.

Most foreign countries issue metallic money only, except those that are on a paper basis. In general the paper currency is issued by banks, many of which are more or less remotely associated with the government. Some of these banks issue notes on the security of the government or other stocks and bonds, while many emit notes based on no special form of security, but upon the general assets of the bank.

As compared with the United States there are but few banks in the principal foreign countries. England has less than one hundred; Scotland less than a dozen; Canada but thirty-eight chartered banks. As in other foreign countries, the Canadian banks have numerous branches affiliated with the head office. National banks in the United States are prohibited from having branches. The Bank of France, the Bank of England, the Imperial Bank of Germany, the Austro-Hungarian Bank, the Imperial Bank of Russia, are all more or less intimately associated with their respective governments.

GERMAN BANK, BREMEN.

The Bank of England was incorporated by royal charter, July 27, 1694, its incorporators lending £1,200,000 to the government, in return for which the Bank was permitted to issue notes to a like amount. It had a practical monopoly up to 1826, and even now, it is believed, no bank within a radius of 65 miles of London may issue notes. It has suspended specie payments more than once. In 1844, the banking and issue departments of the Bank were separated. One fifth of the reserve may be silver, though in practice the reserve is kept in gold coin and bullion. Its notes are based on gold, except £16,800,000, which are secured by the government debt and other securities. It is compelled to buy all gold offered at a fixed price, paying for it in notes. So it must redeem all notes on demand in gold. When so redeemed they are canceled and, after five years, burned. No notes of a lessdenomination than five pounds are issued. The Bank checks gold exports by raising the rate of discount. The building covers about four acres of ground, and employs over eleven hundred persons. It is the keystone of the entire system of British credit, and commands the assistance of the Government when needed.

The Scotch banks issue notes on their own credit to the amount outstanding at the time of the passage of the Bank Act in 1844. Their rate of interest is said to be the same at all of their thousand offices. A unique feature of the Scotch banking system is that of cash credits, by means of which a person of good credit may get his checks cashed without a deposit of actual money, the banks simply entering the credits on their books.

The Bank of France has a monopoly of note issues, charges a premium on gold for export, and may redeem its notes in either gold or silver. The Imperial Bank of Germany and a few other German banks issue notes on gold and other securities, and further amounts on their general credit. Beyond a fixed sum, called the emergency circulation, a tax of five per cent is levied. Other European banks are generally modeled on the same leading principle—a central bank of issue, with numerous branches, and associated with the Government directly or indirectly. The Imperial Bank of Russia issues notes practically covered by gold and redeemable in that coin. Japan tried a system of national banks combined with Government paper money, but is now substituting a system of bank notes issued by the Bank of Japan.

In 1857 the Government owed only $10,000,000 over and above the cash held in the treasury. At the breaking out of the Civil War the debt had increased to about $80,000,000. By August 31, 1865, it had increased to $2,756,000,000, with an interest charge of $150,000,000. In twenty-eight years, down to June 30, 1893, the Government extinguished $1,917,500,000 of its debt, paid $2,364,000,000 for interest on its debt, and $118,000,000 for premium on bonds redeemed, making a grand total of $4,400,000,000, or an annual average payment of $157,000,000 for the entire period.

The rise and fall of the public debt from July 1, 1857, to July 1, 1898, appear more fully in the following table.

Years.Total debt.Debt less cashin the Treasury.1857, July 1$28,699,831$9,998,6211860,”164,842,28759,964,4021861,”190,580,87387,718,6601862,”1524,176,412505,312,7521863,”11,119,772,1381,111,350,7371864,”11,815,784,3701,709,452,2771865, August 312,844,649,6262,756,431,5711873, July 12,234,482,9932,105,462,0601879,”12,245,495,0721,996,414,9051889,”11,619,052,922975,939,7501893,”11,545,985,686838,969,4751895, December 11,708,871,670948,477,6121896, July 11,769,840,323955,297,2531897,”11,817,672,665986,656,0861898,”11,796,531,9951,027,085,492

In 1865 the annual interest charge on the public debt was $150,977,697. In 1898 it was only $34,387,408.

From 1791 to 1898 the gross receipts of the Government were $30,547,063,336.06 and the gross expenditures $29,768,597,237.24. The net ordinary receipts, which do not include loans or proceeds from the issue of Treasury notes, were $405,321,335.20 for the fiscal year ended June 30, 1898, and the net ordinary expenditures, which do not include payments on account of premiums or interest on the public debt, were $405,783,526.57.

