As special advantages of the free-banking system may be mentioned the following points: -

(1) It promotes the easy development of the banking business, and thereby the steady growth of industry and commerce. The history of banking shows that the interests of commerce, especially in the smaller communities, are apt to be neglected or only slowly recognized by privileged institutions, whereas under a free-banking system local banks have sprung up with much greater rapidity. This fact is illustrated in the banking history of France and England, and in particular in that of Norway, Denmark, and Sweden.

The development of banks of issue naturally precedes that of banks of deposit. When, therefore, issues are monopolized by a central institution, which is slow to establish branches in all parts of the country, banking institutions with the right simply of deposit and discount are apt to develop slowly.

(2) Independent banks developed by local needs are also more apt to completely satisfy those needs than an institution situated elsewhere. In France the fact has often been noted that a successful private institution would flourish in localities where a branch of the Bank of France could only be conducted with loss. This is evidently due to the fact that an institution controlled from Paris by men who are necessarily unfamiliar with the needs of a particular locality and out of touch with its business interests cannot appeal to local business men, and is not in a position to render them the same service as a bank established by local capital and controlled by men intimately acquainted with every department of the business activity of the region. While it must be admitted that such local banks are more responsive to local needs in ordinary times, it cannot be denied that The Chief Banking Systems of the World. 215 they are less apt to be serviceable in times of crisis or monetary stringency. On such occasions private institutions are apt to look after their own affairs and to refuse accommodations to the public at precisely the time when they are most needed. Great State institutions under government management, and possessing the unlimited confidence of the public, are able at such times to render great services.

A comparison of the relative advantages and disadvantages of the free-banking and privileged-banking systems leads one to the conclusion that neither of them is superior to the other in all respects. It would doubtless be a great mistake to attempt to introduce the free-banking principle into communities in which the other system has long been established and is in successful operation. It would be quite as fatal to introduce centralized State banks in such countries as the United States and Canada, where the free-banking system has developed its own peculiar advantages. It is possible under either system to adopt certain modifications which will enable a community to enjoy many of the advantages of the other. A banking system must of necessity be a growth and will serve its community best when it has been developed and modified by experience.

In regard to the various systems of note issue, it should be said that the balance of advantage seems to lie with that in force in Canada. Every one of the other systems suffers to a greater or less degree from inelasticity, and thus at times is unable to meet the legitimate demands made upon this part of the currency. Every community must depend largely upon its bank-note system for the adjustment of its currency to the varying needs of the different localities. For example, in the United States, when the crops are moving, there is an extraordinary demand for currency in the South and West. At such times the ability of banks to issue notes against securities would be a great advantage. Such notes retire themselves when the exigency which calls them into existence has passed, and are rarely the occasion of an increased demand upon the bank's reserves. The same may be said of increased note issues in times of crisis. On such occasions there is an extraordinary demand for loans, and other forms of credit currency are apt to disappear from circulation. If banks can then extend their issues against securities, the gaps in the currency can be filled up, and the excess of notes is certain to return to the banks in the form of deposits or as payments for loans as soon as the crisis has passed, and without serious demands upon the banks' reserves. In most countries the limit placed upon the uncovered issues of banks is so low as to make expansion in ordinary times difficult, if not impossible. In Germany, for example, where ample provision is made for the expansion of note issues in times of crisis, the limit of the uncovered issues is so low that nearly the full quota is in circulation all the time, and any increase to correspond with the seasonal fluctuations in the currency is thus rendered impossible. In England and the United States the bank-note systems are extremely inelastic, and in the former country serve only the purpose of giving the community a choice between coin and bank currency for certain monetary purposes. In Canada, on the other hand, the issue of bank-notes is left to the discretion of the banks, while at the same time ample provision is made for their safety and for their constant convertibility. The result is that the quantity in circulation in that country varies from time to time in accordance with the needs of the country as a whole, and in different The Chief Banking Systems of the World. 217 localities as local needs vary. Great as are the advantages, however, of this system, it would probably be difficult to employ it in a country like the United States on account of the responsibility which it places upon the stronger banks for the conduct of the weaker. It would doubtless be possible and very advantageous, however, to modify our system so as to encourage the development of branch banking and the basing of note issues upon general assets, combined perhaps with a safety fund of much less magnitude than the Canadian.

References

The chief banking systems of the world are described in Conant's Modern Banks of Issue; Dunbar, chs. vii-xi; Noel's Les Banques d' Emission en Europe; and Scharling, ch. iii. On the English system see in addition Bagehot's Lombard Street; Gilbart, v. I, secs. 1-14; Macleod, v. II, chs. viii-xi; Phillips's A History of Banks, Bankers, and Banking; Francis's History of the Bank of England; and Easton's Banks and Banking. For Scotland see Kerr's Scottish Banking, and Somers's The Scotch Banks and System of Issue. For Ireland see Dillon's The History and Development of Banking in Ireland.

On banking in the United States see Knox's History of Banking in the United States; Report of the Secretary of the Treasury for 1863; White's Money and Banking, bk. II; Merritt's The Early History of Banking in Iowa; Whitney's The Suffolk Bank; Hadden's History of State Banks and Early Banking in Wisconsin; and the Annals for March 1893.

On the French system see Courtois's Histoire des Banques en France; Bousqtiet's La Banque de France et les Institutions de Credit; and Wolowski's La Question des Banques.

On the German system see Poschinger's Die Banken im deutschen Reiche, Oesterreich und der Schweiz; Lotz's Geschichte und Kritik des deutschen Bankgesetzes; and Wirth's Handbuch des Bankwesens.

The history of banking in Canada is well described in Brecken-ridge's The Canadian Banking System, 1817 to 1890. On the relative advantages and disadvantages of the different systems see Wagner's Zettelbankgesetzgebung, ch. iv, and his Lehre, ch. x; Courcelle-Seneuil's La Banque Libre; and Scharling, ch. iv.