Readings in Money and Banking Part 53

But we can quite justly ask whether these concerns are fully sheltered against disasters; whether nothing can happen to them of a nature to shake their credit; and in such a contingency what should be the att.i.tude of the Bank of France.

The preceding instance, and others that might be referred to, inform us sufficiently as to the possibility of failures. The house of Baring Bros., the Union Generale, and others enjoyed an immense credit, thought to be unshakable, and the events of a day flatly contradicted that opinion.

In the course of the discussion concerning the last renewal of the charter of the Bank of France, much was said as to the possibility of allowing a certain interest to depositors in the bank.... M.

Burdeau[168] has shown that it is impossible for the Bank of France to become a bank of deposit. The issue of bank notes and the receipt of interest-bearing deposits are absolutely incompatible services. Their union in a single hand "would replace the present organization by an entirely new one, which, in case of a crisis, would offer much less vitality and power of resistance." For us it is sufficient to know that the payment to depositors of 1 per cent. on deposits subject to check would attract to the bank nearly all inactive funds, and that a sum in the neighbourhood of 1,000,000,000 francs would leave the private banks.

This would be their death-blow--a result which we are unwilling to contemplate.

By their very nature the financial inst.i.tutions are liable to weakness, and for the public good there must be some means of supporting them. For this reason the Bank of France, which presides over the distribution of credit, can permit the expansion of its auxiliaries only up to the point where its help would suffice to prevent the collapse of the market. Such a measure appears imperative in a country where the protecting wisdom of the Bank of France has always been relied upon. Fortunate land, fortunate inst.i.tution, which excites the envy of foreigners, especially of England, where the least failure may result in disastrous consequences.

Thus the banks of deposit have contributed to progress by gathering and giving life to sums previously lying scattered and idle. They are valuable auxiliaries in the distribution of credit. For this reason they deserve help and protection. The bank, the mission of which is of a wider and loftier scope,[169] has shown on many occasions that its helpfulness is not a pretence; daily, in fact, it a.s.sists them by rediscounting their bills. The prosperity of the financial inst.i.tutions has continually increased. It is a.s.sociated with the confidence and growing security of our times.[170] But the bank must be ready to meet even improbable contingencies in order to be in a position to recapture the market with a sure hand as soon as danger threatens it.

Under these circ.u.mstances, what can the bank do? In the first place, it can utilise its powerful reserve which has been acc.u.mulated for this purpose. It can, in the next place, curb the action of the banks by competing with them when they appear to enter upon a dangerous course, and by showing them what steps to take.[171]

On the other hand, there is a whole series of operations which private banks do not undertake, or do not tend to develop as they deserve.

Directed by self-interest toward the more profitable transactions, they somewhat neglect the others. The Bank of France finds no one engaged in these less remunerative operations, and is, moreover, the better able to undertake them itself, because they are not incompatible with the duties of a bank of issue.

Foremost, perhaps, among these operations is the popularising of credit by means of an ever increasing number of small loans, frequently accepting as pledge securities such as State rentes, bonds of the Credit Foncier, of cities, railroads, and industrials. An enormous transfer business is also carried on for both banks and the public at very low cost. Moreover, the bank clears large sums, annually relieving the clearing house of this burden.

The small business man, much more than the small rentier, reaps continually greater benefit from the advantages offered to the public by the Bank of France. We shall here simply call to mind the dates of some innovations favorable to the democratisation of credit.

January 15, 1824.--Creation of transfer drafts.

April 29, 1824.--Creation of transferable certificates of deposit.

January 13, 1830.--Reduction of interest on loans against bars and coin from 4 per cent. to 1 per cent.

1834.--Loans against rentes and public securities.

1837.--Daily discounting of paper except on holidays.

Law of June 30, 1840, article 2.--Option of replacing the third signature, exacted for discount, by deposit of any French public securities.

Decree of March 26, 1848.--Similar option of replacing by warehouse receipts.

Law of November 17, 1897.--Admission of bills for discount carrying the signature of an agricultural syndicate. The minimum for bills discounted is reduced to 5 francs.

There is here a whole series of measures, which, with the a.s.surance of a cordial welcome, should induce the small business man to trade with the bank.

