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BANKS AND BANKING. The word "bank," in the economic sense, covers various meanings which all express one object, a contribution of money for a common purpose. Thus Bacon, in his essay on Usury, while explaining "how the discommodities of it may be best avoided and the commodities retained," refers to a "bank or common stock" as an expression with which his readers would be familiar. Originally connected with the idea of a mound or bank of earth—hence with that of a monte, an Italian word describing a heap—the term has been gradually applied to several classes of institutions established for the general purpose of dealing with money.
The manner in which a bank prospers is explained by David Banking as a business. Ricardo, in his Proposals for an Economical and Secure Currency, in a passage where he tells us that a bank would never be established if it obtained no other profits but those derived from the employment of its own capital. The real advantage of a bank to the community it serves commences only when it employs the capital of others. The money which a bank controls in the form of the deposits which it receives and sometimes of the notes which it issues, is loaned out by it again to those who desire to borrow and can show that they may be trusted. A bank, in order to carry on business successfully, must possess a sufficient capital of its own to give it the standing which will enable it to collect capital belonging to others. But this it does not hoard. It only holds the funds with which it is entrusted till it can use them, and the use is found in the advances that it makes. Some of the deposits merely lie with the bank till the customer draws what he requires for his ordinary everyday wants. Some, the greater part by far, of the deposits enable the bank to make advances to men who employ the funds with which they are entrusted in reproductive industry, that is to say, in a manner which not only brings back a greater value than the amount originally lent to them, but assists the business development of the country by setting on foot and maintaining enterprises of a profitable description. It is possible that some part may be employed in loans required through extravagance on the part of the borrower, but these can only be a small proportion of the whole, as it is only through reproductive industry that the capital advanced by a banker can really be replaced. A loan sometimes, it is true, is repaid from the proceeds of the sale of a security, but this only means a transfer of capital from one hand to another; money that is not transferred in this way must be made by its owner. Granted that the security is complete, there is only one absolute rule as to loans if a bank desires to conduct its business on safe lines, that the advance should not be of fixed but of floating capital. Nothing seems simpler than such a business, but no business requires closer attention or more strong sense and prudence in its conduct. In other ways also, besides making loans, a well-conducted bank is of much service to the business prosperity of a country, as for example by providing facilities for the ready transmission of money from those who owe money to those to whom it is due. This is particularly obvious when the debtor lives in one town or district and the creditor in another at a considerable distance, but the convenience is very great under any circumstances. Where an easy method of transmission of cash does not exist, we become aware that a "rate of exchange" exists as truly between one place and another in the same country as between two places in different countries. The assistance that banking gives to the industries of a community, apart from these facilities, is constant and most valuable.
With these preliminary remarks on some main features of the Historical development. business, we may pass on to a sketch of the history of modern banking. Banks in Europe from the 16th century onwards may be divided into two classes, the one described as "exchange banks," the other as "banks of deposits." These last are banks which, besides receiving deposits, make loans, and thus associate themselves with the trade and general industries of a country. The exchange banks included in former years institutions like the Bank of Hamburg and the Bank of Amsterdam. These were established to deal with foreign exchange and to facilitate trade with other countries. The others—founded at very different dates—were established as, or early became, banks of deposit, like the Bank of England, the Bank of Venice, the Bank of Sweden, the Bank of France, the Bank of Germany and others. Some reference to these will be made later. The exchange banks claim the first attention. Important as they were in their day, the period of their activity is now generally past, and the interest in their operations has become mainly historical.
The exchange banks were established to remedy the inconvenience to which merchants were subject through the uncertain value of the currency of other countries in reference to that of the city where the exchange bank carried on its business. The following quotation from Notes on Banking, written in 1873, explains the method of operation in Hamburg. "In this city, the most vigorous offshoot of the once powerful Hansa, the latest representative of the free commercial cities of medieval Europe, there still remains a representative of those older banks which were once of the highest importance in commercial affairs. Similar institutions greatly aided the prosperity of Venice, Genoa, Amsterdam and Nuremberg. The Bank of Hamburg is now the last survivor of these banks, whose business lay in the assistance of commerce, not by loans, but by the local manufacture, so to speak, of an international coinage. In a city of the highest rank of commercial activity, but greatly circumscribed in territory, continually receiving payments for merchandise in the coin of other countries, a common standard of value was a matter of primary necessity. The invention of bank money, that is, of a money of account which could be transferred at pleasure from one holder to another, enabled the trade of the place to be carried on without any of those hindrances to business which must have followed on the delay and expense attendant on the verification of various coins differing from each other in weight, intrinsic value, standard of purity of metal, in every point in fact in which coins can differ from each other. By supplying a currency of universal acceptation the Bank of Hamburg greatly contributed to the prosperity of that city." The regulations being strictly carried out, the currency was purely metallic; the "Mark Banco" being merely the representative of an equal value of silver.
Of the early banks in Europe, the bank in Venice, the Banco The first public bank in Europe. di Rialto, was established by the acts of the Venetian senate of 1584 and 1587. This appears to have been the first public bank in that city and in Europe. The senate by the act of the 3rd of May 1619 established by the side of the Banco di Rialto a second public bank known as the Banco Giro, or Banco del Giro, which ultimately became the only public bank of the city and was for generations famous throughout Europe as the Bank of Venice. Earlier than this the campsores or dealers in foreign moneys had carried on the business. The Bank of Venice (Banco del Giro) appears to have been called into existence by the natural developments of trade, but some banks have been established by governments and have been of great service to the development of the countries in which they have carried on their business. Of these, the Bank of Sweden (the Riksbank), established in 1656, is the earliest. This bank still exists and has always been the state bank of Sweden. It was founded by a Swede named Palmstruck, who also invented the use of the bank note—perhaps adapted for use in Europe is the better expression to employ, as notes were current in China about A.D. 800. The first bank note was issued by the Riksbank in 1658. An enquête made by the French government in 1729 recognizes the priority of Sweden in this matter, and declares the bank note to be an admirable Swedish invention, designed to facilitate commerce.
United Kingdom.—English banking may be traced back to the dealings in money carried on by the goldsmiths of London and thus certainly to the 16th century; but it has been so greatly influenced by the working of the Bank of England and by the Foundation of the Bank of England. acts of parliament connected with that institution, that a reference to this bank's foundation and development must precede any attempt at a detailed history of banking in the United Kingdom. The Bank of England was founded in 1694. As in the case of some of the earlier continental banks, a loan to the government was the origin of its establishment. The loan, which was £1,200,000, was subscribed in little more than ten days, between Thursday, 21st June, and noon of Monday, 2nd July 1694. On Tuesday, 10th July, the subscribers appointed Sir John Houblon the governor, and Michael Godfrey (who was killed during the siege of Namur on the 17th of July 1695) deputy-governor. Michael Godfrey wrote a pamphlet explaining the purposes for which the bank was established and the use it would be to the country. The pamphlet supplies some curious illustrations of the dangers which some persons had imagined might arise from the establishment of the bank and its connexion with William III., deprecating the fear "lest it should hereafter joyn with the prince to make him absolute and so render parliaments useless."
The bank commenced business with fifty-four assistants, the salaries of whom amounted to £4350. The total number employed in 1847 was upwards of nine hundred and their salaries exceeded £210,000. Mr Thomson Hankey stated that in 1867 upwards of one thousand persons were employed, and the salaries and wages amounted to nearly £260,000, besides pensions to superannuated clerks of about £20,000 more. The number of persons of all classes employed in 1906 (head office and eleven branches) was about 1400.
