DEPOSIT-RECEIPT CUSTOMERS
A deposit-receipt, which is not a negotiable instrument, cannot be
transferred by one person to another. Where the receipt is issued in
more than one name, instructions should be given to the banker as to
whether, in the event of withdrawal, the note is to be signed by all
or by any two or any one of the depositors. Should no instructions
be given, then all must sign when a withdrawal is made, or when the
interest is taken. These receipts, as a rule, are issued subject to
either seven or fourteen days’ notice of withdrawal; but the notice, in
practice, is not enforced, bankers merely writing it upon the note in
order to protect themselves in the event of a run. Most banks, however,
decline to pay interest unless the sum has remained in their possession
for at least one month.
The large London banks, though they compete eagerly the one against the
other for well-secured advances and loans, have closed up their ranks
against the depositor, their practice being, both in London and the
suburbs, to allow 1½ per cent. below Bank rate upon money left with
them on deposit, every alteration in the rate being advertised in the
leading papers. All one has to do, therefore, in order to ascertain
the London rate for money on deposit-receipt is to deduct 1½ from the
Bank of England rate which may be seen in the city-article of every
newspaper. Whether or not certain banks offer special rates to favoured
individuals is a matter of opinion; or, again, they may bid higher
for large sums for fixed terms; but the small depositor may take it
for granted that, with their rates on loans and advances reduced by
competition among themselves, the banks are determined to keep down
the deposit rate. In fact, the large London bankers have united for
this very purpose, though it must be remembered that the agreement
is not binding at the country branches of the London and provincial
institutions.
A banker is a middleman who borrows from depositors at a rate in order
that he may lend to others at a higher rate, the difference between
the two rates being his margin of gross profit. A certain portion of
his deposits, we know, he obtains in exchange for granting banking
facilities, and upon the rest he allows a rate of interest, while he
has to maintain a reserve of so-called cash and gilt-edged securities
against the danger of sudden withdrawals and panics. At the moment the
companies cannot control the advance rate, or fix from time to time
a minimum rate for secured advances; but in London we see that they
have succeeded in getting the depositor under their thumb, thereby, of
course, increasing their profit margin at his expense. Their next move
will probably be an attempt to corner the borrower against tangible
securities, as has been successfully accomplished by the banks in
Scotland. The number of English banks is rapidly decreasing through
absorptions and amalgamations, so, in the end, it is more than probable
that we shall see a monopoly, and that all the large banks will one
day unite for the purpose of fixing, at each change of the Bank rate,
their deposit rate, and, also, their lowest or minimum rate for secured
advances.
In the provinces the banks, when loanable capital is cheap, are able
to lend and to discount at higher rates than in London, so the country
deposit rate never falls so low as that of London. Neither, however,
does it advance so high when loanable capital is dear, because the
provincial banks then find some difficulty in increasing their rates
upon bills and loans proportionately. The following table will enable
one to see the difference between the rate allowed in London and the
country:--
London Deposit Rate,
Bank Rate. 1½ below Bank Rate. Country Deposit Rate.
5 3½ 3
4½ 3 2½ to 3
4 2½ 2 to 2½
3½ 2 2
3 1½ 1½ to 2
2½ 1 1½
2 ½ 1½
In the country, we must remember, there is no combination or ring of
bankers who meet to decide the rate, which, therefore, is not “fixed”
from time to time on the basis of the Bank rate, though, of course,
the country deposit rate moves up and down in sympathy with the Bank
of England’s published rate of discount or official minimum, as it
is called. There is, moreover, some competition for deposits in the
country, but it is very slight; and, unless the banker think that a
man may be useful, he seldom bids appreciably higher than his rivals
for his money. The small private banker, it is true, may offer more
interest, but a depositor should take care to examine his balance-sheet
before he entrusts him with either his spare capital or his savings.
A few of the purely provincial joint-stock banks, whose branches
are situated in a manufacturing centre, and which, in consequence,
are never overburdened with working resources, offer higher rates
than the great companies, but they are the weaker of their kind, and
it is therefore questionable whether one should lend to them. In
every probability one’s principal would be safe, but it would not be
_so_ safe as in the hands of the really large London and provincial
institutions, whose reserves afford the customer a much better
guarantee; consequently it is always wise to consider whether the
additional risk, be it never so small, is worth taking for the slight
increase in the rate.
