The Battle of the Banks.
But little has hitherto been said concerning the relations of the Bank
of England with its rivals in the money market, and in order to trace
the movement from its beginning we must return to 1826, in which year
joint stock banks could be established in England at a greater distance
than sixty-five miles from London. The Bank stoutly resisted this
innovation, but the Government, in consequence of the constant failures
of the country private bankers, passed the Act of 1826, and the thin
edge of the wedge once inserted, the Bank's monopoly in London soon
disappeared.
The London and Westminster, despite the determined opposition of the
Bank of England, opened business in London during 1834, and the Bank's
monopoly of banking was gone. All that then remained to it was the
exclusive privilege of issuing notes in and within sixty-five miles
of London, the only legal monopoly it still enjoys. Unable to keep the
joint stock banks out of London the Bank actively opposed them, as also
did the private bankers, who, while the Bank refused to open accounts
for the new companies in its books, declined to admit them into the
Clearing House, which was founded by the London bankers about 1775. The
irony of Fate! They are now a feeble minority in a house of their own
building. But history--both domestic and economic--can supply parallel
instances.
Although the new system was destined to drive out the old, the joint
stock banks made a bad start, and failures were at first so frequent
that the public began to share the opinion of the Bank and to look upon
them as anything but safe institutions. They were born in disaster, and
their policy did not provide an antidote to the old evils; but, like
the Bank of England itself, they were taught prudence by a series of
panics and upheavals which threatened to wipe them out of existence.
They were, in short, licked into shape, and that cautious prudent
policy which now distinguishes our great banking companies is the fruit
of a very bitter experience.
Towards the middle of the nineteenth century the manufactures of Great
Britain began to increase by leaps and bounds, and population, which
always augments rapidly when food is cheap and abundant, kept pace with
the country's unprecedented commercial activity. In 1801 the population
of London was less than one million. In 1837 it had increased to about
two millions; and at the present time Greater London contains over six
and a half millions.
It is quite evident that the Bank of England could not alone minister
to the increasing wants of London, and both in the Metropolis and in
the provinces its joint stock rivals rapidly accumulated credit. In
June, 1854, the new banks were admitted into the Clearing House, and
since that date they have carried all before them. They shared in
the almost magical increase in the volume of British trade, but they
neither created nor provided the incentive to that remarkable outburst
of national prosperity which was the result of Free Trade, and which
made this country the workshop of the world. Since then, however, the
world has filled up.
The population of the United States in 1870 was 38,500,000; in
1900, 75,500,000. In 1871 the population of the German Empire was
41,000,000. In 1901 it had increased to 56,000,000. During the same
period the population of the United Kingdom increased from 31,500,000
to 41,500,000. There are more people in the world to be fed, and as the
earth fills up the struggle for existence must surely become fiercer.
Noticing this, people naturally inquire whether, seeing the changed
environment, Free Trade is suitable to the times. Some years ago, when
trade was bad, the bimetallic controversy was raging, but since 1895
its advocates have been dumb, for the simple reason that people will
not listen to theorists when times are good. They are then too intent
upon making money. They think they may not get the chance again.
No doubt, when the depressed portion of the cycle came round
bimetallists would have been heard again. But in the place of
Bimetallism we now find Protection, and, in all truth, the question is
serious enough; for, when the present wave of prosperity dies out in
the States, there seems every probability that the huge American trusts
will endeavour to swamp our markets with their goods. Free traders make
quite a profession of faith of their commercial opinion. They declare
that they are free traders with the same fervour they might infuse
into the avowal that they were Protestants or Roman Catholics. But
modern Christianity is eminently adaptable to every fresh situation. Is
Free Trade?
The worse the times become, the louder, probably, will grow the
controversy between the free traders and the protectionists; and when
we remember that our workshops support our credit, and upon what an
amazingly small reserve of the precious metals that credit is based, it
is evident that the question ought to be approached with the greatest
caution; for a decision that emptied our workshops would ruin the
nation.
