PRIMITIVE BANKING.

BANK OF VENICE; AMSTERDAM; WISSELBANK; BANK OF FRANCE;
FRENCH SYSTEM.

Banking, as we understand the term, had its origin in the
Italian cities during the middle ages. Prior to that time "bank-
ers" were merely money changers, who set up their banks or
benches in the streets or market places of the cities of the Orient.
Money changers were numerous in the cities of Greece and
Egypt. They kept no books, received no deposits, made no loans,
sold no drafts or bills of exchange and issued no circulating cur-
rency, hence they scarcely possessed any of the real functions
of a bank. But when prosperity came to the cities of Italy,

and their ships were upon every sea, the merchants
Bank of Venice found need for other and better facilities in their

financial operations, and hence was gradually de-
veloped the first banking institutions. The first bank, however,
that of Venice, had a peculiar origin. It was founded in 1171
as a combined result of governmental necessity and tyranny.
The republic needed money to carry on its wars with Genoa,
and levied forced contributions upon the leading mercantile
firms and wealthy citizens, in return for which they were given
perpetual annuities at a fixed rate per annum. The payment
of this annual interest was the means of establishing the bank,
and as the annuities were often transferred from one holder to
another, or passed by devise or descent to heirs, the transfer was
made upon the books of the bank, the same as in the case of the
transfer of the stock of a corporation at the present time.

168



AMSTERDAM. 169

Finally, to avoid the frequent and numerous entries on the books
of the bank, certificates payable to bearer were issued and passed
from hand to hand, the same as bank bills of the present day. A
little later bills of exchange were introduced as a means of
transmitting money safely through provinces where property
was unsafe from robbers and barbarians, but it was not until
three hundred years later (1487) that the system of banking thus
begun had developed to the point of deposit banking, and the
issuing of circulating notes by this same bank. The Bank of
Venice played a great part in the commercial history of its time,
proving a vast aid to both the government and the mercantile
houses, and yet it answered very imperfectly the modern defini-
tion of a bank.

During the sixteenth and seventeenth centuries the commerce
of Holland supplanted that of the Italian cities, and Dutch ships
were carrying the produce of the world. Amsterdam then
became a commercial and financial center. For a time the com-
merce of the world seemed to focus there. Foreigners came to
buy, and found the products from all parts of Europe, Asia
and the East Indies, carried thither in Dutch ships. Money
Amsterdam as flowed into Amsterdam from foreign countries in
a Financial payment f or goods and shipping charges, and this
stream of payments made it convenient to settle
in Amsterdam the financial transactions of other cities, such
as Antwerp and Eotterdam. Thus Amsterdam became a com-
mercial clearing house for the world's commerce, the same as
London and New York are at the present time. Bills of ex-
change came into Amsterdam for collection, and the volume of
financial transactions rose to a large figure. Such a concentra-
tion of dealings in money could not fail to develop a convenient
system of banking. "Individuals began to deal in foreign ex-
change and to buy and sell coin and bullion; and, sometimes in
connection with the exchange business, and sometimes inde-
pendently of it, began to receive money on deposit, and to effect



1-70 HISTORY OF BANKING.

payments, when ordered by customers,, by transfer from one
account to another." Thus the business of banking gradually
developed to meet the requirements of commerce until by the
middle of the seventeenth century it is probable that many of
the functions exercised by a modern bank were in use, except
the issuing of a circulating currency.

A great variety of coins were in use in the different Dutch
provinces, and to these was added the influx of gold and silver
Establishment of various weights and values from other nations
Amstoda^ f in the re g u l ar course of foreign commerce. The
1609 rixdaler was the standard of value, but a large

portion of the coins in circulation was light in weight, either
from abrasion, clipping or debasement. Kings were accustomed
to debase the coinage in order to replenish the public revenues.
As a consequence the coins of full weight disappeared con-
stantly, leaving the inferior pieces in circulation. Instead of
attempting to regulate the coinage itself, the city fathers of Am-
sterdam ascribed the confusion in the circulating medium to
the free banking privileges which prevailed, and attempted to
correct the evil by regulating the dealings of private bankers.
Their first law was leveled against deposit banking, and by the
act of July, 1608, deposit holding was absolutely prohibited, and
the receiving or paying out of money for another person, or its
transfer by writing, "or by word of mouth, directly or indirect-
ly" was forbidden. The use of bills of exchange was also strictly
forbidden. The culling of coin, or selecting the heavy coin
from the light was also strictly forbidden. Thus did these ancient
law makers display their ignorance of the laws of trade and
finance, and while attempting to correct evils which they did
not understand, only served to retard the wheels of commerce.
Finally they decided to create a great financial institution, which
should concentrate under public authority the business of receiv-
ing deposits and dealing in specie, and as a result, in 1609, was
established the Bank of Amsterdam, more properly called the



WISSELBANK. 171

Amsterdam Wisselbank (i. e. Amsterdam Exchange Bank). The
bank created several agencies or branches in different parts of the
city, and thus, under the law, monopolized the business of bank-
ing and dealing in money and exchange.

