Bible Encyclopedias
Banking

Amalgamations

Amalgamation of banks or of finance houses was, of course, no new phenomenon; it dates back to the days of the old goldsmiths, when it wa's not unusual for a man to break adrift from one firm of goldsmiths for the purpose of joining forces with another more enterprising competitor, and slowly, but surely, the desire to strengthen their position by absorption or alliance spread to the private banks and later to the joint stock banks. However, it was not until the period between 1891 and 1896 that we find anything in the nature of a rush to create bigger banks through the process of absorption or amalgamation. During those five years a very large number of banks in the United Kingdom ceased to be separate entities, and the policy of amalgamation was steadily pursued up to the outbreak of the World War. There was then a slight pause in what we might call the race for supremacy among the larger joint stock banks; but the great and perplexing financial problems which arose during the war kindled afresh the desire for larger and yet larger banking concerns. Gradually, the lesser banks were drawn into the pool; then important institutions which had previously been regarded as free from the temptation to amalgamate, succeeded in persuading their shareholders that the time had come to incorporate their resources with those of the premier banks, and between 1917 and 1919, scarcely a month passed without the newspapers recording the merging of one large bank into another. The earlier absorption of local banks by larger and more widely spread joint stock banks had created little more than passing interest among the public, but the policy of combination between the large joint stock banks themselves, many of them already possessed of enormous funds and branches spread over a wide area, caused a certain amount of concern in various directions, doubts being expressed as to its being to the public advantage, and in powerful business quarters the action of the banks was keenly, criticized..

To investigate the matter a Treasury Committee was appointed on March i i 1918, and as the result of the deliberations of that committee the Government were recommended to pass legislation requiring that the prior approval of Government be obtained before any amalgamations were announced or carried into effect. Further, it was recommended that the approval both of the Treasury and of the Board of Trade should be obtained and that legislation should be passed requiring the tvvo departments to set up a special statutory committee to advise them. These recommendations were carried into effect, and the new statutory committee set up; but either the objections of this body were easily met, or they found nothing to criticize in further unions, for by 1918-9 almost the entire banking strength of the country had become centred in five great combined institutions, the London Joint City & Midland Bank, Ltd., Barclay's Bank, Ltd., the London County Westminster & Parr's Bank, Ltd., the National Provincial & Union Bank of England, Ltd., and Lloyd's Bank, Ltd.

The date of the establishment of the London County Westminster & Parr's Bank, Ltd., is usually given as 1836, though as a matter of fact the London & Westminster Bank, which was the first joint stock hank established in London, was formed in March 1834. The London & County Bank was established two years later - in 1836. The actual date of the formation of Parr's Bank is not quite certain: there are records of its doing business as a private firm about 100 years ago, but as a joint stock bank it dates back no farther than 1865. Before the final amalgamation, each of the banks had obtained position of great importance by absorbing smaller banks, and when the London & Westminster Bank amalgamated with the London & County Banking Company, Ltd., in 1909 it was thought that the matter would rest there. Nine years later, however - in Feb. 1918, to be precise - a further addition to the strength of the combined institutions was made by the amalgamation with Parr's Bank, and the title of the bank was finally fixed as the London County Westminster & Parr's Bank, Ltd. As the bank now stands it represents six original clearing banks, viz., the London County & Westminster Bank; Jones, Lloyd & Co.; London & County Bank; Alliance Bank (subsequently changed to Parr's Bank); Fowler, Banbury & Co., and the Consolidated Bank. In Ireland the London County & Westminster Bank has affiliated with the Ulster Bank, Ltd., and it also has foreign auxiliaries in France, Belgium and Spain. The total number of banks and affiliations represented in 1921 was sixty.

The rise of the London Joint City & Midland Bank, Ltd., is no less remarkable. It was first established in 1836 as the Birmingham and Midland Bank, and although it absorbed a number of small banks from 1851 onwards, its first great step forward may be said to date from 1891, when it absorbed the Central Bank of London, Ltd., and adopted the new title of the London & Midland Bank, Ltd. Then, in 1898, it absorbed the old City Bank and again altered its name to the London City & Midland Bank, Ltd. Other amalgamations soon followed, and the principal absorptions were those of banks of such provincial fame as the Sheffield Banking Co., the North & South Wales Bank, and the Bradford Banking Co. Further additions were made by the purchase of the share capital of banks wider afield, and the bank now owns the Belfast Banking Co. and the Clydesdale Bank. The great amalgamation came, however, in 1918, when the London Joint Stock Bank, Ltd., which came into existence in July, 1836, was absorbed, and the title of the whole concern was changed to its present one of the London Joint City & Midland Bank, Ltd. As it now stands it represents what were formerly 65 banks.

Lloyd's Bank, Ltd., is remarkable for the series of amalgamations that have marked its rise to fame. The real origin of the bank can be traced back to 1765, although it was not incorporated as a joint stock bank until 1865. According to repute, it has taken over by amalgamation or absorption more banking concerns than any other similar institution. Including its affiliated institutions and foreign auxiliaries it represents a total banking strength of what were formerly 119 separate banks. Among some of the more important joint stock banks which this bank has absorbed during its career are: the Shropshire Banking Co., the Coventry & Warwickshire Banking Co., the Birmingham Joint Stock Bank, the West City & County Banking Co., Bristol & West of England Bank, and the Wilts & Dorset Banking Co. The great amalgamation came, however, when the Capital & Counties Bank, Ltd., was absorbed. The Capital & Counties Bank, as it happens, was itself established in 1834 and some six years later commenced to absorb other banks. In fact from 1877 to 1907 it acquired the business of no fewer than 26 other banks. Its career as a separate institution came to an end in the early part of 1918, when it was amalgamated with Lloyd's Bank, Ltd. Since then Lloyd's Bank has absorbed the West Yorkshire Bank and Messrs. Fox, Fowler & Co. of Somerset. It is also closely associated with the London & River Plate Bank and the National Bank of Scotland.

Barclay's Bank, Ltd., has an almost unique history. Until the year 1896 it was simply a private banking house carrying the name of Barclay & Co. Then it suddenly sprang into fame as being the originator of the amalgamations as we know them to-day. In 1896 the banking world was really taken by surprise by the announcement that Barclay & Co. had absorbed, at one sitting, 15 other private banks and had become incorporated at the same time. From that moment Barclay's progressed rapidly; the bank soon absorbed other institutions, such as the York Union Banking Co., Bolitho Williams & Co., Stamford, Spalding & Boston Bank, Ltd., and Neville, Reid & Co. The absorption of the United Counties Bank, Ltd., followed in 1916. A further large addition to its sphere of influence came in 1918 when the London & Provincial & South Western Bank was acquired, itself an amalgamation of two large joint stock banks. By this step over 250 branches in London and suburbs were added to its strength, and an interest acquired in the French subsidiary - Cox & Co. (France), Ltd. In 1919-20 Barclay's Bank extended its sphere still farther by affiliations with the Union Bank of Manchester, the British Linen Bank and the Anglo-Egyptian Bank, thus giving it a total banking strength of 102 banks.

The last of the " big five " is the National Provincial & Union Bank of England, Ltd. The National Provincial was itself formed in 1833, while the Union Bank of London, though not really established until 1839, can claim through one of its constituent institutions to date back to 1688. The principal absorptions for which the combined institutions have been responsible are: the County of Stafford Bank; Isle of Wight Joint Stock Bank; London & Yorkshire Bank; Briscoe's Bank; Smith, Payne & Smith's; Union Bank of London. The Union Bank of London, it is interesting to note, itself amalgamated with Smith, Payne & Smith's, London, Smith Ellison & Co., Lincoln, Smith, Smith Bros. & Co., Hull, and Samuel Smith & Co., Derby, and the title was changed to the Union of London & Smith's Bank, Ltd., in 1902. The latter institution was amalgamated with the National Provincial Bank in 1917, the title adopted being the National Provincial Union Bank of England, Ltd. The Sheffield Banking Co. was absorbed in Dec. 1917 and the Bradford District Bank on Jan. 11919. A year later an affiliation was made with Cox & Co., the well-known firm of private bankers who had themselves amalgamated with Robarts. Lubbock & Co. as recently as 1914. Finally, the National Provincial & Union Bank of England, Ltd., absorbed the Northamptonshire Union Bank, Ltd., in 1920. With its auxiliary bank, Lloyd's & National Provincial Foreign Bank, Ltd., this institution now represents what were formerly 63 banks.