Originally established to advance the government a loan of £1,200,000, the management of the British national debt has been confided to the Bank of England from the date of its foundation, and it has remained the banker of the government ever since. The interest on the stock in which the debt is inscribed has always been paid by the bank, originally half-yearly, now quarterly, and the registration of all transfers of the stock itself is carried on by the bank, which assumes the responsibility of the correctness of these transfers. The dignity which the position of banker to the government gives; the monopoly granted to it of being the only joint-stock bank allowed to exist in England and Wales till 1826, while the liability of its shareholders was limited to the amount of their holdings, an advantage which alone of English banks it possessed till 1862; the privilege of issuing notes which since 1833 have been legal tender in England and Wales everywhere except at the bank itself; the fact that it is the banker of the other banks of the country and for many years had the control of far larger deposits than any one of them individually—all these privileges gave it early a pre-eminence which it still maintains, though more than one competitor now holds larger deposits, and though, collectively, the deposits of the other banks of the country which have offices in London many times overpass its own. Some idea of the strength of its position may be gained from the fact that stocks are now inscribed in the bank books to an amount exceeding 1250 millions sterling.
In one sense, the power of the Bank of England is greater Bank Charter Act. now than ever. By the act of 1844, regulating the note-issue of the country, the Bank of England became the sole source from which legal tender notes can be obtained; a power important at all times, but pre-eminently so in times of pressure. The authority to supply the notes required, when the notes needed by the public exceed in amount the limit fixed by the act of 1844, was granted by the government at the request of the bank on three occasions only between 1844 and 1906. Hence the Bank of England becomes the centre of interest in times of pressure when a "treasury letter" permitting an excess issue is required, and holds then a power the force of which can hardly be estimated.
One main feature of the act of 1844 was the manner in which the issue of notes was dealt with, as described by Sir Robert Peel in parliament on the 6th of May 1844:—"Two departments of the bank will be constituted: one for the issue of notes, the other for the transaction of the ordinary business of banking. The bullion now in the possession of the bank will be transferred to the issue department. The issue of notes will be restricted to an issue of £14,000,000 upon securities—the remainder being issued upon bullion and governed in amount by the fluctuations in the stock of bullion." The bank was required to issue weekly returns in a specified form (previously to the act of 1844 it was necessary only to publish every month a balance-sheet for the previous quarter), and the first of such returns was issued on the 7th of September 1844. The old form of return contained merely a statement of the liabilities and assets of the bank, but in the new form the balance-sheets of the Issue Department and the Banking Department are shown separately. A copy of the weekly return in both the old and new forms will be found in A History of the Bank of England, p. 290, by A. Andréadès (Eng. trans., 1909); see also R. H. I. Palgrave, Bank Rate and the Money Market, p. 297.
One result of the division of the accounts of the bank into two departments is that, if through any circumstance the Bank of England be called on for a larger sum in notes or specie than the notes held in its banking department (technically spoken of as the "Reserve") amount to, permission has to be obtained from the government to "suspend the Bank Act" in order to allow the demand to be met, whatever the amount of specie in the "issue department" may be. Three times since the passing of the Bank Act—during the crises of 1847, 1857 and 1866—authority has been given for the suspension of that act. On one of these dates only, in 1857, the limits of the act were exceeded; on the other two Bank rate. occasions the fact that the permission had been given stayed the alarm. It should be remembered, whenever the act of 1844 is criticized, that since it came into force there has been no anxiety as to payment in specie of the note circulation; but the division of the specie held into two parts is an arrangement not without disadvantages. Certainly since the act of 1844 became law, the liability to constant fluctuations in the Bank's rate of discount—one main characteristic of the English money market—has greatly increased. To charge the responsibility of the increase in the number of those fluctuations on the Bank Act alone would not be justifiable, but the working of the act appears to have an influence in that direction, as the effect of the act is to cut the specie reserve held by the bank into two parts and to cause the smaller of these parts to receive the whole strain of any demands either for notes or for specie. Meanwhile the demands on the English money market are greater and more continuous than those on any other money market in the world. Of late years the changes in the bank rate have been frequent, and the fluctuations even in ordinary years very severe. From the day when the act came into operation in 1844, to the close of the year 1906, there had been more than 400 changes in the rate. The hopes which Sir Robert Peel expressed in 1844, that after the act came into force commercial crises would cease, have not been realized.
England. France. Germany. Holland. Belgium.
There has been frequent discussion among bankers and occasionally with the government as to the advantage it might be to grant the Bank of England an automatic power to augment the note issue on securities when necessary, similar to that possessed by the Bank of Germany (Reichsbank). One of the hindrances to the success of such a plan has been that the government, acting on the advice of the treasury, required an extremely high rate of interest, of which it would reap the advantage, to be paid on the advances made under these conditions. Those who made these suggestions did not bear in mind that the mere fact of so high a rate of interest being demanded intensifies the panic, a high rate being associated as a rule with risks in business. The object of the arrangement made between the Reichsbank and the treasury of the empire of Germany is a different one—to provide the banking accommodation required and to prevent panic, hence a rate of only 5% has been generally charged, though in 1899 the rate was 7% for a short time. As is often the case in business, a moderate rate has been accompanied by higher profit. The duty on the extra issue between 1881, when the circulation of the Bank of Germany first exceeded the authorized limit, and the close of the year 1906 amounted to £839,052. Thus a considerable sum was provided for the relief of taxation, while business proceeded on its normal course. The proposal made by Mr Lowe (afterwards Lord Sherbrooke) in 1873 was to charge 12%, a rate which presupposes panic. Hence the negotiations came to nothing. The act of 1844 remains unaltered. The issue on securities allowed by it to the Bank of England was originally £14,000,000. This has since been increased under the provisions of the act to £18,450,000 (29th March 1901). Hence against the notes issued by the bank less gold by £4,450,000 is now held by the bank than would have been the case had the arrangements as to the securities remained as they were in 1844.
The state papers included in F. G. Hilton Price's Handbook Early English banking. of London Bankers (1876) contain some of the earliest records about the establishment of banking in England. The first of these is a petition, printed in the original Italian, to Queen Elizabeth, of Christopher Hagenbuck and his partners in November 1581, representing "that he had found out a method and form in which it will be possible to institute an office into which shall enter every year a very large sum of money without expense to your Majesty," so "that not only your Majesty will be able to be always provided with whatever notable sum of money your Majesty may wish, but by this means your State and people also; and it shall keep the country in abundance and remove the extreme usuries that devour your Majesty and your people." Hagenbuck proposed to explain his plan on condition that he should receive "6% every year of the whole mass of money" received by the office for twenty years. The queen agreed "to grant to the said Christopher and partners 4% for a term of twenty years, and to confirm the said grant under the great seal." The document is signed by Francis Walsingham, but nothing further appears to have come of it. When we compare the date of this document with that of the establishment of the Banco della Piazza di Rialto at Venice, it is not unlikely that the idea of the establishment of a bank was floating in the minds of people connected with business and had become familiar to Hagenbuck from commerce with Venice. Other state papers in 1621 and 1622 and again in 1662 and 1666 contain somewhat similar proposals which however were never carried into practice.
Besides the banks in London already mentioned, one in the provinces claims to have been established before the Bank of England. Smiths' of Nottingham, since amalgamated with the Union of London Bank, is stated to have been founded in 1688. Others also claim considerable antiquity. The old Bank of Bristol (Bailey, Cave & Co.) was founded in 1750; the business amalgamated with Prescott & Co., Ltd., of London. The Hull Old Bank (Pease & Co.) dated from 1754; this business also still continues (amalgamated, 1894, with the York Union Banking Co., Ltd., and since with Barclay & Co., Ltd.). The banks of Gurney & Co., established at the end of the 18th century in the eastern counties, have with numerous other banks of similar standing amalgamated with the firm of Barclay & Co., Ltd., of Lombard Street.
