[Sidenote: Foundation of the Bank of England.]
_United Kingdom_.--English banking may be traced back to the dealings in
money carried on by the goldsmiths of London and thus certainly to the 16th
century; but it has been so greatly influenced by the working of the Bank
of England and by the acts of parliament connected with that institution,
that a reference to this bank's foundation and development must precede any
attempt at a detailed history of banking in the United Kingdom. The Bank of
England was founded in 1694.[2] As in the case of some of the earlier
continental banks, a loan to the government was the origin of its
establishment. The loan, which was L1,200,000, was subscribed in little
more than ten days, between Thursday, 21st June, and noon of Monday, 2nd
July 1694. On Tuesday, 10th July, the subscribers appointed Sir John
Houblon the governor, and Michael Godfrey (who was killed during the siege
of Namur on the 17th of July 1695) deputy-governor. Michael Godfrey wrote a
pamphlet explaining the purposes for which the bank was established and the
use it would be to the country. The pamphlet supplies some curious
illustrations of the dangers which some persons had imagined might arise
from the establishment of the bank and its connexion with William III.,
deprecating the fear "lest it should hereafter joyn with the prince to make
him absolute and so render parliaments useless."
The governor and the deputy-governor, having thus been appointed, the first
twenty-four directors were elected on Wednesday, 11th July 1694. Two of
them were brothers of the governor, Sir John Houblon. They were descended
from James Houblon, a Flemish refugee who had escaped from the persecution
of Alva. All the directors were men of high mercantile standing. The
business of the bank was first carried on in the Mercers' chapel. It
continued there till the 28th of September, when they moved to Grocers'
Hall. They were tenants of the Grocers' Hall till 1732. The first stone of
the building now occupied by the bank was laid on the 1st of August 1732.
The bank has remained on the same site ever since. The structure occupied
the space previously covered by the house and gardens of Sir John Houblon,
the first governor, which had been bought for the purpose. Between 1764 and
1788 the wings were erected. In 1780 the directors, alarmed at the
dangerous facilities which the adjacent church of St Christopher le Stocks
might give to a mob, obtained parliamentary powers and acquired the fabric,
on the site of which much of the present building stands. The structure was
developed to its present form about the commencement of the 19th century.
The bank commenced business with fifty-four assistants, the salaries of
whom amounted to L4350. The total number employed in 1847 was upwards of
nine hundred and their salaries exceeded L210,000. Mr Thomson Hankey stated
that in 1867 upwards of one thousand persons were employed, and the
salaries and wages amounted to nearly L260,000, besides pensions to
superannuated clerks of about L20,000 more. The number of persons of all
classes employed in 1906 (head office and eleven branches) was about 1400.
Originally established to advance the government a loan of L1,200,000, the
management of the British national debt has been confided to the Bank of
England from the date of its foundation, and it has remained the banker of
the government ever since. The interest on the stock in which the debt is
inscribed has always been paid by the bank, originally half-yearly, now
quarterly, and the registration of all transfers of the stock itself is
carried on by the bank, which assumes the responsibility of the correctness
of these transfers. The dignity which the position of banker to the
government gives; the monopoly granted to it of being the only joint-stock
bank allowed to exist in England and Wales till 1826, while the liability
of its shareholders was limited to the amount of their holdings, an
advantage which alone of English banks it possessed till 1862; the
privilege of issuing notes which since 1833 have been legal tender in
England and Wales everywhere except at the bank itself; the fact that it is
the banker of the other banks of the country and for many years had the
control of far larger deposits than any one of them individually--all these
privileges gave it early a pre-eminence which it still maintains, though
more than one competitor now holds larger [v.03 p.0336] deposits, and
though, collectively, the deposits of the other banks of the country which
have offices in London many times overpass its own. Some idea of the
strength of its position may be gained from the fact that stocks are now
inscribed in the bank books to an amount exceeding 1250 millions sterling.
[Sidenote: Bank Charter Act.]
In one sense, the power of the Bank of England is greater now than ever. By
the act of 1844, regulating the note-issue of the country, the Bank of
England became the sole source from which legal tender notes can be
obtained; a power important at all times, but pre-eminently so in times of
pressure. The authority to supply the notes required, when the notes needed
by the public exceed in amount the limit fixed by the act of 1844, was
granted by the government at the request of the bank on three occasions
only between 1844 and 1906. Hence the Bank of England becomes the centre of
interest in times of pressure when a "treasury letter" permitting an excess
issue is required, and holds then a power the force of which can hardly be
estimated.