As the savings of the country increased, the joint stock banks
accumulated credit with astonishing rapidity, and the Bank of England,
slow to recognise the power of the new system, which was so admirably
suited to the changed environment, was compelled to receive its hated
rivals into the fold. The companies possessed no vaults for the storage
of the precious metals on a large scale, and they were therefore glad
to avail themselves of the facilities at the disposal of the Bank,
whose premises were much better protected than their own. And then,
again, as the Bank's notes were legal tender, the companies could send
them from the head offices to the branches cheaply, while they were a
convenient form in which to keep a certain proportion of their cash in
hand.
The evolution of the Bank of England, we can see, has not proceeded
smoothly; but it is remarkable that an institution, which owed its
pre-eminence entirely to monopoly, did not gradually begin to sink into
a second-rate banking company directly its exclusive privilege of joint
stock banking was abrogated and free trade in banking established in
England. So conservative was the Bank's policy that it seems little
short of marvellous that its joint stock rivals should have quietly
endured its studied insults. The new movement was then, however,
not only in its infancy, but was under a cloud as well, and through
the companies grouping themselves around the Bank they enabled that
institution to retain its position in the centre of the money market.
The power incident to that position has been fully explained in the
previous chapter.
The London private bankers, whose lack of enterprise can only be
attributed to the fact that they were imbued with those narrow City
traditions which make London the home of Conservatism, also quite
failed to grasp the situation, and allowed the new companies to expand
in every direction, confident that so sudden a change must end in
disaster, and, therefore, they were content to look on, to shake their
heads sadly at the unprofessional conduct of those new banks, and to
soothe their feelings by ever and anon declaring, with due solemnity,
that joint stock banking would ruin the country.
Certainly, the new companies did not manage well at first, and a few
of them were wiped out in consequence; but, in spite of mistakes, they
progressed, because their system was adaptable to the requirements of
a growing England. In these times it is the fashion to apotheosise
man--to picture him as a kind of demi-god; therefore, it is asserted
that man makes his mark on the times. But it is surely more rational
and logical to assume that the times gradually mould the particular
cast of brain that is adaptable to a constantly changing environment,
and that the man who chances to possess that cast of brain goes with
the tide--which takes him a long way. At any rate, such was the case
with the joint stock banks, which owe their success entirely to the
adaptability of their system to a changing market. Moreover, that
market is still changing.
The old-fashioned London bankers found, to their great surprise, that
they had not read the signs of the times aright; but the orthodox
seldom play the _rôle_ of a prophet successfully, because they have
lived too long in one groove, and so are apt to forget that England is
not the world, which is steadily increasing in population. Instead of
failing, the joint stock banks merely occupied the ground, and, by so
doing, confined the business of the London private banker to the one
street in which he was established and in which his father lived before
him. They had no respect for age--those new companies!
The joint stock banks spread their tentacles north, south, east, and
west of his sacred City, thereby effectually preventing his expansion,
and "concentrating" his energies in the one street aforesaid, just
as the nations of Europe have "concentrated" the kingdom of the
unspeakable Turk. Great movements seldom originate within London, which
is strikingly lacking in originality, and that new blood from the
provinces which flows in an ever-increasing stream towards the great
City, and alone arrests decay, also seems to bring with it the new
ideas.
The London private bankers waited in vain for the expected
disappearance of their rivals, who, despite severe panics and crises,
continued to add rapidly to their resources, until, surrounded by rival
branches, profitable expansion became difficult for the private banker,
whose business is now so localised as to render effective competition
with the companies impossible. He cannot make rapid progress because he
does not possess the branches through which alone the necessary credit
can flow to the central office, and therefore the extinction of private
banking in its present form seems only a question of time, for the
wealthy are certain to deal with those banks whose vast accumulations
are at least the outward and visible sign of the confidence the public
has in their stability.