The bank accepts large quant.i.ties of small paper with small signatures, and it finds itself, accordingly, in normal times deprived of first-rate paper, of that which is as good as gold in international commerce.

Gilt-edged paper always finds its market at lower rates than in the bank, and M. d'Eichthal, a regent of the bank, wrote as far back as fifty years ago: "Whatever may be the discount rate, among the bills discounted there will be found but few with the signatures of the Rothschilds, the Hottinguers, and other houses of the same rank. Those are delicacies which always command a premium."[172]...

The bank has always resolutely undertaken to carry through a whole series of operations which could not show great profit; above all, it has unremittingly aimed to be of service to the greatest number. The number of bills discounted grows continuously, while the total amounts, smaller during the most prosperous periods, invariably increase in periods of tight money. The average amount and term of bills is 600 francs for twenty days. This result would be considerably modified, if we were to take into account the bills handed in for collection only, the average value of which hardly exceeds 200 to 250 francs.

TERRITORIAL EXPANSION OF THE BANK OF FRANCE

With its growth in extent the bank has not only developed its services to meet new business needs, by providing an increased staff, and larger, more attractive, and better conducted offices, but it has also endeavored to reach a more and more widely extended territory. Indeed, the mere fact that the bank has entered a place, if only to make collections there, gives a favorable turn to credit conditions; credit becomes cheaper, in that the basis for money rates becomes the official discount rate, because the financial inst.i.tutions have then a more economical method of replenishing their cash. The smallest provincial town where the bank has entered is, therefore, in regard to low money rates, as favored as Paris.

Exchange between cities, particularly when joined with a special commission, reaches sometimes a considerable sum. As soon as the bank opens its branch, exchange is no longer possible. Therefore, whenever the charter of the bank has been renewed, the legislator, in response to the wishes of the public, has wisely required new territorial expansion of the bank. If the bank has not always taken the initiative in this mode of expansion, it is because it has been restrained by several motives. In the first place, the opening of new offices entails considerable expense. It is necessary to count upon several years of deficit, during which the running expenses, including salaries of staff, are just as high as if the profits were large. We could name several cities which for years have shown constant deficits. It can therefore be understood that the Bank of France, which is already established in the 200 towns most important from a commercial standpoint, and which, by means of its collecting department, touches 265 towns of less importance, extends its service only with caution to new localities, since each new branch must necessarily produce a larger and more persistent deficit. Thus territorial expansion is for the bank an ever-increasing burden; it is equivalent to an additional tax imposed by the legislature at every renewal of the charter. The bank submits to this with good grace for the benefit of the public.

In the second place, there is a limit to that expansion. Where the bank has no branches, the financial inst.i.tutions may take root and develop among a population which appreciates their services. Their profits come largely, it appears, from small towns, where compet.i.tion is less keen.

We have already said enough concerning the service of these inst.i.tutions in the development of French credit to show the danger of inflicting upon them fresh injury. On whatever side the bank desires to expand it finds this limit. If the bank encroaches a little on all sides, the result may be very appreciable.

The territorial expansion is further perceptibly increased by what is known in the bank as the exterior accounts. This system, of quite recent origin, allows any person not residing in the town where the branch is established to enjoy the same privileges as residents. Business may be transacted by mail with the aid of certain accounting forms, which often differ from those used for ordinary accounts. Each transaction is the subject of a special report, addressed to the customer by the branch.

Not only is the transaction itself reported, but useful information as to the position of the account is also given, thus permitting the customer to follow the movement of the account until the half-yearly statement is sent.

This department is highly esteemed by the suburban public, and renders many services to landed proprietors and to farmers, especially in the cattle-raising trade.

Thus the direct expansion, which, as has been seen, meets with serious obstacles, is a.s.sisted by this indirect expansion.[173]

Evidently we are far from realising the attractive dream of a France no longer deprived in part of banking facilities, but with all bills taken at par because the bank would reach everywhere. But for the sake of this end, no doubt desirable in itself, is it worth while to go to extremes for a scarcely perceptible advantage, to disturb an inst.i.tution in other respects strong and useful, and thus perhaps to risk disorganising the general credit system of France? On the contrary, we should be content with and even congratulate ourselves upon a progress which leads us, slowly perhaps, but surely, toward the realisation of credit on low terms everywhere and for all.

