Chapter II Money, Credit, and Banking in France

19 20 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING these reports as to their actual operations. Take, for example, the statement of the Credit Lyonnais of December 31, 1905. The statement of assets is as follows: ACTIF DU CREDIT LYONNAIS December 31, 1905 Especes en caisse et dans les banques Fr. 171,554,052.82 Portfeuille 1,030,060,878.68 Avances sur garanties et Reports.... . . . . . . . . . . . . . . . . . . . . . . 395,685,193.93 Comptes courants 535,566,961.42 Fortfeuille-titres (actions, bons, obligations et rentes)..... 5,446,754.89 Comptes d'ordres et divers.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,422,772.67 Immeubles 37,000,000.00 Fr. 2,176,736,614.41 Just because of the uncertainty as to the meaning of certain of these items, it has seemed best to give them in the French version. The first item, cash on hand and in the banks, will seem familiar enough to those used to the accounts of English joint stock banks. French bankers attach little importance to cash reserves. If their portfolios contain plenty of liquid paper, redis countable at the Banque de France, they find their real reserves there, and the question of actual cash in their vaults is purely a matter of convenience. {( Espece JJ obviously can not be trans lated "specie," which would mean, in English, gold and silver coin. Presumbably {( especes" means, simply, "ready funds"

in the money market sense, including gold and silver coin, notes of the Banque de France, and deposits with the Banque de France and other banks. American bankers supply much more detailed information on this point in their reports. French bankers other than the Banque de France-and for that matter English bankers-free from the absurdity of legal minimum reserves, and free to a large degree from the difficulties of get ting cash in an emergency which American bankers, until re cently, have faced, have been accustomed to regard the matter as relatively unimportant. Real question arises, however, as to the second item, "port folio," which contains over a billion francs! What is included in this huge lump sum? The bank does not say "commercial portfolio." A common understanding would seem to be that FRANCE 21 the item contains discounted commercial bills of exchange, with short maturities, but critics of the great private banks have suggested that many other things may be there, including securi.ties owned, and paper drawn in connection with stock market operations. In any case, a subdivision of this huge item among the branches of the great company would be illuminating. 1 Dur ing the war, as we shall see, " portfolio" has been combined with other elements in the statement of this bank, in a very confusing and baffling manner.

" Advances on reports" is definite enough. It means stock market loans made till the next settlement day on the security of stock and bond collateral. The whole item "advances on , garanties' and reports," is translated as " loans against securi ties and contangoes" 2 by the London Economist of May 17, 1913, while in English statements published by the Credit Lyonnais itself, it appears (June 30, 1915) as" loans against collateral and time loans," and (October 31, 1908) "call loans and time loans." It may be safely taken as chiefly, if not exclusively, a figure for loans in connection with bourse transactions. ({ Comptes coura,ntsJ JJ current accounts (on the assets side), is an item which would find its nearest counterpart in American banking under the head of "overdrafts," though it is, perhaps, misleading to say this. It is misleading, first, because with us overdrafts are represented by actual checks drawn on the bank, and held by the bank. In the second place, in American banking, overdrafts are generally illegal, or at all events regarded as bad banking, while there is no such stigma attached to this item in 1 The Credit Lyonnais stated to the National Monetary Commission that only commercial and industrial bills, chiefly commercial bills, were included here, and denied that its security holdings were larger than shown in its published statement. See Senate Document 405, 61st Cong., 2d Sess. Com pare with this statement the contentions of Lysis: Contre d'Oligarchie financiere en France, 12th ed., Paris, 1908 (La Revue), pages 31, 53-86.

2 ." Contango" and "report" are, respectively, the terms used in London and Paris to describe the loans made on collateral security till the next settlement day, on the stock exchange or the bourse. Fortnightly settle ments prevail in these centers instead of the daily settlements made in New York. "Contango" is also applied to the interest rate at which these loans are made. For details, see H. C. Emery: Speculation on the Stock and Produce Exchanges in the United States. The term "report" is also used in Berlin. Neither of these expressions is used in New York.

22 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING French banking. The term "current accounts" appears also on the liability side-in the statement of the date in question it stands on the liability side at 856,272,484.76 francs. It is a form of deposit, with overdraft privileges. The active business man is likely to have a (( compte courant JJ rather than a (( depot JJ (deposit). I f he overdraws this account, he becomes a debtor of the bank to the extent of the overdraft, and pays interest on the amounts overdrawn for the time that his account remains overdrawn. His overdrawn account then appears as an asset of the bank. If his account shows a positive balance, it appears as " current account" on the liability side of the bank's statement. There is a prior understanding as to how much he may overdraw -a sort of "line of credit " understanding. Often securities or other collateral may be deposited in advance. Such a practice has been well known in some of our southern States and on the Pacific coast and similar practices are well established in Scot land· and in England, outside of London. It is perfectly sound banking, if properly understood and safeguarded. For our present purposes, however, it is enough to note that not much information regarding the bank's business is contained in the figure. For what purposes were overdrafts to the extent of three hundred and ninety-five million francs permitted? Critics, unable to find elsewhere in the bank's statement figures which could account for the supposed operations of the bank in " high finance," have suggested that {{ comptes courants JJ may in no small part represent accounts of agents of the bank itself, operat ing on the bourse. 1 .

