THE BANK RETURN
We will now examine the weekly “Return” issued by the Bank of England
in accordance with the requirements of the Act of 1844, and consider
the significance of the various items appearing therein. The Return is
made up to the close of business on every Wednesday, and is published
on Thursday. Though the figures given always attract attention, and are
regularly made the subject of analysis and criticism in the financial
articles of the Press, yet the interest taken in the Return varies
considerably from time to time. During periods of financial quiescence
this interest is somewhat of an academical character; but in times of
doubt and distrust a very real and practical interest is exhibited, not
only by the group of bankers, bill-brokers, and merchants constituting
the “Money Market,” but by that section of the general public who
have financial transactions at stake, and who possess the requisite
knowledge to understand the true import of the figures of the Return.
For the purpose of our analysis we will take the Return of the 2nd
September, 1903.
ISSUE DEPARTMENT
--------------------------------+------------------------------
£ | £
Notes issued 51,831,835 | Government debt 11,015,100
| Other securities 7,434,900
| Gold coin and
| bullion 33,381,835
---------- | ----------
£51,831,835 | £51,831,835
========== | ==========
BANKING DEPARTMENT
--------------------------------+--------------------------------
£ | £
Proprietors’ capital 14,553,000 | Government securities 18,260,841
Rest 3,740,209 | Other securities 24,969,260
Public deposits 7,393,580 | Notes 22,322,875
Other deposits 41,872,061 | Gold and silver coin 2,119,339
Seven-day and |
other bills 113,465 |
---------- | ----------
£67,672,315 | £67,672,315
========== | ==========
ISSUE DEPARTMENT
In a previous chapter we saw that under the Act of 1844 the Issue
Department was to be separated from the Banking Department, and that
it was at liberty to issue £14,000,000 of notes against securities,
of which the Government Debt, amounting to £11,015,100, was to form
a part. Any issue of notes above this amount of £14,000,000 was to
be secured by an equal amount of coin or bullion, with the proviso,
however, that the issue of notes against securities might be increased
from time to time to the extent of two-thirds of the amount of any
lapsed country issue.
In the return before us we see the result of nearly sixty years of the
working of the Act. The notes issued stand at £51,831,835, and are
secured by the Government Debt of £11,015,100 (as at the passing of the
Act) and other securities amounting to £7,434,900 (against £2,984,900
in 1844), the balance being made up of gold coin and bullion, no silver
being now held. We thus see that advantage has been taken of the
lapsing of country bank issues to increase the issue against security
by £4,450,000; but it must be remembered that the net profit on this
additional issue against securities is credited to the public account.
The actual amount of notes issued, as shown in the returns of 1844
and 1903 respectively, as shown on pages 32 and 33, has increased by
the sum of £23,480,540; but if we compare what is called the “Active
Circulation” now with that of 1844 we see that the increase is only
£9,332,690.
The Active Circulation is arrived at by deducting the amount of notes
held by the Banking Department from the total of notes issued by the
Issue Department, and it represents the notes actually in the hands of
the public. This increase in the Active Circulation is a fluctuating
one, but at any time it is totally out of proportion to the expansion
of our trade and financial system which has taken place during the
last fifty years. The comparative insignificance of the increase
is explained by the fact that during the period under review our
manner of effecting payments has changed so vastly, cheques having
almost completely taken the place of notes in settling our various
transactions, both in business and private affairs.
The old idea that a note issue was of vital importance to the life of
a bank, and that a mere bank of deposit could not be profitably and
usefully conducted, was exploded in the early part of last century,
as already explained. The new ideas which then began to prevail, and
which led to the formation of our joint-stock banks, have expanded and
developed in a manner that was probably not anticipated by the banking
pioneers, who successfully assailed the Bank’s presumed monopoly of
joint-stock banking.
In such a manner have these new ideas and methods expanded, that the
use of the bank-note has practically been done away with, except for
special reasons and in certain cases.
