The Issue and Banking Departments Combined.
In the preceding chapter the Issue and Banking Departments of the Bank
of England have been discussed separately. Strictly speaking they can,
of course, only be so treated, as each division stands alone; yet the
notes in the Banking Department undoubtedly form a connecting link
between the two divisions, seeing that they make the one department
by far the largest single creditor of the other. Therefore it is
intended in this chapter to discuss the return as a whole, to place
the totals in the Issue Department back in the Banking Department, and
to ascertain the Bank's exact state of preparedness to meet all its
liabilities. The following table will enable us to do this:
ISSUE AND BANKING DEPARTMENTS.
£ | £
Capital 14,553,000 |Specie and Bullion 35,842,414
Rest or Reserve Fund 3,816,736 |Government Debt 11,015,100
Notes in Circulation 30,401,185 |Other Securities 7,159,900
Public Deposits 10,025,973 |Government Securities 15,826,080
Other Deposits 42,695,526 |Loans, Bills Discounted,
Seven-Day Bills 188,590 | Securities, etc. 31,837,516
----------- | -----------
£101,681,010 | £101,681,010
=========== | ===========
_1st October, 1902._
============+============+=======+============+
| Ratio % of | | |
Ratio % of |Investments |Total |Ratio % of |
Specie and | and |Liquid |Capital to |
Bullion to |Government |Assets.|Liabilities.|
Liabilities.| Debt to | | |
|Liabilities.| | |
------------+------------+-------+------------+
| | | |
43·02 | 40·81 | 83·83 | 17·46 |
| | | |
============+============+=======+============+
============+========+=============+
| | Ratio % of |
Ratio % of | Total | Loans, |
Rest to |Working |Bills, etc., |
Liabilities.|Capital.| to |
| |Liabilities. |
| | |
------------+--------+-------------+
| | |
4·58 | 22·04 | 38·21 |
| | |
============+========+=============+
It may be urged that as the gold and securities in the Issue Department
are mortgaged to the holders of Bank of England notes, they cannot
be treated as ordinary assets, and that is true enough; but when
we remember that upon the day in question the Banking Department
could have exchanged notes to the value of £21,000,000 for gold, the
objection loses much of its force.
However, assuming the Banking Department made the exchange, then specie
to the extent of over £12,000,000 and the second and third items on
the right-hand side of the balance sheet would be mortgaged to the
holders of the notes in circulation, and the Bank, were it in need,
could legally neither sell the securities nor apply the £12,000,000 in
question to the liquidation of any other debt.
But, practically, there is small likelihood of the Bank of England
being drained of specie by its notes, which have always been accepted
without demur, even during the most troublous years of its history;
and, while remembering that the notes in circulation are secured in
the manner aforesaid, we may safely consider the Bank's state of
preparedness to meet its total public indebtedness from the point of
view that its liquid assets would be more than sufficient to discharge
all probable demands made by both holders of notes and depositors.
On the 1st October last the Bank owed on its Notes in Circulation,
Public and Other Deposits, and Bills, the huge sum of £83,311,274,
which we will call its "Liabilities to the Public." Against this it
held £35,842,414 in specie and bullion, which, a glance at the table
shows, works out at a ratio per cent. of 43·02. The Bank had, then,
£43·02 of the precious metals in hand to meet each £100 it owed to its
customers. There is not another bank in the kingdom able to publish a
balance sheet showing such a splendid proportion of cash in hand to
liabilities--but we must also remember that there is not another bank
in the country whose responsibilities are so great and so multifarious.
In the previous chapter it was shown that the Banking Department
possessed £44·6 in notes and coin to meet each £100 of the public
liabilities included therein, and, moreover, this would be the ratio
given by the critics; but we now see that, when the two departments
are united, the ratio only works out at £43·02. Strictly speaking,
the larger ratio is correct; yet the smaller gives a much truer idea
of the Bank's ability to pay off its creditors in cash on demand.
Further, as the Bank cannot compel its customers to accept its own
notes in discharge of a debt, the ratio £43·02 certainly gives one a
more accurate impression of the Bank's position in relation to all its
creditors.
The Government Debt, Other Securities, and Government Securities amount
to £34,001,080, which works out at a ratio per cent. to liabilities of
£40·81, making the ratio of total liquid assets £83·83. A debt owing
by the British Government is rightly included with the liquid assets
of the Bank, for when the credit of the Government ebbs our banking
companies, which hold huge amounts of Consols, will no longer be
solvent institutions; but no reasonable man imagines that an edifice
which has been centuries in building, and which is still far from being
either complete or perfect, will "go under" in a day, though all know
that it cannot last for ever in its present form. We, however, only
live sixty years or so, and therefore each generation of business men
considers what will last out its time, and troubles itself but little
about what the state of commerce will be fifty years later, as though
dimly conscious that, in the end, man will have to go back to the land.
The Bank, we see, possesses £83·83 in cash and the very best securities
to meet each £100 it owes to the public. Such figures cannot fail to
impress one, for they prove indisputably that, on its merits, the
Bank of England is by far the strongest banking company in the three
kingdoms. They should not, however, blind our eyes to the fact that the
Bank is a credit institution, and that were its creditors to go for
gold in a body it would inevitably "smash," for, as we can see from the
figures in the first column of the table on page 49, it never keeps a
supply of the precious metals equal to its liabilities on demand. But,
for all that, the Bank is splendidly prepared to meet every probable
demand; and one cannot ask more of its directors.
