OLIVER M. W. SPRAGUE, Professor Banking and Finance, 1-f arvard University_ 3. WORLD The banking institutions of Europe, with the in crease of capital, the development of industry and the growth of international relations, have naturally conformed to these influences, with the result that there is an approximation every where to certain standards or types for the different classes of banking operauons. Suc.h differences in organization and practke as re main are not fundamental, suid afford little occasion for comparison or argument as to their advantages or desirability, but are ex plained by their origin and the established customs of the people.
Central Banks of every country there is now a central bank, which is recognized to be the head of the system, and is charged with certain responsibilines. It is the fiscal agent of the government and the custodian of treasury funds; it issues the paper currency, carries the gold reserve and holds a dominat ing position in the foreign exchanges and the domestic credit situation. It is the final de pository of the other banks of the country, and as a bank of re-discount, with the power of note-issue, it is expected to have at all times a reserve of available credit which will be used as needed for the support of the banking and general business situation. This reserve of credit is maintained by judicious use of the discount rate, which is raised and lowered to control the demand for credit. In all European countries judgment has been given in favor of confiding the power of note-issue to a single bank, but in Great Britain, Germany and Italy a few banks which were in possession of the right of note-issue when the present system was determined upon were allowed to retain a restricted right.
These central banks, by reason of the pe culiar responsibilities with which they are charged, are required to confine their credit operations in the main to short commercial loans, usually not exceeding four months, which facilitate current trade and industry. Bills of exchange, arising out of specific transactions, and financing the movement of commodities to market, constitute the principal class of invest ments. Loans to the government, however, are authorized, and advances upon government se curities and other approved collateral are made at a higher rate of interest and in limited amount. Nothing but gold and short commer cial bills are considered a proper cover for note-issues.
The capital of these central banks, with the exception of the Russian Imperial Bank, is sup plied by private shareholders, but in many cases the executive officers, and in the case of the Reichsbank the executive board, are named by the government. The Bank of England which is the oldest of the great banks, and which led in the demonstration of the most important functions of a central institution, is a com pletely private institution in its organization, but its policy is none the less governed by a sense of public responsibility. All of these
institutions are bound to safeguard and pro mote the public interest, as their first con sideration.
The most noteworthy difference in the operations of these banks has been in the management of the note issues. The Bank of England is authorized to issue notes to the amount of i18,450,000 upon the security of government bonds and other securities in its possession, but all issuee in excess of this must be fully covered by gold in its vaults. This requirement, which was imposed upon it by the Act of 1844, was prompted by a belief that excessive note issues had promoted over-ex tensions of credit, the exportation of gold and the recurrence of financial crises. The effect was to make the note-issue absolutely fixed save as the stock of gold in the bank was increased or decreased. This restraint npon issues occasioned less inconveniences in Eng land than it would have caused on the Continent, for the reason that even before 1844 the bank checic had become to a great extent in England a substitute for the bank note. With the growth of the joint-stock banks the custom of keeping bank accounts and making payments by check has been steadily spreading, while on the Continent it remains the general custom to make payments in currency. The restriction.of the Act of 1844 not only failed to prevent the recurrence of crises in England, but it actually hampered the bank in dealing with them to such an extent that in 1847, 1857 and 1866, when confronted by emergencies of this character, the Ministry requested the bank to disregard the provisions of the law, and Parliament in each instance afterward gave its approval by passing an act of indemnity. The situation upon each of these occasions was that public confidence in the general state of credit, and in the condition of certain private banking insti tutions, was shalcen, but there was no want of confidence in the Bank of England. The latter, by disregarding the law, and issuing its own notes to the banks and firms which were able to give security, relieved the pressure and stopped the panic. This demonstration of the effectiveness of flexible note-issues under the control of a strong central banking institution has had a powerful influence in shaping the banking systems of other countries. In Eng land no immediate change in the Bank Act was made, but an important change was made in the management of the bank. It was dis covered that by raising the discount rate the tendency to over-expansion could be checked and the gold reserve of the bank increased, thus permitting an enlargement of credits, either by deposit accounts or note issues. Since 1866 this knowledge has been used so skilfully that the arguments in favor of a liberalization of note-issues have not been pressed. In 1914, however, following the outbreak of the European War, Parliament passed an act giv ing the Ministry authority to permit the Bank to issue notes without the statutory reserve.