11,178 current accounts, with power of discount. 4,576 simple current accounts. 26,709 current accounts, with advances. 24,106 accounts, deposits.

Total 66,569 accounts, against 59,182 at the end of 1903.

At the present time the Bank of France operates chiefly through its enormous note circulation (averaging in 1906 L186,300,000), by means of which most business transactions in France are carried on.

The limits of the circulation of the Bank of France and the dates when it has been extended are as follows:—

- - Dates Millions of Converting the Francs Franc as 25 = L1. - - 15th March 1848 350 L14,000,000 27th April, 2nd May 1848 452 18,000,000 2nd December 1849 525 21,000,000 12th August 1870 1800 32,000,000 14th August 1870 2400 96,000,000 29th December 1871 2800 112,000,000 15th July 1872 3200 128,000,000 30th January 1884 3500 140,000,000 25th January 1893 4000 160,000,000 17th December 1897 5000 200,000,000 In 1906 5800 232,000,000 - -

[v.03 p.0343] Most business transactions in France are liquidated, not in cheques as in England, but in notes of the Bank of France. These, owing to their convenience, are preferred to specie. This is accumulated in the vaults of the Bank of France, which in 1906 held on average L115,000,000 gold and L42,000,000 silver. The gold held by the Bank of France is generally considerably larger in amount than that held by the Bank of England, which in the autumn of 1890 had to borrow L3,000,000 in gold from the Bank of France at the time of the Baring crisis. The large specie reserve of the bank has given stability to the trade of France, and has enabled the bank to manage its business without the numerous fluctuations in the rate of discount which are constantly occurring in England. It is true that the holding this very large amount of specie imposes a very heavy burden on the shoulders of the shareholders of the bank, but they do not complain. The advantage to business from the low rate of interest which has to be paid for the use of borrowed capital in France is a great advantage to the trade and industry of that country.

The mass of the reserve in France is so great that the movements of the precious metals, when they are the result only of natural causes, are allowed to go on without corresponding movements in the discount rate. But it must be remembered that this large reserve is held in part against a gigantic note issue, and also that the trade activity and enterprise of the French people are less intense than in either the United Kingdom or Germany; thus it is much easier for the Bank of France to maintain a steady rate of discount.

Besides the Bank of France, several great credit institutions carry on business in the country; as the Banque de Paris et des Pays-Bas (capital and reserve, L3,729,000; other liabilities, deposits, &c., L14,842,000), the Banque Francaise pour le Commerce et l'Industrie (L2,450,000; and L3,505,000), the Credit Lyonnais (L14,000,000; and L82,570,000), the Comptoir National d'Escompte de Paris (L6,772,000; and L47,593,000), the Societe Generale pour favoriser le developpement du Commerce et de l'Industrie en France (L7,469,000; and L45,800,000), and the Societe Generale de Credit Industriel et Commercial (L1,600,000; and L10,060,000).

There is also the Credit Foncier de France with a very considerable capital, but the business done is so largely that of mortgages that it can hardly be included among banks, though it carries on in some measure the business of banking.

Besides the six important joint-stock banks mentioned above, there exists in France a large number of banks, principally in the provinces, carrying on a very considerable business. Little is known as to their deposits, but their business appears to be conducted with great prudence and discretion. One hundred and eighty-two of these firms were members of the French Country Bankers' Association in 1898. They carry on business in 66 out of the 86 departments into which France is divided. More than one of these banks has several offices—one possessing 18, including the head office. These branches are situated in the small towns in the vicinity. In this the business follows more the English method of small branches. The French Country Bankers' Association holds its meetings in Paris, where matters of interest to bankers are discussed. (See Bankers' Magazine, July 1898.)

