The success of the Bank of England and the expan sion of business finally prompted the organization of the Bank of Commercial Discount in 1776. This in stitution received its death blow at the hands of the government in 1789. During its brief existence it was well managed and gave excellent service. The government, however, found that its own credit was unstable and in an effort to repair it by enforcing loans from the bank, it dragged the bank down with itself. The climax came when the bank was ordered to pay into the treasury a large sum of notes in return for worthless assignats. In 1793, the bank was sup pressed by a decree of the National Convention. The Reign of Terror followed, during which no financial institution could live.
9. Bank of France.—The Bank of France was founded by Napoleon in 1800 with a capital of 30, 000,000 francs. At the outset, it had no special privi leges with regard to the issue of notes, nor was it a government institution in any sense. In 1803, the capital was raised to 45,000,000 francs, and it was given the exclusive right of issue in Paris. In 1806, the capital was further increased to 90,000,000 francs and the present system of management was adopted.
Under this system a governor and two deputy gov ernors are appointed by the head of the state. These officials must be stockholders. There is also a board of fifteen regents chosen by the stockholders, but the governor presides over this board and has general supervision of all the loans and bank affairs. The government has never been a shareholder in the bank.
In 1808, the bank was given exclusive right of note issue in all towns in which it had branches. During the years following the fall of Napoleon its influence waned somewhat and public sentiment favored the establishment of a bank in each one of the departments into which France is divided for administrative pur poses. A large number of these came into existence between 1830 and 1840 as the result of a belief that the Bank of France was not properly organized to administer the banking affairs of the average citizen. It was popularly believed to be only a banker's bank. The growth of the departmental banks soon resulted in a spirited contest with the Bank of .France. The main point at issue was whether the privilege of note issue should be confined to the one bank or bestowed upon all. The final result was the Act of 1848 which gave to the Bank of France a monopoly of the note issue function. The bank was required, however, to buy out the departmental banks of issue. It promptly did this by increasing its own capital stock.
The bank is required to maintain one branch in every department in France. Each branch is allotted a certain amount of the capital, and the law requires that half the capital of the branch shall be held lo cally. The total capital, in 1914, was 180,000,000
francs, or approximately $36,000,000. Loans are made at the branches as well as at the central institu tion, and at the same rate of interest. It is worthy of note that the bank often lends in very small sums, running down to a few francs.
10. Meeting a a time of crisis, the Bank of France can raise the rate just as the Bank of England does. There are banks in France en gaged in the discount and acceptance business just as there are similar institutions in England. When they need cash, they take commercial paper to the Bank of France and have it rediscounted. In return, they get notes from the bank instead of leaving the proceeds on deposit as is done in England. As long as the Bank of France is confident that the paper is good it can continue to rediscount and pay out notes. Of course, there is a natural limit to this process. As soon as the currency supply begins to be excessive, prices rise, imports increase and gold begins to flow out of the country. When gold begins to leave the country, the bank knows that credit is over-expanded and it takes measures to force contraction.
The bank has three ways of protecting its gold re serve. It can raise the discount rate but this is a last resort. As a rule, the discount rate is steady, even when the rates of the Bank of England and of the Bank of Germany are fluctuating. The rate is also generally lower than that of the other central banks in Europe. The second method which the bank has of protecting its gold reserve is to charge a premium on gold. Both gold and silver are legal tender in France. If the bank has reason to believe that gold is wanted for export purposes it may exercise the option of redeeming its notes in silver or it may charge a premium on gold if note-holders insist on having it. If the premium is made too great people thruout the country will go to the trouble and ex pense of collecting gold. This pulls the precious metal from all the little nooks and crannies where it has been hoarded and makes it available to meet the emergency. Gold will be exported anyway, but the fear that the bank will charge a premium places a check on credit inflation. It should be noted that the policy of charging a premium does not keep the total gold supply of France from being drawn down, altho it may protect the bank's own reserve. But the bank's reserve,' rather than the general gold supply of the country, should be protected, since the gold when in the bank is in a position to be more effectively used.