Another topic that must be discussed in connection with elasticity of credit is that of the relations of the general market banks to the central banks that hold the reserves and that enjoy practically monopolistic privileges of note issue. It was seen that owing to the peculiar restrictions on note issue in England the banks in the general market are forced to keep considerable quantities of gold on hand to meet the varying demands for currency. Hence centralization of reserves is less complete in England than it is in Germany and France. In general, then, the questions to be answered are, how in the three countries considered are the surplus reserves of one community made available as a basis for credit elsewhere, and how are notes obtained when the demand shifts from deposits to notes.

Character of notes

Contraction of note issue

In England

In Germany and France

Rediscounting etc.

1 Tabular Summary, Publications of National Monetary Commission.

In England, while the central bank will rediscount for the joint stock and other banks, it virtually never does so. Moreover, the larger banks in London will not in practice rediscount in the open market bills that they have purchased. But elasticity is obtained in the English market through the reliance that is placed on call loans on bill security extended to the discount houses. When, for any purpose, a London bank considers it necessary to strengthen its reserves, the loans to the discount houses are called. To obtain funds with which to pay the called loans the discount houses take the requisite quantity of bills and offer them for discount at the Bank of England. The loans are then paid with checks drawn on the Bank of England. The result is thus the same as if the banks themselves had offered the bills for rediscount. The smaller and the provincial banks oftentimes offer bills for rediscount on the open market, or to the large metropolitan banks when the rates prevailing in the London market are favorable for such operations. Hence, as far as variations in local demand are concerned, the English system may be said to be quite elastic.

Notwithstanding the rigid restriction of note issue practically the same must be said about the normal variation in demand as between deposits and notes. An increased demand for a hand-to-hand medium is met, of course, by a withdrawal of cash from the banks. This weakens their reserves, hence they are obliged to call in their loans to the discount houses. The latter, as previously explained, go to the Bank of England and discount bills, obtaining thus the funds with which to pay the loans called. The banks calling the loans therefore strengthen their balances at the Bank of England, which balances then take the place of the money paid out. In other words, the increased demand for a hand-to-hand medium in England is met through the payment of cash, but the effect of this is offset by the creation at the Bank of England of deposit credits which for reserve purposes are equivalent to cash.

In England

Strengthening reserves

Meeting the demand for currency

In France and Germany rediscounting for the other banks by the central banks is the common and accepted practice. This is often at a rate higher than the original discount rate, although, as previously explained, the rediscount is made only for a short period. Bills to be collected in places other than those in which they are held are pretty regularly rediscounted. Hence it is a simple matter for the individual bank at any time to strengthen its balance with the reserve-holding institution. In like manner if the individual bank feels a demand for additional currency it obtains notes from its central bank simply by drawing down its balance in that form. Practically full elasticity is thus assured.

Passing now to the subject of clearings and transfers consideration may be given first to local clearings. In general it may be said that local clearings are much more important in England than in France and Germany. The reason for this is to be found in the fact that, on the continent, notes are extensively employed, while at the same time these notes are issued by a single bank and are available for reserve purposes for the other banks of the system.

The London Clearing House was established in 1777. It is a close corporation, and admits only those banks which have their head office in London. Outside banks can avail themselves of the clearing privilege only through one of the member banks. Checks on the London branches of the Scotch banks and of the colonial and foreign banks generally are collected over the counter. There are three clearings daily, the "metropolitan" the "town," and the

In France and Germany

Strengthening reserves

Obtaining notes

Clearings and transfers

Local clearings

In England

"country." The Bank of England is a member on one side only, presenting at the clearing house its own claims against the other banks. The checks that the other banks have against the Bank of England are simply deposited and forthwith credited. Balances are paid through a special clearing account kept at the Bank of England, so that the ultimate outcome is simply a readjustment at the central bank of the balances of the banks involved in the clearing. There are also local clearing houses in eight of the larger English towns.

There are fourteen local clearing houses in Germany with the largest, naturally, in Berlin. They are all intimately connected with the Reichsbank, being housed in Reichsbank buildings.1 The Berlin clearing house has nineteen members including private banking firms as well as corporate banks. The clearing is carried through at the Reichsbank, where the final differences are adjusted through the transfer of balances. There is also a supplementary clearing institution in Berlin known as the Berliner Kassenverein. The Kassenverein is really a bank owned for the most part by other banks. It is used for stock-exchange clearings and for banks not members of the regular clearing house.