The remaining items on the assets side are small, and need no comment, except that the very smallness of the item (( portfeuille titres JJ (stock ·and bond portfolio) would strongly suggest that most of the holdings of the bank in securities must be somewh~re else! As will later be made clear, banks of the character of the Credit Lyonnais have had as a very great part indeed of their business the handling of securities, particularly foreign issues· which were to be marketed to their depositors, and whose values meanwhile must be protected by bourse operations. 1 Ct. Lysis, Ope cit., pages 58-59.

FRANCE 23 On the liability side, three items aggregate the great bulk of the whole: Depots et bons a vue Fr. 705,650,500.36 Comptes Courants .. . 856,272,484.76 Acceptations f • • • • • • • • • • • • • • • 180,559,616.46 Fr. 1,742;482,601.58 Of total liabilities of 2,176,736,614 francs, 1,742,482,614 are ·contained in these three items. It is not alone the paucity of items, the lack of details, in such reports that baffle us. If American banks gave no more details than this, it ~ould still be possible to trace many general move ments by watching their changes, because we could localize them, compare variations in different States, in different cities, and in different sections of the country. But, as will be made clearer later, the figures for the few great banks like the Credit Lyonnais cover all sections of France, where their branches are widely scattered, and, especially in the case of the Credit Lyon nais, numerous foreign branches as well.

But there are further difficulties. How accurately made up are the figures presented? There is no public auditing. The state ment has been rep~atedly made in France that the figures for profits of the Credit Lyonnais are fictitious, that they gen erally approximate the actual amount declared in dividends, with some hundreds of thousands of francs added to give ver.i similitude. 1 These considerations need not have a sinister significance. The first thought of an American depositor who is told that his banker is "doctoring". his balance sheet would be that the bank is insolvent, and that losses are thereby being concealed. It would appear more probable that the French banks were concealing profits to the extent that such considerations moved them at all. In 1900, an officer of the Credit Lyonnais, replying to a stock holder's question, declined to give out figures on the ground that the banks were subject to heavy taxation, and it would not be 1 IJlnformation, April 12, 1905; ibid., May 9, 1905. Quoted by Lysis, D;. cit., page 62.

24 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING wise to reveal them! 1 But probably the fundamental reas<?n is one which great private bankers in many countries would sympa thize with: banking is a delicate matter; it is not well for the uninitiated to know too much about it; secrecy and privacy are the banker's right. Much is said iIi France about the necessity of guarding secrets from competitors-a defense that evokes a good deal of sarcasm from those critics of the French "money trust" who maintain that all the great private hanks work in perfect accord. Enough has been said to make it clear that, in general, statis tical materials for the study of French banking must be inade quate, and that to "a very unsatisfactory extent we must rely on information which lacks quantitative exactness. This is especially true during the war period, as" the method' of making up the balance sheets has been altered, so that comparison with previous figures is very difficult.

Certain general contrasts between American and French bank ing will perhaps serve best to get the French system before us. This contrast will be more effectively made if we think of both systems as they stood in 1914, before France was torn by war, and before our federal reserve system was inaugurated. Subse quent pages will deal with the four years th~t have passed since then. A familiar contrast is that between centralized and decentral ized banking. French banking is highly centralized, while in America there were over twenty-five thousand independent bank ing institutions-most of which were and are really independent. The great central bank, the Banque de France, holder of the great gold reserve, monopolist in the field of note issue in France, standing ready to rediscount the paper of the other banks at any time, dealing chiefly with the banks rather than directly with the people, closely allied with the state, the reliance of the state in 1 Lysis, Ope cit., pages 80-81. It is very difficult to make much out of the annual reports to stockholders. They deal largely in banal generalities -a practice not unknown to American corporation officials. Lysis quotes Paul Leroy-Beaulieu as follows: "11 faut bien Ie dire, la methode ordinaire ment suivie en France et peut-etre ailleurs pour les rapports de la direction avec les actionnaires est une methode toute illusoire. Elle ne donne au cune garantie de bonne gestion." Page 89.

FRANCE I 25 times of emergency-this feature of French banking, wholly lacking in 1914 in the United States, is familiar enough to Amer ican students. But French centralization goes far beyond that. Apart from the Banque de France, there are some four or five other great private banks which do most of the banking business of the country. Chief among these are the Credit Lyonnais, the Societe Generale pour Favoriser Ie Developpement du .Commerce et de l'Industrie en France (commonly known as the Societe Generale), the Comptoir d'Escompte, the Credit Industriel. The first three re~ly stand in a class by themselves, as the great credit houses. These banks all have numerous branches scat tered allover France (except that the Credit Industriel confines itself to Paris). The Societe Generale has 1,000 branches. The Credit Lyonnais has branches, not only in France but in Russia, where" Lyonski Kredit " is a familiar name, in the Balkans, in almost every part of Europe, and in other continents. Other French banks also have foreign branches. In recent decades, these .great credit houses have rapidly absorbed or driven out of business the independent provincial and local banks, although there remain strong institutions among these, whose relative position has been somewhat strengthened by the events of the war. 1 In general, however, a local bank in France is a branch of a great Paris institution, receives instructions from Paris, is manned by men sent out or chosen from Paris, and is subject to little control by local business men or local authorities.