The business of banking had been carried on by the goldsmiths of the city, who took deposits from the time of James I. onwards, and thus established "deposit-banking" as early as that reign. This is described in a pamphlet published in 1676, entitled The Mystery of the New-Fashioned Goldsmiths or Bankers Discovered, quoted by Adam Anderson in his History of the Great Commercial Interests of the British Empire, vol. ii. p. 402. During the Civil War "the goldsmiths or new-fashioned bankers began to receive the rents of gentlemen's estates remitted to town, and to allow them and others who put cash into their hands some interest for it, if it remained but for a single month in their hands, or even a lesser time. This was a great allurement for people to put their money into their hands, which would bear interest till the day they wanted it. And they could also draw it out by £100 or £50, &c., at a time, as they wanted it, with infinitely less trouble than if they had lent it out on either real or personal security. The consequence was that it quickly brought a great quantity of cash into their hands; so that the chief or greatest of them were now enabled to supply Cromwell with money in advance on the revenues as his occasion required, upon great advantage to themselves."
The Bank of England, as stated before, was incorporated by the act of 1694. The position of the other banks at that time was defined by that act and the act of 1697, which declared that no bank, that is, no joint-stock bank, was "to be established within England during the continuance of the Bank of England," and also by the act of 1708, which provided that "during the continuance of the Bank of England, no company or partnership exceeding six persons in England" should "borrow, owe or take up any sum or sums of money on their bills or notes payable on demand or at any less time than six months from the borrowing thereof." This was confirmed by the act of 1800. No change of importance was made till the act of 1826, which prohibited "bank notes under £5," and the second Banking Act of that year which allowed the establishment of co-partnerships of more than six persons, which necessarily were joint-stock companies, beyond 65 m. from London. The act of 1833 allowed the establishment of joint-stock banks within the 65 m. limit, and took away various restrictions of the amounts of notes for less than £50. But the power of issuing notes was not allowed to joint-stock banks within the 65 m. radius.
Bank notes in England originated in goldsmiths' notes. Bank notes. Goldsmiths received deposits of moneys and gave notes or receipts for such moneys payable on demand. The London bankers continued to give their customers notes or deposit-receipts for the sums left by them until about 1781, when in lieu of such notes they gave them books of cheques. Before the invention of cheque-books, the practice of issuing notes was considered so essentially the main feature of banking, that a prohibition of issue was considered an effectual bar against banking. Accordingly the prohibitory clause in the act of 6 Anne, c. 50, 1707 (in Record edition), which was repeated in the Bank of England Act 1708, 7 Anne, c. 30, § 66 (in Record edition), prohibiting more than six persons from issuing promissory notes, was intended to prevent any bank being formed with more than six partners, and was so understood at the time; and it did have the effect of preventing any joint-stock bank being formed.
To return to the early history of banking—thus, as no bank Private banks. could be formed with more than six partners during the whole of the period from 1694 to 1826 and 1833, the majority of the banks formed throughout England and Wales for more than a century were necessarily small and usually isolated firms. Further, when a partner died, his capital not infrequently went out of the business; then a fresh partner with sufficient means had to be found, constant change was the result, and confidence, "a plant of slow growth," could not thrive, except in those instances when a son or a relation filled the vacancy.
The greater number of the provincial banks in England and Wales had been banks of issue up to 1844. The act of 1844 restricted their power of issuing notes, which at that date and even subsequently continued to be of importance to them, in such a manner that, as Sir R. H. Inglis Palgrave stated in giving evidence before the committee of the House of Commons at the banking inquiry of 1875, these banks possessed in their issues a property they could use, but were not able to sell. The statistics forming part of Appendix 14 to the report of the select committee of the House of Commons on banks of issue (1875) give interesting information as to the proportion of notes in circulation to the deposits of banks in various districts of the country and at various dates. The statements were supplied by twenty-one banks, some in agricultural districts, some in places where manufactures flourished, some in mixed districts, commercial and agricultural, or industrial and manufacturing. In all of these, the inquiry being carried as far back as 1844, the proportion of the circulation to the banking deposits had greatly diminished in recent years. In several cases the deposits had increased three-fold in the time. In one case it was five times as large, in another nearly seven times, in another nearly twelve and a half times. The proportion of the circulation to the deposits had very largely diminished in that time. In one instance, from being about one-third of the deposits, at which proportion it had remained for five years consecutively, it fell to 9% at the end of the term. In another from being 22% it had diminished to 1½% of the total. In all cases where the detail was given it had diminished greatly.
No security was ever required to be given for the local issues Security of note issue. in the United Kingdom. The provisions of the acts of 1844-1845 which compel the Irish and Scottish banks to hold specie against the notes issued beyond the legal limit, do not make the coin held a security for them. The legislation of 1879 which made the note issues a first charge, with unlimited liability, on the total assets of the joint-stock banks which accepted the principle of limited liability for the rest of their business, has been the only recognition by the state of the duty to the note-holders of rendering them secure. It has been a real disadvantage to England that this duty has never been sufficiently recognized, and that the provincial note issue, which is a very convenient power for a bank to possess, and incidentally a considerable advantage to its customers, has been swept away without any attempt being made to remedy its deficiencies. There may be objections raised to a note circulation secured by the bonds of the government, but the security of the note issues of the national banks of the United States made against such bonds, has scarcely ever been questioned.
A different policy was followed by Sir Robert Peel in Scotland and in Ireland from that which he established in England. By the acts of 1844-1845 the Scottish and Irish banks were allowed to exceed their authorized issues on holding specie to the amount of the excess, and no restrictions were placed on amalgamations among banks in these countries. In Scotland and in Ireland notes for less than £5 continued to be allowed. The result has been that the ten large banks in Scotland, and six of the nine banks in Ireland, possess the power of issuing notes. The large proportion of local branches in these countries has been greatly assisted by this power.
Originally, besides the Bank of England, nearly all the provincial Amounts in circulation. banks in England and Wales possessed the privilege of issue. These banks continued their operations as previously during the time while the Bank Act was discussed in parliament. When the arrangements which that act created were made public, nine banks, of which eight were private and one was a joint-stock bank, ceased to issue their notes prior to the 12th of October 1844, when the act came into operation. Of these, the Western District Joint-Stock Banking Co. was dissolved, one of the private banks was closed, the remaining seven issued Bank of England notes and were allowed certain privileges for doing this. By the act of 1844 the maximum circulation of the English issuing banks was fixed at the average circulation of the twelve weeks before the 27th of April 1844.
The purely city banks had associated themselves in a "Clearing Clearing. House" certainly by 1776. An entry in the books of the Grasshopper, namely—"1773 to quarterly charge for use of the Clearing-room of 19/6d.," points to an earlier and perhaps less definitely organized system of settlement. A house was taken for the purpose in 1810, in which year the number of banking houses who settled their accounts with each other at the "Clearing House" was forty-six (Gilbart's History and Principles of Banking, p. 78). The Bank of England has never been a member of the Clearing House, though it "clears on one side," i.e. its claim on the clearing bankers is made through the Clearing House, but the claims of the clearing bankers on the bank are forwarded direct to Threadneedle Street twice or thrice daily. Nor did the banks in Fleet Street or at Charing Cross belong to it. In 1858 the clearing of country cheques was added through arrangements made by Lord Avebury, then Sir John Lubbock. The "country clearing" is a great assistance to business, as it enables a cheque drawn on the most distant village in England to be dealt with as conveniently as a cheque on London. Of the forty-nine banks in London in 1844, twenty-six were connected with the Clearing House. At that time only private banks were allowed to be members. In 1854 the joint-stock banks made their way into that body, and in 1906 the numbers were one private bank and eighteen joint-stock banks who joined in the clearing—nineteen banks in all.
In 1839 the figures of the London clearings were £954,401,600, 29 banks.
In 1840 " " " " 978,496,800, 29 "
In 1899 " " " " 9,150,269,000, 19 "
In 1900 " " " " 8,960,170,000, 19 "
In 1906 " " " " 12,711,334,000, 18 "
Soon after the establishment of the Bank of Scotland the directors began to issue notes, or, as they were then called, bills or tickets, for £100, £50, £20, £10, and £5. In 1704 £1 notes were issued for the first time. In 1727 the Royal Bank of Scotland was established by a charter of incorporation,—which granted them "perpetual succession and a common seal." There was a great rivalry between the two companies. The British Linen Company was incorporated in 1746 for the purpose of undertaking the manufacture of linen, but by 1763 they found it best to confine their operations to banking transactions. This bank also was incorporated by charter.
