The Bank's Weekly Return.
For the nonce we have finished with history, and will turn our
attention to the Bank of England as it now stands in the centre of the
Money Market. The joint stock banks publish their balance sheets either
annually or half-yearly; but the Bank of England, in compliance with
the Act, compiles a weekly statement to the close of business each
Wednesday. This Return or Balance Sheet is submitted to the directors
on the following day, and, when passed by them, is exhibited on the
wall of the Bank to an expectant crowd of messengers and officials,
whose business it is either to criticise or copy it. But by far the
greater number of the persons there assembled merely wish to know
whether any alteration has been made by the directors in the Bank's
discount rate, and, that ascertained, the crowd rapidly thins.
The following is a copy of the Return or Balance Sheet for the week
ended Wednesday, 1st October, 1902:--
ISSUE DEPARTMENT.
£ | £
|
Notes Issued 51,792,330 | Government
| Debt 11,015,100
|
| Other Securities 7,159,900
|
| Gold Coin and
| Bullion 33,617,330
------------- | -------------
£51,792,330 | £51,792,330
============= | =============
BANKING DEPARTMENT.
Liabilities. | Assets.
|
£ | £
Proprietors' | Government
Capital 14,553,000 | Securities 15,826,080
|
Rest 3,816,736 | Other Securities 31,837,516
|
Public Deposits | Notes 21,391,145
|
(Including Exchequer, | Gold and Silver
Savings' Bank, Commissioners | Coin 2,225,084
of National |
Debt, and Dividend |
accounts) 10,025,973 |
|
Other Deposits 42,695,526 |
|
Seven-day and |
other Bills 188,590 |
------------- | -------------
£71,279,825 | £71,279,825
============= | =============
A glance at the right hand side of the statement relating to the Issue
Department tells us that every note, either in the hands of the public
or held in reserve in the Banking Department, is covered by securities
and specie deposited in the Issue Department. The amount of the notes
in circulation is, of course, obtained by deducting the notes in hand
in the Banking Department from the total amount of Notes Issued on the
left-hand side of the Issue Department. The difference, £30,401,185,
is called the "circulation," and represents the sum which the Bank of
England had borrowed from the public on its notes on the 1st October
last.
Each department is distinct, and has, in fact, a separate existence;
so if the Banking Department requires gold, it must, like an ordinary
individual, exchange some of its notes in hand at the Issue Department,
obtaining therefrom the additional coin to satisfy the demands of its
customers in the Banking Department.
The Bank has transferred the Government debt and other securities,
which together amount to £18,175,000, to the Issue Department, and this
sum is called the "authorised issue," for the simple reason that the
Government allows the Bank to issue notes for a like amount against
these securities, which are mortgaged to the holders of its notes.
Gold coin and bullion, we know, must be deposited against every note
issued in excess of this sum; and as both sides of the statement agree,
it is evident that this has been done. These £51,000,000 of gold and
securities, then, are hypothecated to the holders of the Bank's notes,
and, in the event of the Bank of England being wound up, the creditors
in the Banking Department could not touch either the securities or the
gold. But we see that the Bank holds £21,391,145 of its own notes in
the Banking Department, and, of course, these notes are secured in the
same manner as those held by the public; consequently, this department
enjoys similar rights and privileges in respect of them. Add the notes
in hand in the Banking Department to the "circulation," and it will be
found that the total equals the amount issued.
It follows that the Bank only makes a profit on the authorised portion
of its note issue, for, as gold is deposited against the remainder,
it must lose thereupon to the extent of the cost of production of the
notes issued in excess. Obviously, then, the Act does not limit the
note issue of the Bank, but it does limit that portion which is not
covered by gold, and, consequently, it removes the probability of our
seeing Bank of England notes at a discount, as was the case during the
early part of the nineteenth century, for the fact that the Bank of
England is compelled to redeem its notes in gold on demand prevents
depreciation of its paper.
Of course, the amount of notes in circulation varies from day to day,
and so, too, does the amount of notes issued, which rises and falls
as the stock of bullion in the Issue Department is either increased
or diminished. Every note paid is immediately cancelled, and no note,
after it has been changed at the Bank, ever goes into circulation
again. Hence the reason why Bank of England notes present such a marked
contrast to the notes of the country bankers, who issue their paper
over and over again, until it becomes quite unpleasant to handle, and
distinctly malodorous.
The Bank of England may be said to perform four separate functions.
Its Issue Department, as we have seen, is responsible for the
notes. Secondly, the Bank manages the National Debt on behalf of
the Government. Thirdly, in consequence of its holding the bankers'
reserves, it acts as agent for the Mint. And, fourthly, it conducts an
ordinary banking business, but it includes among its customers the
largest and most influential depositor and borrower in the Kingdom, to
wit, the British Government.