One main feature of the act of 1844 was the manner in which the issue of
notes was dealt with, as described by Sir Robert Peel in parliament on the
6th of May 1844:--"Two departments of the bank will be constituted: one for
the issue of notes, the other for the transaction of the ordinary business
of banking. The bullion now in the possession of the bank will be
transferred to the issue department. The issue of notes will be restricted
to an issue of L14,000,000 upon securities--the remainder being issued upon
bullion and governed in amount by the fluctuations in the stock of
bullion." The bank was required to issue weekly returns in a specified form
(previously to the act of 1844 it was necessary only to publish every month
a balance-sheet for the previous quarter), and the first of such returns
was issued on the 7th of September 1844. The old form of return contained
merely a statement of the liabilities and assets of the bank, but in the
new form the balance-sheets of the Issue Department and the Banking
Department are shown separately. A copy of the weekly return in both the
old and new forms will be found in _A History of the Bank of England_, p.
290, by A. Andreades (Eng. trans., 1909); see also R. H. I. Palgrave, _Bank
Rate and the Money Market_, p. 297.
One result of the division of the accounts of the bank into two departments
is that, if through any circumstance the Bank of England be called on for a
_larger_ sum in notes or specie than the notes held in its banking
department (technically spoken of as the "Reserve") amount to, permission
has to be obtained from the government to "suspend the Bank Act" in order
to allow the demand to be met, whatever the amount of specie in the "issue
department" may be. Three times since the passing of the Bank Act--during
the crises of 1847, 1857 and 1866--authority has been given for the
suspension of that act. On one of these dates only, in 1857, the limits of
the act were exceeded; on the other two occasions the fact that the
permission had been given stayed the alarm. It should be remembered,
whenever the act of 1844 is criticized, that since it came into force there
has been no anxiety as to payment in specie of the note circulation; but
the division of the specie held into two parts is an arrangement not
without disadvantages. [Sidenote: Bank rate.] Certainly since the act of
1844 became law, the liability to constant fluctuations in the Bank's rate
of discount--one main characteristic of the English money market--has
greatly increased. To charge the responsibility of the increase in the
number of those fluctuations on the Bank Act alone would not be
justifiable, but the working of the act appears to have an influence in
that direction, as the effect of the act is to cut the specie reserve held
by the bank into two parts and to cause the smaller of these parts to
receive the whole strain of any demands either for notes or for specie.
Meanwhile the demands on the English money market are greater and more
continuous than those on any other money market in the world. Of late years
the changes in the bank rate have been frequent, and the fluctuations even
in ordinary years very severe. From the day when the act came into
operation in 1844, to the close of the year 1906, there had been more than
400 changes in the rate. The hopes which Sir Robert Peel expressed in 1844,
that after the act came into force commercial crises would cease, have not
been realized.
The number of changes in the bank rate from 1876[3] to 1906 in England,
France, Germany, Holland and Belgium were as follows:--
England. France. Germany. Holland. Belgium.
183 27 110 55 77
There has been frequent discussion among bankers and occasionally with the
government as to the advantage it might be to grant the Bank of England an
automatic power to augment the note issue on securities when necessary,
similar to that possessed by the Bank of Germany (_Reichsbank_). One of the
hindrances to the success of such a plan has been that the government,
acting on the advice of the treasury, required an extremely high rate of
interest, of which it would reap the advantage, to be paid on the advances
made under these conditions. Those who made these suggestions did not bear
in mind that the mere fact of so high a rate of interest being demanded
intensifies the panic, a high rate being associated as a rule with risks in
business. The object of the arrangement made between the _Reichsbank_ and
the treasury of the empire of Germany is a different one--to provide the
banking accommodation required and to prevent panic, hence a rate of only
5% has been generally charged, though in 1899 the rate was 7% for a short
time. As is often the case in business, a moderate rate has been
accompanied by higher profit. The duty on the extra issue between 1881,
when the circulation of the Bank of Germany first exceeded the authorized
limit, and the close of the year 1906 amounted to L839,052. Thus a
considerable sum was provided for the relief of taxation, while business
proceeded on its normal course. The proposal made by Mr Lowe (afterwards
Lord Sherbrooke) in 1873 was to charge 12%, a rate which presupposes panic.
Hence the negotiations came to nothing. The act of 1844 remains unaltered.
The issue on securities allowed by it to the Bank of England was originally
L14,000,000. This has since been increased under the provisions of the act
to L18,450,000 (29th March 1901). Hence against the notes issued by the
bank less gold by L4,450,000 is now held by the bank than would have been
the case had the arrangements as to the securities remained as they were in
1844.
The Bank of England has, from the date of its establishment, possessed a
practical, though perhaps not an absolutely legal, monopoly of issuing
notes in London. It became gradually surrounded by a circle of private
banks, some of considerable power.