THE BANK OF FRANCE AND AGRICULTURAL CREDIT

"There is no such thing as agricultural credit; there is only credit,"

said M. Dupin in 1845.[174] Matters have not changed since. It is certain, for instance, that Scotland, which for a long time was the cla.s.sical land of pauperism, owes its prosperity to the banks, which, by developing credit in favor of agriculture, have entirely transformed the soil and the country. Indeed, more than any other, the Scotch farmer needed credit, and more than any other he has benefited by it. It may be said that personal credit is peculiar to agriculture. Thus it suffered as a result of the evolution already mentioned, which, by causing the disappearance of local banks or by giving them a new direction, struck a fatal blow to personal credit.

We know that "agricultural credit" includes loans from seed-time to harvest. The first labor done, the first loan made to the land can only be repaid much later. The average time necessary for agricultural loans is five or six months at least. Now, for other reasons the by-laws of the bank prohibit the discounting of paper having more than ninety days to run. By a special favor which would not be accorded in business, where each loan has a different object, the bank allows the renewals necessary for agricultural loans, which almost exclusively take the form of bills payable to order. The bill returned to the maker on the day of maturity is renewed the following day. The date of maturity alone is changed.

A very important agricultural industry, which we have already mentioned, is that of cattle-raising. The cattlemen are, for the most part, customers of the bank wherever it has a branch. This customer of a somewhat special kind appears, by the very nature of his trade, to be indicated as a suitable client for the bank and not for the financial inst.i.tutions. The bank permits the cattlemen to indorse each other's paper, and thus can accommodate them without intermediaries. There results a very useful co-operation. Moreover, by using the bank the cattlemen effect great savings, the full value of which they alone can estimate.

After the law of July 18, 1898, and the legislation that followed, it might have been expected that the use of agricultural warehouse receipts would be greatly extended. This legislation makes a serious exception to the common law for the benefit of agriculture. It "const.i.tutes the landowner, so to speak, a public warehouse. It is he who, without any other controlling apprais.e.m.e.nt, makes declaration as to quant.i.ty and commercial value to the clerk of the justice of the peace. In short, the agriculturist enjoys a confidence which so far has been denied to industry and commerce." Notwithstanding this favor, the agricultural warehouse receipts are little used,[175] and the bank, despite its willingness to take them freely, regrets to find them among its discounts in such very small number.

Our survey would not be complete should we fail to say a word concerning the agricultural credit a.s.sociations, of which also much was expected and which have only in a very limited measure fulfilled the high hopes of their founders.[176]

For the support of agricultural credit the State draws from two sources the funds required to supply the organs of distribution, the local and regional a.s.sociations. The first source is the loan of 40,000,000 francs made by the bank on November 17, 1897, when the charter was renewed.

This amount, like the 140,000,000 francs already advanced in 1857 and 1878, bears no interest. The second source is the yearly payment made by the Bank of France on the profit-yielding circulation. This payment cannot be less than 2,000,000 francs yearly, and more often it is in the neighborhood of 5,000,000 francs.

All these sums, intended for agriculture, are distributed by the Government, and are used in endowing the a.s.sociations of agricultural credit. The regional a.s.sociations, which are the pivot of the present organisation, are self-governing societies, with a capital of their own.

This capital, added to the advance made by the State, is invested in first-cla.s.s securities, which are then deposited in the Bank of France, as discount guarantee to take the place of the third signature, if need be. The local offices send their paper to the regional office, which then takes it to the bank, as the needs of funds are felt.

Such is the part of the Bank of France in the distribution of agricultural credit. Effective intervention was obviously very difficult, yet the bank has contrived, even beyond its legal obligations, to give the benefit of its credit to agriculture, which so justly deserves the care it is receiving.

THE BANK OF FRANCE

INTERVIEW WITH M. PALLAIN, GOVERNOR OF THE BANK OF FRANCE[177]

Q. Is the Bank of France ever attacked in the controversies between political parties?

A. No charge has ever been made that the bank favored or aided any political party. There is never any claim that politics enters in any degree into the management of the bank.

Q. Is the capital entirely private property?

A. Yes. All the shares are divided between 30,000 shareholders, of whom about 10,000 have not more than one share.

Q. How are your branches managed?