The institutions so far named deal directly with the people, and especially receive 'deposits of almost all sizes from the general public. There is, however, another institution, less conspicuous than those named, but probably as powerful as any of them, namely, the Banque de Paris et des Pays-Bas. This institution does not receive the deposits of the general public or discount commercial paper as a regular business. 'Its nearest counterpart in the United States w'ould be J. P. Morgan and Co. Its power, very great, is commonly exerted indirectly, through its relations with other houses. Its own operations are largely in the field of foreign exchange, security underwriting and marketing, handling 1 See the summary in the London Economist of August 11, 1917, page 209, .of an interesting study of French provincial banks by Leon Barety.

26 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING the deposits of certain great corporations in whose securities it deals, etc. Most of these institutions are supposed to be bo~nd together by close understandings, and to work in close harmony. No such charges of a "money trust" have ever been brought in the United States as have been made by French critics of these institutions. The nature of this cooperation will best be con sidered wh'en we take up the kinds of banking business done in France. . But the centralization has gone much further than this. In •America, there are many thousands of independent savings banks, each, under general laws and some State supervision, free to make its own investments. In France, virtually all the local savings .banks (caisses d'epargne ordinaires) are required to turn over the funds deposited with them to a great central state institution, La Caisse des Depots et Consignations, which makes the investments for them, chiefly in the rentes, the long time obligations of the French Goverpment.

In the midst of this centralization, the independent local banks have themselves felt it necessary to combine. Many of the provincial banks are themselves possessed of numerous branches. There are altogether some 2,700 or more of local and provincial banks, many of them insignificant in size. In 1905, 325 of them formed a protective union, the Societe Centrale des Banques de Province, which also carries on in Paris a banking business, chiefly concerned with the huge security operations which are concentrated there. 1 One great institution, the Credit Foncier, with branches throughout France, does most of the mortgage loan business in the cities. It was anticipated, at the time of its organization, that it would supply agricultural credit largely, but this it has done to a very slight extent. Agricultural mortgages in France are chiefly taken by individuals, rather that) by institutions, and French agricultural lands are not heavily mortgaged. 2 1 Laughlin: Credit of the Nations, New York, 1918, page 147.

2 I am indebted to Dr. J. E. Pope for information regarding agricultural credit in France. Dr. Pope states that it is virtually impossible, with data now accessible, to give an account of war changes in this field.

FRANCE 27 Next to its highly centralized character, we should perhaps mention the important role of bank notes in French banking as a feature marking it off from American banking. Notes of the Banque de France have been the main means of making payments in France. Checks draw'n against deposit accounts have had a very limited use. This generalization is one to which we are accustomed. The situation is, however, more complicated than this simple generalization would imply, and there seems to be some misunderstanding even among French writers who have been advocating an extension. of the check and deposit system during the war as to the significance of the contrast. In America, we are accustomed to the doctrine that deposits grow out of loans, in very large degree. A bank, making a loan to a depositor, gives him, not cash or bank notes, as a rule, but a deposit credit. Against this he draws a check, which is deposited by the one to whom he gives it, leading to a transfer of the deposit credit on the books of the· bank, if both are depositors of the same bank, or, through familiar clearing house machinery, to a deposit credit in some other bank, without actual transfer of cash between the banks to any considerable percentage of the amount involved. Deposits with us, in other words, are a fabric built up largely by the creation of new bank credits, transferred by check, rather than du'e to the actual " depositing" across the bank's counter of actual "money"

(gold, silver, greenbacks, national bank notes, gold and silver cer tificates, etc.). I f we did not use checks, if we could borrow from the banks only coin or bank notes, 'and if only one bank in the country had the power to issue bank notes, it is not easy to see how deposit banking could be a very important matter in this country. And· yet, deposit banking is very important in France. In France proper, only the Banque de France can issue notes. (The Banque de l' Algerie, chartered by the French Gov ernment, is also a bank of issue, privileged to issue' about 300, 000,000 francs in notes before the war.) But the great private banks have, in their "deposits" and (( comptes courants)) (on the liability side) many billions of francs. For the Banque de France itself, on Febraary 12, 1914, the U comptes courants JJ 28 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING (liability) 1 in Paris and branches amounted to 695,000,000 francs. This looks small when compared with the 5,845,000,000 francs of note issue shown by the same statement of the Banque de France, and would make it appear that the main form in which that bank extends credit is clearly in note issue. But it must be remembered that to a large extent the notes of the Banque de France were before the war really little more than gold, or coin, certificates. On the date in question, the Banque de France held a metal cover for the notes of 4,222,000,000 francs, the great bulk of which was gold. Only the" uncovered" part of the note issue could thus represent a real extension of new bank credit.