The resources of the " big five " were, of course, very substantial before the amalgamations, and as the following table will show, there had been no diminution up to 1921: Total Capital, Resources & Deposits, 1913 And 1920 Just how the paid-up capital of the banks compares with that shown before the principal amalgamations took place will be seen from the following table: - The great upward movement in the amount of deposits held by the banks may be said to date from 1910; consequently, it will be of interest to place on record the deposits of the large banks in that year, and those at the end of 1921.

Deposits Of English Banks Affected By The Amalgamations Concerning the reasons for amalgamation, little need be said. The war undoubtedly drove the leading London bankers to look for increased financial resources, in order to cope with the increased magnitude of the operations they were being called upon to finance. Fashion, the desire to out-bid other institutions, the element of self-preservation, banking evolution, the conven ience and gain to trade to be secured by an extension of bank areas - all such factors, however, pulled their weight in what during 1918-9 offered to be a struggle for supremacy between the leading institutions. Probably the most naive reason advanced in justification for amalgamation was that of the chairman of one of the great banks, who said that " combination must come." This was a new variant of the old petitio principii, " it is coming because it must come and it must come because it has come." The remark, no doubt, truly reflected a sense of the inevitability of a further stage of evolution. Even so, to the most casual observer it would seem as if the voracious appetite of the supermen in banking had at last been satiated, for so great had been the absorptions that any further extension of the activities of the " big five " would of necessity be confined to the acquisition of the relatively unimportant private or merchant banks. In a word, amalgamation had spent itself by 1920, since any further fusion of the larger institutions would probably be regarded with suspicion by the general public.

As showing how the old private institutions have gone out of existence it may be said that out of 38 private banks which were doing business in 1891, there remained only four in 1921. The latest absorption up to the middle of 1921 was the acquisition in Feb. of that year of the business of Messrs. Fox, Fowler & Co., Somerset, by Lloyd's Bank. It was interesting as marking the passing of the last country bank which had the right to issue notes. Thus closed a remarkable chapter in English banking, for under the provisions of the Bank Charter Act of 1844, the right of issue lapsed on the amalgamation with Lloyd's Bank. Further, it marked the accomplishment of one of the principal aims of the Bank Act of 18 44 - that of reducing the private note issues of the country, for they now ceased altogether. In 1844 this note-issuing privilege was enjoyed by 207 private banks and 72 joint stock banks, and although the Bank of England was entitled to increase the fiduciary portion of its note circulation by two-thirds of the lapsed issues, the Bank had apparently not availed itself of the full privilege, for out of the maximum issue of £8,631,000 vested in the defunct banks, the Bank of England had only increased its fiduciary circulation by £7,551,000 of the lapsed issues.

Private banking, then, has found its resting place in the archives of the things that have been, and the lesser lights of English joint stock banks are not far behind. As a matter of fact the number of English joint stock banks was reduced from 106 in 1891 to 20 in 1921, and throughout the whole of the United Kingdom, including the Bank of England and the private banks, the number of banks had fallen from I II in 1900 to 41 in 1921.

That the resources of the banks have not suffered by this process of absorption will presently be shown, for the question of resources is an all-important one. In many respects large banks are certainly preferable, because with large resources they are in a position to make advances on a much more generous scale than the smaller concerns. Moreover, it was clearly desirable that the banks should be prepared to adapt themselves to the entirely new order of things in the financial world brought about by the war.

Actually, the public would not appear to have suffered from the fusion of the banks, for if we make a comparison of the figures of the English joint stock banks (the Scottish and Irish banks, except in a minor degree, were not much concerned with amalgamation), we find that there have been very large increases in capital and reserves; the ratio of total cash to demand liabilities has risen, and deposits show a striking increase. The ratio of paid-up capital and reserves to deposits has, however, fallen considerably, though the 1920 figures showed that the upward movement had recommenced. The following table will reveal the true position: - English Joint Stock Banks That there is no foundation for the accusation, sometimes heard, that the country had suffered from the closing of branch banks, is apparent from the fact that in 1890, when the fever for amalgamation had not taken so large a hold on the bankers, there were 104 banks in existence in England and Wales with 2,203 branches; by the end of 1920, with only 20 banks functioning, the number of branches had grown to 7,257.

In Scotland and Ireland, where the banks have preferred to strengthen their position and spheres of influence more by working arrangements with other large institutions than by actual union, the number of branches show similar expansion. Scotland in 1890 had 10 banks with 975 branches; in 1920 with only eight banks she had open 1,283 branches. Curiously enough, the number of banks operating in Ireland has not changed since 1890; there were then nine banks with 456 branches; in 1920, with the same number of banks the number of branches had exactly doubled, the total being 912. The capital and reserves of the Scottish banks in 1890 was £1 4,755 000; cash in hand, at call, etc., £21,427,000, against deposits of £91,610,000. By the end of 1920 the capital and reserves had grown to £17,911,000, cash in hand and money at call to £72,974,000, and deposits to £279,228,000. The capital and reserves of the Irish banks in 1890 was £10,374,000, cash in hand and money at call £9,086,000, and deposits £38,521,000. In 1920 the totals were: capital and reserves, £ 12,899,000; cash in hand, etc., £46,698,000; deposits, £200,441,000.

Just how great has been the extension of banking in the United Kingdom may be gauged from the following table, which shows the aggregate liabilities and assets of the banks in the United Kingdom for the pre-war period, 1913-4, and for the post-war period, 1920-1 and the respective increases involved. The figures for the Bank of England are included: - Liabilities Assets Increase in Deposits. - Apart from the capital and reserves, which show what, in the circumstances, must be considered for 1920-I the satisfactory increase of £48,350,000, or 36.7% over the 1913-4 total, the first item which strikes one's attention here is the enormous increase in deposits, £1,577,590,000, or 142.8% over the 1 9 13-4 figures. The increase in deposits was common to most, if not all, of the banks during the war period, and after. Various reasons have been assigned for it. Some bankers gravely asserted that many of the balances which went to swell their deposits represented money awaiting employment in trade, but however true that may have been during the trade slump of 1919-20, the true causes during the war were to be found in the inflation arising out of the Government's war finance; while immediately after the war, bankers were certainly too free with their advances.

Each advance had the effect of adding to the deposits of the same or of some other bank in the country, since when a person raises a loan with a bank the amount is nearly always credited to his current account. Obviously, then, an increase in bank loans and advances is concomitant with an increase in bank deposits, and as the Bankers' Magazine pointed out in regard to the war period " bankers were able to extend their loans in this manner because a large proportion of the inflated deposits of the war period still remained with them as additional cash, notwithstanding the large sums which they invested in Treasury Bills or were prevailed upon to lock up in the various War Loans." Undoubtedly, the increase in deposits was largely due to the immense creation of Government credits, which eventually found their way into the pockets of producers, traders and wageearners, and so on, to the banks. However, by the summer of 1921 the rate of increase in both deposits and current accounts showed signs of slackening, and there appeared to be little doubt that, whenever trade started to revive, the deposits of all the banks would fall rapidly.

The increase in acceptances calls for little comment; it was falling steadily in 1921, and showed a decline of over £49,000,000 between 1920 and 1921.

