of stocks and bonds, international investments in other forms, payments and receipts of interest and dividends, bankers' balances, ocean freight rates paid and received, expenditures of tourists and immigrants, expenses for embassies and consulates, purchases of public property from foreigners and sales to them, and some other items of less. significance and frequency of occurrence. These items sometimes reach large aggregates and profoundly influence foreign rates of exchange. This is particularly true of international transactions in stocks and bonds and of fluctuations in bankers' balances.

On the stock exchanges of important financial centers, like New York, London, Paris and Berlin, purchases and sales of stocks and bonds for foreign account constitute a regular branch of business, and, by the use of the cable, socalled arbitrage houses buy in one market and sell in another whenever a difference in the quotations of a given security on the two markets offers opportunity for a profit. When New York stockbrokers or arbitrage houses sell securities in London they draw bills on the purchasers and sell them on the market in precisely the same manner that an exporter of wheat or cotton draws against the cargo he ships and realizes the proceeds of his sale by negotiating his bills. In like manner purchases of securities in London create a demand for sterling exchange to be used in payment. The amounts of such purchases and sales, however, are nowhere accurately recorded and their influence on the rate of exchange cannot be accurately measured. That it is frequently great, however, sometimes dominating all other influences, cannot be doubted. Such international movements of securities frequently prevent gold shipments, the high interest rates which usually accompany a money stringency lowering stock quotations and stimulating sales on foreign exchanges.

Bankers' balances with foreign correspondents are quick to respond to international financial influences, particularly to differences in the rate of interest ruling at different centers. For example, if interest rates in New York are considerably above those in London, London bankers may order their New York correspondents to draw upon them and to invest the proceeds in New York paper. Such orders increase the supply of London bills on the New York market. If London rates are the highest, New York bankers may bid for sterling exchange in order to use the proceeds to lend in London. On the markets of continental Europe such influences are very potent, particularly in the determination of exchange rates on London. In New York they are very important at times, but are not so persistent and regular in their influence as they are in such cities as Paris or Berlin.

REFERENCES

On currency movements see Laughlin, ch. x; Kinley, chs. vi and vii; Taylor, ch. iv; and Conant, Principles, bk. 11, ch. vi.

On the domestic and foreign exchanges see Johnson, ch. v; Clare, The A B C of the Foreign Exchanges, and A Money Market Primer and Key to the Foreign Exchanges; Goschen, The Theory of the Foreign Exchanges; Macleod, The Elements of Banking, ch. vii, and The Theory and Practice of Banking, ch. vi; Margraff, International Exchanges; Le Touzé, Traité du Change; Pallain, Les Changes Etrangers et les Prix; Hertzka, Wechselkurs und Agio; Schraut, Die Lehre von den auswärtigen Wechselkursen; Obst, Wechsel- und Scheckkunde and Organisation des Zahlungsverkehrs; and Lexis, Die Fixierung des Wechselkurses in den Silberwährungsländern; and Nachod, Die Organisation des Reisekredits, Kreditbrief, Circularkreditbrief und Reisescheck, in Conrad's Jahrbuch, 3d F., v. 81, p. 289, and v. 82, p. 823, respectively.

The clearing systems of the most important countries are treated in the following books: Cannon, Clearing-Houses; Howarth, Our Clearing System; Seyd, London Bank and Bankers' Clearing-House System; Easton, The Work of a Bank, ch. vii; Bolles, Practical Banking, pt. III; and Rauchberg, Clearing-und Giro-Verkehr.

CHAPTER IX

THE REGULATION OF COMMERCIAL BANKING

COMMERCIAL banking plays so important a rôle in the economy of modern nations that its regulation with a view especially to the safe-guarding of the interests of the public, is a matter of prime importance. The methods at present employed in the different countries will be described in some detail in succeeding chapters. In this one certain principles which have been revealed by experience everywhere will be discussed.

1. Incorporation.-It is generally admitted now-a-days that no one ought to be permitted to engage in the banking business without special authority from the state. The reason for this is the need, in the interests of safety, of the public regulation and supervision of this business. Experience has shown that this can best be secured by the requirement of incorporation through special charter or in accordance with general laws, such charters or laws prescribing the conditions under which the business must be carried on. Without incorporation it is difficult, if not impossible, to separate banking from other lines of business, and consequently to know precisely who are engaged in it and how it is being conducted. Under such conditions certain persons are sure to escape the regulations prescribed by law and designed for the safe-guarding of the public.

As between incorporation by special charter or under general laws practice in the past has varied widely, but general banking laws are fast becoming the rule the world

over. They prevent favoritism and secure uniformity. Only in the cases of highly specialized institutions of peculiar character, like the great central banks of Europe, is the special charter method of incorporation likely to survive. The differentiation of the banking from the general incorporation laws of a state, that is, those applicable to other kinds of industrial corporations, is also desirable on account of the peculiarities and public importance of this business. Such differentation is rapidly becoming the rule in this country.

2. Capital and surplus.-One of the most common requirements imposed by banking laws in this and other countries is the accumulation of a minimum amount of capital and surplus. By the former is meant a fund contributed directly or guaranteed by the stockholders or proprietors, and by the latter an additional fund accumulated from profits. Such funds are primarily desirable for the purpose of safe-guarding the interests of customers. They represent the stake of the proprietors in the business and the possibility of their loss contributes toward conservatism of management. In case of failure, such funds are available for the payment of depositors and noteholders and other creditors, who are to this extent guaranteed against loss. Surplus funds may also be accumulated as a means of meeting temporarily losses without infringing upon the other resources of the bank, and for the equalization of dividends.

The laws of most nations now require a certain paid-up capital as a condition preliminary to the starting of a commercial banking business and the accumulation of a surplus fund equal to a certain percentage of the capital from the profits earned from year to year. Our national banking act, for example, requires a minimum capital of $25,000 of national banks in towns the population of which does not

exceed three thousand inhabitants, of $50,000 of those in towns whose population is between three and six thousand, of $100,000 of those in towns whose population is between six and fifty thousand, and of $200,000 of those in towns whose population exceeds fifty thousand. In most of the states of the Union banks with less than $25,ooo capital are permitted in small towns, but most of them prescribe a certain minimum as a necessary condition of engaging in the banking business.

Regarding the surplus fund the requirement of the national banking act is that before the declaration of a dividend each association shall carry one-tenth of its net profits of the preceding half-year to its surplus fund, until the same shall amount to 20 per cent. of its capital stock. Similar provisions have been incorporated in the banking laws of the various states.

The efficiency of these funds as a means of reimbursing bank creditors in cases of failure depends upon their proportion to the total volume of such obligations, and upon the form and safety of their investment. The regula

tion of this proportion is usually left to the discretion of the banks themselves, the chief exception being the requirement made by our national banking act, the Canadian banking act, and some others, that the total volume of notes issued shall not exceed the capital stock. Inasmuch as the chief obligation of most commercial banks at the present day is to depositors, and in case of failure the greatest losses fall on them, it may be questioned whether some proportion between the total deposits permissible and the capital and surplus funds ought not to be fixed by law. In practice this proportion varies widely. In fact, bank officials usually expand their deposits to the greatest extent possible, consistent in their opinion with safety, regardless of the amount of the bank's capital and surplus. It must