Germany.—Besides the Imperial Bank of Germany, the "Reichsbank," there are about 140 banks doing business in the states which form the German empire. These credit and industrial banks with their large resources have had an immense influence in bringing about the astonishing industrial development of their country. Five banks possess the right of uncovered note-issue; these are:—

The Imperial Bank of Germany with right of issue L23,641,450 The Bank of Saxony " " " 838,500 The Bank of Bavaria " " " 1,600,000 The Bank of Wuerttemberg " " " 500,000 The Bank of Baden " " " 500,000 —————- L27,079,950

At the Bank of Germany the coin and bullion held is sometimes larger than at the Bank of England. The statement of the specie in the weekly accounts includes silver. The amounts held in gold and silver are only separated once a year, when the balance-sheet is published. The figures of the balance-sheet for the 31st of December 1906 showed in round numbers L24,000,000 gold and L9,000,000 silver. As far as the capital is concerned the L18,000,000 of the Bank of England considerably exceeds the L9,000,000 of the Bank of France and the L12,200,000 of the Bank of Germany. The note circulation of both the other banks is considerably larger than that of the Bank of England, that of the Bank of France being L186,300,000, and of the Imperial Bank of Germany L69,000,000 in 1906.

The capitals and reserves of the German banks, including those of banks established to do business in other countries, as South America and the Far East, and of the Bank of Germany, are about L133,000,000, with further resources, including deposits, notes and mortgage bonds, amounting to fully L414,000,000. The amount of the capital compares very closely with that of the capitals of the banks of the United Kingdom. The deposits are increasing. The deposits, however, are not the whole of the resources of the German banks. The banks make use, besides, of their acceptances in a manner which is not practised by the banks of other countries, and the average note circulation of the Reichsbank, included in the statement given above, is between L60,000,000 and L70,000,000.

A large and apparently increasing proportion of the resources of the German banks is employed in industrial concerns, some of which are beyond the boundaries of the empire. The dangers of this practice have called forth many criticisms in Germany, among which may be quoted the remarks of Caesar Strauss and of Dr R. Koch, the president of the Reichsbank. Dr Koch especially points out the need of the development of powerful banks in Germany unconnected with speculative business of this kind. The object of employing their funds thus is the higher rate of interest to be obtained from these investments than from discounting bills or making loans at home. But such an employment of the resources of a bank is opposed to all regular rules of business and of banking tradition, which abstains from making fixed investments of any large part of the resources of a bank. On the other hand, Dr Koch observes that the risks of the one "reserve system" mentioned by Bagehot are not to be feared in Germany.[5] The recent movement in favour of concentration among the banks has been described by Dr E. Depitre and Dr Riesser, who give particulars of the business done by these banks, which does not correspond with banking as practised in the United Kingdom, being more of an industrial character.

There are also many private banking firms in Germany which do a considerable amount of business.

The Reichsbank, by far the most powerful banking institution in Germany, is managed by the bank directory appointed by the chancellor of the empire. The shareholders join in the management through a committee, of which each member must be qualified by holding not less than three shares. The government exercises complete powers of control through the chancellor of the empire. The influence of the Imperial Bank now permeates, by means of its branches, all the separate kingdoms of the empire—the uniformity of coinage introduced through the laws of 1871-1873 rendering this possible. The Imperial Bank assists business principally in two ways—first, through the clearing system (Giro-Verkehr), which it has greatly developed, and secondly, through the facilities given to business by its note circulation. The Imperial Bank also receives deposits, and cheques are drawn against these, but in Germany notes are principally used in payments for ordinary business.

Before the Reichsbank was established, Hamburg was the first, and for a long time the only, example of a clearing in Germany. This was taken up by the Reichsbank when it established its office in Hamburg in the time-honoured building which had belonged to the Hamburg Clearing House. Similar business had long been undertaken by the Bank of Prussia. This was absorbed and developed by the Reichsbank in 1876. Through the "clearing system" money can be remitted from any of the 443 places in which there is an office of the Reichsbank, to any of these places, without charge either to the sender or the receiver. It is sufficient that the person to whom the money is to be remitted should have an account at the bank. Any person owing him money in the remotest parts of the empire may go to the office of the bank which is most convenient to him and pay in the amount of his debt, which is credited on the following day at the office of the bank, without charge, to the account of his creditor wherever he may reside. The person who makes the payment need not have any account with the bank. The impetus given to business by this arrangement has been very considerable. It practically amounts to a money-order system without charge or risk of loss in transmission. From Hamburg and Bremen to the frontiers of Russia, from the shores of the Baltic to the frontiers of Switzerland, the whole of the empire of Germany has thus become for monetary purposes one country only. The amount of these transfers for the year 1906 exceeded L1,860,000,000.