Credit Facilities

Discounts and advances gave the lie direct to the critics who averred that the assistance of the bankers to trade was not what it should be. Discounts and advances together showed the very satisfactory increase of 826,233,000, or nearly 112.4%, and it proved that even if the bankers were scrutinizing more carefully the applications for discounts and advances in 1921, they were giving very active assistance to the finance of trade and industry, so far as was compatible with the precautions they were bound to consider it wise to take in the interests of their depositors.

As a matter of fact, difficulties during the transitional period from war to peace were fully appreciated as long ago as 1916, when the Board of Trade appointed a committee to investigate the question of financial facilities for trade. Another committee was also appointed for similar reasons towards the end of 1917. The terms of reference to the latter body mainly consisted of (a) an inquiry into the financial needs of trade immediately after the war and the respect in which these needs would differ from the needs under normal conditions, (b) the provision of financial facilities to meet those needs. Briefly, the committee foresaw that there would be an increased demand for credit facilities during the reconstruction period, and that the character of the demand would differ from that of normal times in that it would consist of a greater demand for loans secured upon capital goods, compared with loans secured upon consumable goods. Further, the considered opinion of the committee on financial facilities in 1917 was, that to achieve the reconstruction of trade and industry on sound financial and economic lines, it would be necessary to reestablish a sound financial basis by means of an effective gold standard; to check any undue expansion of credit, and to take steps to reduce to more normal proportions the inflation of credit due to the war. In the banking world a movement towards this end had been gradually shaping itself, though progress up to 1921 had necessarily been slow owing to the bursting of the bubble of trade inflation, labour troubles, and world-wide depression in trade during 1920.

That there would be some difficulty in providing the extended credit facilities which, it was foreseen, would be necessary, was recognized, and to meet this difficulty the committee of 1918 recommended, among other things, an increase in the capital of the banks, and the acceptance of deposits for longer periods at fixed rates of interest. They said " To enable the banks to do more in the direction of granting long trade credits, we are also of opinion that it is desirable that bankers should make more widely known their willingness to accept deposits for long periods, at fixed rates of interest. We believe that, if they were encouraged to do so, a number of depositors would be willing to deposit their money at fixed rates of interest, for periods of from one to five years, without the right of withdrawal. The removal of the liability to withdrawal would thus enable the banks to grant loans for longer periods." To a limited extent, effect was given to these recommendations, and in 1921 the banks were all striving to meet the abnormal conditions with which they were faced.

The London branches of the colonial banks, of course, always favoured the taking of fixed deposits at a comparatively high rate of interest; but it is doubtful if the movement is destined to extend greatly among the London joint stock banks who are called upon to maintain greater liquid balances to meet withdrawals than are their colonial confreres.

One good thing towards the solution of the difficulty in providing adequate banking facilities for trade was that which arose out of the recommendations of the Board of Trade committee of 1916. As the result of the deliberations of that committee it was resolved to form a new bank to fill the gap which was said to exist between the home banks and the colonial and British-foreign banks and banking houses. The new institution was called the British Trade Corporation. Its constitution and functions were laid down by the committee to be (1) To have a capital of £io,000,000. The first issue to be from £2,500,000, upon which, in the first instance, only a small amount should be paid up, but which should all be called up within a reasonable time. A further issue to be made afterwards, if possible at a premium.

(2) It should not accept deposits at call or short notice.

(3) It should only open current accounts for parties who are proposing to make use of the overseas facilities which it would afford.

(4) It should have a foreign exchange department where special facilities might be afforded for dealing with bills in foreign currency.

(5) It should open a credit department for the issue of credits to parties at home and abroad.

(6) It should enter into banking agency arrangements with existing colonial or British-foreign banks wherever they could be concluded upon reasonable terms, and where such arrangements were made, it should undertake not to set up for a specified period its own branches or agencies. It should have power to set up branches or agencies where no British-foreign bank of importance exists.

(7) It should inaugurate an information bureau.

(8) It should endeavour not to interfere in any business for which banks and banking houses now provide facilities, and it should try to promote working transactions on joint account with other banks, and should invite other banks to submit to it new transactions which, owing to length of time, magnitude or other reasons, they are not prepared to undertake alone.

(9) Where desirable, it should cooperate with the merchant and manufacturer, and possibly accept risks upon joint account. (to) It should become a centre for syndicate operations, availing itself of the special knowledge which it will possess through its information bureau.

The British Trade Corporation was designed to fill a gap in the financial machinery of the country and to supply needs which had been long felt by trade and industry. Apart from the assistance which it might be able to render in connexion with overseas contracts, the development of existing markets and the securing of new ones, its sphere of usefulness was a large one, and properly directed, it should prove of great value to the development of British trade, finance and industry.

Foreign Banking

As a matter of interest in the trend of British banking it may be noted that all the large joint stock banks had entered by 1921 into more or less extended foreign relations. All had proper branches devoted entirely to the financing and developing of overseas trade, and foreign exchange operations formed a much more important part of the work of all London banks than had been the case before the war.

The ramifications of some of them were by 1921 very wide; Barclay's Bank, for instance, maintained a large foreign department in London and was also affiliated with the Anglo-Egyptian Bank. Lloyd's Bank, in company with the National Provincial Bank, had also its subsidiary in France under the title of Lloyd's & National Provincial Foreign Bank, Ltd. The London County Westminster & Parr's Bank had a subsidiary bank called the London County Westminster & Parr's Foreign Bank, Ltd., and both Lloyd's and the London County Westminster & Parr's Bank were closely concerned in forming (1917) the British Italian Corporation in England and the Compagnia Italo-Britannica in Italy. The London Joint City & Midland Bank had formed no branches abroad, the view being that it was better to refrain from competing with foreign banks in their own centres; further, that besides being able to maintain amicable relations with foreign banks, a greater security was afforded to domestic depositors where the bank's activities were restricted to the home country. Some of the other banks who appeared to support this view had joined together and participated largely in the establishment of a bank known as the British Overseas Bank, which was making steady progress in the particular branch of banking for which it catered.

Altogether, then, whatever may have been the failings of the British bankers up to 1910 in the provision of means for financing overseas trade, and in attending to the foreign exchange operations of their clients, there was in 1921 no lack of facilities for clients whose business called for operations in foreign and colonial currencies.

War Services

A word remains to be said about the rise in the investment figures, which was a noteworthy feature of the aggregate balance sheets of the banks. The increase during the decade was 548,501,000, a little over 246%, and undoubtedly a large proportion of the investments in 1921 represented the bankers' subscriptions to the various war loans in which they had participated heavily. The banks' contribution to the Victory and Funding loans alone, it was estimated, amounted to some £ 1 i i,000,000. In June 1921, however, a small decline had recently been noticeable, and it seemed probable that, as time went on, the bankers would gradually divest themselves of a large portion of Government stocks.