Many believe that a system of postal savings banks could be generally introduced into the United States. Such banks doubtless appeal to those who have more confidence in the Government than in any association of individuals. Their safety may be conceded, for when the Government fails other institutions are likely to go the same way. But when people deposit money in a postal savings bank, they make a loan to the Government. This implies that the Government must be a perpetual borrower, whereas, until recent years, the United States has been a debt-paying nation, and in the course of affairs may soon be again. Unless we are to have a large permanent debt, the deposits in postal savings banks would have to be invested in general securities. Such investments could not well be made by the post-office officials of the country.

In Great Britain these banks have been in existence for about thirty-eight years, and their number has grown to about 12,000, with more than 6,000,000 depositors. The system prevails in a number of other countries. The more concentrated and paternal system of government prevalent in countries having these banks renders their management a much less difficult problem than it would be in the United States with our large areas, vast number of post-offices, and general diversity of conditions. In Great Britain the deposits in the postal savings banks are made at the money order post-offices in a pass book held by the depositor. Withdrawals are made by filling up blank forms, and these withdrawals may be made at any money order post-office. Deposits are invested in the public debt, and the rate of interest is about two and one half per cent. The postal savings banks of Great Britain contain deposits approximating $527,000,000; those of France, $152,000,000; those of Italy, $90,000,000; those of Belgium, $67,000,000; those of Canada, $31,000,000.

There are no worthier financial institutions in the country to-day than the savings banks. Most of these are organized on what is known as the mutual plan. They have no capital, no stockholders, and all the assets are held in trust for the benefit of the depositors. They are managed by a board of trustees, who serve without pay. The investments which the banks are permitted to make are generally restricted to high-class securities insuring safety. The savings banks in New York State, especially, are closely restricted in investing their funds, and failures in recent years are almost unknown. A deposit in one of these banks is hardly less safe than an investment in Government bonds. The savings banks are the primary schoolsof economy and thrift, and I believe that an extension of the mutual savings bank system throughout the country, under proper legal safeguards, would be of the greatest benefit to the people of the United States.

The deposits in banks of this kind are usually limited by law to amounts not exceeding $3000 to one depositor, as they are not intended to be used by the wealthier class of people. The following statistics will be found interesting.

SAVINGS BANKS IN THE UNITED STATES, 1857–1897.(Statement of condition for each period of ten years.)

18571867187718871897Number of banks231371675684980Number of depositors490,4281,188,2022,395,3143,418,0135,201,132Amount of deposits$98,512,968$337,009,452$866,218,306$1,235,247,371$1,939,376,035Average to each depositor200283361361372

In addition to the mutual and stock savings banks in the United States, a system of school savings banks, introduced into the schools of the United States by J. H. Thiry, of Long Island City, N. Y., is worthy of mention. Such banks have been very successful in inculcating habits of thrift and economy among the children of the country.

A clearing-house may be defined as an institution for saving time, money, and labor. Its underlying principle is that of setting off one claim against another.

A bank in a large city receives every day in its mail a great number of checks or drafts drawn on banks in the same place. It does not present these checks directly to the banks on which they are drawn for payment, but sends them by messenger to the clearing-house. Let us say, for illustration, that the First National Bank presents to the clearing-house checks on other banks amounting to $100,000. At the same time the other banks send to the clearing-house checks they have received drawn on the First National Bank, aggregating $75,000. A payment of $25,000 in money to the First National Bank will be all the cash required to pay checks representing $175,000. The economy in the use of money is still better illustrated by the following statement of an actual transaction. On a day in the latter part of 1898 the Bank of the State of New York took to the New York Clearing-House checks on other banks amounting to $15,647,583.82, and other banks brought checks against it amounting to $15,647,401.85. The sum of these items was $31,294,985.67, and they were paid with $181.97 in money, which represents the credit balance due to the Bank of the State of New York. This instance shows what large transactions may be effected with small sums of money by employing proper banking machinery. Banks multiply the usefulness of money many fold.

The New York Clearing-House Association was organized September 13, 1853, and the first clearing made by the Association took place on October 11,1853. The banks belonging to the New York Clearing-House Association reported on April 1, 1899, loans and discounts, $779,951,100; deposits, $898,917,000; specie, $187,114,300; circulation, $13,870,600.

NEW YORK CLEARING-HOUSE.

Clearing-House Loan Certificates.—These are simply devices that the banks have invented for use in times of panic. They are issued by a committee of the Clearing-House Association on the deposit of approved securities by the bank desiring them, and are used only to settle balances between the banks. They are not money, but serve a useful purpose in diminishing the demand for money; for when the banks agree to accept these certificates among themselves, it makes that much money available to be loaned or paid to depositors. In 1893, and in other years of financial stringency, the issue of these certificates afforded great relief to business interests and saved the country from some of the most disastrous results consequent upon such panics.

These certificates are not to be confounded with clearing-house gold certificates issued by the Association on deposits of gold coin. They are used inmaking payments of balances between banks, and obviate the necessity of frequently passing the actual coin from hand to hand.

