Note issue and other operations

The incorporated credit banks

Tendency toward centralization

Nature of business

The other agencies involved in the banking systems of the three countries vary. As already indicated, the English system is characterized by a high degree of specialization. First may be mentioned the "merchant bankers" and accepting firms. These, according to Withers, are not bankers at all. Their business is to accept bills on commission, although this very function puts them in good position to handle outside loans in the English market. Next are the "discount houses," somewhat like American "note brokers," who are primarily middlemen standing between the drawers of bills and the banks who are the ultimate purchasers. They are useful agents in helping to make credit mobile, but they are especially needed in England where the enormous volume of bills requires specialization in handling. They buy bills in wholesale quantities using for the purpose call loans with bills as collateral. Some of the large private firms themselves keep considerable quantities of bills. Private lenders often put funds on deposit with discount houses which pay interest on such deposits. On the other hand, when the bill market is not sufficiently attractive, or when the discount houses have excessive funds, they sometimes engage in syndicate operations or in lending on stock-exchange collateral. Lastly, reference may be made to the investment and finance houses of which there are a considerable number.

Private bankers

Other agencies

England

Merchant bankers and accepting firms

Discount houses

Investment and finance houses

They are mainly investment bankers, but they also engage extensively in foreign exchange operations.

Germany and France show little specialization, although in the field of land credit and of cooperative credit they show a much higher organization than can be found in England. But besides the Reichsbank there are four banks of issue in Germany, namely, the banks of Saxony, of Bavaria, of Württemberg, and of Baden. Their notes, however, enjoy only local circulation and they are hardly a factor in the national situation. Most of the state governments in Germany have also state-owned and state-controlled banks like the Prussian "Königliche See Handlung." These banks accept some deposits and make some discounts, but they too are not of great significance in this field. They are primarily the fiscal agents of their respective governments. There are also some paper brokers in Germany and France, but their operations are not to be compared with those of the English discount houses. Similarly the small brokerage, the investment banking, and the foreign exchange business in Germany and in France is, as already indicated, mostly in the hands of the large commercial banks.

Turning now to the operation of the European systems the first question that suggests itself is that of elasticity. From the viewpoint of credit expansion there may be considered first the system of discounts and of loans. In this connection attention will be given to the paper eligible and to the character of the loans.

The Bank of England may determine without legal interference what is for its purposes acceptable paper. As a matter of fact the bank will buy only paper with two British names, one of which must be that of the acceptor. The maximum maturity of bills bought is usually four months, although in exceptional cases the bank may purchase six months bills. Down to the outbreak of the Great War the bank would buy only "domiciled" foreign bills, namely, bills accepted abroad, but made payable in pounds sterling in England. The early strain of the war on almost every part of the English banking machinery forced the bank into a more liberal policy, however, and the new policy of buying foreign bills will probably survive.

France and Germany

Elasticity of credit in Europe

The discount system

Paper eligible

At Bank of England

The Bank of France is governed in this matter by its charter and by its own statutes. It accepts only three name paper having not more than three months to run. Bills may be payable at any one of almost 500 places where the bank undertakes collections. Two name bills may be accepted if, as a substitute for the third name, there be deposited, as collateral, securities of the kind acceptable as a basis for loans, or warehouse receipts for goods. In every case, however, two of the required names must be French.

The Reichsbank is permitted by law to accept only bills with at least two names and running not longer than three months. But foreign bills are acceptable and are regularly held in large quantities.

The joint stock banks and the other agencies buying paper enjoy in all three countries the widest latitude. The most common forms of bills are bankers' acceptances, drawn by sellers on bankers acting as agents for buyers, and trade acceptances, drawn by a seller of goods and accepted by the buyer. They are both domestic and foreign. All such paper bears two names. Single name paper of the American variety is a negligible factor. There are, of course, differences in detail from country to country. In France and Germany unsecured acceptances known respectively as credits à dècouvert and kredit bianco are fairly common. In England acceptances by bankers and by the accepting firms are almost uniformly secured by negotiable securities. The tendency in all three countries, as credit becomes less and less personal, is toward a collateral requirement.

The general procedure in the field of discount is practically the same in all three countries. The central banks will discount only for those who carry proper accounts.

At Bank of France

At the Reichsbank

At the general market banks

General procedure in the field of discounts

The German and French banks discount only at the official rate, but the. Bank of England will buy paper at a private rate determined by market conditions, when, as Hartley Withers says, the Bank is not discounting officially as the head of the English money market. As the fiscal agents of their several governments the central banks also regularly make advances to the government. These advances are usually on the basis of treasury bills discounted in the ordinary way.