Great services were rendered by the banks to the Government during the war. In most of the large loans that were floated the instalments were spread over a more or less lengthy period. In determining the amounts which the banks could conveniently handle account was taken of their reserve funds, which largely consisted of their deposits with the Bank of England. In describing the actual process of assisting the Government in this loan finance, the late Sir Edward Holden compared the payments with the revolutions of a wheel. The banks were described as placing in the wheel the payments they made for their customers who had subscribed for the loans; the wheel carried these payments to the credit of the Government with the Bank of England, and the subscribers received their securities. The Government then placed in the wheel cheques in payment of commodities and services rendered for conveyance to their creditors, and the creditors in turn used the wheel to carry the cheques to the credit of their accounts in the banks, thus reestablishing the banks' reserves and preparing them for another instalment. Another method by which the Government was helped by the banks was by the steady absorption of Treasury bills and other securities sold over the counter at the Bank of England. The banks also rendered invaluable service to the Government in making available their credit facilities with the Bank of England. " To increase their clients' ability and their own ability to invest in Government issues they would borrow from the Bank of England. These loans would increase their deposits with the Bank of England, which, as reserves, would increase their ability to grant to their own clients loans equivalent to, say, five times such deposits " (English Public Finance). Then in the advances to the Government on " Ways and Means " they were of important assistance. The manner in which these Ways and Means advances operated may be best described in the words of the Committee on Currency and Foreign Exchanges after the war: " Suppose for example, in a given week the Government require £to million over and above receipts from taxes and loans from the public. They apply for an advance from the Bank of England, which by a book entry places the amount required to the credit of public deposits. The amount is then paid out to Government creditors, and passes, when the cheques are cleared, to the credit of their bankers in the books of the Bank of England-in other words, is transferred from Public ' to ' Other ' deposits, the effect of the whole transaction thus being to increase by £io million the purchasing power in the hands of the public in the form of deposits in the joint stock banks and the bankers' cash at the Bank of England by the same amount. The bankers' liabilities to depositors having thus increased by £io million and their cash reserves by an equal amount, their proportion of cash to liabilities (which was normally before the war something under 20%) is improved, with the result that they are in a position to make advances to their customers to an amount equal to four or five times the sum added to their cash reserves, or, in the absence of demand for such accommodation, to increase their investments by the difference between the cash received and the proportion they require to hold against the increase of their deposit liabilities. Since the outbreak of war it is the second procedure which has in the main been followed, the surplus cash having been used to subscribe for Treasury Bills and other Government securities. The money so subscribed has again been spent by the Government and returned in the manner described to the bankers' cash balances, the process being repeated again and again, until each £10,000,000 originally advanced by the Bank of England has created new deposits representing new purchasing power to several times that amount." It may be noted, in connexion with the part played by the great joint stock banks in the raising of war loans, that for the firs' ' ime they were made collecting agents, being so named in *" -Iectuses with the Bank of England.

cues.-The note circulation of the English joint stock fined in 1921 practically unchanged at £174,000. it was found, were on the increase, while Irish considerable decline. The expansion of the `he United Kingdom may be shown as follows, the increases since 1913 being 279% for the Scottish, 206% for the Irish, and 349% for the Bank of England notes: (000's omitted.) The total issue of the Bank of England against securities is known as the Fiduciary Issue, and on June 301914, the amount of this issue was £18,450,000, while the Bank of England notes issued against gold coin and bullion, under the provisions of the Bank Charter Act of 1844, amounted to £38,476,000. As showing how the bank's note issue increased during the war and the period following it, it may be observed that the notes in circulation on June 1 1921 amounted to £144,993,235, as security for which the Government debt amounted to £11,015,000, other securities to £7,434,900, giving an excess circulation over the authorized issue against securities of £126,543,235, all duly covered by the deposit of gold coin and bullion in the Issue Department.

The Committee on Currency and Foreign Exchanges after the war sat in 1918 and 1919, under Lord Cunliffe's chairmanship, to consider among other things the working of the Bank Act, 1844, and the constitution and functions of the Bank of England, with a view to recommending any alterations which might appear to be necessary or desirable. Briefly, the conclusion they came to was that the principles of the Act of 1844, which upon the whole had been fully justified by experience, should be maintained, namely, that there should be a fixed fiduciary issue beyond which, subject to emergency arrangements, notes should only be issued in exchange for gold. They said in their report:- " It is noteworthy that from 1866 till the outbreak of the war (1914) no suspension of the Act was ever necessary." The Committee considered that the stringent principles of the Act had often had the effect of preventing dangerous developments, and the fact that they had had to be temporarily suspended on certain rare and exceptional occasions (and those limited to the earlier years of the Act's operation when experience of the working of the system was still immature), did not, in their opinion, invalidate this conclusion. The Committee therefore recommended that the separation of the issue and banking departments of the bank should be maintained, and that the weekly return should continue to be published in its old form. The possibility of so modifying the Act of 1844 as to make provision for the issue of emergency currency in times of acute difficulty was, however, carefully considered. They said that it might, no doubt, be sufficient to leave matters as they were prior to 1914, and to risk the possibility of the law having to be broken, subject to indemnity from Parliament, but evidently the Committee were alive to the objections that had been expressed in many quarters to this procedure. Their report states:-" We are, therefore, of opinion that the provisions of Section 3 of the Currency and Bank Notes Act, 1914, under which the Bank of England may, with the consent of the Treasury, temporarily issue notes in excess of the legal limit, should be continued in force. It should be provided by statute that Parliament should be informed forthwith of any action taken by the Treasury under this provision by means of a Treasury Minute which should be laid before both Houses. The statute should also provide that any profits derived from the excess should be surrendered by the Bank to the Exchequer." The Committee add:-" It will, of course, be necessary that the Bank Rate should be raised to, and maintained at, a figure sufficiently high to secure the earliest possible retirement of the excess issue." The following table records the changes in the Bank of England rate from 1911 to 1920: A table may also be given showing (in thousands of pounds) the amounts presented through the London Bankers' Clearing House during the ten years ending in 1921 *Seven settlements only. t Eighteen settlements only.

The Definition of a " Bank.

One good result of the British banking amalgamations which the critics of the policy nearly always overlooked is the elimination of the weaker vessels. Even a cursory glance at the figures will convince the reader that amalgamations have given added stability to the British banks, and this cannot but be beneficial to the general public and to the commercial community. The amalgamated institutions, moreover, have been unconnected with any failures; indeed, many times they have been the means of averting bankruptcies and panics. They came through the backwash of the American financial panic of 1907-8 with a firmly established reputation for that conservatism which means strength, and just as they emerged from the black times of the Baring crisis years ago, so have they passed through the critical periods of the war years, 1914-8, with added lustre. In the monetary stringency that befell Europe on the outbreak of war, and brought many of the European bourses on the verge of disaster, it was borne upon the public what a useful function is performed by the great banks of the United Kingdom in averting banking crises and creating confidence in British financial methods.

It is true that between 1910 and 1921 there were one or two failures which brought disaster to many of the poorer folk. But these failures were not by " banks " in any proper sense of the word. One was the Charing Cross Bank, which failed in Oct. 1910. It was nothing more or less than a money-lending concern. When it closed its doors it brought ruin to a large number of poor people who, tempted by high rates of interest, had deposited their savings with the institution. Practically nothing was saved from the wreck brought about by the folly of a man, named A. W. Carpenter, who was the sole proprietor of the concern. Then there was the Birkbeck Bank, which went into liquidation on June 8 1911, mainly through its connexion with building society finance. In this instance, the consequences were not so disastrous, since, largely as the outcome of the assistance of the joint stock banks in the liquidation, the depositors were ultimately paid nearly in full. More recently, on Dec. 20 1920, history repeated itself, and the public was startled by the failure of Farrow's Bank, an institution carried on under the chairmanship of Mr. Thomas Farrow, who was sentenced to four years' penal servitude in connexion with the publication of false balance sheets of the so-called bank. The failure of this bank caused little surprise in banking circles, but, as usual, a large number of depositors of the small tradesman and artisan class were ruined by the failure. As with other institutions of this type, it was the same old story - the public lured by high rates of interest offered on current accounts and small deposits. When the bank failed it had succeeded in obtaining from the public approximately £1,458,000 in current accounts and f2,679,- 000 short deposits, and up to July 1921 all that it had been possible to pay to the depositors was 2s. in the £, and there seemed no probability of anyone receiving more than 5s. in the in final settlement.

In each case the failures gave prominence to the necessity for limiting the use of the title " bank " to institutions that really are banks. It also emphasized the necessity for the great joint stock banks to encourage the small depositor, with the result that most of them now advertise their willingness to open small deposit accounts at rates of interest consistent with prudent banking.