On April 11, 1898, the clearings at the New York Clearing-House for that day amounted to $352,882,567—the largest amount ever reported up to that time. The balances to be paid in money were $17,345,452, or only about five per cent. For the year 1898 the bank clearings at New York were $41,971,781,684, and for the whole country, $68,750,000,000.

An investigation of the amount of credit paper used respectively in the wholesale and retail trade was made by the Comptroller of the Currency in 1896. In his report for that year the Comptroller says: “From the face of the returns the conclusion to be drawn is that 67.4 per cent of the retail trade of the country is transacted by means of credit paper (checks), that 95.3 per cent of the wholesale trade is so carried on, 95.1 per cent of business other than mercantile, and 92.5 per cent of all business.”

A panic is generally due to inflation and speculation, and these, of course, have their origin in various sources not easily determined. An unusual increase in the production of precious metals, bountiful crops, a speculative craze taking possession of the public—such as the tulip mania in Holland—all these and many other causes lead to speculation. The fall in prices due to a stoppage in speculation brings on the panic. Sometimes the catastrophe is produced by war or rumors of war, often by the most trivial circumstances, and not infrequently without any apparent cause. Before everybody had desired to buy; they now became as eager to sell, and this rush to convert securities and commodities into money precipitates a panic.

Crises may be divided into commercial and financial. The last one in the United States, whatever may have been its ultimate developments, was in its inception and culmination essentially a financial panic. The Treasury and the banks were both regarded with more or less distrust.

Panics or crises more or less severe have occurred in the United States in 1814, 1818, 1826, 1837–39, 1848, 1857, during the Civil War, 1861–65, 1873, 1882, 1884, 1890, 1893. Some of these should hardly be called panics, as they were mere local disturbances. Different causes have been given for each of these revulsions. Overtrading and speculation were doubtless responsible for them. The panic of 1857 was coincident with large net imports of merchandise. On August 24, 1857, the onward wave of prosperity, which had been steadily rising to a great height, received a check by the failure of the Ohio Life Insurance and Trust Co., followed by numerous other failures. On October 4 every bank in New York, except the Chemical, suspended specie payments, and they did not resume until December 12.

The speculation in gold in 1869 culminated in what is known as the Black Friday panic, September 24, 1869. Fiske and Gould were conducting a speculation in gold, and sought to corner it. They forced the price up to a high figure, but the Government suddenly appeared as a seller of gold and broke the “corner.”

The year 1873 witnessed another revulsion of confidence and another disruption of the commercial and financial affairs of the country. Business had long been unduly expanded, and the collapse finally came. The failure, onSeptember 18, of the honored firm of Jay Cooke & Co., which had not only been identified with the building of the Northern Pacific R. R. but had been a strong supporter of the credit of the Government when it was in the direst distress, was the first bad news. House after house fell. The Stock Exchange closed its doors on September 20, and did not reopen them until September 30. More than fifty Stock Exchange firms suspended, and several of the leading banking institutions of New York and other cities had to stop business.

During this panic the New York Clearing-House Association issued clearing-house certificates to those of its members who needed available funds, and during the trouble issued $24,915,000 of them. In May, 1884, it issued $24,915,000; in the 1890 panic, $16,645,000; in 1893, $41,490,000.

Following the resumption of specie payments the times were good for several years. The production of the precious metals was averaging $75,000,000 or more per year. From 1879 to 1883 we imported about $190,000,000 of gold. Railroad construction reached a higher point than was ever recorded, either before or since, nearly 40,000 miles of track having been laid in five years. All seemed well, when another collapse came in May, 1884. This was preceded by the failure of Grant & Ward, and it was followed by the failure of the Marine and the Metropolitan Ranks. The disclosures of bad faith on the part of men occupying positions of great trust, made the 1884 panic one of distinct characteristics of its own. The previous activity in all lines of enterprise may have made the revulsion timely, but individual dishonesty greatly aggravated the situation.

The panic of 1890, in the United States, was but a reflection of the great Baring failure in London in the fall of that year. This crash was due to South American speculations, and was one of the greatest failures of modern times. It is the opinion of many well-informed financiers that this was one of the causes which operated to produce the panic of 1893 in the United States. The course of the United States in regard to the purchase of silver, doubts as to the tariff, deficiency in revenues—all, perhaps, had their share in creating distrust. But back of these were the conditions superinduced by an era of inflation and speculation. The 1893 panic bore most heavily upon the banks. There was a continued demand upon the Treasury for gold, and the deposits in banks were withdrawn so rapidly that hundreds of failures ensued. The period of depression continued for nearly three years, and has been succeeded by an era of general prosperity, which it is hoped may be long continued.

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