Date.  Deposits. Number of Offices.
1826 £21,000,000 167 = 1 to every 13,170 inhabitants.
1841 27,000,000 380 = 1 to every" 6,600 inhabitants"
585 = 1 to every" 5,230 inhabitants"
790 = 1 to every" 4,250 inhabitants"
1,180 = 1 to every" 3,790 inhabitants"
The early history of banking in Ireland was marked by Irish 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.
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, at any time, 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.
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 obtained by 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.
Banking, like every other business, has to pass through periods Banking crises of 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.
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.
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%.
£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.
This provides but a narrow basis for the whole business The "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.
The expectations expressed by Sir Robert Peel in his speech on 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 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 in British 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 the Banque Générale, was established in 1716 by John Law, the author of the Mississippi Scheme and the Système. Law's bank, which had been converted into the Banque Royale in 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.
11,178 current accounts, with power of discount.
26,709 current accounts, with advances.
Total 66,569 accounts, against 59,182 at the end of 1903.
Besides the Bank of France, several great credit institutions carry on business in the country; as the Banque de Paris et des Pays-Bas (capital and reserve, £3,729,000; other liabilities, deposits, &c., £14,842,000), the Banque Française pour le Commerce et l'Industrie (£2,450,000; and £3,505,000), the Crédit Lyonnais (£14,000,000; and £82,570,000), the Comptoir National d'Escompte de Paris (£6,772,000; and £47,593,000), the Société Générale pour favoriser le développement du Commerce et de l'Industrie en France (£7,469,000; and £45,800,000), and the Société Générale de Crédit Industriel et Commercial (£1,600,000; and £10,060,000).
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 the empire) 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 the Gazette.
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 by Artikel 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); Economist newspaper, 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 of the 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).
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 of McCulloch v. 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 valuable than 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 (see Jackson, 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.
One of the defects of the state system of note-issues was the inconvenience which it occasioned. Notes issued outside a state could not safely be received without careful scrutiny as to the responsibility of their issuers. The systems prevailing in New England, in Louisiana, in Ohio and in Indiana were eminently successful, and proved the soundness of the issue of bank-notes upon the assets of a well-conducted commercial bank. But the speculation fostered by loose banking laws in some other states, and the need for uniformity, cast a certain degree of discredit upon the state banks, and prepared the way for the acceptance of a uniform banking system in 1864.
The power of note-issue formed a more important part of banking resources before the Civil War than in later years, because the deposit system had not attained its full development. Thus in 1835 circulation and capital of state banks combined were about $335,000,000 and deposits were only $83,000,000, in 1907 circulation and capital of national banks $1,430,000,000, while deposits were $4,322,000,000—in the earlier period deposits forming less than one-third of the other two items and in the later period three times the other items. The circulation of the state banks fluctuated widely at different periods. A maximum of $149,185,890 was attained in 1837, to decline to $106,968,572 three years later and to a minimum of $58,563,608 in 1843. From this point there was a tendency upward, with some variations, which put the circulation in 1845 at $89,608,711; 1848, $128,506,091; 1850, $131,366,526; 1854, $204,689,207; 1856, $195,747,950; 1858, $155,208,344; 1860, $207,102,477; 1863, $238,677,218.
Other leading items of the accounts of the state banks for representative years are as follows:— State Banking Progress, 1835-1863.
The National Banking System.—The creation of the national banking system was mainly the outcome of the financial necessities of the Federal government in the Civil War. It was found difficult to float government bonds at profitable rates, and Mr Chase, the secretary of the treasury, devised the scheme of creating a compulsory market for the bonds by offering special privileges to banks organized under Federal charters, which would issue circulating notes only when secured by the deposit of government bonds. But this plan, authorized by the act of 25th February 1863 (supplemented by the act of 3rd June 1864), was not sufficient to give predominance to the national banks. The state banking systems in the older states were so firmly entrenched in the confidence of the commercial community that it became necessary to provide for imposing a tax of 10% upon the face-value of the notes of state banks in circulation after the 1st of July 1866. The state banks were thus driven out of the note-issuing business, some being converted into national banks, while others continued their commercial business under state laws without the privilege of note-issue. A remarkable growth in the national banking system took place; in 1864 there were 453 national banks with an aggregate capital of $79,366,950, and in 1865 there were 1014 banks with an aggregate capital of $242,542,982.
The national banking system was specially marked by the issue of circulating notes upon United States bonds. Any national bank desiring to issue notes might by law deposit with the United States treasurer bonds of the United States to an amount not exceeding its capital stock, and upon such bonds it might receive circulation equal to 90% of their par-value. No bank could be established which did not invest one-third of its capital in bonds. This was changed in 1874 so as to reduce the requirement to 25%, with a maximum mandatory requirement of $50,000. Notes were taxed at the rate of 1% per annum. The banks obtained from the provision for circulation the benefit of what was described by critics as "double interest," being credited with the interest on bonds in the custody of the treasury department, and being also able to lend their notes to the public. But several deductions had to be made: notes could not be issued to the full par-value of the bonds; the tax of 1% upon circulation reduced by that amount the profit which would otherwise be earned; and the banks had to set aside in gold or other lawful money what was needed for redemption purposes and for reserves. As the banks suspended specie payments at the close of 1861 and great masses of government paper-money were issued, gold ceased to be a medium of exchange except in California, and the new banks redeemed their notes in government paper. The gold-value of the bank-notes, therefore, rose and fell with that of government notes until the resumption of payments in specie by the national treasury on the 1st of January 1879.
A new extension was given to the national banking system by the provisions of the gold standard law of 14th March 1900. Banks were authorized to issue circulation to the full par-value of bonds deposited, and the tax upon circulation was reduced from 1% to ½ of 1% in the case of circulation which was secured by the 2% refunding bonds, which were authorized by this law. By issuing 2% bonds in exchange for those paying a higher interest, at approximately the market-price, it became possible to obtain a given amount of notes upon a smaller investment in bonds, independent of other provisions of the law. Under these provisions the volume of notes outstanding, secured by bonds, which stood on the 31st of October 1899 at $207,920,774, reached on the same date in 1900, $298,829,064; in 1901, $328,198,613; in 1902, $335,783,189; in 1903, $380,650,821; in 1904, $424,530,581; in 1905, $490,037,806; in 1906, $536,933,169; and in 1907 $562,727,614.
The lowest denomination of national bank-notes authorized by law is $5, and not more than one-third of any bank's issues can be of this denomination. The government issues notes for $1 and $2, as well as for higher denominations. The largest amount of bank-notes of one denomination is in bills for $10, which on the 31st of October 1907 constituted $249,946,530 in total outstanding issues of $609,905,441. Of this total circulation $562,727,614 was secured by bonds, and the remainder, $47,252,852, was covered by lawful money in the government treasury, deposited for the redemption and retirement of the notes as they might be received.
An important extension of the national system resulted from the authority given by the act of 1900 to incorporate national banks with a capital as low as $25,000, in places having a population not in excess of 3000. The previous minimum limit had been $50,000. Under this provision there were incorporated to the 31st of October 1907 2389 national banks with capitals of less than $50,000, with aggregate capital of $62,312,500, of which 272 banks were conversions of state and private institutions, 752 were reorganizations and 1365 were new institutions.
The national banks possess most of the powers of commercial banks, but are not permitted to hold real estate other than their banking houses, unless taken for debt. Five reports are required each year to the comptroller of the currency at dates selected by him without notice, and each bank is subject to the visitation of bank examiners acting under the comptroller. No reserves against notes are required by existing law except 5%, which is kept in Washington for current redemption purposes. The redemption system is defective in that redemptions are not authorized at other places, and the notes reach the treasury on an average only about once in two years. For many years the banks were prohibited from retiring more than $3,000,000 of notes monthly, but the limit was raised by an act of 4th March 1907 to $9,000,000 per month.