Immediately following the failure of the Charing Cross Bank the question was raised - " What is a bank? " and there was a demand for a definite ruling on the subject. It is curious, but true, that no Act up to 1921 had ever said what was the meaning of the word " bank, " and what is still more curious, there was no decision of a Court of Law on this point. All the Bills of Exchange Act of 1882 says is - " A banker includes a body of persons whether incorporated or not, who carry on the business of banking " - a definition which has never had the slightest use in preventing scandals that have arisen in connexion with such concerns as the Charing Cross or Farrow's Bank. After the outcry in the press over the Charing Cross Bank failure in 1910 had died down, the subject was dropped, owing, it was said, to the difficulty of framing any satisfactory definition. The question was, however, raised again in 1911 on the amendment of the Money Lenders' Act, but with a similar result, and nothing useful was accomplished in the nature of preventive legislation. Then, in 1915, largely as the outcome of the banks' participation in the Government's War Loans, the question was again raised, and a small committee was got together by the late Lord Cunliffe to discuss the matter in anticipation of legislation. A report was made to the Bankers' Clearing House Committee, and the matter was continually discussed, off and on. The first definition proposed by the Clearing House Committee was this: " A Bank, as the term is understood in this country, may be broadly described as a firm or institution whose main business is to receive from the public monies on current account repayable on demand by cheque." The objection to this definition, it was considered, lay in the words " main business, " a general term which itself calls for explanation. It was urged that the main business of a bank is not in the receipt of money from the public, but in the relending of that money. Consequently, an alternative definition was proposed in the following terms: " The expression ' bank ' means any persons who hold themselves out as carrying on the business of receiving from the public current account money which is to be repayable on demand by cheque, or who use the word ' bank ' or any derivative of that word as part of the title or description under which they carry on business." What, however, was considered to be even a better definition was that given by the president of the Institute of Bankers, London, Dr. Walter Leaf, in his address to the Institute of Bankers in Nov. 1920, namely: " The expression ' bank ' means any persons who receive from the public on current account money which is to be repayable on demand by cheque, or who use the word ' bank ' or any derivative of that word as part of the title under which they carry on business." A good deal was said on the matter at the meeting in question, and most bankers present were in agreement with the president when he said that what actually was needed was a register of bankers which could be established without a hard and fast definition. Further, a tribunal should be set up with power to admit applicants or reject them from incorporation in the register on a wide view of all the circumstances of their business. This tribunal, it was argued, should be representative, not only of Government Departments, but of industry and commerce, as well as of existing banks. If such a register were set up no one would be allowed to use the name of a bank or any derivative from it unless his name was included in the register. On all such registered banks such obligations as the publication of accounts, and so forth, would be imposed as might be thought desirable.

In the meantime the Government itself had in 1918-21 a bill under consideration which was intended to include the principal points put forward. But during 1921 it seemed to have found its resting-place in the archives of the Board of Trade.

Certainly the suggested register of bankers carries us a step farther than previous efforts have done. Sir John Paget, the eminent banking counsel, had constantly urged the necessity for reform in this matter, and in a letter to the Journal of the Institute of Bankers he pointed out in 1920 that the register plan offered finality where finality was sorely needed, elasticity where experience called for change. As he said, the register need not necessarily be either an Index Expurgatorius or a Book of the Righteous; it would be a true guide and friend. It would not be derogatory to bankers, for registration is both recognized and adopted in all professions. The Stock Exchange has its official list of members; the Law List is the register of counsel and solicitors, and when we come to medicine and surgery we find in the Medical Register and the General Medical Council the complete exemplar of a register and tribunal which, as Sir John Paget has argued very reasonably, might well be the pattern to be followed by the bankers. Unfortunately the blunder made by the Government in 1919 in introducing a"banks supervision" bill (for controlling amalgamation), which was so badly drafted that it had to be withdrawn, seemed to have discouraged official action.

Overseas British Banking

The recent tendency of the English joint stock banks to take an interest in overseas banking has already been mentioned. Apparently, they had not yet in 1921 reached the point of carrying the process of amalgamation into unions with the colonial banks, though, as it happens, in 1919, pourparlers were taking place between representatives of Lloyd's Bank and the National Bank of India for the purchase of the shares of the latter. However, before the negotiations had reached a head the British Treasury intervened and vetoed the transaction. Nevertheless, there was an important development in India, namely the amalgamation of the three Presidency Banks, the Bank of Bengal, the Bank of Bombay, and the Bank of Madras, which, under an Act passed by the Indian Legislative Council in 1920, became united on Jan. 27 1921, and were henceforth to do business as the Imperial Bank of India. As is well known, the old Presidency Banks under the former regime were restricted in their operations; they were looked upon as semiofficial institutions and as " bankers' banks." Under the Presidency Banks Act of 1876 they were prohibited from doing foreign exchange business, from borrowing or taking deposits payable outside India. They were not permitted to make loans for longer periods than six months, or to advance upon mortgage, or on immovable property, or upon promissory notes bearing less than two independent names, or upon goods, unless the goods or the title to them were deposited with the banks as security. Under the constitution of the new Imperial Bank of India, these disabilities are to a large extent removed; the bank is empowered to do most of the business which the Presidency Banks were formerly prohibited from doing. Besides acting as the bank for the Government, the Imperial Bank is permitted to have an office in London, and to rediscount bills for the Exchange Banks and other banks. It does not, however, compete with the Exchange Banks in ordinary exchange business. The appointment of the bank as the Indian Government's sole bank in India will make for economy, for it will enable the Government to abolish the expensive Reserve Treasuries in India, and the business hitherto conducted in that connexion by the Government will be done by the Imperial Bank. To render this possible, the Imperial Bank undertook to establish and to maintain within five years no fewer than ioo new branches, not less than onefourth of which would be opened at such places as the Government might consider desirable.

It will be convenient at this point if we give particulars of the capital, etc., of the banks before the amalgamation and the position as it stood in June 1921.

Resources Of The Indian Presidency Banks Before They Were Absorbed By The Imperial Bank Of India (Lakhs of rupees.) (Figures are in lakhs of rupees - one lakh =100,000 rupees) Capital, Etc., Of The Imperial Bank Of India, May 20 1921 (000's omitted.) The above includes: Deposits in London £ 34,500 Advances in London 130,300 Cash and balances at other banks in London 130,607 The establishment of this bank is, of course, a great step forward in the banking development of India; it centralizes the operations of three large banks, but gives them larger working resources and a much larger scope. A further advantage is found in the fact that although the Government is fully represented the main working of the central concern is in the hands of private individuals. The president and vice-presidents are the representatives of the shareholders, and practically the only Government officials on the central board are; the controller of the currency, not more than four nominees of the Government, and one or two managing governors appointed by the Indian Government in consultation with the central board. The first two governors were Sir N. Warren and Sir R. Aitken, who were formerly secretaries and treasurers of the Banks of Bengal and Bombay respectively, whilst the first London manager was Sir Bernard Hunter, who held formerly the position of secretary and treasurer of the Bank of Madras. Subsidiary to the central board, forming the main governing body, there were to be local boards, the latter being the existing boards of the amalgamated institutions in the three presidency towns. The central board was to function much in the same way as the Bank of England does in England. It deals with matters of general policy, " such as the movement of funds from one part of India to another, the fixation of the Indian Bank rate, which will in future be uniform for the whole of India, and the publication of the weekly statement." 1 The local boards, under the general control of the central board, were to have a very free hand in administering the affairs of the bank, and, altogether, the whole administration was designed to carry on the work of the previous Presidency Banks with the minimum of disturbance and the maximum of efficiency.

Precisely what business the Imperial Bank was in 1921 authorized to transact was set out in the following schedule of the Imperial Bank of India Act: The bank is authorized to carry on and transact the several kinds of business hereinafter specified, namely: (a) The advancing and lending money, and opening cash-credits upon the security of: (I.) stocks, funds and securities (other than immovable property) in which a trustee is authorized to invest trust money by any Act of Parliament or by any Act of the GovernorGeneral in Council and any securities of a local Government or the Government of Ceylon.

(II.) Such securities issued by State-aided railways as have been notified by the Governor-General in Council under section 36 of the Presidency Banks Act, 1876, or may be notified by him under this Act in that behalf.

