Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

But in spite of the usual suspension of the Bank Act, no use was made of it. That is, a demand for more currency in the hands of the public could have been supplied by the bank, but was not. In truth, the Lloyd George currency notes need not have been issued. Nevertheless, when once issued, they made unnecessary any resort to additional Bank of England notes. There was no need of both. But in one respect the currency notes helped to maintain the country's gold standard. By issuing them in small denominations of one pound, and ten shillings, they replaced the gold in general use for these denominations, and allowed it to be used as reserves. Yet, it must be remembered that sound policy required a gold reserve (which has been generally kept at about 40 per cent.) behind these currency notes, so that the whole amount of gold replaced was not, in fact, a gain.

As all know, the question of gold for Great Britain pivots on the reserves of the Bank of England, which is the agent for the Government, receiving its taxes and paying out its expenses, as well as the holder of reserves for other banks—being thus a bankers' bank, as well as a national agent. Moreover, the reserves mentioned, and which are of prime importance, are those of the banking department—and these are chiefly Bank of England notes (not gold). The percentage of reserves to deposits, which marks the safety line for England, refers to the items in the banking department. These notes, however, are protected (except the bottom layer of £18,750,000 covered by consols), pound for pound, by gold in the issue department. Hence, they can be turned into gold at any moment.

Then, to what do these facts lead us? Simply that gold has increased just in proportion to the issue of bank notes. In addition, the currency notes of the Government served in the place pro tanto of the Bank of England notes. Hence, at the end of the war, the provision for redemption of Bank of England notes will work automatically. Nor can there be any question as to the gold being there to redeem them; for they cannot get out without a previous deposit of gold. Indeed, the questions of difficulty cannot arise regarding the basic currency of Great Britain; they will arise, if at all, in connection with the assets in the loan item of the banking department, since they will determine the safety of the deposits chiefly created as the result of loans. The bank discounted large sums of pre-moratorium acceptances and paper; and yet even in these assets it is protected by the guarantee of the Government.

Darlehnskassen and Other Financial Novelties in Germany

[319]Germany, at the outbreak of the war, removed the limit of notes issuable by the Reichsbank without tax; created about 1,800 Darlehnskassen (loan banks), located throughout the Empire, wherever the Reichsbank maintained a branch; they were started without capital, in lieu of which they issued Darlehnskassen Scheine (Imperial Loan Bank notes) in denominations of one mark and upwards, the aggregate amount being limited to 1,500,000,000 marks; these banks made loans against stocks, shares, produce, any personal property of a non-perishable character, as collateral, and issued certificates, having the quality of bank notes, to the borrowers; the loans ran for three and sometimes six months; the minimum loan was 100 marks; a very wide margin of safety was required, making the loans good beyond question; these certificates were receivable for public dues and by the Reichsbank; the smaller denominations circulated as money, the Reichsbank received the larger, giving its notes in exchange; these certificates were not legal tender, but were given the quality of gold and "may be considered by the Reichsbank as gold cover, which means that against 100 marks of these Scheine in its vault the Reichsbank is allowed to issue 300 marks of its own notes." (I. De Bruyn.)[320]...

Sir Edward H. Holden, president of the London City and Midland Bank, in a speech to his board of directors, January 29, 1915, said:

Germany proceeded to establish War Loan Banks, War Credit Banks and War Aid Banks under the patronage of corporations, municipalities and private financiers, and to make use of the Mortgage Banks already established....

The Mortgage Banks are under the control of Chambers of Commerce and municipalities, and they make advances on the mortgage of properties by an issue of notes....

Germany made greater use (than of the Darlehnskassen) of the Mortgage Banks, the notes of which are identical in power and use with the notes of the Darlehnskassen. Another part of their scheme was to relieve the pressure on insurance companies (life), by forming an insurance bank, which advanced 40 per cent. on the value of policies. These advances were paid on notes which were exchanged for Reichsbank notes in the same way as the notes of the Darlehnskassen and Mortgage Banks.