[Sidenote: Early English banking.]
The state papers included in F. G. Hilton Price's _Handbook of London
Bankers_ (1876) contain some of the earliest records about the
establishment of banking in England. The first of these is a petition,
printed in the original Italian, to Queen Elizabeth, of Christopher
Hagenbuck and his partners in November 1581, representing "that he had
found out a method and form in which it will be possible to institute an
office into which shall enter every year a very large sum of money without
expense to your Majesty," so "that not only your Majesty will be able to be
always provided with whatever notable sum of money your Majesty may wish,
but by this means your State and people also; and it shall keep the country
in abundance and remove the extreme usuries that devour your Majesty and
your people." Hagenbuck proposed to explain his plan on condition that he
should receive "6% every year of the whole mass of money" received by the
office for twenty years. The queen agreed "to grant to the said Christopher
and partners 4% for a term of twenty years, and to confirm the said grant
under the great seal." The document is signed by Francis Walsingham, but
nothing further appears to have come of it. When we compare the date of
this document with that of the establishment of the Banco della Piazza di
Rialto at Venice, it is not unlikely that the idea of the establishment of
a bank was floating in the minds of people connected with business and had
become familiar to Hagenbuck from commerce with Venice. Other state papers
in 1621 and 1622 and again in 1662 and 1666 contain somewhat similar
proposals which however were never carried into practice.
The little _London Directory_, 1677, contains a list of goldsmiths
mentioned as keeping "running cashes." Of these firms described in 1677,
five houses were carrying on business in 1876. Three of these, or firms
immediately descended from them, Child & Co. of Temple Bar, Martin & Co. of
Lombard Street (as Martin's Bank, Ltd.), and Hoare & Co. of Fleet Street,
are still carrying on business. Barnetts, Hoare & Co. and Willis, Percival
& Co. have been absorbed since 1876, the first by Lloyds Bank (1884), the
second by the Capital and Counties (1878). Many of the goldsmiths carried
on a considerable business. Thus the books of Edward Blackwell, who was an
eminent goldsmith and banker in the reign of Charles II., show that the
king himself, the queen mother, Henrietta Maria, James, duke of York, the
prince of Orange, Samuel Pepys, the East India Company, the Goldsmiths'
Company and other city companies did business with him. Sir John Houblon,
the first governor of the Bank of England, kept an account with Blackwell,
who was, however, ruined by the closing of the exchequer in 1672. But his
son married into the family of Sir Francis Child, and his grandsons became
partners in Child's Bank.
[v.03 p.0337] Besides the banks in London already mentioned, one in the
provinces claims to have been established before the Bank of England.
Smiths' of Nottingham, since amalgamated with the Union of London Bank, is
stated to have been founded in 1688. Others also claim considerable
antiquity. The old Bank of Bristol (Bailey, Cave & Co.) was founded in
1750; the business amalgamated with Prescott & Co., Ltd., of London. The
Hull Old Bank (Pease & Co.) dated from 1754; this business also still
continues (amalgamated, 1894, with the York Union Banking Co., Ltd., and
since with Barclay & Co., Ltd.). The banks of Gurney & Co., established at
the end of the 18th century in the eastern counties, have with numerous
other banks of similar standing amalgamated with the firm of Barclay & Co.,
Ltd., of Lombard Street.
The business of banking had been carried on by the goldsmiths of the city,
who took deposits from the time of James I. onwards, and thus established
"deposit-banking" as early as that reign. This is described in a pamphlet
published in 1676, entitled _The Mystery of the New-Fashioned Goldsmiths or
Bankers Discovered_, quoted by Adam Anderson in his _History of the Great
Commercial Interests of the British Empire_, vol. ii. p. 402. During the
Civil War "the goldsmiths or new-fashioned bankers began to receive the
rents of gentlemen's estates remitted to town, and to allow them and others
who put cash into their hands some interest for it, if it remained but for
a single month in their hands, or even a lesser time. This was a great
allurement for people to put their money into their hands, which would bear
interest till the day they wanted it. And they could also draw it out by
L100 or L50, &c., at a time, as they wanted it, with infinitely less
trouble than if they had lent it out on either real or personal security.
The consequence was that it quickly brought a great quantity of cash into
their hands; so that the chief or greatest of them were now enabled to
supply Cromwell with money in advance on the revenues as his occasion
required, upon great advantage to themselves."
The Bank of England, as stated before, was incorporated by the act of 1694.