But the joint stock banks did not confine their energies to London. The
London and South Western Bank, which was established in 1862, began a
vigorous crusade in the London suburbs, with the happiest results to
its shareholders; and the London and Provincial Bank, which was formed
two years later--in 1864--established small suburban branches in every
direction, with equally satisfactory returns for its enterprise; while
the London and County, larger and, perhaps, more cautious than either,
also recognised the advantages of suburban expansion. A branch bank
belonging to one of these three banks is now to be found in almost
every London suburb.
The London and Westminster Bank (established in 1834) was the first
in the field, but the atmosphere of the City is not favourable to
progress, and the Westminster, though an exceptionally strong and
well-managed bank, undoubtedly failed to move with the times. So,
too, did the London Joint Stock Bank and the Union Bank of London,
which has recently somewhat altered its name. It was not until the
provincial joint stock banks invaded London that these companies began
to realise the opportunity they had missed; Lloyd's and Parr's Banks
however, evidently taking in the situation, adopted the new system, and
by skilful amalgamations rapidly forced themselves to the front. The
country banks, in short, practically took possession of Lombard Street.
Why the Bank of England did not share the same fate as the private
bankers has already been demonstrated. It certainly was not one whit
better informed than they; and it sympathised with them in their
distrust of the intruders, whose speedy downfall it quite expected to
witness. That the joint stock banks must come to grief was the opinion
of the majority of City men in 1834, and the then directors of the Bank
were City men imbued with those tenets which found credence within the
sacred square mile.
The bank which keeps the Government account must always be a great
power in the land. Had that account been removed in 1844, together with
the last vestige of monopoly, the Bank--the directors of which shared
to the full in that tenacity and narrow-mindedness characteristic of
wealthy City merchants, whose businesses, and therefore whose ideas,
flow in the narrowest of grooves--must have ceased to be a progressive
institution. But no Government has ever hinted at deserting the Bank,
whose record, though bristling with mistakes, is one of unbroken
integrity; and the public has always looked upon its management as
above suspicion. Especially was this the case during the first few
decades of the new movement.
The Bank of England had public opinion behind it; and the joint stock
banks, concerning whose stability opinion was divided, were not then
strong enough to keep their own reserves and to defy the Bank; but when
their system had stood the test of time, the Bank opened its doors to
them, and the companies meekly bowed to the inevitable--for they were
not the power in Lombard Street in those days that they are now.
In the first instance, we found the private bankers grouped around
the Bank; and now we see our huge joint stock banking companies in a
similar relation to her. They kept their reserves with her when their
system was in its infancy, when the Bank of England, as a result of
monopoly, was the greatest credit institution in the country. As the
companies spread their tentacles throughout the land, accumulating
credit at an extremely rapid pace, those reserves grew proportionately,
until, to-day, we find the Bank of England in the centre of a system
which owes over £910,000,000 in _cash_ to the public.
Our modern credit system has developed around the Bank, which, as
the holder of the bankers' reserves, now occupies an almost national
position. That position is, undoubtedly, the indirect result of a
monopoly which, prior to 1826, enabled the Bank of England to build
up a huge business unopposed by others of its kind. In other words,
it had a start of 132 years. The greater, consequently, attracted the
smaller. But united Lombard Street is now a much greater power than
Threadneedle Street--therefore it is always wise to remember that the
Bank of England can only retain its position in the centre of the money
market so long as Lombard Street is agreed that it shall.
The banks are not legally obliged to keep their reserves with the Bank
of England. Were they so inclined, they could withdraw them to-morrow
and accumulate stores of the precious metals of their own. It follows,
therefore, that the best of feeling should exist between the "Old Lady"
and Lombard Street. Obviously she is not now in a position to dictate
her own terms, as her greatest power is derived from the "bankers'
balances" on the left-hand side of her balance sheet.
Perhaps it is now easier to understand that the Bank of England, when
it from time to time states the lowest rate at which it will discount
bills for outsiders, occupies the position of a most important lender,
whose minimum rate, though not always the market rate, is seldom either
greatly above or below those of its rivals.