note was cut into two pieces, left in the hands of the drawer and the payee, and payment was made after the genuineness of the note had been ascertained by collating one piece with the other. As these notes could be issued without restrictions, the system led to abuses, which were rectified in 1905 by a code of regulations for promissory notes and note associations. These regulations limited the issue of such notes to regularly organized associations, which were made arbiters of their genuineness. These regulations were modified in November, 1906, so as to permit the use of checks and bills of exchange and to modernize the form of the note. The Seoul Note Association, which was formed in January, 1906, contained in 1908 230 members and had issued up to the close of February 2,355,092 yen ($1,177,500) in notes, of which 433,850 yen were outstanding. Five similar associations in other cities brought up the total issue to 5,380,046 yen ($2,690,000), of which 4,404,006 yen had been paid off and 976,040 yen were still outstanding.'

The actual currency circulation of Korea is furnished by the First Bank of Japan under an Imperial ordinance of March, 1905. This bank is one of the largest of the jointstock banks which survived the reorganization of the Japanese monetary system. The bank has no authority to issue notes in Japan, and its circulation in Korea is covered partly by specie and partly by securities. The highest denomination of notes is ten yen ($4.98), and the lowest ten sen (five cents). The amount was increased after the full inauguration of the gold standard, rising from 3,371,817 yen at the close of 1904 to 9,224,400 yen in 1906 and 12,465,300 yen ($6,232,500) in 1907. The reserve at the close of February, 1908, consisted of 3,816,212 yen in specie and 6,779,288 yen in securities.'

1 Financial and Economic Annual of Japan, 1908, Appendix, 8. 2 Ibid., 5.

CHAPTER XXI.

BANKING AND EXCHANGE IN THE ORIENT.

Difficulties in Exchange in Silver Countries Caused by Fluctuations in the Gold Value of Silver-Relief Sought by Adoption of the Gold-Exchange Standard-Successful Evolution of the Plan in Java-The More Difficult Problem in British India-Suspension of the Rupee Coinage in 1893-Success of the Policy of 1898The Indian Banks-The Gold-Exchange Standard in the Philippine Islands-The Exchange Problem in Hong-kong and the Straits, China, Siam, and French Indo-China.

TH

HE conditions of banking in the Orient were dominated for more than a generation by the fluctuations in the gold value of silver and by the importance which this fact gave to exchange relations with gold countries. The most important banks derived their profit for many years from these fluctuations in rates of exchange rather than from commercial discounts. Their interests ran counter to some extent to those of the business community, whose operations in the import and export trade were constantly exposed to hazard by the uncertainty as to what would be the gold value of silver obtained for imports from gold countries and what would be the silver value of gold obtained for exports to gold countries. The almost uninterrupted fall in the gold value of silver from 1873 to 1903 not only caused many difficulties in trade, but tended gradually to check investments of capital from the wealthy gold countries.'

1 This subject is more fully discussed in the author's Principles of Money and Banking, under "The Dislocation of the Exchanges," I., 339, seq.

This evil of the dislocation of the exchanges was recognized by the English Gold and Silver Commission in 1888, when silver had already fallen in gold value from an average of 59 pence in 1873 to 423 pence in 1888. The disadvantages resulting from these conditions led to a series of measures by the Caucasian governments having interests in the Orient which largely corrected the evils of fluctuating exchange and wrote a new chapter in the history of monetary science. The Dutch in Java were the first to put in operation in 1875 a system for ensuring stability of exchange with Europe. The British attacked the much greater problem of giving stability to the mass of hundreds of millions of silver coins in India, first in 1893 and finally more completely in 1899. The United States attacked the same problem in the Philippines in 1901 and solved it in 1903 by a measure which represented the most advanced development of what came to be known as the gold-exchange standard. The Philippine experiment became a model for Mexico in 1904 and Panama in the same year, and was partly followed by the British in the Straits Settlements and by the French in Indo-China.

