¹ To some extent the banks in New York City acted as a central bank for the rest of the country, and the U.S. Treasury also performed central banking functions. On the Treasury as central bank see Taus, Esther Rogoff, Central Banking Functions of the U.S. Treasury, 1789–1941 (New York, 1943)Google Scholar. For a discussion of cooperative activities of American commercial banks see Redlich, Fritz, The Molding of American Banking: Men and Ideas (New York, 1968 reprint), Vol. II, ch. xx.Google Scholar

² The international character of the Bank of France's support function has been pointed out by a number of writers. See Wilson, J. S. G., French Banking Structure and Credit Policy (Cambridge, Mass., 1957), pp. 277–278Google Scholar; Lemoine, Robert J., “The Banking System of France,” in Foreign Banking Systems, ed. Willis, H. Parker and Beckhart, B. H. (New York, 1929), pp. 558–563Google Scholar; Liesse, Andre, Evolution of Credit and Banks in France, U.S. Senate Document No. 522 (Washington, 1909), pp. 187–192Google Scholar. Of course, while the accumulation of specie facilitated stabilization policies, the blessing was not unmixed. Specie reserves of the Bank of France supported a money supply of 15.4 billion francs (40 percent of which was also specie) in 1900, a ratio of 1:4.8. The corresponding ratio in England was 1:23.5. As has been pointed out elsewhere for an earlier time, this surely implied greater real resource costs for France. See Cameron, Rondo, “France (1800–1870)” in Cameron, Rondo et al. , Banking in the Early Stages of Industrialization (New York and London, 1967), pp. 115–121, 128.Google Scholar

³ Sayers, R. S., Central Banking After Bagehot (London, 1957), ch. ii.Google Scholar

⁴ Hawtrey, R. G., A Century of Bank Rate (London, 1938)Google Scholar, passim.

⁵ Goodhart, C. A. E., The Business of Banking, 1891–1914 (London, 1972), pp. 101–102Google Scholar.

⁶ Bagehot, Walter, Lombard Street (Homewood, Illinois, 1962 reprint)Google Scholar. (Lombard Street was originally published in 1873.)

⁷ Hinderliter, Roger H. and Rockoff, Hugh, “The Management of Reserves by Antebellum Banks in Eastern Financial Centers,” Explorations in Economic History, 11 (Fall 1973), 37–53CrossRefGoogle Scholar.

⁸ Contributions to banking theory along these lines include Orr, Daniel and Mellon, W. G., “Stochastic Reserve Losses and Expansion of Bank Credit,” American Economic Review, 51 (September 1961), 614–23Google Scholar, and Morrison, George R., Liquidity Preferences of Commercial Banks (Chicago, 1966Google Scholar).

⁹ Applications to commercial bank behavior may be found in Kane, Edward J. and Malkiel, Burton G., “Bank Portfolio Allocation, Deposit Variability, and the Availability Doctrine,” Quarterly Journal of Economics, 79 (February 1965), 113–133CrossRefGoogle Scholar, and Hart, Oliver D. and Jaffee, Dwight M., “On the Application of Portfolio Theory to Depository Financial Intermediaries,” Review of Economic Studies, 41 (January 1974), 129–147CrossRefGoogle Scholar.

¹⁰ It is, of course, not necessary to treat the reserve position and the portfolio position as separate decision-making variables. Whether it is desirable to do so has not yet been agreed upon by monetary theorists. Kane and Malkiel, “Portfolio Allocation,” pp. 130–133, incorporate deposit variability into the portfolio position.

¹¹ Baumol, William J., “The Transactions Demand for Cash: An Inventory Theoretic Approach,” Quarterly Journal of Economics, 66 (Nov. 1952), 545–556CrossRefGoogle Scholar.

¹² A brief summary of the evidence is presented in Laidler, David E., The Demand for Money: Theories and Evidence (Scranton, Pa., 1969), pp. 106–107Google Scholar. A recent bank study is Barth, James R. and Bennett, James T., “Deposit Variability and Commercial Bank Cash Holdings,” Review of Economics and Statistics, 57 (May 1975), 238–241CrossRefGoogle Scholar.

¹³ Arrow, Kenneth J., “The Theory of Risk Aversion,” Essays in the Theory of Risk Bearing (Chicago, 1971), pp. 96–98Google Scholar.

¹⁴ We would have preferred to use the age of the management tradition influencing current policy rather than simply the chronological age of the bank. A bank like Lloyd's, for example, which was founded in 1765 as a rural bank, might have passed through several distinct regimes from our perspective, only the last of which is relevant. As a practical matter, however, we generally were forced to identify the founding of the relevant management tradition with the founding of the bank. The one exception was the Comptoir d'Escompte, which was reorganized in 1889, the date we use, after it had failed. It had first been organized some four decades previously. The reorganization provided an objective basis for assigning a younger “age” to the bank.

¹⁵ The supply of liquid assets is available to each bank in the financial center and is altered vis-à-vis areas outside the center through changes in the market rate of interest. Within each center, individual banks may acquire as much of the supply as they want by foregoing jnterest earnings. Thus, although the market rate of interest enters both the supply function and the demand functions, the reduced form will be dominated by demand variables on the assumptions given. The reduced form substitution may be demonstrated as follows:

where R^s = Supply of reserves; R^D = Demand for reserves; i = Market rate of interest.

Substituting into the equilibrium condition and rearranging terms gives:

Now as α increases relative to β₈, β₈/α approaches zero and the above expression becomes equivalent to equation (5).

¹⁶ The dummy variables measuring individual bank characteristics were assigned a priori to quantify what seemed to be obvious distinctions within the three systems. Thus, for example, a dummy was assigned to the Credit Lyonnais because of its vast size and to Lloyds because of its rapid growth through merger. The justification for introducing the variable for the London and Westminster Bank and the Union Bank of London, however, was primarily empirical. One rationalization discovered after the fact is that their conservatism may have been a reflection of substantially higher ratios of callable capital to paid-up capital. Greater liquidity may have been needed to reassure stockholders that management would not exercise its option to call additional capital.

¹⁷ It is possible that the basic assumption concerning DIVD—that it was a fairly firm commitment to shareholders and hence implied a minimum risk exposure—was not fulfilled, especially by the London banks. The coefficient of variation of DIVD in London was 13 times as large as in New York and 42 times as large as in Paris.

¹⁸ Goodhart, Business of Banking, pp. 131–134.

¹⁹ We bring in the coefficient of EXPT as a behavioral parameter because of the obvious differences the signs imply for portfolio management over the cycle. The positive sign in the Paris equations suggest that the more cautious banks in France actually increased their liquidity holdings during expansion, that is, managed their portfolios in a countercyclical fashion.

²⁰ This conclusion is not altered significantly if Table 4 is calculated by excluding the Banque de Paris et des Pays-Bas, the investment bank, from the French sample.