privilege of renewing the deposit indefinitely at the end of the six months' period, but failure to withdraw or renew forfeited the deposit to the bank. For generations this bank money constituted the basis of the large foreign exchange of Amsterdam. With the establishment of "giro" or transfer banks at Hamburg in 1619, and at Nuremberg in 1621, these written orders came to be used in much the same way as the modern check and were widely employed. These early transfer banks did not make loans or incur any liability beyond the coin and bullion deposits. The Bank of Amsterdam was not subject to official examination, but its credit was never questioned. Toward the close of the eighteenth century it became known that the bank had not lived up to its obligations to keep in its vaults an amount of coin and bullion equal to the "bank money" outstanding. The small committee of city "fathers" responsible for its administration made no report of its affairs, but in 1790 it leaked out that for years favored depositors had been permitted to overdraw their accounts and that enormous loans of specie had been made to the city and to the Dutch East India Company. These disclosures destroyed confidence, the premium on bankmoney disappeared, and the bank became insolvent. It was finally closed by royal decree in 1819. The first bank of issue was the Bank of Sweden, founded as a private institution in 1656, but converted into a public bank in 1668. 65. Early banking in England.—The Jews were probably the first bankers in England. They came to the country with William the Conqueror. They knew the use of bills of exchange, and accumulated stocks of coins which they loaned at high rates of interest to the nobility and others upon the security of their estates. When the king and the nobles became so heavily in debt that they could not repay their loans, they repudiated the debts and expelled the Jews from the country. After the expulsion of the Jews, the Lombards took up the banking business, lending at interest and remitting money by means of bills of exchange. They were allowed to farm the customs as security for their loans. They combined the occupations of goldsmith, pawnbroker and banker. Lombard Street, the "Wall Street" of London, takes its name from them. Mention has been made of how Edward III defaulted in his payments to some of these Lombardy bankers, driving them into bankruptcy and causing as great distress as any of our modern crises. The guild of goldsmiths, known as the Goldsmiths' Company, began to act as bankers about the middle of the seventeenth century. They collected rents for customers, and having vaults and strong boxes they received money and valuables for safekeeping. They also received money on deposit upon which they paid interest. A sort of checking system arose by customers giving written orders on their goldsmiths. They loaned out deposits and issued a crude sort of bank note. 66. The Bank of England. The Bank of England was founded in 1694, not to aid commerce and business primarily, but to provide funds for the Government. The origin of many banks, both before that date and since, can be traced to fiscal rather than to commercial needs. The English government needed large sums of money to carry on its war with France. William Patterson, a Scotchman, proposed the establishment of a bank that should lend its capital to the Government and be permitted to issue notes to the amount of the loan. In 1694 Parliament chartered a corporation for ten years known as the Governor and Company of the Bank of England. The corporation was to lend to the Government at once £1,200,000 ($6,000,000) at 8 per cent interest, with the right to issue an equivalent amount of interest-bearing notes, to deal in bills of exchange, to buy and sell coin and bullion, and to make loans on the security of merchandise. The Bank of England differed from the earlier banks mentioned in that it was an incorporated company and a bank of issue. With that institution modern banking may be said to have begun. READING REFERENCES Conant: History of Modern Banks of Issue, Chs. II, IV. Principles of Money and Banking, Vol. II, Bk. V, Chs. I, II. Dunbar: Theory and History of Banking, Chs. VII, X. Fiske: The Modern Bank, Ch. XXIII. Knox: History of Banking, Pt. I, Ch. I. CHAPTER IX BANKING DEVELOPMENT IN THE UNITED STATES 67. Early state banks.-The early experiments in banking in the United States were concerned largely with the issue of circulating notes and with the fiscal operations of the Government. During colonial times several banks were projected in New England with the right to issue circulating notes based on the security of land. These early banking projects assumed that if such security were given for the ultimate payment of the notes, current redemption would be unnecessary. Usually they had no actual paid-in capital but depended upon mortgages as a basis for their operations. These "land bank" schemes to supply a circulating medium were suppressed by the colonial or the English governments.1 The first bank established in the United States was the Bank of North America in Philadelphia, which was chartered by the Continental Congress in 1781. It was planned by Robert Morris, the Superintendent of Finance, in order to give financial support to the Revolution. A little earlier a number of patriotic Philadelphia citizens had organized the so-called "Bank of Pennsylvania," which consisted merely of private subscriptions to provide supplies for the army. The Bank of North America took over its foreign bills and assumed its claims against the Federation. The Bank of North America was capitalized at $400,000, 1 For a discussion of some of these Colonial banking schemes, see White: Money and Banking, Bk. III, Ch. IV. of which the Government subscribed $250,000. There was About this Some of the restrictions imposed upon these early state banks are noteworthy. The charter of the Bank of Massachusetts limited its debts, except sums due to depositors, Ao twice the paid-in capital, and the debts of the Bank of New York, over and above deposits, were not to exceed three times the paid-in capital. This distinction between the bank's liability to depositors and to noteholders was due to the fact that deposits were not then created by loaning as they are to-day, but by the actual deposit of money. Actual money, not deposit currency, was used in making payments; hence deposits were distinguished from other liabilities in estimating the right to contract debts. Both banks were prohibited from dealing in merchandise. The Bank of New York was prohibited from dealing in the stocks (bonds) of the United States or any of the states, an evident attempt to separate banking and government. It was also prohibited from loaning on real estate or holding it except for banking purposes or when it was necessary to take it to secure the bank against debts previously contracted. This restriction was incorporated in the national bank law passed nearly eighty years later. The Bank of Massachusetts was also prohibited from dealing in bank stocks. |