These exceptions divide themselves into two heads. Firstly, the large
number of Bank of England notes held in place of actual coin in the
tills of our banks; and secondly, notes used in settling certain
transactions when it is not the custom, or it is not convenient, to
pass cheques; such as the settlements arising from the purchase of
property, travelling expenses, and for effecting payments and purchases
with the non-banking class—a class which is diminishing day by day
under our present system of banking.
The amount of notes held by bankers as “till money” is of paramount
importance in point of amount compared with the amount of notes in
circulation for the other purposes mentioned. The average amount
held by bankers from time to time usually remains at a fairly steady
figure, whereas the amount of notes in the hands of the people varies
considerably; increasing at the end of each month on account of
salaries paid by notes, at the end of quarter for payment of rents,
etc., and largely increasing during the holiday season by reason of
notes carried by travellers to the Continent and elsewhere.
As regards the items appearing on the credit side of the Issue
Department’s weekly balance sheet, the _Government Debt_ stands at the
same figure as at the passing of the Act.
_Other Securities_ have risen in accordance with the provisions of
the Act, and are doubtless of a first-class character, although no
information is vouchsafed to us as to the actual securities held.
The remaining item of _Gold Coin and Bullion_ of course fluctuates
with the amount of notes issued; the department is something like an
automatic machine in this respect—you put in gold and take out notes,
and you put in notes and gold comes out. The Issue Department is not
only compelled to issue notes in exchange for sovereigns, but also for
gold bullion—in bars or foreign coin—at the rate of £3 17_s._ 9_d._
per ounce of standard fineness. Any bullion the Bank acquires in this
manner it is at liberty to send to the Mint and have converted into
coin; but as a matter of fact, a large amount is retained in the form
in which it is received, that is, in bar gold and foreign coin. If
an export of gold is in progress the exporter can, of course, obtain
five sovereigns for every £5 note he presents; but it frequently suits
his purpose better to draw bar gold or foreign coin in exchange for
his notes, and the Bank is at liberty to charge what it likes for so
accommodating him. The price usually charged by the Bank for its bar
gold is £3 17_s._ 10½_d._ per ounce, but if the demand is pressing it
will raise its price to perhaps £3 17_s._ 11_d._ Above this figure
it is not effectual to raise the price, or sovereigns would, in that
event, be drawn and melted down. A similar course as regards sale is in
vogue for dealing with foreign coins, and the Bank makes a small profit
on such transactions.
BANKING DEPARTMENT
Turning now to the return of the Banking Department, the first item
which appears is _Proprietors’ Capital_, which stands at the enormous
figure of £14,553,000—enormous in itself, and enormous in comparison
with the capitals of other and competing banks. From the original sum
of £1,200,000 with which the Bank commenced business in 1694, the
capital has gradually increased until it amounted to the present figure
in 1816, since which year there has been no alteration.
The _Rest_ in the Bank of England Return is an accumulation of
undivided profits, and compares with the Reserve Funds of other banks.
It now stands at about the same figure at which it stood in 1844; and
it is never reduced below the sum of £3,000,000. The Bank has also a
further reserve in the valuable asset of its premises in the City—the
very finest site in London—no credit being taken for the value of this
item.
Taking the Proprietors’ Capital and Rest together, we see that the Bank
has a total working capital of about seventeen and a half millions,
which is far above that of any other Bank, both in amount and in
proportion to liabilities. This large capital forms, of course, an
element of great strength, but the profit which is earned is so spread
out on such a sum, that the actual dividend paid is small in comparison
with that of many ordinary joint-stock banks. The dividend paid during
the last ten years has averaged 9½ per cent., having been at the rate
of 10 per cent. since the end of 1896. The price of Bank Stock has
fluctuated between 311 and 367 during the same ten years.