Of course the country depositor will take care to inquire what rates
the other large banks in his town are granting, so that he may judge
whether his own banker is allowing him a fair rate. Again, if the
amount of his deposit be, say, over £1,000, he can sometimes obtain a
special rate; and he may rest quite assured that, if he do not interest
himself in the matter, the bank-manager will allow him the lowest rate
possible, for as there is not a fixed minimum it follows that some,
more especially during certain conditions of the market, are obtaining
better rates than others. A little pressure will occasionally induce
the manager to quote, as he quaintly calls it, a “special” rate of
interest, if he consider the customer’s name be worth keeping on his
books. It may be added that some people, in order to minimize their
risk, keep their current accounts with one banker and deposit with
another.
We can now refer to the table of rates on page 48. The country rate, of
course, is stated approximately, for we have seen that under certain
conditions the customer may possibly obtain more. Glancing at the
table, we find that when the bank rate is at 2, the London depositor
receives ½ per cent. and the country depositor 1½. If the London
customer deal with a London and provincial bank, it will obviously
pay him better to deposit at one of the country branches. He should,
therefore, if he consider that money is likely to be cheap for some
considerable time, give notice in London and transfer his deposit to
the country. If his banker object, he can deposit with any large,
well-managed provincial bank. With the Bank rate at 2½ the move would
pay him, but when it rises above these figures the rate is either
equal or in his favour. A person who keeps two banking accounts, one
in London and the other in the country, can make this move with the
greatest of ease; and by transferring his deposit from the one to the
other as the rate favours him, he may easily increase his interest.
Conversely, with a high bank rate it may pay the country depositor
to transfer his principal to London. There is no occasion to let the
banker see the move.
In London and the great cities a large proportion of the deposits at
interest, especially during periods of depression, would represent
capital temporarily withdrawn from trade, and awaiting either more
profitable investment or an increased demand and rising prices. It is
this accumulation of idle capital that tempts the company-promoter
from his lair, and sometimes results in a Stock Exchange boom, whilst
it always produces an increased demand for the so-called gilt-edged
variety of securities and a consequent rise in their price. The
country depositor, however, even when he leaves fairly large sums at
interest, is generally waiting to invest his money in house property,
which will return him from 5 to 6 per cent., or to place it out on a
first mortgage at from 3½ to 4 per cent. In the first instance, he is
careful not to purchase old property that will swallow up much of his
rent in repairs. Cautious by nature, he shakes his head dubiously at
the glowing prospectus of the promoter, and refuses to believe in the
high-toned and cunningly tuned leaflets with which the bucket-shops
favour him, for he likes to see his investment, to feel it, to walk
upon it. Paper does not satisfy his soul; he is not even without his
suspicions of banker’s paper; but when he possesses house property,
then all he has to fear is the Almighty and a bad earthquake, and he
can sleep comfortably on those risks.
Country depositors consist largely of working men, clerks, artisans,
small shopkeepers, dressmakers, women of slender means, and so on,
together with the banks’ current-account customers. The huge aggregate
of deposits is made up principally of small sums, so it is easy to keep
down the rate, because the great majority are ignorant of the condition
of the money-market, and hardly seem to be aware that the Post Office
gives 2½ per cent. upon small sums left with it. The companies trade
upon the ignorance of their depositors; and though a few of the
better-informed customers withdraw their savings when the rate is
extremely low, experience has taught the banks that the great bulk of
them simply grumble and take what is offered.
Seeing that the deposits are spread over so great an area, and among
men and women who have not sufficient business knowledge to invest
their savings advantageously, the banks have been able to keep down
rates without reducing their own resources; and the few who do
withdraw their savings when the deposit rate is at 1½ per cent. are
practically of small account when contrasted with the alternative
policy the companies would have to adopt in order to retain them, for
it obviously pays better to lose a few receipts than to raise the rate
to 2 for the whole of the deposits. For instance, a bank would rather
lose £100,000 by withdrawals when the rate is at 1½ than pay 2 per
cent. on £5,000,000 for the purpose of preventing the drain, £25,000
being too large a premium to sacrifice for the purpose of retaining its
connexion intact, when, perhaps, money is being employed in the London
shortloan market at 1½ per cent. and under.
Again, very many of the country depositors look upon the
deposit-receipt as an investment, and the banks, quite naturally, do
not wish to inform them that even Consols are a more profitable one.
Not so very many years ago the country minimum deposit rate was 2, and
it was not without certain misgivings that it was reduced to 1½; but,
as we have seen, the experiment proved safe, though the banks, given
another long period of a 2 per cent. Bank rate, will hardly care to
risk 1 per cent. in the provinces, as it seems pretty certain that,
were the minimum further reduced, disgusted depositors would invest
their savings either in the Post Office or the gilt-edged class of
securities. Having once turned this stream of deposits into another
channel, it is improbable that a higher rate would tempt them back
again; and as the depositor is essential to the modern banking system,
the provincial banks will think many times before they risk a rate
below 1½, even when cheap capital is again reducing their dividends
right and left.