The Banking Department, which we will next discuss, stands quite by
itself. The first entry on the left-hand side of the balance sheet,
we can see, consists of the Bank's capital. Then follows the "rest"
or reserve fund, which is never allowed to fall below £3,000,000, the
accretions made thereto from time to time representing the profits of
the Bank, which are distributed among the stockholders in the shape of
dividend after the close of each half-year on the 5th April and the 5th
October.
The third entry on the statement, Public Deposits, is made up of the
various Government balances; and Other Deposits, which form by far
the largest debit in the balance sheet, comprise current account and
bankers' balances, the latter largely predominating. Since 1877 the
Bank has not published the sum standing to the credit of the London
bankers in its books; and as this deposit represents the reserve upon
which the bankers might have to draw in the event of a panic, it seems
an error of judgment not to give publicity to the figures, even if they
do show how largely the Bank of England is dependent upon the other
banks for its own working resources.
Public or Government Deposits and Other Deposits stand in a very
peculiar relation to each other, and, before discussing the October
return, it is perhaps desirable to illustrate this relation. The fiscal
year ends on the 5th April; consequently, the Government is busily
engaged in collecting the revenue during January, February, and March.
"Other Deposits" are often referred to as the market fund of cash, and
as those persons who pay their taxes draw cheques upon their bankers,
it follows that during these months huge sums are transferred from the
bankers' balances (Other Deposits) to the credit of Public Deposits,
which are consequently swollen appreciably.
Bankers' balances being reduced, the banks have therefore less to
lend; and if the demand for loanable capital is brisk at the time,
borrowers are driven to the Bank of England, which sometimes has to
raise its rate of discount in order to protect its reserve. Payment of
instalments upon Government loans and large issues of Treasury bills
produce a like effect.
On the 5th October (four days after the date of the return under
discussion) a quarterly instalment on the National Debt is due. Then
credit flows from Government Deposits back to Other Deposits. The banks
can lend freely again, and the Bank of England, in order to attract
borrowers, may even have to lower its rates. Undoubtedly, this is a
somewhat artificial state of affairs, because money at times is made
either cheap or dear, not solely as the result of demand and supply,
but partly according to the personality of the holders of the loanable
capital when the demand arises.
A glance at the return shows us that there is a balance of over
£10,000,000 against Government Deposits. This implies that the Bank
has control of the money market, that many of the bill brokers,
finding Lombard Street empty, have been compelled to borrow from the
Bank, which puts on the screw as demands upon its resources increase.
Further, rates are not likely to be easier until money is released by
the Government. Were the banks to keep their own reserves, and did the
Government deposit with three or four of the strongest of them, then
this constantly recurring tightness would not occur; but under our one
reserve system it is unavoidable. However, it by no means follows
that the average rate of discount would be lower under such a system.
Indeed, the probability is that it would be much higher, because the
banks would be compelled to keep larger reserves, and, consequently,
would have less to lend.
The last amount on the liability side of the statement is £188,590,
which is owing by the Bank on bills in circulation. Shortly after the
passing of the Act, and before the joint stock banks had accumulated
their vast deposits, the Bank of England issued a much larger volume
of these post bills; but since the country banks have been able to
draw upon their London agents and head offices in London, the Bank's
bills in circulation have gradually dropped from well over £1,000,000
to their present figures. The last three entries, when added together,
give us the amount of the Bank's indebtedness to the Government and
to the public; and the aggregate, £71,279,825, represents the total
liabilities of the Banking Department. But a company, if it be solvent,
must possess assets for a like sum, and these we find on the right hand
or credit side of the statement.
Nearly £16,000,000 are invested in Government securities; and though
any advances made to the Government by the Bank on deficiency bills
are included therewith, the description is correct, as a loan to the
British Government is as safe as Consols. Just before the dividends on
the funds fall due the balance in the Exchequer is often insufficient
to meet requirements, and it is then that money is borrowed from the
Bank of England on deficiency bills. Of course the Bank also advances
to the Government for other purposes, and the extent of these loans may
be seen in the statement issued by the Chancellor of the Exchequer each
week.
The next entry on the Assets side, "Other Securities," is extremely
misleading, or, at least, it embraces such a wide variety of assets as
to make the entry practically useless to all who wish to ascertain the
real position of the Bank. Included therein are (1) All the investments
of the Bank other than Government securities; (2) Loans to customers
and to the Stock Exchange, and bills of exchange discounted for
customers and for the bill brokers; (3) The book value of its various
premises, unless, of course, its head office and branches have been
paid for out of the profits of previous years, on which subject the
return does not enlighten us.
