The Store in the Issue Department.
We next have to consider the amount of gold coin and bullion in the
Issue Department--to wit, £33,617,330, and we must remember that this
accumulation is the national store, that the cash reserves of all the
banks in England, Scotland, and Ireland are dependent thereupon, and
that, consequently, the solvency of the nation is decided thereby.
The indebtedness of the English, Scotch, and Irish Banks to the public
at December, 1901, as shown by their balance sheets, upon current
accounts, deposit receipts, and notes in circulation, amounted to
nearly £910,000,000. The liabilities of the Bank of England and of
those private bankers who publish balance sheets are included in this
huge total.
This £910,000,000 may be called the "floating capital" of the
country. It is deposited or left with the banks, who invest a certain
proportion of it in securities, in short loans to the bill brokers
and stockbrokers, in making advances and loans to their customers,
and in discounting bills for them; and, as the said millions are left
at either call or short notice, the banks also have to maintain a
sufficient supply of legal tender to meet all probable demands upon
this immense debt. It is with this "floating capital" that the present
chapter is principally concerned.
Stored in their strong rooms the banks keep sufficient legal tender
(Bank of England notes and specie) with which to conduct their
business. The sum thus held may be called their "till money"; and
it probably would not exceed five per cent. of the £910,000,000 in
question--viz.: £45,500,000. A large part of this till money is,
however, held in Bank of England notes, which are warrants for gold
upon the store in the Issue Department, but as creditors cannot refuse
the notes they are quite as valuable to a banker as gold. All a banker
has to consider is whether he has a sufficient supply of legal tender
to discharge his public indebtedness; and if he have, he need take no
thought for the morrow.
Deducting £45,500,000 from £910,000,000, we get £864,500,000. Though
this is an accumulation of credit in the books of the banks rather
than of cash, their customers can demand the equivalent from them in
legal tender; yet we see that, were the banks drained of £45,500,000,
they would then be entirely dependent upon their reserves at the Bank
of England.
The reserves are included in Other Deposits, £42,695,526; and seeing
the magnitude of the amount it seems a pity that the Bank of England
does not tell us each week what portion of this total belongs to the
other banks. Further, the Bank of England employs these balances in
its own business; and, though it generally maintains a very large
ratio per cent. of reserve to liabilities, the fact remains that a
certain proportion of the cash reserves of our banks is lent out to
the public--a somewhat startling position at first sight. The banks
accumulate a reserve against those dangers from which their business
is never free, and the Bank of England advances some of it to its own
customers! Apparently, what could be more absurd? But in finance things
are so often not what they seem.
We now come to the store of gold coin and bullion in the Issue
Department--£33,617,330. A certain proportion of this must be retained
in order to secure the convertibility of the notes of the Bank, and the
remainder may perhaps be called the national store or accumulation.
The banks of the United Kingdom are indebted, roughly speaking, to
the public to the extent of £910,000,000. But we have seen that, say,
£45,500,000 of this sum is secured by legal tender in hand, so the
unsecured portion amounts to £864,500,000. Our position, then, stands
as under:--
Indebtedness of the Banks of
the United Kingdom to the
public £910,000,000
_Less_ covered by legal tender
(say) 45,500,000
------------
£864,500,000
Gold and bullion at the Bank
of England £35,800,000
As a matter of fact, we are looking on the bright side of the picture,
for seeing that a large amount in Bank notes would be held among the
£45,500,000 deducted, it follows that the store in the Issue Department
might be appreciably reduced were a considerable number of these notes
presented for payment; and then again, the indebtedness of those
private bankers who do not publish balance sheets has been omitted.
Suppose we say that the banks hold £35,500,000 in specie. This,
added to the store at the Bank, gives us £71,300,000. Then our banks
owe £910,000,000; but there is only £71,000,000 of specie in their
possession with which to pay their huge debt. On the other hand, many
of the banks do not hold nearly five per cent. of their liabilities
to the public in legal tender on their premises; and, were the truth
known, it is more than probable that in some instances three-and-a-half
to four-and-a-half per cent. would be nearer the mark.
England, after all, is only a gigantic workshop, and so long as her
shops are busy there is no danger. But have those people who live on
incomes invested solely in British securities ever reflected that, were
there no work for her shops, this system of credit would collapse like
a castle of cards, when their incomes would be gone? Our solvency as
a nation depends absolutely upon the skill and ability displayed by
British manufacturers, and upon the muscles and intelligence of their
workmen. Given a high standard of efficiency and adaptability on the
part of our producers, then trade flows to this country, and by trade
alone can we support our credit and pay our debts. Small wonder, then,
that thoughtful people are becoming alarmed at the apotheosis of Games
in this country, and at the large number of idlers who do not take a
part in production, but are dependent upon the interest received from
investments, which can only be productive so long as our commerce is
flourishing.
