The Banks and the Public.
We have seen that the history of the Bank of England may be divided
into two periods. From 1708 to 1826 the Bank enjoyed the monopoly of
joint stock banking in England. After 1826 it had to adapt itself
to a constantly changing environment. England, in fact, outgrew the
Bank, just as the financial world has outgrown London. The directors
of the Bank of England were City merchants, whose ideas usually run
in a particular groove. It is not, therefore, in the least remarkable
that they stuck to old customs and neglected new opportunities. The
directors of the London and Westminster Bank made the same mistake. So
did those of the Union Bank of London, the London Joint Stock Bank, and
one or two others, simply because their training was of the City: that
is to say, like the streets around the Bank, narrow.
To a very great extent the Bank of England is dependent upon the
bankers' balances, for, unless it held them, it would not be able to
finance the Government. If its directors had, however, thoroughly
understood the movement of 1826, the Bank would now be a much more
independent institution, and would be a power in every county in
England and Wales. In 1826 the Government expressly desired the
directors of the Bank to open country branches, and by 1830 it
possessed eleven offices in the large provincial towns. But the
innovation was not encouraged by those in authority, and to-day the
Bank of England possesses only nine country and two Metropolitan
branches. Unquestionably a golden opportunity was neglected, for, had
the directors decided to open in the large provincial towns, Bank stock
would probably be worth over five hundred at this moment.
At first the joint stock bank movement was neither popular nor
successful, but nobody questioned the credit of the Bank of England;
and if that institution had quickly met the wants of the country by
opening branches in the towns, it could have had the pick of the
provincial business, for everybody, including both commercial firms
and the leisured classes, would have been anxious to deal with a
bank which was absolutely above suspicion. And who would dream of
making a run upon the "Government" bank? The Bank would gradually have
accumulated vast deposits, which would have made it independent of
the "bankers' balances"; but the ground is now covered with banking
companies, and the Bank of England's opportunity is gone, never to
return. At present it is a great bank of discount. Had it farmed the
provinces in earnest, it would have become a great deposit bank,
deriving its power from its depositors and the Government account,
instead of from the Government and the bankers, as it now does. But
its directors were not trained bankers, and they failed to realise the
important part that branches or feeders were to play in the new system,
consequently, with the huge capital of the Bank, large dividends on its
stock are now out of the question.
Our present system is, after all, the result of chance as well as of
skill. It grew. Further it committed all the follies of youth and
inexperience. Then, again, at the beginning, it was as a house divided
against itself, and consequently upon more than one occasion it fell,
for a banking system can only be worked successfully when all the
strong members are pledged either to stand or to fall together. Indeed,
our system would be considerably strengthened if the great banks were
in closer touch with the Bank of England.
Some few years ago, when there was a somewhat bitter feeling between
Lombard Street and the Bank, it was often suggested that were each bank
to keep its own reserve of cash the rate of discount would be more
stable; but, in the event of such a change, the banks would undoubtedly
have to maintain increased reserves, and a greater proportion of their
resources would consequently be non-productive. As they would then
have less capital to lend, it also follows that, even if rates in the
open market did fluctuate less, the average rate of discount paid by
the public would be higher, because there would be less capital in the
London short loan money market to meet the demands of the bill brokers
and stockbrokers.
On the other hand, if the banks realised their investments in
proportion as they increased their reserves, and so maintained the same
amount of capital in the London short loan fund, their own profits
would decrease; and the bank proprietors are not philanthropists.
In the one case the public would suffer, and in the other the banks
themselves would lose, whilst in neither instance is the advantage
to be gained at all proportionate to the risk incurred by a sudden
disturbance of credit.
Our present system, with all its imperfections, has gradually grown
up around the Bank of England, and if Lombard Street were to decide
to keep its own reserve, the result would be confusion, and confusion
might be followed by panic--so great is the faith of the public in
the Old Lady, whose history entitles her to both consideration and
respect. The change might, or might not, result in a run upon Lombard
Street; but the Bank of England, whether or not the money market were
disorganised, would not lose the confidence of the nation, which is
convinced that the Bank cannot fail.
Lombard Street, we may rest assured, would not risk so drastic a
change. It may be urged that, were the banks to keep their own
reserves, the Bank could not finance the Government, which would then
have to borrow to a greater extent in the open market; and perhaps
such would be the case. But though the Bank of England is at present
largely dependent upon the "bankers' balances," and upon the power
derived from its position in the centre of the system, it must not be
assumed, even if the banks could agree among themselves as to the ratio
of cash each should hold, that the Bank would be compelled to bow to
their decision.