This uncovered note issue amounted to only 1,623,000,000 francs on the date in question, an amount larger, indeed, than the current accounts of the Banque de France by nearly a billion francs, but still a very small amount when compared with the deposits and current accounts of all the French banks, including the Banque de France itself. The Credit Lyonnais alone, for example, at about the sa.me time (December, 1913)2 showed deposits and current accounts (liability) combined aggregating about 1,220,000,000 francs, an amount which is only four hundred millions short of the uncovered note issue of the Banque de France, and which, combined with the current accounts of the Banque de France, exceeds the uncovered note issue by nearly three hundred millions. If deposit banking can represent real extensions of new bank credit only in connection with checks, and if the chief form of credit extension in France is by means of the bank note, we have some curious phenomena to explain.

There is a real problem here, from the standpoint of one familiar only with American or English banking, if the state ments commonly made about checks and bank notes in France are to be accepted. And first, it must be observed, that the use of checks in France, even before the war, was by no means so limited as many have supposed. To be sure, the concierge and 1 Unlike many of the French banks, the Banque de France shows no (( c01nptes courants" on the assets side. The term "deposits" would be used by an American bank to describe this item in the Banque de France statement. 2 London Economist, May 23, 1914, page 1254.

FRANCE 29 the small tradesman would commonly have nothing to do with checks. To be sure, the general practice, in paying house rents, in paying retail bills, in paying wages, in paying taxes, and in many other places where an American would unhesitatingly draw checks, was to pay with bank notes or coin. Even large payments were often made by bank notes. The use of checks was, and is, a thing little known among the masses of the people in France. Indeed, the" woolen sock," in which gold itself, rather than bank notes, was hoarded, is a long standing tradition in France, and hard money, rather than either notes or deposits, has -been a large factor in French life. But it by no means follows from this that large business transactions, and stock market transactions, ha~e not freely availed· themselves of the convenience of the checking system. To a very large extent, they have done so. No such study has been made in France of the use of credit instru ments in payments as that which has been made in this country by Dean David Kinley.

1 One can only rely on general statements made by men who can speak authoritatively from first hand knowledge of French banking. But the author, on the basis of such information, is quite confident that the use of checks has been much more extensive in France than has been generally stated in English and American books upon the subject. In the United States, as Kinley's figures show, over 90 per cent of all payments are made by check, rather than coin or paper money. Over 50 per cent of all retail payments are made by check; about 30 per cent 0 f wages are paid by check; and over 90 per cent of wholesale business is done by check. No such high proportions could be found for wholesale, retail or wage payments in France. But Kinley's figures also make it clear that retail and wholesale payments combined consti tute ,only about one-fourth of the payments made in the United States. The bulk of our payments is listed in his figures under the head of "all other," and these "all other" payments are found, on analysis, to be concentrated in the great centers of 1 The Use of Money and Credit Instruments in Payments in the United States, National Monetary Commission Report.

30 EFFECTS OF THE WAIt ON MONEY, CREDIT AND BANKING speculation and finance, notably New York City itself. 1 France is also a country where financial and speculative operations are carried on on a vast scale, and the men who carry them on are by no means ignorant of the convenience of the checking system. In the second place, it must be pointed out that the check is by no means the only instruJ:!lent for mobilizing deposit credits, and making it possible to utilize the deposit as a means for extending new bank credit. In Germany, where also it has been supposed that the bank note, rather than the deposit, is the chief means of payment, we find the "giro system," under which a depositor instructs his bank to transfer to some other person, perhaps in a different city, a deposit. credit, performing a service similar to the checking system. It is dependent in part on branch banking, although it can be worked out through independent correspondent banks as well.

In 1907, the Banque de France made transfers between clients to the extent of 180 billion francs. 2 The Banque de France makes transfers all over France for the government for its private depositors and for the other banks which deposit with it. The other banks will commonly make transfers between branches in a given city, but for transfers between their own branches in different cities they will normally use the machinery of the Banque de France. 3 Here, then, is an enormous body of payments made by deposit credit by a method which is quite as effective as the check for the purpose, without the use of checks. The annual income of the people of France before the war has been estimated at about thirty billion francs. 4 The total annual retail trade of the country must be substantially less than that. 1 Cf. the present writer's Value of Money, Macmillan, 1917, chaps. 13 and 19, for an analysis of Kinley's figures.

2 National Monetary Commission Report: Interviews on the Banking and Currency Systems of England, France, etc., Senate Document No. 405, 61st Cong., 2d Sess., pages 204 and 240. 8 To a considerable extent, these transfers take the place of clearings among the other banks and their volume explains the insignificant volume of operations of the Paris clearing house. Cf. Patron, Bank of France. National Monetary Commission Report, pages 71-75. 4 Helfferich's estimate, quoted by Laughlin, Ope cit., page 194.

FRANCE 31 In America, Kinley's studies,l referred to abov\.~, would show that wholesale trade is about twice as great as retail trade, in pecuniary magnitude, if payments are a test. If this should be true also of France, the total of French wholesale and retail trade before the war could not exceed ninety billion francs per year and hence these bank transfers would be double the total wholesale and retail trade of France. To assume that the five billions' . of bank notes in France made as many, payments as the 180 billions of transfers made by the Banque de France alone during the year, one would have to assume that the bank notes have a " velocity of circulation" of thirty-six times per year. 2 Deposit and current account banking, then, is obviously a large factor in France, and the notion that notes constitute the chief medium of payments must be seriously challenged. That notes and coins are used in the major number of transactions is doubtless true. It would probably be true in the United States.

