Bank Of France
( Originally Published 1918 )
Fifty Years of Panic
The reign of ruin that set in with Law's collapse lasted almost fifty miserable years, during which there was only one attempt to establish another national bank.
In 1776 the Bank of Commercial Discount was organized, but dissolved under the pressure of government rapacity in 1793. The government's credit was very low, while the credit of the bank was high. The government forced the bank to pay into the royal treasury a large sum in bank notes in exchange for treasury notes called assignats, which had no value. As a result, the bank went into liquidation.
Then came the revolution, and financial chaos prevailed through seven years, until Napoleon came into power.
The Bank of France was founded by Napoleon in 1803 (by-laws which were not finally approved in 1808), with a capital of 30,000,000 francs. It had no special right to issue notes, nor had it any direct connection with the government. But it prospered, and 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 its present system of banking was adopted.
Under this system a governor and two deputy governors are appointed by 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 supervision of loans and of bank affairs generally.
In 1808 the bank was given the exclusive right of note issue in all towns in which it had branches. After the fall of Napoleon in 1815 its influence was somewhat impaired by the establishment of departmental banks. A large number of these were established between 1830 and 1840 as the result of the belief that the Bank of France was not properly organized to administer the banking affairs of all the people. It was called "a banker's bank." The growth of departmental banks soon resulted in a quarrel with the Bank of France, the question being whether the privilege of note issue should be confined to one bank or bestowed upon all. The result was the Act of 1848, which gave the Bank of France a monopoly of that function. But it was required to buy out the departmental banks of issue, which it promptly did by increasing its own capital stock.
Deposit Currency Little Used. The monopoly of the right to issue notes did not result in building up great banks of deposit in France as it did in England. One of the most interesting features of the French system is the undeveloped condition of deposit currency. Notes are used almost entirely in large transactions as well as in small trade. The confinement of the privilege of note issue to one great institution has given France a uniform, stable currency against which there is little complaint and because of which there is held to be no necessity for the growth of deposit banking.
The Notes of the Bank of France are issued on what is known as the "asset currency" plan. There is no fund set aside for their redemption, such as that required by the English law and by the National Bank Act of the United States. The volume of notes outstanding is fixed solely by the needs of business and by the cash reserves held by the bank to redeem the notes. Under this plan bank notes are treated as deposits are treated in our national banking law-as demand obligations of the bank against the redemption of which a reasonable cash reserve must be kept.
In practice the amount of notes against which an equivalent amount of cash is not held is relatively small. Although the Bank of France is not required to provide any specific reserve, it has found it advisable to keep a much larger one than we consider necessary in this country. The reserve of the Bank of France will average about Branches. The bank is required to maintain one branch in every department of France. Each branch is allotted a certain amount of the capital, and the law requires that half the capital shall be held locally. The total capital now is over 180,000,000 francs (about $36,000,000). Loans are made by the branches as well as the central institution, and at the same rate of interest. The bank often loans in sums running down to a few francs. The bank also does a large rediscount business, the small institutions throughout France accepting paper with the intention of passing it on at a small profit to the central bank.
The French Banking Theory. The Bank of France represents a theory of banking in strong contrast with that upon which the Bank of England is conducted. The Bank of England issues notes only against the actual deposit of gold with the issue department; the Bank of France issues them without any restriction whatever except those imposed by its own caution. This method, though on its face it may not appear safe, gives to the currency a valuable attribute of elasticity. The English system is inelastic. The volume of outstanding notes can be increased only by the purchase and deposit of gold, a method both slow and costly.
The rigidity of the English system has caused the growth of deposit currency, the bank note losing entirely its true function as a credit instrument. England's only resource in time of stringency is the suspension of the bank act, in itself an admission that the system is incorrect. In France unrestricted issue has allowed the bank note to retain its character and importance as a medium of exchange. The volume of the circulation expands and contracts with the changes in demand. Although there are no reserve requirements, the same result has been accomplished by conscientious management, so that the .note of the Bank of France has become as readily acceptable as the Bank of England's gold certificate.