_Public Deposits_ include the balances of the Exchequer, Savings Banks,
Commissioners of the National Debt, and Dividend Accounts. This is a
very variable item, and its fluctuations at certain seasons of the year
have a marked effect on the Money Market. On the 14th of January, 1903,
Public Deposits stood at just over eight millions, and on the 25th
March, 1903, at over sixteen millions, this increase being due to the
collection of taxes at this season of the year, which gradually sweeps
away a portion of the balance of other banks, and draws a large sum
from the pockets of the people. The increase of the balance of Public
Deposits reaches a maximum about the end of March, when the collection
of taxes comes to an end.
This gradual accumulation of an extra sum of £8,000,000 in the hands of
the Bank of England naturally affects the amount of money which other
bankers have at their disposal for lending purposes, and money being
thus scarcer, borrowers have to pay more for the use of it. Hence it
follows that during this season of the year a tightening of the rates
charged by bankers for accommodation is generally seen. After the
end of the financial year on the 5th April, the Government generally
commences to disperse its large balance by paying its various bills;
and this disbursement, together with the dividends on public stock
which are paid at the beginning of April, quickly alters the position;
money becomes plentiful in the hands of ordinary bankers, and the rates
charged for the use of it consequently fall away. From this time on to
about the beginning of December, Public Deposits gradually decrease,
although there is generally a slight rise at the end of each quarter,
followed by a fresh fall immediately after the quarter, this movement
being due to the payment of dividends.
_Other Deposits_ include the balances of the ordinary customers of
the Bank, both in London and the country, and also the balances kept
by bankers with the Bank of England. The balances of the ordinary
customers of the Bank are subject to the same conditions and
fluctuations as are the balances of the customers of other banks, but
the bankers’ balances are of another class. Every “clearing” bank
_must_ keep an account with the Bank of England, in accordance with
the rules of the Clearing House, as will be explained later. Most
other London bankers also keep an account there, as well as many
country bankers. The aggregate of the bankers’ balances forms a large
proportion of the “Other Deposits.” Up to the year 1877 the total of
bankers’ balances was stated as a separate item in the Weekly Return,
but this practice was discontinued at that time. In the year 1877—the
last year of separate publication—these bankers’ balances averaged
about nine and a half millions, but the amount has doubtless largely
increased since that time.
Bankers’ balances form, as we shall see, the ultimate reserve on
which our banking system rests. Hence the subject is one of great
importance. Every “clearing” banker keeps a balance for the purpose of
settling the difference which may arise with each day’s settlement at
the Clearing House. In addition to this, they, as well as other London
and country banks, maintain a large balance at the Bank of England for
the purpose of meeting any sudden or extraordinary demands which may be
made on them. This is done in place of keeping cash in their tills for
the purpose, though of course a sufficient sum in ready cash is kept
in hand to meet the ordinary daily requirements. In the case of those
country banks which do not keep an account at the Bank of England, the
custom is adopted of keeping a reserve balance with a London agent.
This reserve swells the amount under the control of the latter, and
consequently of the balance he deems it prudent to maintain with the
Bank of England. Thus our system is so knitted together that a demand
for cash, in whatever part of the country arising, has a prompt effect,
to a less or greater degree, on the bankers’ balances at the Bank of
England.
From this can be seen the great importance of bankers’ balances, and
the great responsibility thrown on the Bank of England of keeping
itself strong enough to meet demands from all quarters. The system is
certainly a peculiar one, that results in all banks keeping a large
part of their surplus funds with another bank, and that not a State
bank, though the banker of the State. It is an interesting fact that
on many occasions since the passing of the Act in 1844 the “reserve,”
or actual cash held by the Bank of England, has been less than the
bankers’ balances alone.
This custom of the reserves being held by a central bank has been,
and is, the subject of much criticism, principally on the ground that
a “one reserve system” is not a sufficient guard against disaster in
time of crisis, and that it would be a much safer method were each
bank to keep its own special reserve in cash against sudden need. The
discussion of the subject during the last few years, combined with
other circumstances, has led to some increase in the cash held by
bankers in general, and several banks are understood to have commenced
keeping a special reserve in cash, on a small scale. The whole subject
is a very intricate one, and one that cannot be more than glanced at in
the course of this small book.