(III.) Debentures or other securities for money issued under the authority of any Act of a legislature established in British India by, or on behalf of. a district board.

1 Economic Journal, vol. xxxi.

(1) (1) bona fide (b) United States.

[[Growth Of National Banks By Five-Year Periods Principal Items Of Resources And Liabilities Of National, State, Savings, Private Banks, Loan And Trust Companies From To Federal Reserve Banking System) Yearly Increase Or Decrease In National Bank Circulation From 1900 To 1920 National Bank Notes Outstanding Oct]]. 1920.

3 The Opening of the World Resources And Liabilities Of 22,109 State, Savings, And Private Banks And Loan & Trust Companies, J Une 30, 1920 (In thousands of dollars.) and of many of the importations of manufactures, it had become customary in past years for English banks to hold claims upon American institutions which gradually accumulated each year up to the opening of the autumn season, when the movement of crops to foreign countries provided funds which were used for the cancellation of these balances. At the opening of the war it was supposed that in trade with England such balances against American banks amounted to something like $500,000,000. One phase of Great Britain's economic policy upon the outbreak of war was to call in the balances due to her in foreign countries and generally to cut off trade relations that might subject her credit structure to fresh demands. At the same time the presence of German war-vessels in the Atlantic made it uncertain how long a time must elapse before the movement of goods to and from Europe would be resumed upon a normal basis. The export trade of the United States was thus seriously checked at the same time that extensions of credit by British banks were practically suspended. One immediate effect of this situation was to cause a large exportation of gold from the United States, while the shipment of goods was first reduced, and at last temporarily suspended. These two factors caused serious disturbances in the eastern part of the country and produced a general lack of confidence, while at the same time they tended to depress the prices of American staples. Cotton was affected with particular seriousness, its price declining during the autumn to a point as low as five cents per pound as against a figure, then regarded as normal or satisfactory, of 12 or 13 cents in the early part of the year. In consequence of this stagnation of export trade, there was a somewhat corresponding shock to domestic business, a resulting difficulty in making collections, and eventually a withdrawal of funds from banks not only for export of specie, but also for the purpose of domestic hoarding. Congress, which was then in session, hastened to amend the Aldrich-Vreeland Act of 1908, the measure thus adopted taking effect on Aug. 4 1914. Under the terms of this amendatory measure the issue of emergency currency was permitted under more liberal conditions than before. It would have been much better if the Federal Reserve Act, which was passed during the preceding Dec., had been brought into operation, but as a matter of fact reserve banks did not get under way until Nov. 1914. The action of Congress in passing the emergency currency law was, therefore, necessary in order to provide an immediate means of furnishing funds for the payment of depositors. The currency thus provided for under the new law was accordingly issued and eventually rose to a peak point of about $430,000,000. This served to take the place of gold which was then moving out of the country, the total gold exports during 1914 amounting to approximately $223,000,000. Meanwhile the Federal Reserve Bard had been organized in accordance with the terms of the Federal Reserve Act on Aug. 10 1914, and was immediately confronted by the great losses of gold which were being incurred by the banks in order to satisfy the demands of British creditors. In the belief that much of this withdrawal of gold was due to a lack of combined action on the part of the American banks, the board supervised the formation of what becam(known as the " international exchange fund," or " gold pool," which was in effect an agreement among American banks to provide a total of $100,000,000 of gold for export (or gold exchange), permitting any bank that might be drawn upon to supply itself from the common stock by depositing therein satisfactory funds in other forms. This measure was effective in restoring confidence while at the same time the first fear and uncertainty that had resulted from war conditions began rapidly to disappear; German vessels were soon driven from the North Atlantic and the movement of products from the United States to Europe was resumed upon a limited scale. The urgency of demands for cash declined and the banks (which had begun the issue of clearing-house certificates on Aug. 3) were able to retire their obligations on Dec. 1, although the Stock Exchange (which had been closed on July 31) was not reopened until later. Thus the banks of the country passed through the dangerous early stages of the war partly by exercising their own latent power and partly in consequence of the aid which had been extended to them through Congressional enactment and through cooperative effort under the leadership of the Federal Reserve Board.

The Banks and the Federal Reserve System.-The projected text of the Federal Reserve Act had been made public in June 1913, and had served as a basis for discussion from that date up to the passage of the Act on Dec. 23 of the same year. It may fairly be said that practically all of the banks of the country were opposed to it-the national banks primarily because it made membership in the system compulsory; the other banks because they feared that great changes and innovations in business would result from the new system. After the adoption of the Federal Reserve Act the question whether or not to enter the system became acute with national banks since the law had provided that a failure of any national bank to enter the system would mean the necessity of surrendering its charter and transferring itself to a state banking system, through reincorporation. Accordingly during the early part of the year 1914 there was constant discussion of the wisdom oc the un.- wisdom of declining to accept membership. The result was a practically unanimous determination to take stock in the new Federal Reserve banks. The principal points at which the new Act immediately touched the national banks were in connexion with the contribution of capital and the transfer of their reserves. In the course of the discussion of the Federal Reserve Act there had been an effort on the part of the national banks (especially after membership in the system had been made compulsory) to reduce the required amount of contribution to the capital stock of the Federal Reserve banks to as low a level as possible. It was eventually fixed at 3% of the capital and surplus of each national bank, so that when the banks eventually entered the system (as all except some eight or ten finally did) they were obliged to pay in only about $50,000,000. In the same way they had endeavoured to avoid the necessity of transferring any part of their reserves to the Federal Reserve banks, except as they might elect, but had not entirely succeeded, although a three-year period was finally provided during which the transfers might be made in instalments, and only part of the reserves was even eventually to be transferred. At the outset the banks paid over to he Federal Reserve banks only about $18,000,000 of capital and $227,000,000 of reserve deposits. These payments were made during the month of Nov. 1914 and, as just shown, were only about $245,000,000 in all, so that the burden of establishing the reserve system was not a particularly heavy one. Indeed, with the reduction in reserve requirements which had been nade in the Federal Reserve Act (central reserve city banks being cut from 25% of reserve deposits to 18%, reserve city banks from 25% to 15% and country banks from 15% to 12%), the banks were in much better condition to take care of the needs of their customers than they were before the organization of the reserve system, even without any recourse to rediscounting. In view of the fact that European demands for American goods were considerably reduced during the first months cf the war, so that industry was temporarily checked and domestic prices were lowered, bank resources were more than adequate to the needs of customers. Later as the requirements of European countries became heavier and export shipments from the United States were increased, the banks entered upon a period of unusual prosperity, and the difficulty in earning dividends which they had experienced during 1915 disappeared. Credit in fact became comparatively safe, not only on account of the rapidly rising prices which greatly reduced the danger of business failure, but also because of the fact that many of the large purchases of goods in the United States made for European account were practically guaranteed by foreign Governments which at that time were in a relatively strong financial condition. The number of banks accordingly increased steadily and the capital and surplus even more markedly, as may be seen from the tables already given. What has been said in this section is intended to apply directly to the case of the national banks but holds equally true of state institutions (both banks and trust companies). All went through a somewhat parallel course of development, while the high wages and steady employment which were due to very large European purchases of goods provided a strong basis for the growth of savings. Savings deposits accordingly advanced decidedly in amount. For the same reason which enabled national banks to refrain from re-discounting, state banks and trust companies were relieved of any urgent necessity to enter the Federal Reserve system. The system accordingly extended but little credit to its members up to the end of 1916, while it enlarged its membership very little outside of the national banks themselves.