As a matter of fact, such a decision on the part of Lombard Street
would change the Bank of England from a discount bank into a deposit
bank--a metamorphosis which Lombard Street could not face with
equanimity. The Bank, whatever arrangements it may make with its own
customers, does not at present compete against Lombard Street for
deposits at interest; but were the bankers to withdraw their balances,
the Bank would be compelled to appeal to the public for deposits, and
who can doubt that it could not attract as much capital to its vaults
as it required? The Bank would only have to make its rate of interest
sufficiently attractive, and the public would rush to it with deposits.
Where would Lombard Street be then?
Unless the Bank rate be unusually high, the banks allow one-and-a-half
per cent. below it upon money left at interest in London. The country
deposit rate, which is somewhat higher, is affected to a certain
extent by competition in the provincial towns and cities. But the
Bank would not confine its efforts to London if its hand were forced.
It would offer high rates at its branches, and might even open fresh
offices. The bankers' deposit rates would then be forced upwards in
order to arrest the drain from themselves to the Bank of England. No;
Lombard Street cannot play fast and loose with the Old Lady; and,
if certain critics will reflect, they will see that the Bank has
less to fear from a change in our present system than have those who
occasionally threaten her. Her position, were the banks foolish enough
to withdraw their balances, is not quite so hopeless as it is sometimes
made to appear upon paper. Indeed, the better the understanding between
the Bank and Lombard Street, the safer is our "one reserve" system, and
consequently the less liable is the country to financial crises--for it
is only by the united action of all the great banks that the situation
can be saved in times of stress. This was clearly proved during the
Baring scare of 1890.
The "clearing" bankers from time to time fix the deposit rate for
London by the Bank rate, and though their country branches are not
bound by their decision--which is advertised in the newspapers directly
a change is made--the country deposit rate fluctuates with the Bank
rate, though, as a rule, it neither falls so low as the London rate
when capital is cheap, nor advances so far when it is dear. Further,
the rates charged for loans and advances should be regulated to a
certain extent by the Bank rate. However, that is a question which need
not be entered into here.
Should the bankers decide to keep their own reserves, it is evident
that the Bank of England's rate of discount would immediately cease
to be a representative rate, and that a powerful rival, with a great
history and a clean record, would at once begin to compete against the
bankers for both deposits and advances. Were the Bank of England, so
to speak, to decide to remain outside the system, Lombard Street could
not even fix a minimum deposit rate for London, because the Bank, if it
required capital, would bid against its rivals, and would soon obtain
all it needed. Instead of being more stable, rates in the open market
would move up and down with startling suddenness. Would-be borrowers,
puzzled by such irritating movements, would soon grow nervous, for
the prices of commodities would fluctuate too, and everybody would be
afraid to make large purchases. The closer one examines the question,
the more absurd appears the suggestion of a split between the Bank and
our great joint stock banking companies; and the only wonder is that
any person with the slightest sense of proportion can seriously advance
so dangerous a proposition, which that friend of our youth, "Euclid,"
would have at once pronounced "absurd."
Custom has placed its seal upon our banking system; and the person who
is rash enough to break that seal may discover that he has released
new forces, which, though theory plainly demonstrates that they will
act in a certain direction, are pretty sure to make their way through
an unsuspected flaw which offers less resistance. A system which has
been over two hundred years in the building cannot be changed in a
day--especially a system which, even if it be not understood, has
entered into the daily life of the people. It is because the system is
not understood that the change would be so dangerous--so irritating.
It would be asking the British public to think, to change its habits,
to suddenly adopt new ideas; and as that mysterious body has never
yet been educated up to thinking for itself, it would be found that it
would kick against a new system like the stubborn donkey it is. Here
is the real danger. The change, if the public would adapt itself to
it, might prove beneficial--but the public would not; and as even its
advantages over the present system are doubtful, where is the practical
banker who would suggest the move? His one aim is not to disturb the
money market, and for that reason alone he would hesitate to remove
the Bank of England from its position in the centre of the system; but
when we remember that the Bank, by accepting deposits, could probably
beat Lombard Street at its own game, the change in question need not be
discussed seriously.
There is one other phase in modern banking which, perhaps, calls for
notice, and that is the fierce competition for safe business taking
place between the banks themselves both in London and the provinces.
Most of our large towns and cities are overbanked. Consequently, the
public has a choice of many markets, as it were; and, quite naturally,
it tries to lend in the dearest and to borrow in the cheapest. It may
be asked: How much longer will this state of affairs exist? And the
answer is: Just so long as the banks decide that it shall; and not a
day longer!
The better the risks of banking are understood by the public the more
difficult will it be for a weak bank to attract custom; and as the
smaller banks, especially in the manufacturing centres, are unable to
obtain sufficient deposits to meet the demands for advances, it follows
that, when their loans grow out of all proportion to their resources,
they are compelled to amalgamate with a large institution possessing
numerous branches, and therefore in a position to collect huge sums of
loanable capital, and distribute it just where it is wanted.