Reserves are required against deposits to the amount of 25% in so-called reserve cities," and 15% in what are called the "country banks" outside of reserve cities. Not all these amounts, however, are required to be kept in cash. The three central reserve cities, where cash is required, with only trifling deductions, are New York, Chicago and St Louis. In other reserve cities, which in 1908 numbered forty, the banks are permitted to deposit half their cash in national banks in central reserve cities, while country banks may deposit three-fifths of their cash in any reserve city. The shareholders of national banks are subject in case of liquidation to double liability upon their shares, and this is now the rule in most of the conservative state banking systems. National bank-notes are not legal tender, but are receivable by the government for all obligations except customs dues.
The panic of 1907 imposed a severe strain upon the cash resources of the banks of New York City, but did not cause any such considerable number of failures as occurred in 1893.
Payment of cheques in currency was suspended in New York on the 28th of October 1907, and continued until about the beginning of the year 1908. The panic was precipitated by over-speculation by a group of national banks, followed by the suspension of the Knickerbocker Trust Company on the 22nd of October with deposits of $48,000,000. Then came runs on other companies, a deficit in the required reserves of New York banks of $38,838,825 in the week of 2nd November, and arrangements for the importation of foreign gold to an amount which soon approached $100,000,000. With an increase during the autumn of about $77,000,000 in national bank circulation, a transfer of $72,000,000 from the treasury to the banks, and a further decline in required reserves in New York during the next week, the amount of currency which was added to the circulation or disappeared during a few weeks of the panic amounted to more than $275,000,000, or nearly one-tenth of the usual volume of circulation in the country. The total bank-note circulation on the 28th of December 1907 had risen to $687,340,835; but this amount was abnormal and was reduced somewhat during the spring of 1908.
The position of the trust companies, especially those of the city of New York, was one of the disturbing features of the panic. These companies were comparatively a small factor in New York finance at the time of the panic of 1893. The capitalization of all the trust companies in the United States, even as late as 1897, was only $106,968,253, and individual deposits were $566,922,205. The capital of these companies had risen in 1907 to $276,146,081 and their deposits to $2,061,623,035. The trust companies of New York were required by the law of the state to maintain only 5% of their demand deposits in cash in their vaults. Whilst most of them had also large amounts on deposit in national banks, these reserves proved inadequate to sustain the vast mass of credit which was built upon them. The absolute amount of the reserves, however, was perhaps less important than the class of business to which some of the less conservative of these companies had committed themselves. Instead of keeping their assets liquid by purchases of commercial paper and loans on first-class negotiable securities, they had in some cases engaged in speculative underwritings and had locked up their funds in enterprises requiring a long time for their consummation.
It was these combined influences which led to distrust of the Knickerbocker Trust Company, and to the runs upon that company and others during the late days of October and early November. The result was to reduce the total resources of the forty-eight trust companies of Greater New York from $1,205,019,700 on the 22nd of August 1907 to $858,674,000 on the 19th of December 1907. Individual deposits subject to cheque fell from $692,744,900 to $437,733,400. Such a reduction of resources within so short a time, most of it being accomplished within a few weeks, has hardly ever been recorded in the history of banking, and the fact that the stronger companies were able to call in their cash and meet such demands was evidence to a certain extent that the criticisms upon them were exaggerated. The necessity for stronger reserves and for greater safeguards against speculative operations was so strongly impressed upon the public mind, however, that several restrictive measures were enacted at the session of the New York legislature in 1908, designed to prevent any abuses of this sort in the future.
Resources of State Banks, Trust Companies, &c.
1873 115,885,794 4.15 Great business activity.
1874 74,692,574 5.62 Industrial depression.
1881 159,232,191 3.66 Renewal of railway building.
1885 82,789,480 5.12 Results of bank panic.
1890 123,074,139 4.65 Business expansion.
1894 79,704,426 6.54 Depression following panic.
1896 96,232,442 6.28 Free silver panic.
1899 189,961,029 5.37 Renewed confidence and activity.
1901 254,193,639 4.56 Culmination of industrial flotations.
1904 195,648,514 5.20 Diminished stock-exchange and business activity.
1906 342,422,773 3.69 Stock-market activity.
Authorities.—William M. Gouge, A History of Paper Money and Banking in the United States (Philadelphia, 1833); Condy Raguet, A Treatise on Currency and Banking (Philadelphia, 1840); J. S. Gibbons, The Banks of New York, their Dealers, the Clearing-House and the Panic of 1857 (New York, 1858); Albert S. Bolles. Financial History of the United States (3 vols., New York, 1884-1886); Charles F. Dunbar, Chapters on the Theory and History of Banking (New York and London, 1891); Horace White, Money and Banking (Boston, 1902); Charles A. Conant, A History of Modern Banks of Issue (New York, 1896); Alexander D. Noyes, Thirty Years of American Finance (New York, 1898); Davis Rich Dewey, Financial History of the United States (New York and London, 1903); John C. Schwab, The Confederate States of America, 1861-1865 (New York, 1901); David Kinley, The Independent Treasury of the United States (New York, 1893); Report of the Monetary Commission of the Indianapolis Convention (Chicago, 1898); Charles A. Conant, The Principles of Money and Banking (2 vols., New York, 1905); William G. Sumner, A History of American Currency (New York, 1884); Amos Kidder Fiske, The Modern Bank (New York, 1904); William G. Sumner, A History of Banking in the United States (New York, 1896), being vol. i. in A History of Banking in All the Leading Nations; John Jay Knox, History of Banking in the United States (rev. ed., New York, 1900); and R. C. H. Catterall, The Second Bank of the United States (Chicago, 1903).
Issue of Notes.—The legislation which culminated in the Bank Charter Acts of 1844 and 1845 secured to the Bank of England the absolute monopoly of the note issue within the city of London and a 3-m. radius. Outside that radius, and within 65 m. of the city, there is a concurrent right in banks, consisting of six or less than six persons, established before 1844, and issuing notes at that date; beyond the 65-m. radius the privilege may be exercised by all banks established before 1844, and then issuing notes, who have not since lost their right to do so by bankruptcy, abandonment of business, or temporary suspension of issue. According to some authorities, the effect of 20 and 21 Vict. cap. 49, sec. 12 [re-enacted Companies Consolidation Act 1908, sec. 286 (d)] was to sanction the increase in the constitution of any bank issuing notes outside the 3-m. and within the 65-m. radius from six to ten persons without affecting the power to issue notes. The rule as formulated above is, however, that enunciated by Bowen J. in Capital and Counties Bank v. Bank of England, 1889; 61 L.T. 516. The increase in the number of joint-stock banks and the gradual absorption of the smaller and older concerns have had the effect of minimizing the output of notes other than those issued by the Bank of England, and, as exemplified by the case of The Attorney-General v. Birkbeck, 12 Q.B.D. 57, it would seem impossible to devise any scheme by which the note-issuing power of an absorbed bank could be continued to the new or amalgamated body. But a bank having the right would not necessarily lose it by absorbing other banks (Capital and Counties Bank v. Bank of England). Foreign banks may establish branches in Great Britain on complying with the regulations imposed on them by the Companies Consolidation Act 1908, but cannot apparently issue notes, even though payable abroad.