The War Period

An entirely different situation came into existence immediately upon the entry of the United States into the World War in April 1917. There had already been some growth of re-discounting during the earlier months of that year, and Congress after the opening of the war, June 1917, amended the Federal Reserve Act. By the terms of this new law all reserves of national banks were to be carried in Federal Reserve banks and nothing held in vault was to be counted as reserves, it being felt that such action was practically essential in order to concentrate the banking power of the country, to enlarge the lending power of the reserve banks and to relieve. the members of the necessity of carrying coin in vault. At the same time effort was made to discourage the payment of coin or legal-tender money to depositors, so that the banks soon passed to what was really a paper basis. The continued importations of gold strengthened the reserve bank holdings, so that there was at all times far more gold in the country than before the war. The net increase in gold holdings was fully $1,000,000,000, but gold coin had practically disappeared from common use. Congress had also provided, in the Act already referred to, for membership of state banks in the Federal system under conditions which permitted them to withdraw whenever so disposed by giving six months' notice. Partly because of this assurance of ability to retire and partly because of a feeling that the advent of war would naturally subject all banks to severe stress, while at the same time it was regarded as a matter of patriotism to render such aid to the Government as they could, a large number of institutions entered the system. These accretions to membership continued rapidly during the years 1917-8 and resulted eventually in the admission of about 1,200 state institutions. The movement into the system had a rather important effect upon the banks and trust companies that joined. They were compelled as a condition of membership to maintain reserves equal to those of the member banks already in the system, so that a process of standardizing reserves was effectively carried forward. During the years 1915-8 there had been extensive changes in state banking legislation. These changes had provided more nearly uniform reserve requirements, besides authorizing the local state banks to become members of the reserve institutions if they felt so disposed. In consequence even those banks which did not become members were in some measure adjusted to the banking situation by being subjected to more uniform requirements.

A somewhat similar process was also going on in the matter of types of bank paper, the new legislation both of Congress and of the states being intended to standardize these types. Thus the United States emerged from the war with a much more harmonious and uniform system of banking legislation than it had ever before possessed.

Change in Holdings

The effect of the war was, however, of a very far-reaching character in its relation to the portfolios or paper holdings of the banks of the country. The method of financing the war which was chiefly resorted to by the Treasury involved heavy taxation, but it was some time before the new taxes could yield any returns and the Federal Government never obtained from that source more than about one-third of its total outlay. The other two-thirds were obtained from the banks and the public by borrowing. The public was encouraged to save and to use its savings in the purchase of Liberty Bonds, but a very large proportion of the bonds sold to the public had to be carried in part at least by means of loans obtained at banks upon paper collateralled by Government obligations. This was true of all classes of banks, both national and state, as well as of the trust companies, while the latter and the savings banks were also urged to purchase and hold as many Liberty Bonds as they could. In these ways the investments of the banks and their commercial portfolios came to consist very largely of paper collateralled by Government obligations. This was true not only of the paper which represented subscriptions to bonds, but also of paper which took the place of ordinary commercial borrowings. Due to the fact that many business men preferred to borrow on their own notes collateralled by Government bonds in order to get the lower rates of interest made by the banks on such notes, paper of this kind rapidly displaced ordinary evidences of indebtedness. This state of things continued until some time after the close of the war, a modification occurring in the autumn of 1919 and continuing to grow more pronounced thereafter.

New Functions of National Banks. - Prior to the adoption of the Federal Reserve Act national banks had not been allowed to perform so-called fiduciary functions, including those of acting :as guardian or trustee, registrar, fiscal agent, administrator and others. These functions had been exclusively performed by trust companies, most states following the example of the National Bank Act and drawing a sharp line of distinction between their own state banks and their trust companies. The Federal Reserve Act authorized the assumption of fiduciary powers by national banks upon permission of the Federal Reserve Board. Such permission when granted by the Board was promptly questioned in the courts, but was upheld by the Supreme Court of the United States. This decision led to an extension of the scope of the fiduciary functions so that national banks were shortly placed upon a basis of competitive equality with trust companies. The situation led various states to modify their laws in such a way as to permit state banks to take on fiduciary functions likewise. Thus the distinction which had previously existed between national banks, commercial state banks, and trust companies was gradually wiped out. By the end of 1920 about 1,200 national banks had been granted permission to exercise trust functions. The time has not yet been sufficiently long to permit an accurate judgment of the effect of these changes upon the general banking situation, the full exercise of fiduciary functions being usually a process of comparatively slow development.

Organizing for Foreign Trade

One of the principal defects of the old national banking system was that it did not function well in connexion with foreign trade. Neither national nor state banks had been in the habit of using bankers' acceptances, which had become the standard basis of foreign business in Great Britain. This defect was remedied in the Federal Reserve Act, which authorized the making of acceptances by national banks up to an amount equal to loo % of the capital and surplus of the accepting bank (50% in the original Act confined to foreign trade, but later amended to 1 oo % of which not to exceed 50% might be domestic acceptances). Several of the states in which banking had assumed the greatest development made a similar change in their legislation at about the same time, so that at the opening of the World War, with its great impetus to American foreign trade, the banking system, both national and state, was in position to finance business on the acceptance plan. It was seen, however, in the formulation of the Federal Reserve Act that in order to develop foreign banking successfully the use of the branch system would be necessary. Branch banking had never been permitted in the United States under the National Bank Act, and although it sporadically existed under various state laws such systems were only local and not particularly successful. It may broadly be said, therefore, that there had been no development of the branch bank principle prior to 1913. Although at one time it was proposed to insert in the Federal Reserve Act permission to establish domestic branches of national banks, and although the Act gave to Federal Reserve banks power to establish branches within their own districts and at their own discretion, it withheld from national banks power to create domestic branches. It, however, did vest them under certain conditions with the power to establish branches abroad. This power was used by only one or two of the larger national banks, and early in 1915 the demand for action which would allow national banks to subscribe to the stock of foreign trade banks to be jointly owned by them became very strong. Accordingly Congress in 1915 modified the Federal Reserve Act to the extent of permitting the organization of foreign trade banks. The plan, however, did not meet with much favour and few such banks were organized. Those which were brought into existence did a fairly successful business, but not enough were established to give the plan a commanding place in American financial life. The subject, however, of financing foreign trade was unavoidably thrown into the background by the advent of the war and the conditions growing out of it. Foreign countries financed their purchases of American goods upon what was practically a cash basis prior to the time that the United States itself entered the war. and after that date practically the whole export trade of the United States was financed upon the basis of Government credits for which the U.S. Treasury furnished the means. The result was to make the whole foreign banking question far less urgent or immediate than it would otherwise have been. Not until the war had closed, and indeed, not for some considerable time after, did the subject receive discussion. Such discussion, however, became general about the middle of 1919, and at that time it seemed to the Federal Reserve Board that a plan of action modelled upon the British investment trust might serve as a basis for the general long-term financing of American exports. This export financing was regarded as essentially a problem which involved the shipment of goods upon longterm credit, it being recognized that much time must elapse before foreign countries could send to the United States enough goods to keep their American trade in current balance. Accordingly the so-called Edge Act was passed Oct. 1919. It and the regulations subsequently issued by the Federal Reserve Board provided for the establishment of foreign trade financing corporations of two classes, the one vested with very large powers of acceptance and really differing in no essential way from the foreign trade banks already referred to, except that the stock of the Edge Act corporations might be held by individuals or commercial establishments and not exclusively by banks. The other type of corporation was to be organized for the purpose of providing credit in the export trade, the securities and evidences of indebtedness which it received being employed as a basis upon which debentures or bonds would be issued and offered to the public, thereby restoring to the corporation issuing them the funds which it required, for still further dealings and advances of the same kind. At first but little interest was shown in the idea of such corporations. Prior to the close of 1920 only one had been actually organized although several were under consideration, and early in 1921 the formation of two additional enterprises of the same sort was announced. The most important of the early undertakings under the Edge enactment was a corporation projected by the committee representing the American Bankers' Association, whose capital was to be $10o,000,000 and whose stock was offered to the public early in the year 1921. The Edge Act may be summarized in the statement that it was in effect a plan to provide for the financing of foreign trade apart from domestic banking operations, and with a very much greater latitude in respect to the granting of credit than could properly be allowed to domestic institutions.