A customer, before leaving his money with a banker, will be careful to
inquire what rate he is to receive, and if the rate be not written upon
the receipt, then he might pencil the answer he gets upon the back of
the document. If there be three good banks in his town, and he has,
say, £200 to deposit, there can be no harm in his going to all, and
asking the highest rate each is allowing. John Jones, we will assume,
holds a deposit-receipt for £200 dated 10th June and he takes it to the
bank on 9th December following in order to draw the interest at the
rate of 2 per cent. per annum. Between 10th June (excluding the first
day) to 9th December (inclusive) there are 182 days, so the banker owes
him 2 per cent. per annum on £200 for 182 days. Hence the following
sum:--
(200 × 2 × 182)/(100 × 365) = £1 19s. 10d.
The cashier, therefore, pays John Jones £1 19s. 10d. in cash, and gives
him a new receipt, dated 9th December, for £200. A depositor, as a
rule, draws his interest twice a year. Some persons, however, leave
their receipts from three to five years without disturbing them; and
the bank-manager, always anxious to swell the profits of his branch,
is careful, when they are presented, to make his calculations at simple
interest instead of at compound. Deposit customers, therefore, even
when they do not require the interest due to them, should present their
receipts six months after date in order to have the interest added to
the principal, when both bear interest together.
For instance, assuming that John Jones had not required his interest,
then he would have taken a new note for £201 19s. 10d.; but Mr.
Jones, who is acquainted with the internal economies of a bank, and
who is also aware of the intense frugality of the agent, knows that
the companies do not allow interest upon the odd shillings of a
deposit-receipt; so, giving the cashier an additional twopence, he
takes a fresh note for £202, and walks away very well satisfied with
himself. Were he to omit taking this precaution each half-year, and to
hold his receipt for, say, five years, then, when he took it in, he
would merely get certain rates upon £200 for five years. The larger
the principal the greater, of course, is the loss of interest to the
depositor.
Should not the depositor reside in the neighbourhood he can, after
the expiration of six months, write his name on the back of the note
and send it through the post to his banker, with the request that a
new receipt be returned to him for the amount of the principal and
interest. In the event of his wishing to draw the interest, a banker
will send him either a draft or postal orders for the amount due to
him, as he may direct. Of course, if he at any time require part of
the principal, he will state what amount, and give directions whether
the interest is to be added to the new receipt for the balance or to
be included with the sum he is withdrawing, while he will take care to
write his name upon the back of the note before despatching it. When
sending a receipt by a messenger it is usual to write a note to the
banker, telling him just what one requires and requesting him to pay
the bearer of the letter.
Where interest amounting to £2 and over is withdrawn, the
deposit-receipt must have on the back a penny postage stamp, which the
depositor should cancel by writing his name across it. This must be
done upon each note when the depositor has a plurality of receipts.
Where, however, the interest upon any one is less than £2, a stamp is
unnecessary. Nor is it required when the depositor adds principal and
interest together and takes a fresh note for the aggregate, but where
principal and interest or principal or interest amounting to £2 or over
is _withdrawn_, the receipt must bear a penny stamp.
We now come to the question of the seven or fourteen days’ notice on
these receipts, and, as previously stated, the banker seldom or never
enforces his claim, though, when notice is not given, he occasionally
deducts fourteen days if the whole of the principal be withdrawn. When
this is contemplated it is better, perhaps, to give the necessary
notice, but the manager, should the customer protest against this
deduction, generally gives way. Again, if the note be for £100, and the
depositor withdraw £50, and take a new receipt for the balance, the
banker may deduct a certain number of days from the term on £50 (the
sum withdrawn without notice). The customer, by checking his interest,
will discover this loss, which the teller, if he remonstrated with him,
will obligingly make good. It is also as well to bear in mind that some
banks have two rates.
The London depositor, we know, receives 1½ below Bank rate; so assuming
that Mr. Jones, of Whitechapel, held a note for £200, dated 5th
February, 1903, and took it to the bank to draw the interest on 5th
July of the same year, he would want to know how much was due to him
at the latter date. First, therefore, he must ascertain whether any
changes were made in the Bank rate during the period in question; and
upon inquiry he found that the “official minimum” was raised to 4 per
cent. on 2nd October, 1902, and lowered to 3½ on 21st May following,
and to 3 upon the 18th June next.
Now, from 5th February (exclusive) to 5th July (inclusive) there are
150 days. His banker, therefore, owed him:--
Bank Rate was from
105 days’ int. at 2½ p.c. p.a. on £200 Feb. 5 to May 21 4 p.c.
