CHAPTER VIII_The Money Market

THE GROWTH OF JOINT-STOCK BANKS

We have already seen in dealing with the Bank of England that the

formation of a bank with more than six partners was _supposed_ to have

been expressly prohibited by the Bank’s Charter. The direct result

of this presumed prohibition was the establishment throughout the

country of a large number of small private banks. Many of these were

institutions of credit, ably managed and backed with a fair capital;

but the majority of them were weak, and in times of trouble proved

a source of danger and loss to the community. The various financial

crises of the later part of the seventeenth and the early part of

the eighteenth century gradually brought home to the people and the

Government the unwisdom of the system whereby the growth of small banks

was fostered, and the establishment of large and wealthy institutions

was forbidden. At length—in 1826—the Bank of England was by Act of

Parliament compelled to part with a portion of its presumed monopoly,

and joint-stock banks were allowed to be established outside a

sixty-five-mile radius from London.

It is somewhat remarkable that after the formation of joint-stock

banks was at last permitted, very small advantage was at first taken

of the permission thus afforded; one joint-stock bank was founded at

Lancaster, another at Bradford, and a third at Norwich. But it was not

until a period of commercial prosperity set in that any considerable

number of such banks were founded. In the year 1833, however, and for

a few following years, a large number of provincial joint-stock banks

sprang into existence.

The presumed monopoly of the Bank of England within the sixty-five-mile

radius was next called in question in London, and it was asserted that

the monopoly consisted only of a prohibition of the formation of banks

of issue, and steps were taken to found a joint-stock bank in London.

This was strongly opposed by the Bank, which tried to have its Charter

so amended that its monopoly might be complete. This proposal of the

Bank of England was, in its turn, strongly opposed by the Government,

which not only refused to alter the Charter, but, at the next renewal

thereof, in 1833, actually inserted a clause expressly permitting

joint-stock banks to be established within the sixty-five-mile limit,

provided that such banks did not borrow or take up in England any sum

or sums of money on their bills or notes payable on demand or at less

than six months from the borrowing thereof.

No sooner had this clause become law than advantage was taken of

it, and the formation of the first joint-stock bank in London was

commenced. This bank was the London and Westminster, which was

established in 1834, and it was quickly followed by the London Joint

Stock Bank in 1836, and the Union Bank of London and the London and

County Bank, both in 1839.

The London and Westminster Bank commenced business in the city of

London and at Westminster in March, 1834; at that date the paid-up

capital was £50,000 only; but that the bank quickly commanded

confidence, and began to gather together a lucrative connection, can be

gathered from the fact that by the close of that year its balance sheet

showed that it held balances belonging to the public of over £180,000.

The paid-up capital had by then been increased to about £180,000.

The earlier joint-stock banks which were established in London had to

contend with many disadvantages. They were not allowed by the Bank of

England to open current accounts with that institution, and the private

bankers would not allow them the facility of being represented in the

Clearing House—an institution to which we shall refer later.

They were likewise troubled with legal difficulties, as the position

of the shareholders of such banks was merely that of a common law

partnership; and consequently, in any action, the exact names of all

the shareholders had to be given, and all were parties to the action.

This inconvenience was remedied by an Act passed in 1838, which allowed

a banking company to sue or be sued in the name of any of its members;

but the position of its shareholders still remained the same as to

their unlimited liability, and it was not until the year 1858 that

an Act was passed allowing joint-stock banks to take advantage of

the system of limited liability; a system which was first allowed to

ordinary joint-stock companies by an Act passed in 1855.

Another inconvenience with which these banks had to contend was

occasioned by the enactment providing that no such partnership could

accept bills having a less date than six months. Various expedients

were tried to circumvent this difficulty, but none were successful, and

it was not until the year 1844 that joint-stock banks were released

from this incubus.

In spite of so many embarrassing and hindering circumstances the

joint-stock banks more than held their own, and gradually increased

their wealth and importance. From small beginnings they gathered

strength as the years rolled on, and little as the originators of the

movement may have imagined to what colossal proportions the business

would attain to-day, the joint-stock banks of England and Wales

together hold deposits from the public exceeding the enormous sum of

£600,000,000; a sum nearly equal to our National Debt.

The number of our banks, both private and joint-stock, has been

decreasing for many years. This is owing partly to the failure of the

weaker banks of both classes, but chiefly to the numerous amalgamations

of recent years. At the close of the year 1849 there were ninety-nine

joint-stock banks established in England and Wales, at the close of

1892 there were one hundred and two, and at the close of 1902 only

sixty-eight, not including the Bank of England. These banks then held

deposits amounting to no less a sum than £600,333,000. The decrease

in joint-stock banks in the last ten years, from one hundred and two

to sixty-eight, is remarkable; but this does not necessarily imply

any lessening of banking accommodation to the public; on the contrary,

the reverse is the case, owing to the great increase in the number of

branches which have been established.