Taken as a whole, and in ordinary times, “Other Deposits” indicate
the state of the Money Market. They rise and fall fairly regularly at
certain known seasons of the year; but if they rise above the average
for the time of year, it may be taken as an indication that money is
abundant, and that bankers and others have funds in hand for which they
cannot find profitable employment, and therefore the interest rate
charged for the use of money is likely to fall. On the other hand, if
“Other Deposits” are below the average, money is evidently in request,
and rates are likely to rise. _This is in ordinary times._ In times
of trouble, however, “Other Deposits” will rise considerably, and at
the same time interest rates will also advance. The reason of this is
that on any note of alarm being sounded in the financial world, bankers
will at once begin to strengthen their position—to “keep their powder
dry”—and consequently will begin to increase their balances at the Bank
of England. Owing to the curtailment in their loanable funds resulting
therefrom, money will increase in value, and a higher rate will have to
be paid for the use of it by borrowers.
Together with the bankers, other large customers of the Bank of England
will increase their balances against emergencies, and possibly, if
the trouble become acute, money will be transferred to the Bank from
other banks for greater safety. Thus in such times we see the “Other
Deposits” of the Bank increasing, while the deposits of other banks
are decreasing. It is related that during one crisis a customer of
a certain bank became alarmed, and drew out his balance. Not knowing
what to do with his money when he had got it, he wrote to the financial
editor of one of the great daily papers, asking him where it would be
safe to put it, and quickly got back the reply, “Put it in the——,”
naming the same bank from which the customer had withdrawn it!
The remaining item on the liability side of the Banking Department,
namely, “Seven-day and other Bills,” largely explains itself by its
title. The item is not a growing one, as can be seen by referring to
the first return issued after the passing of the Bank Act in 1844, when
the amount under this heading was over one million pounds.
The seven-day bills referred to are what are known as Bank Post Bills,
and are practically drafts on the Bank of England. The custom of
issuing these bills appears to have originated about the year 1738,
when, in response to representations, the Bank announced that it would
give “bills payable at seven days’ sight, that, in case of the mails
being robbed, the proprietors might have time to give notice thereof.”
The changes which have occurred since this date, and even since 1844,
amply account for the falling off in this item. It may be noted that
the Bank does not take advantage of the customary three days’ grace in
respect of these bills.
_Government Securities._—As an ordinary bank in issuing its balance
sheet roughly summarises the classes of securities in which its funds
are invested, so does the Bank of England in its Weekly Return. The
item “Government Securities” comprises, as its name indicates, the
amount of all securities held which are guaranteed by the British
Government, and it also includes any temporary advances made to the
Treasury on “Ways and Means” or “Deficiency Bills.” Advances which are
made on the security of “Deficiency Bills” are generally required at
the end of each quarter, excepting the March quarter, when, as we have
seen, the Public Deposits are large, and the advances are required
to meet the interest due on the public funds at the beginning of the
ensuing month. The advances are repaid in the course of a few weeks
from the incoming revenue. While in force they have the effect of
increasing the figure at which Government Securities stand, and also,
on the other side of the account, of increasing the total of Public
Deposits.
_Other Securities._—Under this heading are included all the investments
of the Bank other than Government Securities—investments in general
securities, loans, bills under discount, and advances to bill-brokers.
No particulars are given as to the amount invested in the various
items above mentioned; the investments in general securities, and the
loans to ordinary customers of the Bank, may be presumed to be fairly
steady in amount, as is the case with other banks; but the amount of
investments in bills under discount and of advances to bill-brokers
are subject to wide fluctuations from time to time. These fluctuations
are due to the complicated system of our Money Market. As will be
explained later, ordinary banks employ a certain portion of their
funds in advances to bill-brokers. These loans are either repayable
at “call,” or are fixed for a certain number of days, and the amount
lent varies with each particular bank from day to day, and from week
to week. In the aggregate, however, the amount advanced in this way by
all the banks combined is not subject to much fluctuation, for this
reason—what one bank may lose in available lending balance another will
gain, and so the total is not materially altered. At certain seasons
of the month and of the year, however, or during periods of threatened
disturbance in the Money Market, this is not the case. Circumstances
may compel several or even all the banks simultaneously to call on the
bill-brokers to repay their advances or part of their advances. Thus
the aggregate of the money lent in this manner is materially reduced.