28 ” ” 2 ” ” ” May 21 to June 18 3½ p.c.
17 ” ” 1½ ” ” ” June 18 to July 5 3 p.c.
--------
150 days
Here we get three rule-of-three sums, and, perhaps, it were as well to
give a statement of the first, viz.:--
(200 × 2½ × 105)/(100 × 365) = £1 8 9
28 days at 2 p.c. per annum on £200 = 0 6 1½
17 ” ” 1½ ” ” ” ” ” = 0 2 9½
-------------
Interest due £1 17 8
Mr. Jones, of Whitechapel, then, should have received £1 17s. 8d.
from his banker in cash and a fresh deposit-receipt, dated the 5th
July, 1903, for £200. At each change of the bank rate the London
depositor, when calculating his interest, must make a fresh sum, as in
the above illustration, and so, too, must the country depositor when
the fluctuation of the Bank of England rate is sufficiently wide to
influence the rate of interest allowed in the provinces, though the
latter must remember that he can only ascertain the rate by making
inquiries of the bankers themselves or among those of his friends who
deposit with them.
Adverting to the dates in the foregoing illustration, a few words of
explanation are perhaps necessary, for it will be seen that under
the heading “Bank rate was,” 21st May and 18th June, the days upon
which the official minimum was changed, are placed opposite different
rates. The Bank of England directors examine their weekly return or
balance-sheet, which is made up to the close of business each Wednesday
on the Thursday following, and in the afternoon of the latter day any
change in the Bank’s rate of discount is announced. Of course, during
abnormal times the rates may be changed on any day as the exigencies
of the moment may direct; but, fortunately, though the money-market
is subject to fits, its surface, as a rule, is seldom so violently
perturbed as to call for drastic remedies, and we shall find that the
dates in question were Thursdays. It follows, therefore, that these
days opened with the bank rate at one figure and closed with it at
another. Hence the anomaly to which attention has been drawn. The
banker owed Mr. Jones, of Whitechapel, interest at 2½ per cent. from
5th February (exclusive) to 21st May (inclusive). On the 21st May, we
know, the Bank rate was reduced from 4 to 3½ per cent.; so he owed him
2 per cent. on his principal from 21st May (exclusive) to 18th June
(inclusive)--the date of the next change. Should not the reason of this
be quite clear to any reader, if he remember that from 21st to 22nd May
the Bank rate would have been one day at 3½ per cent. the difficulty
will probably disappear.
From an investment point of view the deposit-receipt seems hardly worth
consideration, because even Consols, over a period of five years, will
return an appreciably higher yield; but when one is merely waiting for
a suitable investment to turn up, or for a revival of trade, then the
deposit-note exactly meets one’s requirements, for its only charm lies
in the fact that the depositor gets back his principal intact. When
the deposit rate is low trade is generally dull, and the prices of
gilt-edged securities consequently move up. The depositor, therefore,
when the rate is high should not be tempted to let his money remain
with his banker for that reason alone, because he can then, as a rule,
buy gilt-edged securities at cheaper figures, and, needless to say, the
average return on his purchase-money will greatly exceed the average
rate of interest on deposit. Conversely, if he buy the so-called
gilt-edged variety of securities when interest is low, he is much more
liable to a loss of capital should he want to realize them when trade
is good and the rate of interest high. It follows that the man of
business, who finds capital accumulating in his hands during periods of
temporary depression, when interest, of course, is low, prefers taking
a deposit-receipt for his idle capital, which he hopes to again use in
his business directly markets improve, to purchasing, say, Consols at a
time when demand has enhanced their price, and, consequently, added to
his risk of loss upon realization.
Some banks, instead of issuing a deposit-receipt for money left at
interest, give the depositor a pass-book, in which the sum he leaves is
credited. Each time the depositor leaves new money he takes his book
with him, and the cashier enters the amount therein to his credit,
while he draws out his interest, or any part of the principal he
may require, by cheque. As the banker rules off his deposit-ledgers
half-yearly, and then adds the interest due to each customer to the
principal, it follows that principal and interest, when the balance
is brought forward, give a return to the customer, who by this method
receives compound interest on his capital or savings. The advantages
of this system are too obvious to call for explanation, but it may be
added that, when a deposit customer is given a cheque-book, he should
be careful not to operate too freely upon his account, as some bankers
then transfer the balance to their current-account ledgers, their
reason being that the account has ceased to be used for the purpose for
which it was opened, and that, therefore, the depositor is no longer
entitled to interest.
The chapter on “Unclaimed Balances” should prove especially interesting
to depositors.