For instance, a large bank collects very much more capital in certain
districts than it lends therein; but at branches situated in busy
manufacturing cities the demand for capital, especially when trade is
brisk, approximates much too closely to the sums collected at those
branches to be compatible with sound banking. However, the bank has
accumulated more than it requires in other towns, and is therefore
in a position to transfer the surplus to those places where demand
is strong, and, at the same time, to maintain a good ratio of liquid
assets to liabilities, whereas a local bank in a busy centre can often
only meet the requirements of its customers by advancing to a dangerous
extent.
The directors of such banking companies are beginning to realise this
danger; and fearful that one day they may be caught short of cash, the
smaller joint stock banks are gradually being absorbed by the greater
companies, whose numerous tentacles enable them to distribute their
capital evenly throughout their system, and to maintain fair cash
reserves against their liabilities.
As the small banks disappear, competitors are removed from the
market; and there is every probability that banking in this country
will by-and-by be in the hands of a few large and powerful banking
companies. The public could not resist the banks were they to unite
against it. Already the "clearing" banks have fixed the deposit rate
for London, and it is only one step farther to declare the minimum rate
at which they will advance--for what resistance can the public offer to
a combination with more than £910,000,000 in deposits alone behind it?
Were the banks to hold a conference, and to decide that competition
must be kept within bounds, the public would not have a voice in
the matter. The English banks, like those of Scotland, would, after
having come to some arrangement among themselves, meet from time to
time in order to fix the minimum rates of interest and commission, and
their customers would either have to pay those rates or else obtain
accommodation outside the confederation. Of course, all the banks would
have to close up their ranks before this arrangement would be possible,
and, at the moment of writing, it seems improbable that certain
companies, which make a business of competition, could be persuaded to
come inside. So long as the banks are divided the public will be able
to drive bargains with them, but, directly they fall into line, their
rule will begin, and the quicker the smaller companies disappear the
nearer the reign of the banks approaches.
Seeing that our banking system can only work smoothly so long as both
Lombard Street and Threadneedle Street work in harmony, it follows
that in time the link which connects the large banking companies will
become stronger, and the relations between them pleasanter, because, in
business as elsewhere, friendship is centred in the head rather than
in the heart. The banks must draw closer together, because, if they
do not, their system is unworkable; and, as they are now compelled
to adopt certain precautions in order to protect themselves against
panic on the part of their customers (who in that respect are their
enemies), it is only natural that they should take steps to put an end
to excessive competition, which weakens their position and prevents
their acting together at a moment when united action alone can restore
confidence in their ability to meet their liabilities.
We all know the stale apothegm: "Self-preservation is the first law of
nature." It is the religion of the world. We can see the law at work
among our friends, but, being polite, we refrain from comment--though
if we be wise, we reflect; for here is the great unpreached gospel
which governs the actions of men. Self-preservation clearly dictates
that the banks cannot afford to allow competition among themselves to
weaken the system upon which their safety depends; and, should the
danger become pronounced, they are certain to combine against the
public in order to at least agree to certain minimum rates below which
none will do business.
It may be said: You yourself were the first to point out that certain
customers are in a position to make terms with the bankers, and to
advise them to do so. That is true enough; and so long as the banks are
divided amongst themselves this is possible; but it by no means follows
that, because the customers can make certain bargains this year, they
will be able to make similar arrangements next, for the banks have
their remedy, and when the right time comes they will not neglect to
take it.
We have dissected that complex machine, which is called the Money
Market, and of which the Bank of England is the heart. As each unit is
dependent upon the strength of the whole, no bank should be allowed
to trade upon the credit of the rest, for obviously it cannot exist
outside the system during a time of stress unless it possess an
adequate reserve of cash. Therefore each unit ought to bear its fair
share of the burden when the sun is shining, and, if it refuse, it
should be made to take the consequences when the storm bursts.
The closer our banking system is examined the stronger becomes the
conviction that the interests of all the banks are identical, and
that, therefore, if banking is to be conducted in this country with
comparative safety, every bank should be compelled, either by the
law of the land or by public opinion, to keep a fair reserve in legal
tender against its liabilities. Further, the true interests of the
banks are the same as those of the public--for the good business man
is always a cautious man, and if he takes the trouble to study the
risks to which a banking business is exposed, he will hardly care to
place his money with a company unless it be well prepared to face those
storms to which its environment peculiarly exposes it.
Under our one reserve system the banks must either stand or fall
together during a crisis. The system, therefore, requires the support
of all; consequently, the duties or obligations of each bank should
be clearly defined, and this can only be done by an Act of Parliament
or by an understanding between the banks. The closer the banks draw
together the safer is our system of banking.