Deposit Business.—The term "bank of deposit" gives a mistaken Relation between banker and customer. idea of the real relation between banker and customer. So long ago as 1848 it was decided by the House of Lords in Foley v. Hill, 2 H. of L. 28, that the real relation between banker and customer was that of debtor and creditor, not in any sense that of trustee and cestui que trust, or depositee and depositor, as had been formerly supposed and contended. The ordinary process by which a man pays money in to his account at his banker's is in law simply lending the money to the banker; it fixes the banker with no fiduciary relation, and he is in no way responsible to the customer for the use he may make of the money so paid in. And as being a mere debt, a customer's right to recover money paid in is barred on the expiration of six years by the Statute of Limitations, if there has been no payment meantime on account of principal or interest, and no acknowledgment sufficient to bar the statute (Pott v. Clegg, 16 M. & W. 321). Such a state of affairs, however, is hardly likely to arise, inasmuch as, in the absence of specific appropriation, earlier drawings out are attributed to the earlier payments in, as in the ordinary case of current accounts, and so the items on the credit and debit side cancel each other. An apparent exception to this system of appropriation exists in cases where a man wrongfully pays into his own account moneys held by him in a fiduciary capacity. In such circumstances he is presumed to have drawn out his own moneys rather than those affected by the trust, and so long as the account is in credit, any balance will be attributed to the trust money. As between contending claims to the money, based on different breaches of trust, the ordinary rule of appropriation will apply.
It has often been suggested that the only method of withdrawing Cheques. money from a banker is by cheque, that the presentation of a cheque is a condition precedent to the liability of the banker to repay. This is not so; such view being inconsistent with the cases establishing the effect of the Statute of Limitations on money left in a banker's hands, and with the numerous cases in which a balance at a bank has been attached as a simple and unconditional debt by a garnishee order, as, for instance, in Rogers v. Whiteley, 1892, A.C. 118. The banker's position with regard to cheques is that, superadded to the relation of debtor and creditor, there is an obligation to honour the customer's cheques provided the banker has a sufficient and available balance in his hands for the purpose (Foley v. Hill). If, having such funds in his hands, the banker dishonours a cheque, he is liable to the customer in substantial damages without proof of actual injury having accrued (Rolin v. Steward, 14 C.B. 595). Where several cheques are presented simultaneously and the available balance is insufficient to pay all, the banker should pay as many as the funds will cover, and is not bound to discriminate between particular cheques. It would seem a legitimate condition that a cheque should be drawn in the ordinary recognized form, not in one raising any question or doubt as to its validity or effect. Cheques drawn to "wages or order," "petty cash or order," or the like, are common, and are sometimes regarded as payable to bearer. Such payees are not, however, "fictitious or non-existent persons," so as to render the cheques payable to the bearer under sec. 7, subs. 3 of the Bills of Exchange Act 1882, nor can such payees endorse. Some banks refuse to pay such cheques, and it is conceived they are justified in so doing. Money paid in so shortly before the presentation of the cheque that there would not have been time to pass it through the books of the bank would not be treated as available for drawing against. If a person have an account at one branch of a bank, he is not entitled to draw cheques on another branch where he has either no account or is overdrawn, but the bank has, as against the customer, the right to combine accounts at different branches and treat them as one account (Garnet v. McEwen, L.R. 8 Ex. 10). Funds are not available so long as a garnishee order, founded on a judgment against the customer, is pending, since it attaches all moneys on current account irrespective of the amount of the judgment (Rogers v. Whiteley).
The banker is bound to observe secrecy with respect to the customer's account, unless good cause exists for disclosure, and the obligation does not cease if the account becomes overdrawn (Hardy v. Veasey, L.R. 3 Ex. 107). In England a cheque is not an assignment of funds in the banker's hands (Bills of Exchange Act 1882, sec. 53). The holder of the cheque has therefore no claim on the banker in the event of payment being refused, his remedy being against the drawer and endorser, if any. On this section is also based the custom of English bankers not to pay part of the amount of a cheque where there are funds, though not sufficient to meet the whole amount. The section does not apply to Scotland, where it would seem that the bank is bound to pay over what funds it has towards satisfaction of the cheque. A banker is entitled to hold paid cheques as vouchers until there has been a settlement of account between him and the customer. The entries in a pass-book constitute prima facie evidence against the banker, and when returned by the customer without comment, against him; but the proposition that such return constitutes a settlement of account has been much disputed. Indeed where forgery is the ground of repudiation of a cheque, no dealings or omissions of the customer with regard to the pass-book would seem to preclude him from objecting to being debited and throwing the loss on the banker (Kepitigalla Rubber Co. v. National Bank of India, 25 Times L.R. 402). As against the banker, however, credit entries in the pass-book cannot be disputed if the customer has altered his position in reliance thereon, and cheques drawn against an apparent balance must be honoured (Holland v. Manchester & Liverpool District Bank, 25 Times L.R. 386).
By sec. 19 of the Stamp Act 1853, the banker paying a draft or order payable to order on demand, drawn upon him, was relieved from liability in the event of the endorsement having been forged or unauthorized. This enactment was not repealed by the Bills of Exchange Act 1882, and, in London City & Midland Bank v. Gordon (1903), A.C. 240, was held to cover the case of drafts drawn by a branch of a bank on its head office. Sec. 60 of the Bills of Exchange Act 1882 extends like protection to the banker in the case of cheques, the definition of which therein as "bills drawn on a banker payable on demand" debars drafts of the above-mentioned description. Such definition, involving the unconditional character of the instrument, also precludes from the protection of this section the documents now frequently issued by corporations and others, which direct bankers to make payments on a specific attached receipt being duly signed (London City & Midland Bank v. Gordon). Sec. 17 of the Revenue Act 1883, however, applies to these documents the crossed cheques sections of the Bills of Exchange Act 1882 (see Bavius, Jr., & Sims v. London & South-Western Bank , 1 Q.B. 270), while denying them the position of negotiable instruments, and a banker paying one of them crossed, in accordance with the crossing and in the absence of any indication of its having been transferred, could probably claim immunity under sec. 80. The Bills of Exchange Act 1882 contains no direct prohibition against a banker paying a crossed cheque otherwise than in accordance with the crossing, but if he do so he is liable to the true owner for any loss suffered by him in consequence of such payment (sec. 79), and is probably unable to charge his customer with the amount. A banker paying a crossed cheque in accordance with its ostensible tenor obtains protection under sec. 80 and the proviso to sec. 79. Questions have arisen as to the bearing of the crossed cheques sections when a crossed cheque drawn on one branch of a bank is paid in for collection by a customer at another branch; but the transaction is so obviously a legitimate and necessary one that either by the collecting branch may be regarded as a separate bank for this purpose, or sec. 79 may be ignored as inapplicable (Gordon v. London City & Midland Bank , 1 K.B. 242 C.A.).
The collection of crossed cheques for a customer being virtually incumbent on a banker, qualified immunity is accorded him in so doing by sec. 82, a final exposition of which was given by the House of Lords in London City & Midland Bank v. Gordon (1903), A.C. 240. To come within its provisions, the banker must fulfil the following conditions. He must receive the cheque from, and the money for, a customer, i.e. a person with whom he has definite and existing business relations (see Great Western Ry. Co. v. London & County Bank , A.C. 414). He must take the cheque already crossed generally or specially to himself. His own crossing under sec. 77 is absolutely inefficacious in this connexion. He must take the cheque and receive the money in good faith and without negligence. Negligence in this relation is the omission to exercise due care in the interest of the true owner, not necessarily the customer. To avoid this disqualification of negligence, the banker must see that the endorsements, where necessary, are ostensibly correct; he must satisfy himself of the authority where an endorsement is per procuration; he must not take for private account a cheque which on its face indicates that the holder is in possession of it as agent, or in an official capacity, or for partnership purposes (Hannan's Lake View Central Ld. v. Armstrong & Co., 16 Times L.R. 236; Bevan v. National Bank, 23 Times L.R. 65); he must not take a cheque marked "account payee" for an account other than that indicated (Bevan v. National Bank). It is further demonstrated by the Gordon case that the banker only secures protection so long as he is acting strictly as a conduit pipe, or as agent for the customer. If he put himself in the position of owner of the cheque, he no longer fulfils the condition of receiving the money only for the customer. In the Gordon case, adoption of the not uncommon practice of crediting cheques as cash in the bank's books before the money was actually received was held equivalent to taking them as transferee or owner, and to debar the bank from the protection of sec. 82. The anxiety and inconvenience caused to bankers by this unexpected decision was ultimately removed by the Bills of Exchange (Crossed Cheques) Act 1906, which enacts that a banker receives payment of a crossed cheque for a customer within the meaning of sec. 82 of the Bills of Exchange Act 1882, notwithstanding that he credits his customer's account with the amount of the cheque before receiving payment thereof. Apparently the scope of this act must be confined to its immediate object, and it does not affect the relations and rights between the banker and his customer or parties to the cheque arising from such crediting as cash. For instance, the customer, in the absence of agreement to the contrary, may at once draw against cheques so credited, while the banker may still debit the customer with the amount of the cheque if returned unpaid, or sue the drawer or indorser thereon.