But. that notes and coins' are used in making the major part, in pecuniary magnitude} of the payments in France is probably untrue. Transf~rs, by check or bank transfers, of deposit credits and current account credits, were probably quantitatively greater than note payments before the war. But there is yet another highly important, even though unmeas urable, substitute for notes and coins in payments in France, little used for a generation in the United States (though very important here two generations ago) and that is the bill of exchange or acceptance. The wholesaler, sending a shipment of goods to a retailer, instead of receiving a check or cash in pay1 This comparison is rough and inexact, partly because of the assumption that the proportions of wholesale to retail trade are the same for France as for the United States. and partly because of uncertainty as to the rela tion of paY"1ents to trade. Ct. Value of Money, chaps. 13 and 19. For the purpose in hand, however, the figures given do not understate the mag nitudes of wholesale and retail trade, because the whole national income is allowed to be spent at retail, and because i.t is assumed that payments bear the same relation to wholesale trade that they do to retail trade. In fact, payments are more likely to represent duplications, speculations, and loans and repayments, in wholesale than in retail business.

~ Cf. the studies in velocity of circulation of Kemmerer, Fisher and Pierre des Essar. Fisher places the "velocity of money" for the United States at from nineteen to twenty-two times a year. Kemmerer's estimate is about twice as high. Fisher appears to me to have made the better estimate, though the whole problem is a baffling one.

32 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING ment, draws a bill on the retailer, either" at sight" or on thirty, sixty or ninety days' time, and this bill, "accepted" by the retailer, becomes the latter's promise to pay. It may then be used by the wholesaler in making payments to some one else-a practice probably more common in Germany than in France, and much more common with "bank acceptances" (to be described in a moment) than with" trade acceptances" (the transaction just described). In any case, the drawing of the bill, and the accepting of the bill, in themselves constitute final payment for the goods.1 Frequently the wholesaler will draw, not on the retailer himself, but on the retailer's bank, and the " acceptance" of the retailer's bank makes the instrument a "bank acceptance." In the figures given above for the balance sheet of the Credit Lyonnais, (( acceptations" appear at 180 million francs-a liability of the bank, much of it, presumably, on customers' account. An acceptance of the Credit Lyonnais can be used by the drawer for many purposes. He can discount it with his banker, and get a deposit credit, or bank notes, in • return. It can be freely rediscounted by the banker at other private banks, or at the Banque de France. The .wholesaler himself, if a depositor with the Banque de France, can discount it there. Or, the wholesaler may use it directly as a means of paying his own debts to other business men, passing it on at the market discounta discount which may not always be required.

An acceptance by a well known bank, with only a few days to run, would be vi.rtually a certified check, so far as serving as a medium of exchange is concerned. Our problen-{, then, ceases to be quite as baffling as it at first appeared. There is a wide extension of new bank credit under the deposit system in France. Checks are used. And deposits can be made mobile w·ithout them by bank transfers. The bank acceptance, and even the trade acceptance, are in part credit substitutes for notes and cash as media of exchange. In addition to the uncovered note issue of the Bat!que de France, there 1 Of course. the bill itself has yet to be paid. This may require bank notes or a check. But it may be accomplished by an offsetting bill. And the bill may pass through several hands, paying for goods several times, before being paid.

FRANCE 33 is a very substantial body of real bank credit, growing out of bank loans, serving as the counterpart of our own elastic bank deposits. But this is not the whole story. To an extent that is almost incredible at first blush to the American student, it is true in France that "deposits" really are deposits in the primitive sense-that they represent real savings put in over the counter, in the form of coin, bank notes and credit instruments, which come in payment of net income, rather than as part of the gross income of the active business man. It is true to a very high degree in France that loans grow out of deposits, rather than that deposits (as in England and Americ~) grow chiefly out of loans. For individual banks, or even communities, this is often true in the United States. There is, for example, a bank in Cambridge, Massachusetts, whose depositors include few impor tant active business men. The retail merchants at Harvard Square deposit with it, but for the most part, its deJ.*>sits come from students and teachers of Harvard University, and from people whose incomes, often large, are chiefly derived from stocks and bonds or other investments. It can not possibly lend all-its deposits to its o\vn depositors. It goes outside, buys commercial paper from other cities, lends to Boston brokers on collateral security who are not among its depositors, buys securities, etc.

To be sure, the checks deposited with it would not be nearly so great in volume if other banks, in other places, were not making loans. It is part of a larger system in which deposits grow largely out of loans. But by and large, so far as its own balance sheet is concerned, its loans result from its deposits, rather than the reverse. Now France occupied before the war, in the general world credit system, much the position of this Cambridge bank in the general banking system of the larger community. The deposit ors of French banks are real capitalists, recipients of incom~e from which they save substantial amounts, rather than active business men who rely on bank accommodation for carrying on their businesses. The French are notoriously a thrifty people, and their surpluses constantly overflow their own boundaries, 34 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING seeking investment abroad. In France, the bankers do really lend out their deposits, instead of chiefly creating their deposits by lending. Indeed, the deposits of French banks in general are very much like the deposits of our savings banks. The active business man has a " current account," rather than a deposit. A careless reading of the balance sheet of the French banks, how ever, might lead one to overestimate the relative importance of " deposits" as compared with" current accounts." In America, when a business man borrows from his bank, he will receive a deposit credit for the whole amount covered by the agreement, which will appear as a liability of the bank in its balance sheet.

