Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

Local banks, pre-eminent less than one hundred years ago, have gradually seen their field of activity growing smaller, and a large number of them have been amalgamated with great institutions, possessed of much greater resources, with branches over the entire country, and, it must be said, free from the routine which caused the downfall of many provincial houses. With their decline we greatly regret to see the disappearance of personal credit, which it is more and more difficult to make available. The intuitus personae (the judgment of character), which may serve as a basis for credit granted to a neighbor by a neighbor, can not be considered by a corporation official who has almost no means of estimating the solvency of individuals except from the material and tangible side.

The local banks, as far as they have survived, have adopted methods which do not bring them into competition with their powerful rivals. They have been obliged to grant long-term credits or content themselves with being intermediaries for the Bank of France in granting credits to parties known to them, generally farmers or small landed proprietors, with a view to rediscounting the paper. On this point again there is cause to regret, if not their disappearance, at least their effacement. The institutions for agricultural credit, in spite of all the attention they have received, have not yet been able to replace the local banks in the distribution of personal credit applied to agriculture.

The great financial institutions, of which the four most important are the Crédit Lyonnais, the Comptoir National d'Escompte de Paris, the Société Générale, and the Crédit Industriel et Commercial, have a much more important part in the distribution of credit. Thanks to their numerous agencies, to their attractive conduct of business, with the service of a courteous and attentive staff, they have gradually taught the people new habits in investment and confidence in credit, to such a degree that he who but yesterday hoarded in a stocking prefers to-day, if not to speculate on the Bourse, at least to make deposits in the savings banks. The great financial institutions have done much to give even the lowest classes confidence in credit, and to introduce a system of clearing.

In closer contact with the public than the Bank of France, which is restricted by having to protect the reserve of which we have spoken, these institutions are able more readily and effectually to reach and to mould the public. But that is not their only service nor the only reason for their existence. There are transactions which they alone undertake, which they alone can undertake, and which must be performed because they are in the line of progress. These operations are sources of profit in the same way as are discounts and loans for the Bank of France. Such are demand deposits, stock-market orders, and the flotation of securities. These operations cannot be undertaken by the local banks. Occupied for the most part with long-term dealings, they have no use for deposits payable on demand. If they should have such deposits, their total would never reach a sufficient proportion safely to permit the investing of an important amount.

On the other hand, the Bank of France does not and, even if it wished, cannot compete with the financial institutions in undertaking such operations. Neither the acceptance of interest-paying deposits nor the flotation of securities can come within the province of a bank of issue. The flotation of securities necessitates a certain contingent responsibility, and the institutions which place securities on the market sometimes engage their credit for very large sums, which are sufficiently guaranteed by their capital, but the credit which is intended to safeguard the stability of the bank note cannot be pledged for that purpose.

It happens that the Bank of France sometimes transmits subscriptions, but this is a gratuitous and entirely voluntary service. In no case can the bank take for its own account bundles of securities in order to dispose of them to the public. The purchase and sale of securities, which is so profitable a business in all financial institutions, could never, it is clear, be a successful undertaking in the Bank of France. The staff of the bank has no special information as to the various securities dealt in on the Bourse, and cannot, therefore, give valuable advice. Its rôle would apparently be confined to handing out the financial journals and passively awaiting orders. If it should act otherwise, the staff would engage the moral responsibility of the Bank of France; but the bank, evidently reluctant to undertake such operations, prefers to leave that field to its auxiliaries, the financial institutions.

However, at the present time, the Bank of France tends to compete with these institutions for the purpose of maintaining sound conditions of credit which inclines more and more to speculation. Thus it is extending its department for the purchase and sale of securities in order to safeguard a poorly informed public against the excesses of speculation which dazzle with the hope of an always illusive gain.

IN WHAT MANNER THE BANK OF FRANCE PROMOTES THE FREE DISTRIBUTION OF CREDIT IN FRANCE

Thus the Bank of France must leave entire freedom of action to the financial institutions and must not encroach, theoretically at least, on their functions, which, as has been shown, differ materially from its own. The bank even owes them its protection, since they are valuable auxiliaries in pursuing its aim of extending credit as liberally as our metallic base permits. In the interest of the public the cash holdings are daily at their disposal. The help and protection of which we speak are not mere passive professions. Unfortunately, there have already been numerous cases where the bank has had to interfere in order to bring effective assistance to private banks. The bank has, of course, acted thus for the welfare of the entire community, but also for the satisfaction of protecting its auxiliaries with all its power in the fulfilment of a difficult task.

Let us recall the failure of the Société des Dépôts et Comptes Courants, in the beginning of 1891.