The protection to the collecting banker is in no way affected by the cheque being crossed "not negotiable," or by the nature of the fraud or crime by which the cheque was obtained by the customer or any previous possessor, although there are dicta which have been interpreted in the contrary sense. Nor does the fact that the customer is overdrawn deprive the banker of the character of a collecting agent, unless the cheque be definitely given and taken in reduction of such overdraft. Where the conditions requisite for protection exist, the protection covers not only the receipt of the money, but all operations usual in business and leading up to such receipt, on the basis of the customer's title being unimpeachable. The provisions of the crossed cheques sections of the Bills of Exchange Act 1882 are extended to dividend warrants by sec. 95 of that act, and to certain orders for payment issued by a customer of a banker by sec. 17 of the Revenue Act 1883, as before stated. But the wording of the Bills of Exchange (Crossed Cheques) Act 1906, specifying as it does cheques alone, appears to exclude documents of both these classes from its operation. With regard to the orders for payment, inasmuch as the same section which brings them within the crossed cheques sections expressly provides that they shall not be negotiable, a banker would probably be protected only in taking them from the specified payee, though this distinction has been ignored in some recently decided cases.
Where a banker incurs loss through forgery or fraud in circumstances Fraud. not covered by statutory protection, his right to relief, if any, must depend on general principles. He cannot charge his customer with payments made on a forgery of that customer's signature, on the ground either that he is presumed to know such signature or that the payment is unauthorized. But if the customer has accredited the forgery, or, having knowledge or reasonable ground for belief that it has been committed, has failed to warn the banker, who has thereby suffered loss or prejudice, the customer will be held estopped from disputing the banker's right to debit him with the amount (Vagliano v. Bank of England , A.C. 107; McKenzie v. British Linen Co. 6 A.C. 82; Ewing v. Dominion Bank , A.C. 806). The doctrine of the fictitious person as payee may also exonerate a banker who has paid an order bill to a wrongful possessor. Payment on a forgery to an innocent holder is payment under mistake of fact; but the ordinary right of the payor to recover money so paid is subordinated to the necessity of safeguarding the characteristics of negotiability. Views differ as to whether the recovery is precluded only where the opportunity of giving notice of dishonour is lost or prejudiced by delay in reclaiming payment, or whether mere possibility of damage is sufficient (cf. London & River Plate Bank v. Bank of Liverpool , 1 Q.B. 7, and Imperial Bank of Canada v. Bank of Hamilton , A.C. 49).
Cases have frequently arisen where the carelessness of a customer in filling up cheques has enabled a person to fraudulently increase the sum for which such cheques were originally drawn. In Colonial Bank of Australasia v. Marshall , A.C. 559, the judicial committee of the privy council held that the affording such facilities for forgery was no breach of the customer's duty to his banker, and that the latter was not entitled to debit the customer with more than the original amount. As before stated, the customer's dealings with the pass-book cannot, in the present state of the authorities, be relied on as debarring him from disputing unauthorized payments appearing therein.
The payment of bills accepted payable at the bank is not, Custody of valuables. like the payment of cheques, an essential obligation of the banker, and the risk involved is enhanced by the fact that the banker must pay or refuse payment at once, no interval being allowed for verification of endorsements. The abolition or modification of the practice has frequently been advocated, but it is one of the facilities which competition compels bankers to extend to their customers. On the same basis stands the receipt of a customer's valuables for safe custody. The question of the banker's responsibility for the loss of goods so deposited with him was raised, but not decided, in an action brought by Mrs Langtry against the Union Bank of London in 1896. Certain jewels belonging to her had been delivered up by the bank to an unauthorized person on a forged order. The case was settled; but bankers being desirous to ascertain their real position, many legal opinions were taken on the point, and after consideration of these, the Central Association of Bankers issued a memorandum, in which they stated that the best legal opinion appeared to be that a distinction must be drawn between cases in which valuables were by mistake delivered to the wrong person and cases in which they were destroyed, lost, stolen or fraudulently abstracted, whether by an officer of the bank or some other person. That in the former case the question of negligence did not arise, the case being one of wrongful conversion of the goods by a voluntary act for which the bank was liable apart from any question of negligence. That, in the second case, that of loss or theft, the banker, being a gratuitous bailee, would only be liable if he had failed to use such care as an ordinary prudent man would take of valuables of his own. The latter rule is practically that laid down in Giblin v. MacMullen, L.R. 2 P.C. 318, but in estimating the amount of care to be taken by the banker, the nature of the goods, if known or suspected, and the exceptional means of protection at the disposition of bankers, such as strong-rooms, must be taken into consideration. Methods of obviating both classes of risk by means of special receipts have frequently been suggested, but such receipts do not appear to have come into general use.
Theoretically, bankers are supposed to refuse accounts which Trustees. are either expressedly or are known to be trust accounts. In practice, however, it is by no means uncommon to find accounts opened with a definite heading indicating the fiduciary capacity. In other cases, circumstances exist which affect the banker with notice of that capacity. In either case, however, the obligation to honour the customer's cheque is the predominant factor, and the banker is not bound or entitled to question the propriety or object of the cheque, unless he has very clear evidence of impending fraud (Gray v. Johnston, L.R. 3 H. of L. 1). Even though the banker have derived some personal benefit from the transaction, it cannot be impeached unless the banker's conduct amount in law to his being party or privy to the fraud, as where he has stipulated or pressed for the settlement or reduction of an ascertained overdraft on private account, which has been effected by cheque on the trust account (Coleman v. Bucks & Oxon Union Bank , 2 Ch. 243). A banker is entitled, in dealing with trust moneys, known to be such, to insist on the authority of the whole body of trustees, direct and not deputed, and this is probably the safest course to adopt. Scarcely larger responsibility devolves on Joint Stock Banks appointed custodian trustees under the Public Trustee Act 1906, a remunerative position involving custody of trust funds and securities, and making and receiving payments on behalf of the estate, while leaving the active direction thereof in the hands of the managing trustees.
Other incidents of the ordinary practice of banking are the Bill-discounting. discounting of bills, the keeping of deposit accounts, properly so called, and the making of advances to customers, counting either by way of definite loan or arranged overdraft. So far as the discounting of bills is concerned, there is little to differentiate the position of the banker from that of any ordinary bill-discounter. It has been contended, however, that the peculiar attribute of the banker's lien entitled him to hold funds of the customer against his liability on current discounted bills. This contention was ultimately disposed of by Bowen v. Foreign & Colonial Gas Company, 22 W.R. 740, where it was pointed out that the essential object of a customer's discounting bills with his banker was to feed the current account, and that a possible liability constituted no set-off against an existing debt. Whether a particular bill has been taken for discount or collection is a question of fact. As in the payment of bills, so in the collection of them, there is no statutory protection whatever for the banker; as against third parties he can only rely either on the customer's title or his own as a holder for value, if no forged endorsement intervene and he can establish a consideration.