The balance sheets of some of the minor joint stock banks are
disgracefully compiled, but, with respect to this one entry, the Bank
of England return runs them very close, and it seems a pity that so
powerful a corporation does not set a better example. The Bank, because
it holds the bankers' reserves and keeps the Government accounts, is
often able to corner the outside market; therefore the least it can do
is to issue a plain statement, which will enable the public to see the
exact situation created by the unique position it occupies.
The return is badly worded, and essential information is certainly
withheld, while distinctness is not by any means one of its good
points, for nobody, unless he studied the statement with the greatest
care, could possibly divine the meaning of some of its quaint,
old-world phraseology. But, as we all know, "great men and great things
are never in a 'urry"; and the Bank of England, which is great in the
best sense of the word, like the Government whose account it keeps,
has never been known to anticipate a new development. A pedigree
person always swears by the old. But the time has surely arrived when
public opinion should compel the directors to issue a fuller and less
ambiguous weekly statement. The present form was no doubt a model of
lucidity in 1844; but it is woefully behind the times in 1902.
The last two entries on the Assets side form the Bank's reserve
of legal tender. Strictly speaking, a bank's cash reserve is that
sum which it has set aside to meet possible demands of an abnormal
character, and as the Bank of England's till-money is included in the
two entries in question, the total, £23,616,229, cannot be considered a
true reserve, as a certain deduction has first to be made therefrom to
provide for the ordinary demands made upon its resources in the usual
course of business. Further, the Bank, because it is the bankers' bank,
is peculiarly exposed to large drains of specie and notes. It follows,
therefore, that to ascertain its true reserve, a very large amount
would have to be deducted from the sum in question. A true reserve
is a sum set apart for a particular purpose, of which no portion is
used in the business it is intended to guarantee. It is a fund apart.
Consequently, a banker's real reserve is obtained by deducting from
his legal tender in hand the sum he requires for the conduct of his
business. The Bank of England, however, needs more till-money than an
ordinary banking institution.
Glancing at the liability side of the statement, we see that the first
two entries represent working capital. In other words, £18,369,736 is
a fixed sum, against which it is not necessary to hold one penny in
reserve, because no withdrawals can be made therefrom during a time of
bad credit. Such an immense amount of working capital makes the Bank
of England more independent of its depositors than is the ordinary
joint stock bank, and, therefore, its strength as a banking company is
increased appreciably thereby, for the weakness of our banking system
is due entirely to a fear of possible sudden demands on the part of
depositors.
Still keeping on the same side, the last three entries give us the
Bank's liabilities to the Government and to the public; and as large
demands upon this sum of £52,910,089 may be made at any moment, a sum
of notes and coin is held in the Banking Department to meet them. This
sum, the Bank's so-called reserve, amounts, we know, to £23,616,229,
and we next have to ascertain the ratio per cent. it bears to the
liabilities in question. The following sum will supply the answer:
(£23,616,229 × 100) / (£52,910,089) = £44·6%
The Bank, then, on 1st October last, held £44·6 in notes and specie in
the Banking Department to meet each £100 it owed to its customers. Yet
we say "as safe as the Bank of England," when, as a matter of fact,
the Bank could not pay its debts on demand; and, paradoxical as it may
seem, so the Bank _is_ safe, because its credit is so good that no man
in England would ever dream of questioning its stability, for, if he
did, he would only be laughed at for his pains. Again, comparatively
speaking, the Bank of England is certainly safer than its rivals, and
when we consider, in so far as its customers are concerned, the huge
amount of its capital and reserve, it is evident that it is by far the
safest bank in the land for depositors, as the larger the capital of a
bank the greater is the guarantee of the customer against loss.
We have seen that the notes and coin in the Banking Department work out
at a ratio per cent. of 44·6 to deposits; but as notes are not legal
tender by the Bank of England, its creditors can refuse to accept them
in discharge of a debt. This £21,391,145 of notes might, however, have
been exchanged for gold with the Issue Department at any moment, so
that the Bank could have paid off 44·6 per cent. of its liabilities on
the day in question--a huge proportion.
It may be objected that, as a certain portion of its gold is held in
bars, which would have to be sent to the Mint for coinage, the Bank
could not discharge its debts quite so rapidly, and the contention
would be perfectly true. But, assuming this exchange were made,
£12,226,185 in gold would remain in the Issue Department to meet
£30,401,185 of notes in circulation. The Bank, of course, could not
then pay one half of its notes were they presented; but such a demand
is almost outside the bounds of probability. Still, it is one of those
extremely remote possibilities which no prudent Board of Directors can
afford to forget; and we may be quite sure that this fact has not been
overlooked by the Bank, which can always protect its gold by raising
its discount rate.
In the next chapter another view will be taken of the Bank of England's
weekly balance sheet.