According to the _Economist_, there were 2,336 banking offices

belonging to joint-stock banks open to the public in England and Wales

on the 31st of December, 1891, whereas on the 31st of December, 1901,

the number had nearly doubled and stood at 4,146. The network of banks

thus spread over the length and breadth of the land has resulted in

tapping new sources of business. An enormous number of people now keep

banking accounts who previously did not do so, but who used to pay

cash for all their purchases and keep their money in the proverbial

stocking. Though the average balances maintained by this new class of

customer may be small, it is a case of “many a mickle makes a muckle,”

and the aggregate of new balances so obtained has largely helped to

swell the total balances in the hands of the banks. In 1892, one

hundred and two joint-stock banks of England and Wales held balances

amounting to nearly £400,000,000, whereas now, as already mentioned,

a sum exceeding £600,000,000 is in the hands of the banks. It must be

remembered, however, that a considerable portion of this increase is

due to the fact that a large number of private banks have been absorbed

by joint-stock banks during the ten years in question, and that the

balances held by the private banks so absorbed were not included in the

figures of ten years ago.

Some of the joint-stock banks of London established branches in

certain mercantile districts of the town early in their career, but

they were slow to see the advantage to be gained by opening branches

in the suburbs, and by catering for the wants of private individuals,

tradesmen, and the smaller classes of merchants and manufacturers.

But the conspicuous success which attended the efforts of one or two

institutions in this direction, drew the attention of other banks to

the advantages to be gained by keeping level with the growth of Greater

London, and providing what is required by its inhabitants. The result

is that the suburbs of London are now as well, or better, provided

with banking accommodation than any other part of the kingdom; and so

great is the competition among various banks in this direction, that

the limits of discretion appear to be overstepped in certain districts,

as to the number of branches which can possibly obtain a profitable

business from those localities.

As regards capital invested in banking companies, we find an increase,

but not anything like the same proportionate increase that the balances

exhibit. The paid-up capital of the joint-stock banks of England and

Wales at the end of 1892 (not including the Bank of England) was about

forty-four million pounds, and by the end of 1902, or in ten years, it

had only increased to about forty-seven and a half million pounds; and

this in spite of the capital represented by absorbed private banks not

appearing in the former total.

The “Reserve Funds” of the banks, however, show a fairly satisfactory

increase of six millions, from twenty-eight millions to thirty-four

millions in the ten years.

Adding together the two items of Capital and Reserve, so as to arrive

at the total working capital, we find that this has increased from

seventy-two millions in 1892, to eighty-one and a half millions in

1902, or an increase of little more than 13 per cent., while the

balances increased about 50 per cent. in the same time. The uncalled

and reserved (_i.e._ capital which can only be called up in the event

of failure) capital of the banks increased from one hundred and fifty

millions to one hundred and sixty-three millions, or an increase of

slightly under 10 per cent.

Turning from the consideration of the amount of funds which the

joint-stock banks have at the present time within their disposition

and control, to the question of how they employ those funds, it is

interesting to note the changes which have taken place during the last

ten years. The main portion of a banker’s assets is divided between—

1. Cash, and the balance maintained at the Bank of England or with

a London agent, and money at call or short notice.

2. Investments.

3. Discount and Advances.

As regards these three items, we find the following changes have taken

place during the last ten years. At the end of 1892 the joint-stock

banks held nearly ninety-four millions in cash, etc.; they now have

nearly one hundred and sixty-five millions. This represents an

increase of about 75 per cent., and is a very satisfactory feature in

present-day banking, indicating that the question of keeping a stronger

cash reserve is receiving attention, the liabilities in the time

having increased only 50 per cent. As regards investments, ninety-five

millions was held in this form in 1892, against one hundred and

thirty-one millions ten years later, an increase of 38 per cent.; while

Discount and Advances have increased from two hundred and eighty-three

millions to three hundred and eighty-seven millions—which represents

an increase of about 37 per cent. These proportionate increases of

Cash, Investments, and Advances and Discounts have taken place while

the balances have proportionately increased 50 per cent. In the next

chapter we shall proceed to examine in more detail the composition of

the balance sheets of banking companies, and the relative proportions

which the items appearing therein bear to each other, or should bear to

each other, to be in accordance with the system of business maintained

by our leading banks.

For ready reference we append on the next page a short table relating

to the figures which we have been considering in the present chapter.

These figures amply show the advance made by joint-stock banks during

the last ten years.

AGGREGATE FIGURES OF THE JOINT-STOCK BANKS

OF ENGLAND AND WALES (EXCLUDING THE

BANK OF ENGLAND)

,000,000 omitted (except in the last two columns)

----------+--------+--------+-------+--------+--------+-----------

| (1) | (2) | (3) | (4) | (5) | (6)

----------+--------+--------+-------+--------+--------+-----------

Dec. 1892 | 397 | 44 | 28 | 150 | 94 | 23·7%

” 1902 | 600 | 48 | 34 | 163 | 165 | 27·5%

----------+--------+--------+-------+--------+--------+-----------

---------+-------+-------+---------+-------+-------+------+--------

| | Per- | | Per- | Per- | |

| ments.| of | and | of | of (5)| of | of

Date. | | (7) |Advances.| (9) |+ (7) +|Joint-|Banking

| | to | | to |(9) to |Stock |Offices.

| | (1). | | (1). | (1). |Banks.|

| (7) | (8) | (9) | (10) | (11) | (12) | (13)

---------+-------+-------+---------+-------+-------+------+--------

Dec. 1892| 95 | 23·9% | 283 | 71·3% |118·9% | 102 | 2,326

” 1902| 131 | 21·8% | 387 | 64·5% |113·8% | 68 | 4,146

---------+-------+-------+---------+-------+-------+------+--------