A deposit account, whether at call or on fixed notice, does not Deposit accounts. constitute any fiduciary relation between the depositor and the banker, but merely a debt due from the latter to the former. It has been suggested that cheques can be drawn against deposit account on call, and, though a banker might safely honour such a cheque, relying, if necessary, on his right of lien or set-off, there appears no legal right in the customer to enforce such payment. Deposit receipts given by bankers are exempt from stamp duty, even though they contain an undertaking with respect to payment of principal and interest. They are clearly not negotiable instruments, but it is difficult to deduce from the cases how far dealings with them may amount to an equitable assignment of the moneys they represent. Probably deliberate definite transfer, coupled with endorsement, would confer an effective title to such moneys. Where, as is not uncommon, the form of deposit note includes a cheque, the banker could not refuse to pay were the cheque presented and any superadded formalities complied with.
There is no obligation on a banker to permit his customer Overdrafts and advances. to overdraw, apart from agreement express or implied from course of business. Drawing a cheque or accepting a bill payable at the banker's which there are not funds meet is an implied request for an overdraft, which the banker may or may not comply with. Interest is clearly chargeable on overdrafts whether stipulated for or not. There is no direct authority establishing this right in the banker, and interest is not usually recoverable on mere debts, but the charge is justifiable on the ground of the universal custom of bankers, if not otherwise. The charging of compound interest or interest with periodical rests has been supported where such system of keeping the accounts has been brought to the notice of the customer by means of the pass-book, and not objected to by him, but in the present attitude of the courts towards the pass-book some further recognition would seem necessary. Such system of charging interest, even when fully recognized, only prevails so long as the relation of banker and customer, on which it is founded, continues in force; the taking a mortgage for the existing debt would put an end to it.
The main point in which advances made by bankers differ Lien. from those made by other people is the exceptional right possessed by bankers of securing repayment by means of the banker's lien. The banker's lien is part of the law merchant and entitles him, in the absence of agreement express or implied to the contrary, to retain and apply, in discharge of the customer's liability to him, any securities of the customer coming into his possession in his capacity as banker. It includes bills and cheques paid in for collection (Currie v. Misa, 1 A.C. 564). Either by virtue of it, or his right of set-off, the banker can retain moneys paid in by or received for the credit of the customer, against the customer's debt to him. Goods deposited for safe custody or moneys paid in to meet particular bills are exempt from the lien, the purpose for which they come to the banker's hands being inconsistent with the assertion of the lien. The existence of the banker's lien entitles him to sue all parties to bills or cheques by virtue of sec. 27, subs. 3 of the Bills of Exchange Act, and to the extent of his advances his title is independent of that of the previous holder. Moreover, the banker's lien, though so termed, is really in effect an implied pledge, and confers the rights of realization on default pertaining to that class of bailment. But with regard to the exercise of his lien, as in many other phases of his relation to his customer, the banker's strict rights may be curtailed or circumscribed by limitations arising out of course of business. The principle, based either on general equity or estoppel and independent of definite agreement or consideration, requires that when dealings between banker and customer have for a reasonable space of time proceeded on a recognized footing, the banker shall not suddenly break away from such established order of things and assert his strict legal rights to the detriment of the customer. By the operation of this rule, the banker may be precluded from asserting his lien in particular cases, as for instance for an overdraft on one account against another which had habitually been kept and operated on separately. It equally prevents the dishonouring of cheques in circumstances in which they have hitherto been paid independent of the actual available balance.
Restrictions arising from course of business can of course be put an end to by the banker, but only on reasonable notice to the customer and by providing for outstanding liabilities undertaken by the latter in reliance on the continuance of the pre-existing state of affairs (see Buckingham v. London & Midland Bank, 12 Times L.R. 70). As against this, the banker can, in some cases, fortify his position by appeal to the custom of bankers. The validity of such custom, provided it be general and reasonable, has frequently been recognized by the courts. Any person entering on business relations with a banker must be taken to contemplate the existence of such custom and implicitly agree that business shall be conducted in accordance therewith. Practical difficulty has been suggested with regard to proof of any such custom not already recognized in law, as to how far it can be established by the evidence of one party, the bankers, unsupported by that of members of the outside public, in most cases impossible to obtain. It is conceived, however, that on the analogy of local custom and the Stock Exchange rules, such outside evidence could be dispensed with, and this is the line apparently indicated with relation to the pass-book by the court of appeal in Vagliano's case (23 Q.B.D. at p. 245). The unquestionable right of the banker to summarily debit his customer's account with a returned cheque, even when unindorsed by the customer and taken by the banker in circumstances constituting him a transferee of the instrument, is probably referable to a custom of this nature. So is the common practice of bankers to refuse payment of a so-called "stale" cheque, that is, one presented an unreasonable time after its ostensible date; although the fact that some banks treat a cheque as stale after six months, others not till after twelve, might be held to militate against the validity of such custom, and lapse of time is not included by the Bills of Exchange Act among the matters working revocation of the banker's duty, and authority to pay his customer's cheque. Indirectly, this particular custom obtains some support from sec. 74 (2) of the Bills of Exchange Act, although the object of that section is different.
That section does, however, import the custom of bankers into the reckoning of a reasonable time for the presentation of a cheque, and with other sections clears up any doubts which might have arisen on the common law as to the right of the holder of a cheque, whether crossed or not, to employ his banker for its collection, without imperilling his rights against prior parties in case of dishonour. On dishonour of a cheque paid in for collection, the banker is bound to give notice of dishonour. Being in the position of an agent, he may either give notice to his principal, the customer, or to the parties liable on the bill. The usual practice of bankers has always been to return the cheque to the customer, and sec. 49, subs. 6 of the Bills of Exchange Act is stated to have been passed to validate this custom. Inasmuch as it only provides for the return of the dishonoured bill or cheque to the drawer or an endorser it appears to miss the case of a cheque to bearer or become payable to bearer by blank endorsement prior to the customer's.
With regard to guarantees, the main incidents peculiarly Guarantees. affecting bankers are the following. The existence of a guarantee does not oblige the banker to any particular system of keeping the account. So long as it is not unfairly manipulated to the detriment of the guarantor, there is no obligation to put moneys paid in, without appropriation, to the guaranteed rather than to the unguaranteed account, and on the termination of a guarantee, the banker may close the account, leaving it to be covered by the guarantee, and open a new one with the customer, to which he may devote payments in, not otherwise appropriated. Where by its nature or terms a continuing guarantee is revocable either summarily or on specified notice, difficult questions may arise on such revocation as to the banker's duty and obligations towards the customer, who has probably incurred liabilities on the strength of the credit afforded by the guarantee. Although the existence of a guarantee does not bind the banker to advance up to the prescribed limit, he could not well, on revocation, immediately shut off all facilities from the customer without notice, while subsequent purely voluntary advances might not be covered by the guarantee. These contingencies should therefore be fully provided for by the guarantee, particularly the crucial period of the pendency of notice.
Authorities.—The Institute of Bankers (London), Questions on Banking Practice (6th ed., 1909); J. Douglas Walker, A Treatise on Banking Law (2nd ed., 1885); Chalmers, Bills of Exchange (7th ed., 1909); Sir J. R. Paget, The Law of Banking (2nd ed., 1908); H. Hart, The Law of Banking (2nd ed., 1906).
↑ A translation of the act of the 3rd of May 1619 may be found in the appendix to the Quarterly Journal of Economics (Boston, U.S.A.) for April 1892. These documents present a distinct picture of banking in its true sense.
↑ The clearest account of its early (1825 is found in Thorold Rogers' History of the First Nine Years of the Bank of England.
↑ The date 1876 is taken as being that when the Imperial Bank of Germany came into full operation.
↑ "The Grasshopper" in Lombard Street, by John Biddulph Masters (1892).
↑ See Vortrage und Aufsdtze hauplscichlich aus dem Handels- und Weehselrecht, von Dr R. Koch, pp. 163-164.
↑ The imperial treasury is bound to pay the state notes in cash at any time when this is required, but an independent fund of cash set apart for this purpose does not exist. See Handwürterbuch der Staatswissenschaften, vol. v. art. “Papiergeld," p. 97 (Jena, 1893; ed. J. Conrad, L. Elstei, W. Lexis and E. Lösing.

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