In France, under the fa:" current account" system, the more com mon practice will be for no entry to appear in the bank's books at all until he actually draws against his account, and he will only gradually draw the \vhole of his loan. This will lead to an asset item on the bank's books .. The main way in which current actounts, as a liability, develop on the bank's books will be by the actual depositing of items coming in from outside the bank, canceling the borrower's indebtedness and building up a surplus to his credit. One difference between the two systems, therefore, is that the French method leads to smaller figures on the bank's balance sheet than the American system, for a given extension of credit,' and that the importance of the loan and deposit business of French banks, as compared with American banks, is not adequately presented by a mere comparison of balance sheets. The difference is largely a matter of form and bookkeeping methods. The economic sub3tance is not altered thereby. This consideration does not, however, remove the fact that French loans grow chiefly out of the capital and deposits of the banks, instead of the deposits growing out of the loans.

In the fact that the French in general deposit more than the banks lend in France, and in the consequent overflow of French funds into foreign investments, we have one of the most interest ing and distinctive features of the whole French system. In the fate of these foreign investments during the present war, we have the most tragic episode in the whole financial chronicle of the war period in France.

FRANCE 35 For many years before the war, the French banks were market ing to their customers, through their numerous branches, enor mous quantities of securities, largely foreign securities. It is not easy to get exact figures of the extent of this, but that a billion and a half f~ancs of French savings were in one form or another sent abroad in an ordinary year. is not improbable. This was perhaps two-thirds to three-fourths of tbe total annual savings of the French people. To an ever increasing extent, the outside world was becoming indebted to France. Annual pay ments of interest and dividends, steadily increasing, turned the balance of international payments more and more in. favor of France. Part of this France took in the form of gold, and the Banque de France built up a vast gold reserve. This' gold reserve stood at the outbreak of the war at over four billion francs. Partly this great reserve seems to have been built up, as a matter of deliberate policy, as a war chest. From 1899 to 1910, the Banque de France increased its gold reserve by 75 per cent, while its discounts and advances increased only 5 per cent.

Part of her excess foreign credits France took in the form of goods-the physical" balance of trade" was regularly" against" France, which means, merely, that as a rich capitalist nation she was able to consume more than she produced at home. But a very considerable part of her income from abroad she reinvested abroad, adding ever to her creditor position, and constantly increasing the back flow of titles to goods produced by other peoples. In her huge gold reserve, and in her great store of claims on the wealth of the outside world, France felt herself well provided against the war which she feared her brutal and arrogant neighbor was prepa~ing to force upon her. She could live and fight upon her capital accumulations. Her surplus, if she could weather the military shock, would enable her to outlast her formidable opponent economically. It seemed a strong posi tion. France felt secure.

But the position had its weak points, which French critics, to say nothing of German and English critics, had vigorously pointed out before the war. Chief among these French critics 36 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING was the redoubtable Lysis-a pseudonym which many have sup posed represents the distinguished editor of La Revue) Jean Finot. At all events, Finot stands sponsor, in a preface, for the book (( Contre l' 0 ligarehie final1eiere en Franee," 1 which fi rst appeared as a series of articles in La Revue, running froth November 1,1906, to November 15, 1907. The book is certainly written by an a~dent patriot, a clear thinker and a man wonder fully well informed about French money, credit and banking. It hangs together, and it carries conviction. It has been easy to verify many of its contentions by conversations with English and American financiers familiar with the operations of the IFrench banks, and in every way friendly to France. The course of the war has itself been a sad fulfilment of many of Lysis' apprehensions.

Has it been well for France that so much of her savings were sent abroad, if F'rench industry was thereby starved of the capital needed for its development? Was France better off, even with good foreign investments, than she would have been with a strongly developed industry, which would have enabled her to produce within her own borders the goods she needed for the war? Is it well with a nation that its people are largely capitalists and agriculturalists, instead of active entrepreneurs and factory laborers, when a great war comes? It will not serve to answer that capital seeks the best market, that the thing is settled by impersonal economic law. That would be true in a country where banking is decentralized, and where many competitive agencies are offering investments to the people. But in France the decision has been made by a few great private banks, on whose judgment their numerous depositors almost wholly relied. And these great private banks, nominally com petitors,. have in fact been closely associated, following a com mon policy, and often sharing openly in the same marketing operations.

1 Douzieme Edition, Paris, 1908. Aux Bureaux de La Revue. See also Kaufmann, E.: Das franzosische l3ankwesen 11zit besonderer Berucksichtigung der drei Depositengrossba1tken~ Tiibigen, 1911; and Mehrens. B.: Die Ent stehung und Entwicklung der grossen franzosischen Kreditinstitute, Stuttgart, 1911, for the same general view.