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 L12,500,000, increased to L14,811,450 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 L23,641,450. Against the notes thus issued which are not represented by specie, treasury notes (Reichskassenscheine, the legal tender notes of the [v.03 p.0344] empire)[6] and notes of the issuing banks which are allowed to be reckoned as specie or discounted bills, must be held—maturing not later than three months after being taken—with, as a rule, three, but never less than two, good indorsements. There is also a provision that at least one-third of the notes in circulation must be covered by current German notes, money, notes of the imperial treasury, and gold in bullion or foreign coin reckoned at L69, 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 (L69, 12s. reckoning marks as 20 = L1) 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 L67,000,000, and the loans and advances to L14,200,000. The notes issued averaged for the year L69,000,000. The gold held amounted, 30th December 1906, to L24,069,000. 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 L25,267,000 on the 29th of September 1906 and L28,632,000 on the 31st of December of the same year. The amount of the duty paid on the excess issue in the year 1906 was L184,764, and the total amount paid thus from 1876 to 1906 was L839,052. 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 (L1), and 50 marks (L2, 10s.) in addition to the 5, 10, 100 and 1000 mark notes (5s., 10s., L5, L50) previously in circulation. Imperial paper currency of the value of 20 or 50 marks (L1 and L2, 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 L9,000,000. The reserve fund has been raised out of surplus profits to L3,240,000. This exceeds the amount required by the act of 1899, which was L3,000,000. 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 1/4% 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 1/8% 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 Abaenderung des Bankgesetzes vom 14. Maerz 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 1/4% 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 1/8% 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); Handwoerterbuch der Staatswissenschaften, edited by Conrad, Elster, Lexis and Loening, 1899; Woerterbuch der Volkswirthschaft, 2 vols. (ed. Elster, 1898); Dictionnaire des finances, edited under the direction of Leon 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 Jaffe, 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 [v.03 p.0345] 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. Andreades, 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 Societes par actions (1905); A. Raffalovich, Le Marche 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 fuer Oesterreich-Ungarn (Vienna).

JAPAN.—The House of Mitsui (Tokio); The Law and the By-Laws of the Nippon Kogyo Ginko (The Industrial Bank of Japan) (1903).

H. W. Wolff, People's Banks (1893). (On systems worked by Schulze-Delitzsch, Raiffeisen, Luzzatti, Banche Popolari, Dr Wollemborg, Popular Banks in Belgium, Switzerland, France, England).

(R. H. I. P.)

UNITED STATES

The early history of the American colonies is strewn, like that of most new countries, with many crude experiments in banking and currency issues. Most of these colonial enterprises, however, were projects for the issue of paper money rather than the creation of commercial banks. Speculative banking was checked to a large extent in the colonies by the Bubble Act (6 Geo. I. c. 18), which was passed in England after the bursting of the South Sea Bubble. This act, which forbade the formation of banking companies without a special charter, was in 1740 extended to the colonies.

The serious history of banking in the United States may be said to have begun with the foundation of the Bank of Pennsylvania. This bank originated in the project of a number of the citizens of Philadelphia to supply the continental army with rations. The first bills, issued in 1780, were nothing more than interest-bearing notes payable at a future time. The advances in continental money made by the shareholders were secured by bills of exchange for L150,000, drawn on the American envoys in Europe, but not intended to be negotiated.

A further outgrowth of the needs of the continental government was the Bank of North America, which was authorized by congress on May 26, 1781. The act gave to Robert Morris, the financier, power to create a bank with a capital of $400,000, to be increased if desirable. Morris arranged with the Bank of Pennsylvania to take over its holdings of foreign bills and paid in cash its claims against the Federation. The Bank of North America did not begin business until the 7th of January 1782, and there was so much doubt of the power of the continental congress to charter a bank that it was thought advisable to obtain a charter from the state of Pennsylvania. Under this charter the bank continued to operate until it was absorbed in the national banking system in 1863, and it may be considered the oldest organized banking institution in the United States.

The bank did much, during the first eight years after its organization, to restore order to the chaos of Federation finances. It loaned to Morris, as government superintendent of finance, $1,249,975, of which $996,581 was repaid in cash and the remainder by surrendering the stock in the bank owned by the government.