The fundamental principle of the gold-exchange standard is the maintenance of silver coins at parity with gold, without reference to their bullion value, by restriction of the quantity to the requirements of local trade and by the sale of bills of exchange at legal gold parity, plus such legitimate charges for exchange as prevail between gold countries. This is practically what was accomplished, with some variations of detail, in most of the silver-using countries of the Orient, except China, between 1897 and 1906. The earlier experiment in Java, although eminently successful, was not at first adopted as a guide in other countries because of the limited area in which it was tried and the process of evolution by which it grew up.

The Bank of Java.

The bank-note circulation of the Dutch East Indies, of which the Island of Java forms the most important part, is

furnished by the Bank of Java. The bank was founded in 1828, with a capital of 6,000,000 florins ($2,400,000), but the chief interest of its history to the Western World is the success with which it has maintained the gold standard in Java since the suspension of free coinage in Holland in 1875. The situation in Java has been in many respects the same as in the mother country, but the experiment is one which might have seemed more precarious because of the situation of Java in the midst of silver standard countries and the almost entire absence of gold in the reserves of the bank. Silver was for many years the legal standard of Java, but the government of Dutch India continued for a considerable time, beginning in 1818, to make the bulk of its payments in copper. This resulted in driving silver from circulation and led to the introduction of paper currency to represent the copper coins.' In 1875 the Bank of Java was empowered to regulate its operations according to the principles on which the Bank of Holland was working. A bill was brought forward and passed in 1877, by the Dutch Ministry, for the regulation of the currency of their Indian possessions. The principal features of this bill were the establishment of the double standard on the same basis as in Holland,—the formal suspension of the further coinage of silver.

The parity of the notes of the Bank of Java and of the silver coins is maintained through the foreign exchanges. All commercial operations with Holland or other countries in Europe are settled by bills drawn on Amsterdam or London, and the exchange has shown an extreme fluctuation never greater than five and a quarter per cent. on Amsterdam and six per cent. on London. Since 1885 the fluctuation has not been greater than three per cent. The bank rate has varied from nine per cent. for a time in 1876 to as low a rate as four per cent. in 1878 and in 1886. The mean rate in 1906 was 4.5 per cent. Settlements for merchandise balances between Holland and Java are made by shipments of silver. These shipments are taken up at home by the Bank of the Netherlands against bank-notes or credits at

· London Bankers' Magazine, March, 1893, LV., 383–91.

par with gold.'

There was an industrial crisis in Java în 1886, which was attributed in some quarters to the maintenance of the gold standard of wages and prices, but the planters adopted improved methods of production and recent years have been years of prosperity.

From 1861 to 1908 the highest course of exchange was 12.17 florins and the lowest 11.35 florins, par being 11.91.' The note circulation of the bank was 58,451,000 florins ($23,380,000) March 31, 1906, and the metallic reserve was 30,867,000 florins ($12,347,000).' The circulation was substantially unchanged in 1908, but the metallic reserve had risen to 37,710,299 florins. Discounts were 14,317,783 florins. The reserve is required to be not less than forty per cent. of demand liabilities, and three-fourths must be in standard coins. The bank has a monopoly of note issue in Netherlands India, and its notes are received at public offices in the absence of contrary instructions on the part of the GovernorGeneral, but they are not legal tender between individuals.*

Banking in India.

The issue of circulating notes through the medium of banks was brought to an end in India in 1861, but prior to that date there was a flourishing system of banks of issue. Banking in India in the early days of European supremacy was subject to no fixed regulations. The bulk of the business was transacted for many years by the "agency houses," founded by civil and military employees who had retired from the active service of the East India Company to go into private business. They made loans to the company at a high rate during the latter part of the last century, but the rate had fallen by 1813 to six per cent. and the debt had

1 Letter from Mr. Van den Berg, Report of the Indian Currency Committee, Sen. Misc. Doc. 23, Fifty-third Cong., 1st Sess., 573. • Économiste Français, July 25, 1908, 130.

82.

3

3 Jaarcijfers Voorhet Koninkrijk der Nederlanden, Kolonien, 1905,

4 Van den Berg, The Money Market and Paper Currency of British India, 44.