FRANCE 37 Officials of the Credit Lyonnais, testifying before the Ameri can National Monetary Commission, had this to say: A. There are two kinds of ~uch operations; first when the Credit Lyonnais is alone interested in the operation; and second, when others of the Paris bankers are interested with us. The largest recent issue, in connection with other bankers, was the five per cent Russian loan of 1906 of 1,200,000,000 francs. What is very important in our way of floating a loan is that the sales are made in small quantities; the transaction is completed in a very few days, and each of our customers buys only the number of bonds cor responding to his investment requirement. Q. As a matter of fact, anything you recommend they will buy? A. Yes, and even with a very large issue; the bonds do not remain long in the market, because in our country savings are very extended. Every one saves his money. The small savings of France are the wealth of the country. By examining the balances of accounts of our customers we can know whether they want to invest or not, and then we endeavor to have stocks and bonds to offer them as they require them; but that is variable, and sometimes we might have a large issue, forty or fifty million francs, taken up by the public in a few days.1 In reply to further questions, it developed that the French banks are much like bond houses in America, and handle virtu ally all the security business of France. . Most of their opera tions are in securities which they sell on commission, rather than in securities they own. When asked as to the amount of the commission, the only information they vouchsafed was: "Naturally the commission varies." 2 .

Lysis supplies more detailed information regarding the com missions. CJn the 800 million franc issue of Russian 5 per cent Treasury notes of 1904, the margin was 10 per cent. On the 62,500,000 ·franc issue of Morocco in the same year, the profit was at least 18 % per' cent. The profit is rarely less than 5 per cent of the selling price of the issues. 3 The Russian 5 per cents of 1906, the enormous issue which was mentioned in the testimony of the Credit Lyonnais above, and whose fortunes during the' war we shall follow in later pages, was sold at a profit of over 7 percent. THe Russian Government received 1 National Monetary Commission Report, Senate Document No. 405, 61st Cong., 2d Sess., page 233. 2 Ibid., page 234. 8 Lysis, Ope cit., pages 24-31.

38 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING eighty-three for a bond which the banks sold the people at eighty-eight. But the Russian Government received only eighty two in reality, since it had to pay 1 per cent of the par value as a further commission to an intermediary of the banks! 1 Doubtless it may be urged that selling expenses are high. They are. They include a good many services which the banks through their numerous branches perform gratis for their customers. They include elaborate marketing campaigns. They include, as an American banker who has had dealings with French bankers in this connection states, not merely advertising charges in the press, but also, quite frankly, in one case at least, subsidies to the press. The selling costs are high-but need costs be so high for good securities? London can do the thing more cheaply. New York, despite past scandals in connection with. underwrit ing operations, does the thing more cheaply. There can be little doubt that in many of these operations French bankers have shown themselves greedy to a marked degree, and that the greed has been largely at the expense of their confiding clients.

The direction of French investment, then, has been subject, not to the free movement of capital, sent piecemeal, under com petitive conditions, by alert individual investors, to those lines of investment which promised the best yield for a given degree of safety, but has been controlled by a few great banks, working to a large degree in harmony, acting for a passive body of depositors, and controlling public opinion through the press. In choosing the investments, these bankers have in no small degree been moved by the fact that certain lines of investment gave them higher commissions than others. But the securities whose necessitous sellers will pay high commissions for are not the ones which a great investing people find it best to hold when the evil days come! What has been the direction of French investment? To a very large degree, the issues of second rate fo.reign governments. 2 1 Lysis, op. cit., pages 48-49, note ..

2 Ibid., passim. London Economtst, Supplement, December, 1914, page 8.

FRANCE 39 Russian securities have been bought in enormous quantities. Bulgarian state issues have been bought in large amounts. Brazilian issues, not alone of the central government, but even of the municipalities, ha.ve been largely bought.! These w.ere a poor resource for France when the great war came! Brazil, dependent largely on the price of a single commodity, coffee, for its public revenues, was not in a happy condition when the price of coffee dropped from a high of fourteen cents in 1913 to a low of 5~~ cents in March, 1914! Nor did extensive agricultural loans in Belgium and Austria, for which the banks are little responsible, prove to be the happiest source from which to se cure funds quickly when emergencies arose. In part, evils of this sort are found in every cC?untry. No great money market can feel itself wholly virtuous when scandals of this' sort are mentioned. But the evils have been accentuated in France, in no small part by virtue of the very centralization of banking, the extensive development of branch banking and the disappearance of the local independent banker, who was inter ested in local industry, in touch with local needs, and who pre ferred to put funds where he could watch them, at home. The deliberate policy of many French banks-openly avowed by the Credit Lyonnais 2-of keeping local men out of the branches, accentuates this. The investment of banking funds in local commerce and industry requires watchfulness and local knowl edge, as well as initiative on the part of the local banker.