The Bank of the United States.—A national bank of issue was one of the essential parts of the system built up by Alexander Hamilton in organizing the finances of the Federal government under the constitution of 1789. The first "Bank of the United States" was accordingly incorporated in 1791, with a capital of $10,000,000, divided into 25,000 shares of $400 each. This bank issued circulating notes, discounted commercial paper and aided the government in its financial operations. The government subscribed one-fifth of the capital, but paid for it by a roundabout process which actually resulted in the loan of the amount by the bank to the treasury. Other loans were made by the bank to the government, which gradually carried the obligation by the end of 1795 to $6,200,000. In order to meet these obligations, the government gradually disposed of its bank stock, until by 1802 its entire holdings had been disposed of at a profit of $671,860. The bank did not publish regular reports, but a statement submitted by Gallatin to congress for January 24, 1811, showed resources of $24,183,046, of which $14,578,294 was in loans and discounts, $2,750,000 in United States stock and $5,009,567 in specie.

The expiration of the charter of the bank in 1811 was the occasion of a party contest, which prevented renewal and added greatly to the financial difficulties of the government in the war with Great Britain which began in the next year. Although foreign shareholders were not permitted to vote by proxy, and the twenty-five directors were required to be citizens of the United States, the bank was attacked on the ground of foreign ownership as well as on the constitutional ground that congress had no power to create such an institution.

The government was compelled in the war of 1812 to rely on the state banks. Their suspension of specie payments, in 1814, made it very difficult for the treasury to transfer funds from one part of the Union to the other, because the notes of one section did not circulate readily in another. Gallatin left on record the opinion that the suspension of specie payments "might have been prevented at the time when it took place, had the former Bank of the United States been still in existence."

The financial condition of the government became so bad during the war that the second Bank of the United States was authorized in April 1816. The general project was that of Alexander J. Dallas, who in October 1814 had become secretary of the treasury. The capital of the new bank was $35,000,000, and the government again appeared as owner of one-fifth of the stock, which was paid in a stock note. The president of the United States was authorized to appoint five of the twenty-five directors and public funds were to be deposited in the bank, "unless the secretary of the treasury shall at any time otherwise order and direct." The right of congress to charter the bank came before the Supreme Court in 1819 in the famous case 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 [v.03 p.0346] 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:—

[v.03 p.0347]

State Banking Progress, 1835-1863. - - - No. of Loans and Year. Banks. Capital Stock. Discounts. Deposits. - - - 1835 704 $231,250,337 $365,163,834 $83,081,365 1845 707 206,045,969 288,617,131 88,020,646 1850 824 217,317,211 364,204,078 109,586,595 1855 1307 332,177,288 576,144,758 190,400,342 1860 1562 421,880,095 691,945,580 253,802,129 1863 1466 405,045,829 648,601,863 393,686,226 - - -

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.

The amount of bank-notes in circulation proved in practice to be influenced largely by the price of bonds. The maximum originally set for bank circulation was $300,000,000. This was increased in 1870 by $54,000,000, and in 1875 the limit was removed. The circulation reached $362,651,169 on the 1st of January 1883, but afterwards declined materially as bonds became scarce and the price rose. The fact that circulation could be issued to only 90% of the par-value of the bonds greatly reduced the net profits on circulation when the price of 4% bonds rose in 1889 above 129 and other classes of bonds rose in like ratio. The circulation of bank-notes fell as low as $167,927,574 on the 1st of July 1891, but afterwards increased somewhat as the supply of bonds was increased to meet the treasury deficiencies of 1894-1896 and the expenses of the war with Spain.

The national banks supported the government cordially in the measures taken to bring about resumption of gold payments on the 1st of January 1879 under the law of 1875. The banks held more than $125,000,000 in legal tender notes, of which sum nearly one-third was held in New York City. A run upon the treasury for the redemption of these notes would have exhausted the gold funds laboriously accumulated by secretary Sherman and compelled a new suspension. But the banks appointed a committee to co-operate with the treasury, declined to receive gold longer as a special deposit, and resolved to receive and pay balances without discrimination between gold and government notes. Thus resumption was accomplished without jar, and as early as the 17th of December 1878 gold sold at par in paper.