The advantages offered by the Wisselbank to the commercial
world, of which Amsterdam was the center, were security for
deposits and a uniform value in its transfers; and while the
multitude of debased coins continued to circulate in the chan-
nels of trade the same as before, the deposits in the bank were
a standard of value. The bank received only money of full
weight and paid out only such, hence a credit
upon its books was equivalent to so much good
coin. Credits in the bank were frequently trans-
ferred, and came to be called "bank money." Payments made
in "bank money" were preferable to payments made in "current
money," owing to the established value of the former. Such
payments or transfers were made by means of orders required
to be presented by the payee in person, or his authorized agent,
but the payee did not receive the credit for the transfer until
the following day. This is the first exemplification of the
check system, but it fell far short of its modern uses. Even this,
however, was a great convenience to the commercial public.
The law required that all Bills of Exchange payable in Amster-
dam should be settled for by transfers in the bank, and this had
the advantage of assuring foreign holders that exchanges on
Amsterdam would be paid in standard money, thereby giving
stability and uniformity to exchanges and encouraging foreign
trade.

Every merchant was obliged to keep an account with the
bank in order to pay his foreign bills of exchange, and once
having made a deposit it was to his advantage to continue it,
because the moment he withdrew his money and mingled it with
the current money in trade, from which it was not readily
distinguishable, it fell in value to the level of the current



172 HISTORY OF BANKING.

money. "While it remained in the coffers of the bank its su-
periority was known and recognized, but when it came into the
hands of private individuals, its superiority could
n t we ^ ke ascertained without more trouble than
the difference was worth" (Adam Smith in
Wealth of Nations). The difference in value between money in
bank and current money sometimes reached as high as nine
per cent., but was usually about four per cent., and this (called
the agio) the depositor lost by withdrawing his deposit.

In 1683 the bank established a system of making advances
upon deposits of coin. Under this system a depositor was
allowed to withdraw an amount of bank money not far from
the value of the specie, and upon this he was charged interest.
These advances were commonly made for a period of six months,
and in case the borrower failed to renew or pay the loan at
maturity, the margin of his deposit over and above the amount
of his withdrawal was forfeited to the bank. The
business of advances upon specie deposits grew in
the eighteenth century to an enormous volume,
and completely superseded the earlier practice of simple deposit.
Then the administrator of the bank began to permit individuals
at times to transfer more bank money than their deposits of
specie warranted, which was equivalent to giving permission to
overdraw.

Mismanagement and a diminishing commerce are the causes
which, after two hundred years of useful services, led to the
decline of the Wisselbank. Wars and the growth of manufact-
ures had changed the channels of trade, and Dutch ships no
longer possessed a monopoly of the carrying business. The
center of the financial world moved westward to
Bank * London, and the Bank of England was coming

into prominence as a great financial agent. Be-
sides there had come about a desire for an improvement in
the system and methods of banking to conform more to the



BANK OF FRANCE. 173

requirements of commerce, a larger scope in bank functions,
and the Bank of England was more in conformity with this
idea. The Wisselbank was finally dissolved and went out of
business in 1819. The present Bank of the Netherlands, which
may be considered its successor, was founded in 1814 with
authority to make loans upon commercial paper and other public
securities. It is also the bank of issue of the currency of the
Netherlands, and keeps the funds of the state and the cash of
the postal savings banks. There is no limit upon the circulation
of the bank, but the law requires that it must be secured by a
reserve of two-fifths of the aggregate of the circulation and
demand liabilities. This reserve consists chiefly of gold.

The Bank of France was established in 1800, the First
Consul being one of its original stockholders. In 1803 its scope
was enlarged and it was endowed with the exclusive privilege in
Paris of issuing circulating currency, a monopoly which was
finally extended so as to cover the whole of France, and which

it still enjoys. In some respects the bank is the
of France greatest of financial institutions, and enjoys a

reputation for solidity at home and abroad. While
the Bank of France is the only one of issue, there are numerous
private banks in Paris and scattered throughout the country
which do a general deposit, discount and exchange business.
The capital of the bank is 182,500,000 francs, and its circula-
tion limit is 5,000,000,000 francs the greatest of any financial
institution in the world. While nominally a private banking
house, the Bank of France is really a semi-official institution,
for the reason that, being a monopoly, its operations are under
government control. The management of the bank is vested in a
board of fifteen regents and three inspectors or auditors, but the
governor and two deputy governors are appointed by the Cham-
ber of Deputies. Only the 200 stockholders who hold the
largest number of shares are allowed to attend the annual meet-
ing and participate in the election of officers. French states-



174 HISTORY OF BANKING.

men believe that private ownership of the bank is an advantage,
since it and the government have thus been enabled to be of
assistance to each other at various times, in financial and politi-
cal crises. M. Thiers said, "The bank saved us because it was not
a state bank," by advances when the government was hard
pressed, as in 1871. On account of its issue of the circulating
medium, the impression prevails among the uninformed people
of France that the bank is a government institution, and it is
respected as such, but business men know that while this is not
the case, the government could not allow it to fail, and that
behind it is the fortune of the nation. The note issue is regu-
lated by law, and has been gradually increased until it has
reached its present enormous volume.