The position of the other banks at that time was defined by that act and
the act of 1697, which declared that no bank, that is, no joint-stock bank,
was "to be established within England during the continuance of the Bank of
England," and also by the act of 1708, which provided that "during the
continuance of the Bank of England, no company or partnership exceeding six
persons in England" should "borrow, owe or take up any sum or sums of money
on their bills or notes payable on demand or at any less time than six
months from the borrowing thereof." This was confirmed by the act of 1800.
No change of importance was made till the act of 1826, which prohibited
"bank notes under L5," and the second Banking Act of that year which
allowed the establishment of co-partnerships of more than six persons,
which necessarily were joint-stock companies, beyond 65 m. from London. The
act of 1833 allowed the establishment of joint-stock banks within the 65 m.
limit, and took away various restrictions of the amounts of notes for less
than L50. But the power of issuing notes was not allowed to joint-stock
banks within the 65 m. radius.
In the early days in England, issuing notes formed, as Bagehot says in his
_Lombard Street_, the introduction to the system of deposit-banking--so
much so, that a bank which had not the power of issuing notes could
scarcely exist out of London.
[Sidenote: Bank notes.]
Bank notes in England originated in goldsmiths' notes. Goldsmiths received
deposits of moneys and gave notes or receipts for such moneys payable on
demand. The London bankers continued to give their customers notes or
deposit-receipts for the sums left by them until about 1781, when in lieu
of such notes they gave them books of cheques. Before the invention of
cheque-books, the practice of issuing notes was considered so essentially
the main feature of banking, that a prohibition of issue was considered an
effectual bar against banking. Accordingly the prohibitory clause in the
act of 6 Anne, c. 50, 1707 (in Record edition), which was repeated in the
Bank of England Act 1708, 7 Anne, c. 30, s. 66 (in Record edition),
prohibiting more than six persons from issuing promissory notes, was
intended to prevent any bank being formed with more than six partners, and
was so understood at the time; and it did have the effect of preventing any
joint-stock bank being formed.
The prohibition, as already related, was modified in the year 1826 and
removed in 1833. Even then the privilege of limitation of liability was not
permitted to any other bank but the Bank of England. The result was that
when joint-stock banks were first formed many persons of good means were
kept back from becoming shareholders, that is to say partners, in banks.
For up to the date of the act of 1862 permitting "limited liability," every
shareholder in a joint-stock bank was liable to the extent of the whole of
his means (see the article COMPANY). Even as late as 1858 when the Western
Bank of Scotland and 1878 when the City of Glasgow Bank failed, very great
hardship was inflicted on many persons who had trusted with over confidence
to the management of those banks. The failure of the City of Glasgow Bank
was the cause of the Companies Act of 1879, passed to enable unlimited
companies to adopt limited liability. In limited companies the shareholder
who has paid up the nominal amount of his holding is not liable for any
further amount, unless the company issues bank notes, in which case the
shareholders are liable in the same way as if the company were registered
as an unlimited company. The facilities allowed by this act were used by
almost every joint-stock bank in the United Kingdom except those banks
which were at that date limited by charter or by special act.
[Sidenote: Private banks.]
To return to the early history of banking--thus, as no bank could be formed
with more than six partners during the whole of the period from 1694 to
1826 and 1833, the majority of the banks formed throughout England and
Wales for more than a century were necessarily small and usually isolated
firms. Further, when a partner died, his capital not infrequently went out
of the business; then a fresh partner with sufficient means had to be
found, constant change was the result, and confidence, "a plant of slow
growth," could not thrive, except in those instances when a son or a
relation filled the vacancy.
The banks in the country districts had frequently branches in the small
market-towns close to them; those in London had never more than one office.
These banks were sometimes powerful and generally well managed, a
considerable number being established by members of the Society of Friends.
The restriction of partners in private banks to the number of six continued
till 1862. By the act of that year they were allowed to be ten. This power,
however, did not extend to issuing private banks, which were restricted to
six partners as before. The power of increasing bank partnerships to ten
has been made but little use of. The difficulties of carrying on business
on a large scale by private firms were augmented by certain legal
technicalities which practically rendered large private banks impossible in
ordinary circumstances. Hence banking business did not begin to assume its
present form till almost half-way through the 19th century. The gradual
change followed the passing of the acts of 1826-1833, of 1844-1845, of 1862
and of 1879. Incidentally the act of 1844 had an unexpected influence on
the constitution of the banking system. After favouring the existence of
small banks for many years, it gradually led, as the time arrived when the
establishment of large and powerful banks in England and Wales became
necessary, to their formation. No new bank of issue whatever was allowed to
be established--restrictions were placed on the English issuing
banks--private issuing banks with not more than six partners were allowed
to remain, to amalgamate with other private issuing banks and to retain
their joint issues. The joint-stock banks which possessed issues were also
allowed to continue these, but when two joint-stock banks amalgamated, the
continuing bank only retained its issue. Also when a private issuing bank
was formed into or joined a joint-stock bank, the issue lapsed.