The capital of this country has been computed by a competent authority
at about £10,500,000,000, but doubtless these figures are very wide of
the mark. Still, the amount of fixed capital invested in the country
must be immense. By "fixed" capital, as distinguished from the floating
or loanable capital deposited with the banks and kindred institutions,
those investments of a more permanent character are implied. A
depositor can demand his money back from his banker, but bank shares
he would have to sell on the Stock Exchange--therefore the one is
"floating" and the other "fixed" capital. It is the same with Consols,
railway shares, and with the shares of all companies in which there is
a market. When there is not a market, then the capital is fixed indeed;
and there would not even be a market for Consols were the Bank of
England drained of its gold. Moreover, during normal times the demand
for loanable capital at the banks will help to determine the price
an investor will receive should he desire to sell any of his fixed
investments.
It consequently amounts to this: The fixed capital of the country
cannot be converted or sold unless the banks maintain large cash
reserves; so we may truthfully assert that about £10,000,000,000 of
capital is erected on a basis of about £71,000,000 of cash. This cash,
in its turn, can only be kept in the country while our workshops are
busy; therefore it at once becomes apparent that the national aim
should be to increase our trade, for the yield, and consequently the
value, of British securities is bound to either increase or diminish
in proportion as the trade of the country is either flourishing or the
reverse. Even the Government can only meet the interest on Consols
while the people are in a position to pay their taxes.
Such a statement may come as a shock to those persons who are
accustomed to draw their dividends each half-year or year, and to
imagine that unless the world came to an end these dividends could
not cease; but they would cease were this country to fall hopelessly
behind in the race for trade. This is not the old Socialist maxim that
"Labour supports the world" put into a new print dress. It is evident
that the fixed capital of this country, as represented by stocks and
shares, would be mere waste paper unless the banks held sufficient
gold to ensure a market for them: and as this gold cannot be kept in
the country unless our workshops are able to compete successfully with
those of other nations, it follows that the position of those persons
who draw incomes from British securities is entirely dependent upon
the brains and abilities of the men who direct our industries. How
important, then, that the very best talent the nation possesses should
be used in trade; and what folly it is on the part of those so-called
"superior" persons to sneer at the trader--at him who, without doubt,
enables them to draw their incomes regularly!
There was a time when capital, broadly speaking, could only be obtained
in London; but since then population has increased all the world over,
and as capital is only the savings of labour, it naturally follows that
it can now be obtained abroad, and that London is less necessary to the
foreign borrower; and, as the world fills up, it must surely become
less and less necessary. Yet our gilded youth affects to despise trade.
This is somewhat absurd, when it is trade that enables him to live in
idleness; and British pride, unless it recognises this fact, may have a
bad fall.
The banks of the United Kingdom, roughly speaking, are indebted to the
public to the extent of £910,000,000. They only keep till-money in
their safes, and are dependent upon the store in the Issue Department
of the Bank of England for their reserves of cash. In other words, this
£33,000,000 of specie is the foundation stone upon which £910,000,000
of credit rests. It has already been shown in what relation the fixed
capital of the country stands to this fund.
The smaller of the provincial banking companies keep their cash
reserves with their London agents, who also place their reserves with
the Bank of England. Consequently, as the agents include the reserves
of these banks with their own deposits, they, like the Bank of England
in relation to the bankers' balances, lend out a percentage of the
reserves of the smaller banks. It follows, therefore, that the bankers'
balances in the hands of the Bank are smaller than would be the case
if each bank kept its reserve with it. The London agents are dependent
upon the Bank, and the smaller banks upon the agents.
As the store in the Issue Department is the only large collection of
specie and bullion in the three kingdoms, and as the amount therein
is always extremely small when compared with the huge liabilities
which, under certain conditions, it might be asked to liquidate, any
considerable depletion of this store makes the owners of large bank
balances nervous; for if the Bank of England cannot pay the bankers,
then their bankers will not be able to pay them.
Again, the liabilities of the banks are so immense in comparison
with their reserves that a very small diminution of the fund in the
Issue Department makes owners of capital anxious, whilst a serious
drain would probably create a panic; and unless means were devised to
allay the panic, it might develop into a revolution; for we are very
commercial in these days, and are beginning to realise that mere glory
may be bought too dearly. Commercialism, however, is not exactly a
fascinating virtue.
We are constantly being told that the money market is an extremely
sensitive organisation. And no wonder! The banks owe hundreds of
millions on demand and short notice. Considerably over eighty per cent.
of these millions is invested and lent, and as the banks' reserves of
gold are small, every sudden demand for large supplies of the precious
metals is liable to disorganise the market; and the Bank, which holds
the final reserve, is therefore compelled to raise its rate of discount
in order to protect the bullion in its Issue Department.
But for this very reason capital may generally be borrowed more cheaply
in London than elsewhere; and though cash is perhaps dangerously
economised, credit is proportionately the more easily obtainable, and
the price of a loan is cheaper than would be the case were the banks to
maintain a higher ratio of cash to liabilities. They would then have
less to lend, and in times when trade was brisk demand would drive up
the rate of interest to higher figures than those which prevail under
our present system, and reduce the profits of borrowers. The average
rate, too, would be greater.
The dangers of our system are very apparent, but so are its advantages;
and though we consider it pays us to take the risks, it is evident that
we cannot afford to neglect the necessary precautions.