The silver legislation enacted by Congress in 1878 and 1890 caused uneasiness in banking circles, and the banks discriminated against silver dollars and silver certificates in their cash. When the treasury began to lose gold heavily, however, in 1893, a combination of leading bankers in New York, Boston, Philadelphia, Baltimore and Chicago turned over a large part of their holdings to replenish the government reserves. About 150 national banks suspended during the panic of 1893, but 84 of these afterwards resumed business. As in former periods of depression, the system suffered the greatest decline during the years of liquidation following the actual panic, the number of banks falling from 3856 on the 1st of June 1893 to 3585 on the 1st of June 1899, and aggregate capital falling during the same period from $698,454,665 to $610,028,895.

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 1/2 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 [v.03 p.0348] 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.

The function of issuing notes, which is exclusively a privilege of national banks, has diminished in importance in America, as other methods of transferring credit have attained a wide development. This has not only been true of the national banks themselves, but has accounted for the development alongside the national banking system of state banks, private banks and trust companies, which have not had the privilege of note-issue, but have obtained other privileges sometimes greater than those of the national banks.

The aggregate resources of all classes of banks in the United States have greatly increased in recent years. The following table shows the increase in the chief items of the accounts of national banks for representative years from the reports made nearest to the beginning of the year:—

PROGRESS OF NATIONAL BANKS, 1865-1908 + + + -+ -+ No of Loans and Individual Year. Banks Discounts. Deposits + + + -+ -+ 1865 638 $166,448,718 $183,479,636 1870 1615 688,875,203 546,236,881 1875 2027 955,862,580 682,846,607 1880 2052 933,543,661 755,459,966 1885 2664 1,234,202,226 987,649,055 1890 3326 1,811,686,891 1,436,402,685 1895 3737 1,991,913,123 1,695,489,346 1897 3661 1,901,160,110 1,639,688,393 1899 3590 2,214,394,838 2,225,269,813 1900 3602 2,479,819,494 2,380,610,361 1901 3942 2,706,534,643 2,623,997,521 1902 4291 3,038,255,447 2,964,417,965 1903 4666 3,303,148,091 3,152,878,796 1904 5180 3,469,195,043 3,300,619,898 1905 5528 3,728,166,086 3,612,499,598 1906 5911 4,071,041,164 4,088,420,135 1907 6288 4,463,267,629 4,115,650,294 1908 6625 4,585,337,094 4,176,873,717 + + + -+ -+

The combined returns of state and private banks, savings banks and loan and trust companies in the United States show a growth within a few years which is indicated by the principal items of their accounts:—

RESOURCES OF STATE BANKS, TRUST COMPANIES, &c.

- Items. 1897. 1907. - Capital stock $380,090,778 $807,178,262 Surplus and profits 382,436,990 924,655,010 Loans 2,231,013,262 6,099,897,535 Deposits 3,324,254,807 8,776,755,207 Total Resources 4,258,677,065 11,168,514,516 -

The aggregate banking power of the United States, as computed by the comptroller of the currency in his annual report for 1907, increased from $5,150,000,000 in 1890 to $17,824,800,000 in 1907, and the banking power of foreign countries from $10,835,000,000 to $27,034,200,000, representing an increase for all reporting countries from $15,985,000,000 to $44,859,000,000.

The system of clearing cheques has attained a higher development in the United States than in any other country, except perhaps, Great Britain. Clearing-houses exist in about 112 leading cities, and the aggregate clearings for the year ending 30th September 1907 reached $154,662,515,258. The New York Clearing-House inevitably does a large proportion of this business; its clearings constituted in 1906 67.2% of the total clearings in 55 of the larger cities. The volume of clearings fluctuates greatly with the volume of stock-exchange transactions and with the business prosperity of the country. An indication of these fluctuations at New York is afforded by the following table, taken from Conant's Principles of Money and Banking, brought down to 1907.

