unrelated functions by banks is still the rule. The country bank in the western part of the United States will discount local commercial paper, lend on long term to farmers with mortgage security, accept savings deposits and pay interest on them, discount the notes of local merchants, furnish domestic remittances, make collections, hold for safe-keeping the valuables of customers, and perform a variety of other duties. The process of differentiation goes hand in hand with the progress of the community in the division of labor. One after another the various functions of the primitive bank are sloughed off or transferred to other institutions, until at length the specialized type of banking emerges either with or without definite organization of the kind already described.

From what has been said in this chapter it will be seen that the expression "banking system" or "type of banking system" is one which must be used with caution and which can be understood only in connection with the grade of industrial situation to which it applies; while still more caution must be used in approving or disapproving this or that plan of organization until there is exact knowledge as to the conditions under which it is to be put into effect. Banking is in one aspect a branch of business and goes hand in hand with business. It cannot be developed very much faster than general business develops, and its principles and methods must always be those which render it efficient in its aid to and support of general business.

CHAPTER XXIV

BANKING ABROAD

WORKS on banking frequently include a somewhat detailed description of European central banking institutions, such as the banks of England, France, Germany, etc., and the discussion is sometimes at least presented in such a way as to suggest the thought that these "central banking countries" are fully provided for each by its own central bank which entirely meets the needs of the population. In fact, central banking has been usually the outcome of a slow evolution.

In most European countries the development of banking has been a long process extending over some hundreds of years. There has been a fairly well-marked tendency toward the development of a single type of banking organization, but there are still very broad differences of method and even of theory between European banking systems. A review of the history of the European countries shows that in practically all of them banking began as a more or less unregulated private occupation, and that as the business grew to greater importance it gradually fell under the supervision of the government, to some extent at least, or was subjected to control by a central institution in which the government took a strong part and which became sufficiently active in the market to exert a powerful influence over banking transactions in general.

Most of the non-European countries which were organized on the modern industrial basis by immigration from Europe have naturally followed European models in banking organization. Nevertheless, a very considerable difference of practice and method had developed in many of them, owing to differences in local needs, prior to the Euro

pean War. It should be emphasized, moreover, that the student of foreign banking will do well to differentiate sharply between the conditions relating to banking and currency which existed prior to the European War and those which have developed subsequent to the close of the struggle. At the present time monetary conditions practically the world over are abnormal, and scientific analysis of banking systems, especially those of Europe, must confine itself very largely to prewar conditions, although taking account, as a matter of information, of the transitory problems which have arisen of recent years.

Looking back for the moment entirely to prewar conditions and confining attention exclusively to western Europe, it may be said that the standard form of banking organization which had grown up during the commercial development of the nineteenth century was essentially a co-ordinated or centralized system in which a fairly sharp line of division had been drawn between banking functions that could to best advantage be carried on as a private or individual matter and other functions which were better performed as a matter of community action or joint and common responsibility. As representative of the former may be taken the task of making direct loans or extending credit to individuals, while as respresentative of the latter may be cited the issuing of notes.. In practically every European country the duty of issuing notes had been taken over almost entirely by a central banking institution, while in one way or another this institution had also acquired the responsibility for holding the bulk of the reserve funds of the community. In like manner the central bank had usually been assigned the duty of holding, receiving, and disbursing the public funds of the nation.

On the other hand, in practically every country it had been found undesirable to have the central bank, acting as it did on behalf of the financial community as a whole and vested as it was with a public quality, discharge the duty of testing private credit or of carrying the responsibility for loans to individuals, or that of regulating or controlling relations with foreign countries by furnishing exchange.

It may be stated generally, therefore, that European countries had fairly closely concentrated the functions of note issue, of the handling of public funds, and of the conservation of reserves, and had tended to decentralize the other functions of banking.

Particularly was such decentralization deemed to be desirable in the case of loans to specific classes of enterprise which were vested with a peculiar character of their own. In nearly all of the European countries there had accordingly been developed classes of institutions known as export banks, whose function it was to facilitate foreign trade, land-credit institutions of various kinds intended to assist agriculture, and specialty banking establishments which devoted themselves to meeting the requirements of certain elements in the financial and business community.

A brief sketch of some of the principal foreign banks, intended to present certain of their salient features, will now be necessary. Effort is made only to furnish the basic facts concerning each of the systems, both as originally developed and as modified by war conditions. It should be remembered, of course, that the existing situation in practically all foreign countries is purely one of transition, the war having brought about changes which cannot be considered permanent.

I. THE BRITISH BANKING SYSTEM.

The oldest among banking systems in anything like their present form is the Bank of England, which dates from 1694, and which as operated to-day finds its fundamental charter in the Bank Act of 1844, which superseded earlier statutes. The bank, although owned by individual stockholders, is to all intents and purposes a public institution whose most important functions are the general direction and control of the money market, the handling of government finances, and the supplying of a uniform note circulation.

Great Britain was the earliest country to develop banking upon the modern highly specialized and differentiated basis. At the close of the seventeenth century England had already

advanced far toward a recognition of the special functions performed by the issue of bank notes and of the necessity of centralizing a certain proportion of the banking resources of the country in the hands of one institution. At that time there was in existence a considerable number of banking houses operating in competition with one another and controlled by no single policy; owing, moreover, no obligations to the government save those owed by any good citizen.

Under the Act of 1844 the issue department of the bank was permitted to put out notes only when protected pound for pound by coin or bullion, except that a basic issue of £14,000,000 sterling might be placed in circulation upon a basis of the government debt. Other banks of issue were to transfer their note-issue privilege from time to time to the Bank of England, and such transfers were to bring about an increase in the issues of the Bank of England to the extent of two-thirds of the independent bank circulation so retired. Before the war the note issue secured by government bonds had thus risen to the equivalent of about $90,000,000, the total outstandings being about $150,000,000.

The function of the Bank of England in controlling the market is exerted by the performance of a very conservative commercial banking business based upon the discounting of short-term paper, partly for banks and partly for individuals, the bank, where necessary, going out into the open market and buying such paper of specified amounts as might be available. Before the European War the handling of government finances consisted largely of the receiving of public funds and the disbursing of them upon suitable check or warrant, or from time to time conversion operations in the long-term debt when necessary, accompanied occasionally by short-term advances. The war changed England's financial structure to a great extent, bringing about alterations which may or may not be permanent. In the Currency and Bank Notes Act of 1914, convertibility of currency and bank notes into gold was provided for, but for several reasons has never been really effective. The government had issued, early in the war, treasury notes which varied in amount from time to time, and at the time