The bill-brokers, finding that they cannot obtain the funds from the
ordinary sources wherewith to repay the amounts “called” from them,
must have recourse to the Bank of England—both for discounting bills
and for short loans. These facilities are there granted to them on
certain conditions. The accommodation thus granted to the bill-brokers
amounts to very large figures when the resources of the Money Market
become locked up, owing to some special cause, such, for instance,
as the issue of a big loan like the Transvaal loan of May, 1903. For
this loan the “application money” alone, in the hands of the Bank of
England, amounted to over £35,000,000, the bulk of which had been
temporarily taken from the balances of other banks, thus reducing their
lending powers and compelling them to call their advances from the
bill-brokers.
_Notes, and Gold and Silver Coin._—These two items together form what
is known as the “Reserve” of the Bank, and the Reserve is the most
important item appearing in the Weekly Return, and the item on which
the attention of the Money Market is constantly fixed.
On looking at the balance sheet of one of our joint-stock banks,
we find that the first item appearing among the assets of such an
institution is “Cash in hand and Balance at the Bank of England”; but
it is impossible to tell from this how much is actual cash, and how
much balance at the Bank. The average proportion of “Cash and Bank of
England balance” to “liabilities to the public” held by our leading
joint-stock banks is about 15 per cent., while the proportion of “Cash”
(Notes, and Gold and Silver Coin) to “liabilities” with the Bank of
England has averaged 50 per cent. during the last ten years, and the
fall of its reserve to anything like 15 per cent. would doubtless
be coincident with a world-shaking panic. The reason of this great
divergence in the proportion of cash in hand held by the Bank of
England in comparison with other banks needs explanation, as do also
the means taken to maintain the Reserve at a figure of presumed safety.
The “Reserve” is the reserve of the Banking Department only, and has no
connection with the Issue Department as regards the convertibility of
its notes. The great importance that is attached to the Reserve being
maintained at a large figure is due to the fact that not only can this
Reserve be drawn upon for home requirements, but that it is open to
attack, and serious attack, from abroad.
As regards home requirements, the needs of the public in usual times
follow a regular course, and one that is known and can be provided for
beforehand; but this is not the case as regards foreign demands, and
it is in connection with these demands that most of the changes in the
Bank Rate owe their origin. If the directors of the Bank of England
had to deal with home demands only, the question of fixing the Bank
Rate would be an easy one—that is, of fixing the rate at which they are
nominally prepared to discount for the public and for bill-brokers, and
the rate which, by custom, governs the interest allowed on deposits and
in many cases the rate charged for loans by other banks. But London
is the most open market for gold in the whole world, and any country
which requires gold for any purpose can draw it from London with more
ease than from any other quarter. Hence our stock of gold is peculiarly
open to attack, and in fixing the Bank Rate from time to time, the
directors have to consider the question of whether gold is coming to us
or leaving us. If gold is coming here in large quantities, the Reserve
will improve, money will be plentiful with ordinary banks, who will
consequently be prepared to lend at cheaper rates—considerably below
the advertised rate of the Bank of England—and that institution will
gradually lower its rate so as to keep in line with the prevailing
conditions. On the other hand, if gold is leaving us in considerable
quantities, the Reserve will of course fall, and this will be followed
by a gradual tightening of rates in the Money Market, and the Bank Rate
will be raised, not only in order to check the export of the metal, but
to attract imports. Why a high Bank Rate is likely to attract foreign
gold to our shores, and a low rate to have the contrary effect, will be
explained in a later chapter dealing with the Foreign Exchanges.