The functions of the bank as prescribed by law are: "To
issue bank notes payable on demand; to discount bankers' drafts
and commercial bills, drawn at a fixed period not exceeding
three months and bearing the names of business people and
others well known to be solvent; to collect bills remitted them
by private parties or public establishments; to receive in account
current sums for deposit with the bank by private individuals or
public institutions, and to pay amounts drawn to the extent of
the funds deposited; to keep a record of voluntary deposits of
all securities, bullion and all kinds of gold and
silver money; to make advances upon French bills
and French securities, upon bullion and foreign
coins, in accordance with a certain proportion fixed by law and
the terms fixed by the statutes of the bank; and, finally, to deliver
to any person applying therefor orders from Paris to their branch
offices, and orders on Paris from the branch offices."

The bank does an extensive business in discounting short
time commercial paper, according to the above-mentioned regu-
lations, but its business in this line is considerably hampered
by its rule which requires three names to each paper. This
compels many merchants to discount their paper through brokers



BANK OF FRANCE. 175

or private bankers, who, after endorsing it, re-discount it in the
Bank of France.

To satisfy the demand for banking facilities in the provincial
towns of France, the bank is required to maintain in each
department (equivalent to a state) in the republic, a branch with
a capital allotted to it by the parent institution in Paris. These
branches, which now number more than one hundred, are con-
ducted under the supervision of the head bank, and can engage in
no operation with other banks or with each other without special
leave. Their business, even to the rate of discount, is directed
in Paris, and not with reference to local wants. The local
managers are frequently strangers sent from Paris
Branch Banks and are not in close sympathy with the business
public. Nevertheless the branch banks discount
a large amount of commercial paper, besides issuing bills of
exchange, collecting government revenues, stamp duties, etc.

The note issues of the Bank of France are regulated by law.
The volume has been increased from time to time until now the
limit is 5,000,000,000 francs, with an actual circulation of about
3,600,000,000. This large circulation of the bank is, according
to Conant, in a measure due to the large quantity of silver in the
reserve of the bank. The bank has made repeated and continu-
ous attempts to force its five franc pieces into general circulation,
but they constantly and persistently flow back to the bank, the
people preferring paper currency based upon the gold and silver
reserve in the bank vaults. The circulation of the
Not"s 3tl bank is divided into two classes, denominated as

"productive" and "non-productive." Notes issued
to meet the demands of commerce, and which are secured by
discounted bills, are called productive, probably for the reason
that interest is earned, and are subject to a tax of 50 centimes
per 1,000 francs, while those issued against specie or bullion are
called non-productive, and pay a tax of 20 centimes per 1,000
francs. As soon as a bank note passes into circulation it is a



176 HISTORY OF BANKING.

legal tender for all debts, public and private, so long as the bank
maintains specie payments. They are guaranteed by gold or
silver coin, by loans made upon gold or silver bullion, by securi-
ties or public funds, by loans made to the government, or by
drafts discounted upon the terms prescribed by law.

The Bank of France has the option of redeeming its notes
in either gold or silver, and it does it in whichever metal seems
most advantageous at the time. In case a note-holder desires
gold when silver is offered him, or vice versa, the bank exacts
a small premium, as a compensation for paying in the other
metal. It has been the policy of the bank to keep on hand a
large gold reserve and prevent the exportation of the yellow metal
as far as possible. This has been done by charging
a premium on gold for export. The gold reserve
in the Bank of France is, in round numbers,
2,500,000,000 francs, or about one-half the authorized limit of
circulating notes. The silver reserve is in the neighborhood of
1,000,000,000 francs. There is no law fixing the amount of coin
reserve, or proportion of specie to be held against the notes in
circulation. In a time of crisis the government can give the
notes of the bank a forced circulation, in which case the bank
would be relieved from the necessity of redeeming its notes in
coin.

The enormous volume of the circulating medium of France
is necessitated to a considerable extent by the fact that it is a
country of small traders, as well as small farmers, and the
minute division of properties and enterprises is not favorable
to the use of bank checks to the same extent as in countries
where industries are more consolidated and cen-
tralized. Then again the masses of the French
people are not educated in the use of checks, or
accustomed to their use as we are, and are conservative in their
habits in regard to changing long-established methods, and hence
adhere to the old way of using the actual coin or bank notes.



FRENCH BANKING. 177

The French people, therefore, require a large amount of cash
for the transaction of their daily business, and accordingly we
find that France has the largest volume of both gold and silver
as well as paper money, in proportion to the population, of any
of the great nations.

The banking of France is remarkable as an example of the
free organization of a financial system under general laws, and
without those restrictions and provisions for the safety of all
bank debts, especially circulating notes, which in other countries
has come to be regarded as essential to a stable currency.
Here is a great bank authorized to discount paper, receive de-
posits and issue circulating notes, but without any special pro-
vision for the safety of one class of liabilities rather than an-
NO special Lia- other. All liabilities of the bank are upon the for Note same footing and equally a charge upon its general assets. The Bank of England existed in this
manner until 1844, and banking in the United States was con-
ducted under the same condition up to the period of our National
Banking Act, but in both these latter countries public opinion
has required important modifications in the law for the safety
of creditors and note-holders.