1Op. tit.

Market rates

Loan rates

Expansion of note issue

England

The control of note issue in the several countries varies. Here again this control may be discussed under the three general heads of limitation of issue, requirements as to reserves and requirements as to "cover."

There is no absolute limitation of note issue in England, but there is the rigid requirement that beyond the so-called "uncovered" issue the Bank of England must have a sovereign-for-sovereign reserve behind all notes issued. The "uncovered" issue is that based on government bonds, and amounted at the outbreak of the Great War to £18,450,000. When the Peel Act was passed the amount was £11,015,100. It grew as a result of the surrender by other banks of their issue-right. In times of great emergency, however, the government has suspended the Peel Act, and has allowed the bank to issue notes without reference to the limitations imposed by the act.2

The charter of the Bank of France imposes an absolute limit on note issue. This limitation has not, however, been of great significance, because whenever the actual issue threatened to reach the prescribed maximum the latter was quickly increased. It stood at fr. 6,800,000,000 in 1912, but as a result of the Great War this has been raised to some twenty billions.

France

Germany

Control of note expansion

Limitation of issue

In England

In France

1 Publications of National Monetary Commission, Vol. 1 (Interviews), p. 13.

2 1857, 1860, 1866, 1914.

Germany imposes on the Reichsbank no absolute maximum, but provides a tax-free "kontingent," referred to above. This contingent before the war stood at 550,000,000 marks. The sum of the tax-free contingent and the actual cash in reserves is deducted from the total outstanding circulation, and the balance is subject to a tax of 5% per annum, payable weekly. The Reichsbank's issue has often exceeded the maximum exempt from this taxation, and yet the discount rate has remained below 5%. On these occasions it has been the theory of the management that a temporary loss to the stockholders of the bank is more than offset by the general advantage accruing to trade and industry from a uniform discount rate. The combined "kontingent" of the other banks of issue amounted at the outbreak of the Great War to only 68,771,000 marks. Their average circulation in the period 1901-1910 equaled only 10% of that of the Reichsbank.

In England no reserve at all is required for the "uncovered" issue, but, as already stated, beyond the uncovered issue, notes must be backed with a 100% specie reserve. Legally, one-quarter of the specie reserve may be in silver, but practically no silver has been used as a reserve for notes since 1853. Before the expansion made necessary by the Great War the uncovered issue made up about one-third of the total.

No reserve requirement of any kind has been imposed on the Bank of France. In practice, however, the bank has maintained a very high percentage. A considerable proportion of this reserve is in silver, and, as the notes are legally redeemable in both gold and silver, the bank can protect its gold through the payment of silver instead of gold when notes are presented for redemption. It must also be noted that there are in circulation in France a large number of the silver franc pieces of the other states belonging to the Latin Monetary Union. Should the Union ever be dissolved these states must redeem in gold all their silver franc pieces held by France in excess of the French silver pieces that such states can cull from their own circulation. As the balance in such a calculation would probably weigh heavily in France's favor, it is believed that a considerable portion of her silver circulation is thus itself really equivalent to gold.

In Germany

Reserves for notes

In England

In France

Behind its circulating notes the Reichsbank is required to have a reserve of 33 ⅓% made up of specie and government notes. There is no restriction on silver in this connection, but, as previously stated, the coinage law limits the coinage of silver to 20 marks per capita, and this tends to prevent any large accumulation of silver in the reserves. The reserve requirements of the other banks of issue are the same as those of the Reichsbank.

As "cover" for its notes not based on specie the Bank of England is required to have government bonds. As a matter of fact the notes based solely on bonds are usually referred to as the "uncovered" issue, but in this connection it is to specie cover that reference is made. No distinction is observable between the "covered" and the "uncovered" notes in general circulation. The practical effect of the distinction in law is simply the requirement of a heavier specie reserve behind the total issue as the proportion of the "uncovered" issue in the total tends to diminish. It should also be remarked, in connection with the Bank of England notes, that the estates of all stockholders of the bank may be used as a guarantee fund behind them, since, under the Companies Act of 1874, the principle of limited liability of shareholders is not applicable to note issue. In France the cover for the notes are the statutory discounts and loans. Security investments cannot be used as a basis of note issue. In Germany the cover is commercial paper running not longer than ninety days and bearing at least two signatures.

In Germany

Other assets behind notes

In France

In Germany

In all three countries the notes are full legal tender, except in payments by the banks of issue themselves, and are consequently acceptable for reserve purposes at other banks. Bank notes are redeemable in gold in London and in Berlin, and in gold or silver in Paris.

The last question to be considered in connection with note issue is that of contraction when demand falls off. In all three countries no special pressure is brought to bear on notes to force their prompt redemption. In England no pressure is necessary, because, in first instance, notes are relatively unimportant, while in the second place they are so largely simple bullion certificates. In Germany and France no special pressure is necessary just because so large a part of the operations of the central banks are carried on by means of notes rather than by deposits and checks. Bills rediscounted at the Reichsbank and at the Bank of France for collection purpose may be originally paid for by the central banks by crediting "current accounts" or deposits, but most of them will be ultimately repaid by those liable with bank notes. In Germany and France bank notes constitute so large a proportion of the available circulating medium that in all cash payments to the banks they tend naturally to predominate. The result is that, without special pressure, they flow back to the banks as demand falls off. In 1909 the variation from maximum to minimum issue in Germany exceeded 600,000,000 marks. In France, in 1910, the variation exceeded 550,000,000 francs.1