The different banking systems described above are variations of two main types which are in marked contrast to each other. The one is the free-banking system, characterized by numerous independent, competing institutions, and the other is the privileged system, characterized by a great central institution under direct State control and sometimes under direct State management, endowed usually with a monopoly of note issues, with the exclusive privilege of keeping the government deposits, etc., etc. The latter system is all but universal in Europe, and at present the tendency seems very strong in the direction of its complete establishment in all places where it now finds only partial application. The free-banking system, on the other hand, is best represented in the United States and Canada. In favour of the former system the following arguments are employed:-

(1) It is said that the equipment of the community with money is a function of sovereignty, and since banknotes perform all the functions of money, it is quite as important that the State should issue these as that it should manufacture coins.

(2) Strong, centralized banks with exclusive privileges are in a position to render extraordinary services to the State in times of exigency, and to render great assistance to the government in the performance of its regular financial duties.

(3) Through a strong, privileged institution, with numerous branches all over the country, it is possible to exert a control over discounts and over the movements of the precious metals which is quite impossible under the free-banking system. By raising and lowering the The Chief Banking Systems of the World. 211 rate of discount such a bank is able to increase or decrease its reserves almost at will, and frequently to check or expedite movements of gold to and from the country.

(4) It is further claimed that in banking, as in every other branch of business, great economies and better management are possible when the business is concentrated and conducted on a large scale than when it is performed by numerous small, competing institutions. A large bank with branches in all important commercial centres is also able to distribute the bank capital of the country according to the relative needs of different localities and thus to avoid waste. Such a large institution, it is also said, is more apt to attract talent and to train up an efficient service than is a small local institution.

(5) It is further claimed that public opinion is able to exert an influence upon such an institution more easily than upon a large number of independent banks. This is believed to be a great advantage, especially in times of financial stress and difficulty.

In regard to the first of these arguments, it should be noted that the reason for the concentration of the right of coinage in the hands of government is the fact that the community needs to be assured of the honest conduct of this business. Since individuals are not able to test the metallic content of coins, some guarantee of their weight and fineness is needed, and it is because States are able to give this guarantee better than any private corporation that the business of coinage is regarded in modern times as a function of sovereignty. With banknotes the case is quite different. The systems of issue in force in Canada and the United States give to the holder of such notes quite as much assurance of their convertibility into coin on demand as do any of those under which notes are issued by a single privileged institution. It is, therefore, not at all necessary that bank-notes should be issued by governments in order that they may perform with perfection all the functions of money.

There can be no doubt about the value of a great privileged bank to the State in ordinary as well as extraordinary times. The banks of England, France, and Germany have repeatedly loaned money to their respective governments on occasions when such loans were greatly needed and difficult to obtain elsewhere, and they have performed the functions of holder and disburser of government funds in a commendable manner. This advantage, however, is necessarily accompanied by a disadvantage which perhaps more than outweighs it. The close connection which necessarily exists between the government and these privileged banks makes it possible for the State to use such institutions for its own purposes and frequently to compel them to neglect the application of sound banking principles. At times nearly every one of the great State banks of Europe have been forced into severe financial difficulties on account of their inability to resist the influence exerted upon them by the government, and history would seem to justify the conclusion that they are more apt to indulge in questionable banking practices than well-managed independent banks.

It is certainly a great advantage to be able at times, by means of varying the rate of discount charged by a great privileged bank, to control the discount market and through it the movements of the precious metals. Such a control it is impossible to secure under the free-banking system, where no one institution is able to exert a controlling influence over the others. However, this advantage also must be purchased with a corresponding disadvantage. The regulation of the rate of discount The Chief Banking Systems of the World. 213 from a central institution is apt to involve a frequent disregard of local needs and local interests. Rates of discount ought to vary with the nature of the industries of different localities, and any attempt to enforce a common rate is apt to discourage enterprise in some quarters and over-encourage it in others. It is not, of course, necessary that a central bank should enforce a common rate, but recent experience, especially in the case of the Imperial Bank of Germany, seems to indicate a strong tendency in that direction.

The advantages of business on a large scale are not necessarily confined to the privileged institutions. A number of large competing banks with numerous branches is able to secure quite as economical a distribution of capital and equally able employees as a great privileged institution. Indeed, it is probable that a number of large competing institutions will tend to develop a more skilled and efficient service than a great institution which possesses a practical monopoly. Political influences are apt to be felt in the appointments of the State bank, and even when a good civil-service system which prevents favouritism is in existence, bank officials are apt to be influenced in their policy by considerations of a political character which are foreign to the economic interests of the country and to the real nature of the banking business. So far as the influence of public opinion goes, it is doubtless true that it operates with greater efficiency upon a State bank than upon numerous competitors. It should be observed, however, that the influence of public opinion regarding bank questions is not always to be relied upon and should sometimes be resisted. There is little doubt that independent banking institutions are less apt to be misled by so-called public opinion than State banks.