[v.03 p.0349]

VARIATIONS IN CLEARINGS AT NEW YORK

+ + -+ -+ -+ Average Per cent Year. Daily Balances to Remarks. Clearings. Clearings. + + -+ -+ -+ 1870 $90,274,479 3.72 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. + + -+ -+ -+

The Clearing-House Committee of the New York Clearing-House exercises a powerful influence over the banking situation through its ability to refuse aid in emergencies to a bank which is unwisely conducted. This power was used in the panic of 1907 to eliminate several important, but speculative, financial interests from control of national banks. Only national and state banks and the sub-Treasury were members of the Clearing-House at this time. Their weekly reports of condition were awaited every Saturday as an index of the state of the money-market and the exchanges; but this index was incomplete and sometimes misleading, because regular weekly reports were not made by trust companies. It was announced early in 1908 by the state superintendent of banking that he would exercise a power vested in him by law to require weekly reports in future from trust companies, so that the two classes of reports would present a substantially complete mirror of banking conditions in New York.

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).

Much statistical information is contained in the annual reports of the comptroller of the currency of the United States, published annually at Washington.

(C. A. C.)

ENGLISH LAW AFFECTING BANKS AND THEIR CUSTOMERS

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.

[Sidenote: Relation between banker and customer.]

Deposit Business.—The term "bank of deposit" gives a mistaken 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.

[Sidenote: Cheques.]

It has often been suggested that the only method of withdrawing 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 [v.03 p.0350] 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 very questionable practice of post-dating cheques has been the source of considerable doubt and inconvenience to bankers. The use of such documents enables the drawer to obtain the results of a bill at a fixed future date without the expense of a regular bill-stamp. But the Bills of Exchange Act 1882, sec. 13, subs. 1, provides that "a bill is not invalid by reason only that it is ante-dated or post-dated, or that it bears date on a Sunday." The banker cannot therefore refuse to pay a cheque presented after the apparent date of its issue on the ground that he knows it to have been post-dated. On the other hand, he is entitled and indeed bound to refuse payment if such a cheque is presented before the apparent date of its issue (Morley v. Culverwell, 7 M. & W. at p. 178). Revocation of authority to pay a cheque must come to the banker's conscious knowledge and be unequivocal both in terms and method of communication. He is not bound to act on an unconfirmed telegram (Curtice v. London City & Midland Bank [1908], 1 K.B. 293). The banker's authority to pay cheques is terminated by the death, insanity or bankruptcy of the customer, or by notice of an available act of bankruptcy committed by him.

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).

The rule by which the holder of a cheque has no direct recourse against the banker who dishonours it, holds good even where the banker has before issue marked the cheque as good for the amount, such marking not amounting to an acceptance by the banker. As between banker and banker, however, such marking or certifying probably amounts to a binding representation that the cheque will be paid, and, if done by request of the drawer, the latter cannot subsequently revoke the authority to pay. In certain circumstances, marking at the instance of the person presenting the cheque for payment may amount to an undertaking by the banker to hold the money for his benefit (In re Beaumont [1902], 1 Ch. p. 895).

A banker either paying or collecting money on a cheque to which the person tendering it for payment or collection has no title or a defective title is prima facie liable to the true owner for conversion or money had and received, notwithstanding he acted in perfect good faith and derived no benefit from the operation. Payment of an open cheque, payable to bearer either originally or by endorsement, is, however, in all cases a good payment and discharge (Charles v. Blackwell, 2 C.P.D. at p. 158). Limited protection in other cases has been extended by legislation to the banker with regard to both payment and collection of cheques, usually on the principle of counterbalancing some particular risk imposed on him by enactments primarily designed to safeguard the public.

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 [1900], 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 [1902], 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 [1901], 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 [v.03 p.0351] 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.

[Sidenote: Fraud.]

Where a banker incurs loss through forgery or fraud in circumstances 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 [1891], A.C. 107; McKenzie v. British Linen Co. 6 A.C. 82; Ewing v. Dominion Bank [1904], 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 [1896], 1 Q.B. 7, and Imperial Bank of Canada v. Bank of Hamilton [1903], 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 [1906], 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.

[Sidenote: Custody of valuables.]

The payment of bills accepted payable at the bank is not, 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.

[Sidenote: Trustees.]

Theoretically, bankers are supposed to refuse accounts which 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 [1897], 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, [v.03 p.0352] 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.