It would be easy enough to write an indictment against the Bank,
proving that its policy is all wrong, that it could not discharge its
obligations under certain given conditions, and that, therefore, it is
a menace to the solvency of the country. But such deductions, which
have already been made by more than one critic, are crass nonsense,
and only testify to the critics' ignorance of the subject. We know
that the Bank's system is not by any means a perfect one, but, surely,
the person who advertises an infallible financial system is either a
great rogue or a great simpleton; for why is he not himself rich beyond
desire?
The Bank of England, it is admitted, cannot meet its liabilities on
demand, and most people would think that its directors had gone mad if
they prepared to, while the stockholders would certainly threaten to
turn out those directors who proposed a policy which would reduce the
value of their stock considerably below parity.
The question seems to be: Is the Bank of England sufficiently prepared
to meet all likely withdrawals of gold by its customers and by the
holders of its notes?
The two columns, which give us the amount of the Bank's liquid assets,
tell us plainly enough that the Bank of England was well prepared on
the 1st October. We can see that it held a good supply of coin and
bullion, and, secondly, a valuable list of convertible securities; but
as the securities are only convertible so long as the Bank, which holds
the reserves of cash of all the banks in the United Kingdom, is in a
position to meet all probable demands upon its store of gold, it is
evident that the first ratio is of paramount importance.
The Bank of England, which possesses the only large store of the
precious metals in this country, has to meet both the home and foreign
demands for gold. It follows, therefore, that its ratio per cent.
of Reserve to Liabilities is eagerly scrutinised each week on the
publication of the return, because it indicates whether or not loanable
capital is likely to be dear or cheap. The means at its disposal for
maintaining an adequate supply in reserve will be discussed later on.
Should the said ratio fall below, say, forty per cent., then it
is prudent to inquire the reason; and should it recede to, say,
thirty-three or thirty-four per cent., then there may be cause even for
apprehension; but so long as the Bank of England keeps a fair ratio
of reserve to its public indebtedness, there is no cause for alarm:
though a bank which holds the national reserve must always be extremely
cautious, even when credit is good and there is not a breath of
suspicion in the air, for the proverbial little cloud gathers strength
with incredible speed when once it does appear.
Undoubtedly our banking system is exposed to the gravest dangers, but
as it brings us cheap money we accept the risks; and unless a critic
can produce a workable scheme which will eliminate the hazard and
retain the blessing of cheap loanable capital, he had better by far
confine his attention to those safeguards that reduce the risks of our
present system, which _is_ workable, to a minimum. Provided the Bank of
England keeps an adequate reserve in the Banking Department, we have at
least the satisfaction of knowing that all that can reasonably be done
to ensure safety has been done, and that those risks, which a credit
bank cannot avoid under any system, have at least been insured against
under our own.
No doubt the Bank's large working capital of over £17,500,000 has
contributed very considerably to its ascendancy, and helped it,
especially since 1844, to more than hold its own against all comers;
for despite the fact that we occasionally hear sneers--no doubt
prompted by jealousy--at its so-styled omnipotence, an examination of
its return soon convinces the sceptical that it is still the largest
and safest bank in England. Further, it has occupied this enviable
position for over two hundred years.
The ratio per cent. of Advances (loans, bills discounted, securities,
&c.) to Liabilities is only 38·21--a proportion, especially when it
is remembered that an unknown amount of investments is included
therewith, which clearly informs us that the Bank is fully alive to the
responsibilities of its unique position, and that its directors, while
they are no doubt anxious to make as much net profit as possible for
the proprietors, have not lost sight of the fact that they also have
duties to perform towards the public.
But it must not be thought that the directors discharge their duties
towards the public so well from philanthropic motives. Even from a
selfish standpoint it pays them to keep the Bank thoroughly prepared,
as, should they allow the reserve to sink too low, an anxious period
would be certain to follow, when additional profits, made by trading
with too large a proportion of the deposits, would speedily be swept
away by the expense incurred by borrowing back at high rates in order
to strengthen the cash in hand. For a little while the interest upon
the increased loans would swell the profits, but directly the foreign
exchanges moved against this country, and gold began to flow abroad,
even an inexperienced director would realise the folly of risking a
panic for the sake of seeing the dividends rise, and he would not make
such a doubtful experiment a second time.
Perhaps, before bringing this chapter to a close, it may be interesting
to compare the total indebtedness of the Bank of England to the public
and its stockholders with that of Lloyds and the National Provincial
Bank of England to their customers and shareholders. The following
table will supply the figures:--
========================================================
Name of Bank. | Total Liabilities.
------------------------------------+-------------------
| £
Bank of England | 101,681,010
Lloyds | 58,411,041[A]
National Provincial Bank of England | 56,444,126[A]
------------------------------------+-------------------
[Footnote A: Balance Sheet dated 31st December, 1901.]
========================================================
We can now see how much larger are the working resources of the Bank
of England than those of either of the other above-mentioned banking
institutions, though, as the joint stock banks keep their reserves of
cash with the Bank of England, the comparison loses a little of its
force. Still, the preponderance of the Bank of England is most marked,
a fact one is not, perhaps, so apt to realise when the Issue and
Banking Departments are considered apart.