Branch banking can not be recommended to America on the basis of French experience. Very much of our vigor and eco nomic progress must be attributed to our many thousands of independent local banks. Of course there are other factors. France is a static country from other causes. The population, already relatively dense, has 1 Professor O. M. W. ~prague states that the French bankers have the tradition that securities backed by the taxing power, even of an inferior government, are much superior to any industrial securities. For Professor Sprague's general endorsement of the criticism 0 f French banking here given, iiee American Economic Review, March, 1912, pages 126-129. 2 Interviews on the Banking and Currency SystetnS of England, France, etc., National Monetary Commission Report, Senate Document 405, 61st Cong., 2d Sess., page 246.

40 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING not been increasing. The people are by tradition conservative in economic matters. Canada has not found that branch banking has stifled her rapid expansion. Canada borrows from her banks, instead of investing through them. Her people are will ing to take chances, believing in the resources of an undeveloped country. The French investor has come to feel that only con servative securities should be bought. It is not wholly the fault of the French banker that when he buys securities which yield 7 and 8 per cent, he markets them to his people to yield 4 or 5 per cent. The French investor would distrust a security that yielded more than 5 per cent. He prefers a safe Russian state issue, yielding 4 ~ per cent, to a French industrial security yielding 6. He is like the New England investor who bought New Haven because the yield was so low that it must be safe!

Branch banking in a country which has little capital can exist only if it makes real credit extensions in the localities where the branches are found. But in a country like France, where surplus capital exists in abundance, and where the banks are primarily investing agencies for their depositors, branch banking, carried far, is almost certain to be pernicious. The policy must be worked out by a small set of men in Paris. The loans entrusted to the discretion of branch officials must be mechanically made, under the safeguard of rigid formulae. They are. In Paris great financial operations are planned and executed. But in the branches the operations are chiefly confined to two things: (1) selling to customers the securities 1 selected and recommended by the central office; (2) making the safest kind of discounts on short term commercial bills. French banks are loath to take manufacturers' paper. They are wholly unwilling to act as "sleeping partner" in a manufacturing enterprise (commandite). German banks will finance a manu facturing establishment, put a bank official on its board, and give it every assistance. They will buy its securities outright, and hold them as regular investments of the bank. American bankers. com1 Lysis states that promotion and salary for officials in the branches de pend chiefly on their success in marketing securities. Ope cit., page 31.

FRANCE 41 monly do not buy the securities of small manufacturing corpora tions, but they do lend to them heavily, often for the purchase of fixed capital, and give them a great deal of supervision and advice. In France the local independent banks and the provincial banks with branches have done this, but the great credit houses which dominate French banking refuse to do it. Within France, . in the matter of loans and discounts, they play the safest sort of game. Some short time industrial paper they will take, covering a small part of the circulating capital of a manufacturer (work in process, raw materials), but chiefly they insist on true com mercial paper, growing out of the actual movement of goods. Even mercantile credit is extended grudgingly. "Our theory is that every merchant ought to have capital enough to go on by himself in normal times, but there are times in the busy season say three or four months-when he will need more capital, and then he comes to us and we lend him money under this item [comptes courants]." 1 No doubt the German banks have over done this matter of financing manufacturers, and their assets were not as liquid as bankers' assets ought to be. But the F'rench bankers in their extreme conservatism have gone to absurd lengths in the other direction, while taking wild risks for their customers in investments outside of France. 2 Part of. it, no doubt, is to be explained by the simple consideration that it is easier for a small group of busy gentlemen to give attention to th~ annual budgets of foreign states, involving millions and billions of francs at a time, once a year, than to watch piecemeal weekly and monthly details of many smaller businesses scattered throughout France. The financing of industry requires care, attention, discrimination. But strict commercial banking based on documentary bills can be trusted to subordinates under rule of thumb.

French banks hold very much short time paper of foreign banks. They lend to the New Orleans banks to help move the cotton crop. They were, down to 1911, lending a great deal to German banks, which enabled the German banks to finance 1 Statement by Credit Lyonnais, in Interviews on the Bal'tking and Cur rency Systems of England, France, etc., loco cit., page 231. :a London Economist, Supplement, December 19, 1914, page 8.

42 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING German industry more generously, and led to the building of factories in Germany which could not otherwise have been built, which Germany has turned to good account in the present war. When France recalled these loans at the time of the Morocco trouble in 1911, Germany was financially embarrassed-but the physical factories and equipment remained on German soil! Had France continued the practice ti111914, Germany would not have been even financially embarrassed by a French effort to recall the loans-she would simply not have paid them! 1 It is proper to call attention to the fact that the Banque de France itself has been free from responsibility for these foreign investments. It has been a high minded public institution. It has limited its profits greatly by its huge gold accumulation. It has properly limited its assets to liquid itetps (including short loans on collateral security of specified types to the bourse). It has retained at every step the confidence of the French people.

Indeed, one of the severest arraignments of the great credit houses in France for their policy of sending away French capital and starving French industry came recently, in a debate over the renewal of the Banque's privilege in the French Chamber of 'Deputies, from a leading defender of the Banque de France, M. Candace. Early in July, 1918, M. Candace reiterated virtually all of Lysis' main contentions. 2 1 The writer ventures to refer here to his discussion of the policy of Eng lish, American and German banks in the financing of industry, in the chapter on "Bank Assets and Bank Reserves" of his Value of Money. 2 London E'conomist, July 13, 1918, page 42.