The greater number of the provincial banks in England and Wales had been
banks of issue up to 1844. The act of 1844 [v.03 p.0338] restricted their
power of issuing notes, which at that date and even subsequently continued
to be of importance to them, in such a manner that, as Sir R. H. Inglis
Palgrave stated in giving evidence before the committee of the House of
Commons at the banking inquiry of 1875, these banks possessed in their
issues a property they could use, but were not able to sell. The statistics
forming part of Appendix 14 to the report of the select committee of the
House of Commons on banks of issue (1875) give interesting information as
to the proportion of notes in circulation to the deposits of banks in
various districts of the country and at various dates. The statements were
supplied by twenty-one banks, some in agricultural districts, some in
places where manufactures flourished, some in mixed districts, commercial
and agricultural, or industrial and manufacturing. In all of these, the
inquiry being carried as far back as 1844, the proportion of the
circulation to the banking deposits had greatly diminished in recent years.
In several cases the deposits had increased three-fold in the time. In one
case it was five times as large, in another nearly seven times, in another
nearly twelve and a half times. The proportion of the circulation to the
deposits had very largely diminished in that time. In one instance, from
being about one-third of the deposits, at which proportion it had remained
for five years consecutively, it fell to 9% at the end of the term. In
another from being 22% it had diminished to 1-1/2% of the total. In all
cases where the detail was given it had diminished greatly.
The Bank Act of 1844 was arranged with the intention of concentrating the
note issues on the Bank of England in order to secure the monopoly of that
bank as the one issuer in England and Wales. The result was that nearly all
the provincial banks in England had by 1906 lost the right of issue.
Doubtless all were destined to do so before long, a result by which banking
in England and the industries of the country must lose the advantage which
the local issues have been to Scotland and Ireland. Had the English country
banks been allowed, as the Scottish banks were, to associate together and
to retain their issues, powerful banks would many years since have been
established throughout England and Wales, and the amalgamations of recent
years would have been carried through at a much earlier date, and on terms
much more favourable to the public.
[Sidenote: Security of note issue.]
No security was ever required to be given for the local issues in the
United Kingdom. The provisions of the acts of 1844-1845 which compel the
Irish and Scottish banks to hold specie against the notes issued beyond the
legal limit, do not make the coin held a security for them. The legislation
of 1879 which made the note issues a first charge, with unlimited
liability, on the total assets of the joint-stock banks which accepted the
principle of limited liability for the rest of their business, has been the
only recognition by the state of the duty to the note-holders of rendering
them secure. It has been a real disadvantage to England that this duty has
never been sufficiently recognized, and that the provincial note issue,
which is a very convenient power for a bank to possess, and incidentally a
considerable advantage to its customers, has been swept away without any
attempt being made to remedy its deficiencies. There may be objections
raised to a note circulation secured by the bonds of the government, but
the security of the note issues of the national banks of the United States
made against such bonds, has scarcely ever been questioned.
A different policy was followed by Sir Robert Peel in Scotland and in
Ireland from that which he established in England. By the acts of 1844-1845
the Scottish and Irish banks were allowed to exceed their authorized issues
on holding specie to the amount of the excess, and no restrictions were
placed on amalgamations among banks in these countries. In Scotland and in
Ireland notes for less than L5 continued to be allowed. The result has been
that the ten large banks in Scotland, and six of the nine banks in Ireland,
possess the power of issuing notes. The large proportion of local branches
in these countries has been greatly assisted by this power.
[Sidenote: Amounts in circulation.]
Originally, besides the Bank of England, nearly all the provincial banks in
England and Wales possessed the privilege of issue. These banks continued
their operations as previously during the time while the Bank Act was
discussed in parliament. When the arrangements which that act created were
made public, nine banks, of which eight were private and one was a
joint-stock bank, ceased to issue their notes prior to the 12th of October
1844, when the act came into operation. Of these, the Western District
Joint-Stock Banking Co. was dissolved, one of the private banks was closed,
the remaining seven issued Bank of England notes and were allowed certain
privileges for doing this. By the act of 1844 the maximum circulation of
the English issuing banks was fixed at the average circulation of the
twelve weeks before the 27th of April 1844.
The number of the banks to which the privilege of circulation was then
allowed and the amount of notes permitted were, in England:--
207 private banks with an authorized issue of L5,153,417
72 joint-stock banks with an authorized issue of 3,478,230
------------
L8,631,647