Growth of a Discount Market

The use of the acceptance function to which reference has already been made progressed comparatively slowly during the early years of the Federal Reserve system, being retarded by the various disturbing conditions attendant upon the war. The expansion of the acceptance proceeded most rapidly and reliably in connexion with foreign trade, where this type of paper speedily assumed a position of some importance. Its growth was, however, greatly restricted as a result of the lack of branch banks maintained by American institutions in foreign countries. At the close of 1920 it was estimated by the Federal Reserve Board that the total amount of acceptances made by member banks of the system and then outstanding was probably a little under $650,000,000. The bulk of these acceptances had been made by a comparatively small number of acceptance-issuing institutions located for the most part at points whose interest carried them in considerable measure into the export trade. Some interior banks had attempted to develop the domestic acceptance, but with no great success, while the commercial, or trade, acceptance, or " domestic bill " as known in other countries, had shown but slight signs of assuming importance. This was partly due to the existence of the well-known system of offering cash discounts which, if it did not originate in the United States had attained by far its greatest development there. Under the cash discount system, while invoice prices were strictly maintained, a second or reduced invoice price was offered to those who were able to make an immediate or " cash " payment within a specified number of days from the date of the invoice, while to those who preferred to enjoy the full period of credit the full face value of the merchandise was charged. It was clear that in these circumstances, with two rates of charge, the drawing of a merchandise bill at a fixed figure would have been difficult. Hence the very slow development of what was called the trade acceptance, and trade acceptances thus created tended to become in many cases long-term accommodation paper and fell somewhat into disrepute. In the case of the bankers' acceptance, although some bad practices prevailed during the war when the practice of renewing acceptances gained a foothold even with the best and strongest banks through the use of syndicate agreements which provided for the issuing and discounting of blocks of acceptances by groups of banks acting in common, the paper on the whole maintained its position of solvency and reliability. The chief trouble encountered in its development was early found in the fact that no genuine market existed for it and that the Federal Reserve banks had found it practically necessary to supply such a market by taking or re-discounting freely the acceptances of banks in their own district. Had they not done so, it appeared, the acceptances would have found no buyers on many occasions and the practice of making them and financing trade by that means would have been discontinued. This tended to transfer to the portfolios or holdings of the Federal Reserve banks an unduly large proportion of the acceptances at any time in the market, while the bad habit of some banks in discounting their own acceptances deprived the paper of much of its economic virtue as a basis for dealing in commercial credit under better market conditions. It had still in 1921 to be seen how far and to what extent it would be possible to overcome these bad elements in American banking practice and to resume the development of the acceptance upon the lines followed in the more advanced commercial countries of Europe.

History of Interest Rates

After the panic of 1907 and throughout the whole pre-war period rates of interest on bank loans tended on the whole to move in the United States steadily to lower levels. A variety of reasons had been assigned for this drift, among them the rapid accumulation of capital and the intensity of the competition in the investment market. As had been the case with the American market throughout its whole history, the movement of interest and discount rates was by no means uniform, call loans on many occasions shooting up above the general level, while even commercial paper and bank rates tended to fluctuate sharply at different seasons. The tendency, however, was on the whole downward, and after the financial disorders attendant upon the opening of the World War had subsided and the new reserve banks had become thoroughly organized interest and discount rates fell to an extremely low level. This was partly the outcome of the release of credit by the Federal Reserve Act, and partly the result of scarcity of business due to the opening of the war and the transition it implied from a peace to a war basis. Low rates continued to prevail practically throughout the years 1914-6, indeed, until the entry of the United States into the war in 1917. The natural tendency of interest rates would have been to advance immediately after the participation of the United States in the war had become known. Recognizing this tendency, however, the Federal Reserve banks had in conjunction with the United States Treasury determined upon a low rate of discount for paper at Federal Reserve institutions, such rate corresponding closely to the coupon rate upon Liberty Bonds. This rate, however, was put into effect upon the condition that a correspondingly low rate should be made by member banks to their customers. Thus the whole interest rate system of the country was " stabilized " or " price-fixed." In ordinary conditions this stabilization at a low figure would have given rise to an abnormal demand for funds, but this danger was in part averted through the control of industrial operations by the " rationing " of coal and materials for industries, which kept producers from drawing too heavily upon bank credit for support. In some cities, notably New York, a majority of the banks rationed in a similar way the stockbroking and speculative community, agreeing to furnish them with a limited amount of funds at a specified and relatively low rate of interest on condition that there should be no effort to use more than this specified amount in stock speculation and that a correspondingly low rate of interest should be charged to customers. Capital was also rationed by the use of analogous methods. Subject to these conditions the rate of interest continued on an abnormally low level until after the war when, as seen in another connexion (see Federal Reserve Banking System), the rate of discount at the Federal Reserve banks was sharply advanced. Commercial rates, which had already been on the point of rising in some directions, advanced immediately. The action of the Federal Reserve banks was the signal for a still further and subsequent advance in rates, and from the opening of 1919 on throughout the year 1920 there was a fairly steady advance in discount charges which brought the current charge for bank loans at the close of 1920 up to the highest point it had reached for many years. Call loan rates, although fluctuating to some extent subsequent to the war, did not suffer the extreme variations which had been characteristic in other periods of stress. (H. P. W.) Savings Banks. - According to the report of the comptroller of the currency for the fiscal year ending June 30 1920, there were in the United States 620 mutual savings banks with aggregate assets amounting to $5,619,017,000; there were 9,445,327 depositors with combined deposits of $5,186,845,000, an average of $549.14 for each depositor. On the same date the number of stock savings banks was 1,087, with aggregate assets of $1,506,413,000; there were 1,982,299 depositors with combined deposits of $1,349,625,000, an average of $680.86 for each depositor. These figures exclude stock savings banks of those states in which they were included with state bank returns: namely, Georgia, Kansas, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Nebraska, and North Dakota. In the following table, for the years 1910 to 1919 inclusive, the figures are for mutual and stock savings banks combined: The establishment of postal savings banks was authorized by Act of Congress, approved June 25 1910. On Jan. 3 1911 depositories for experiment were opened in each of the 48 states and territories. At the close of the month deposits amounted to $60,252 and by the end of the year $11,000,000. The original plan was gradually to designate as depositories all post-offices doing a money-order business, but it soon became apparent that many small offices would not be utilized. In 1913 the number of depositories had reached 13,000, when a policy of retrenchment was adopted. At the close of the fiscal year June 30 1920 there were 6,314 depositories. Deposits made during that year amounted to $11,942,496; withdrawals 12,802,207; balance credited to depositors $157,276,322; number of depositors 508,508; average per depositor $309.29. On June 30 1919 there were 6,439 depositories with deposits totalling $167,323,260; the number of depositors 565,509 with an average deposit of $295.88. The majority of depositors are of foreign extraction and their deposits constituted in 1920 75% of the total. The original law allowed a depositor to have to his credit a maximum sum of $500; on May 18 1916 this was increased to $1,000; and on July 2 1918 to $2,500. Any person ten years old or over may make deposits. The minimum deposit is $1; but a postal savings card may be purchased for ten cents, containing nine spaces for affixing postal savings stamps, costing ten cents each, and a card when filled is accepted as a deposit of $1. The rate of interest is 2% annually, but deposits may be exchanged for postal savings bonds, issued in denominations of $20, $50, and $500, bearing interest at 21%. As savings banks pay regularly 3% or 4%, and in some cases 5%, the postmaster-general, in his report for 1920, recommended an increase in interest on postal savings. According to the preliminary figures (Aug. 1921) on school savings, compiled by the American Bankers Association, covering the school year 1920 -I, 236 cities reported school savings banks. There were 2,630 reporting schools; enrolment, 1,479,567; pupils participating, 666,478; average weekly deposits, $205,704; total collections for the year, $3,475, 868; average saving per depositor, $5.22; withdrawals during the year, $1,393,230; average net deposit, $3.13.