CONCLUSION
In the course of this book we have briefly surveyed the rise and
development of the banking system of England. We have studied
the establishment and growth of the Bank of England, the gradual
elimination of the private banker, and the wonderful development of
joint-stock banking, and we have noted the causes which led to London
becoming the financial centre of the world, and also the various
factors which constitute our Money Market.
From a weak beginning we have seen our system of finance develop into
a mighty machine; but we have seen that, although it is mighty, it is
a machine of very delicate construction, and that it needs the most
careful attention on the part of those connected with its working. A
breakdown in one of its parts may mean wreck for the whole concern,
and bring with it, not only unparalleled individual distress, but
actual danger of an acute form to the whole nation.
The weakest spot of our system arises from the custom of the cash
reserves of the bankers being kept with the Bank of England, that is,
the one-reserve system. The total deposits held by the banks of the
kingdom may be roughly estimated at one thousand million pounds, and
practically the whole of this vast sum is repayable in cash on demand.
But banks conduct their business on the law of averages, assuming that
the demands for cash will be met by the deposit of cash—that what
is paid out to one set of customers will be paid in by another set;
and, while keeping sufficient till money to tide over the variations
of demand and supply from day to day, they maintain no other reserve
of cash, beyond the balance at the Bank of England,—or with a London
agent, through whom such balances are in effect passed on to the Bank
of England. Thus the Bank of England is the reservoir from which all
banks expect to be able to draw cash in time of need.
When we turn to the Bank Return, what cash do we find is retained to
meet such a heavy contingent liability? In the figures of the “Return”
given in chapter vii., the “Reserve” stands at about twenty-five
million pounds only; and with regard to this Reserve, it must be
remembered that the Bank is peculiarly open to foreign demands in
addition to home demands. Such a reserve is slender, to say the least
of it, and the strengthening of the “Reserve” to a figure more in
keeping with our increased liabilities is, or should be, constantly
before the authorities who have the control of our banks. This matter
will have to be faced some day, and the longer action is delayed the
more difficult will it become to grapple with it.
Various schemes for increasing our reserve have been put forward from
time to time: one suggestion was that banks should retain a safety
reserve of gold in their own keeping; another that a bankers’ bank
should be established, to hold the reserves of other banks in place
of the Bank of England; a third, that each bank should maintain a
larger balance with the Bank of England, on the understanding that that
institution should increase its reserve in respect of such increased
balances. These schemes have each their advocates and opponents, but
with each the result to the banks would be a loss of profit, for each
would involve more money lying idle. This loss of profit is at the root
of the whole difficulty.
This brings us to consider the question of competition among bankers,
which at present is very keen, and which quite conceivably may lead to
dangerous results unless kept within reasonable bounds.
The tendency of the time is towards the absorption of the smaller and
weaker banks of the country by the large joint-stock banks. In itself,
this is not an undesirable feature, in that it places the banking
system, as a whole, on a sounder footing. Another feature is the
establishment of branch offices throughout the length and breadth of
the land. This gives facilities for capital to flow readily from one
part of the country where it may be in excess, to another where it is
in demand.
The joint-stock banks, however, are keen competitors among themselves,
new branches being established wherever the possibility of securing new
business exists, or where existing connections are threatened by the
incursions of some other bank.
This multiplication of banking offices is of decided convenience to
customers; it saves them the trouble of sending long distances to pay
in, or to draw wages, etc.
In the race for business, however, rates are cut down to attract
custom, and risks are perhaps undertaken which would not be entertained
if competition were not so keen. These risks may not be large
individually, but collectively they may amount to a large sum. They
possibly tend to lock up resources in _one class_ of security, which,
as we have seen, is a source of danger. This is especially the case in
new and growing districts, where much accommodation is asked for on
the security of house property, and for the purpose of developing new
estates. There is, in fact, a growing tendency at the present day to
transfer to banks business which formerly went to building societies;
and if this system is encouraged, it is likely to result in a large
portion of a bank’s advances becoming of a fixed nature and unavailable
in case of need.
Mr. F. E. Steele, in a lecture recently delivered to the students of
the London Chamber of Commerce, called attention to another danger
resulting from undue competition. He said:—
“There is another phase of competition which should be
touched upon. This phase I do not remember to have seen
specifically dealt with in treatises on banking. I refer
to the growing tendency on the part of banks to ear-mark,
for the benefit of particular depositors, securities
which should form a free asset; a security to the general
body of its depositors. You will find now in some balance
sheets, either in the investment column or as a footnote,
that a certain portion of the bank’s investments are held
for public bodies, such as county councils, borough
councils, corporations, etc. In order to secure the
accounts of these bodies the banker hypothecates to them
certain securities, such as Consols, which would otherwise
be held for the benefit of its depositors in general.
This tendency to tie up assets which should be free
should be narrowly watched by the public, and carefully
controlled by bankers. That it should be resorted to in
some cases seems inevitable. It is done by some of the
best and soundest banks. But it is a course which should
be resorted to as little as possible.”
In conclusion, we will turn from the question of the Money Market
itself to the army of individuals who spend their lives in the service
of the various institutions forming the Money Market. By far the
largest number of these individuals are connected with our various
joint-stock and private banks. It is commonly thought that the life
of a bank clerk is an easy one. Jerome K. Jerome, in his amusing book
_Three Men in a Boat_, in referring to the occupation of his friend
George, says, “He sleeps in a bank from nine till four, when they wake
him up and put him outside.” Common ideas, however, are frequently
not quite correct, and though certain members of the fraternity, who
happen to be situated in country and suburban districts, do not suffer
from overwork, yet as regards those connected with London and the large
centres of industry, their life is an arduous one,—often tedious in
its sameness,—the hours of work are not short, and the remuneration,
although adequate, is not generally on the scale that some time ago
was popularly believed to be the happy lot of the bank clerk. Still,
one’s life is what he makes it, and the idea embodied in Napoleon’s
saying—that every soldier carried in his knapsack a marshal’s bâton—is
equally true of the banking profession.
Every junior on entering the service of a bank has before him the
prospect of ultimately rising to occupy a position of importance and
respect, even to the position of general manager of his bank, if he
so equips and conducts himself as to be fit for and worthy of such
promotion.
The facilities and inducements to self-improvement placed before bank
clerks of the present day are much greater than in bygone times. Many
classes are held and lectures given dealing with banking subjects.
Examinations are held, and many banks recognise and reward the success
of their clerks at these tests of knowledge. Technical knowledge,
however, is not everything; common sense, good judgment, tact, and a
cool head are also necessary in order to become a successful banker or
financier, but these qualities are of much more value when combined
with sound and good technical knowledge.
Greatness is not thrust upon any bank clerk, but it is in the power of
all, if they will, to achieve it, to a greater or less degree.
APPENDIX
THE GOLD RESERVE
Since the remarks concerning the Gold Reserve were written (chapter
xiv.) much interest has been aroused in the matter by a suggestion made
by Mr. J. Herbert Tritton, the President of the Institute of Bankers.
At the opening of the last session of the Institute (November, 1903)
the President, in his inaugural address, after referring to many
current and important topics, passed on to the subject of the visible
gold reserves, and made the following novel suggestion. By Mr.
Tritton’s courtesy his remarks on this matter are here reproduced in
full.
“VISIBLE GOLD RESERVES
“The ever-pressing question of this country’s visible reserves of
gold, quiescent during the war, is again attracting attention.
Theoretically, everyone would admit that larger reserves of gold in
this country are desirable; many would go further and say necessary;
but any, even the smallest, step in the direction of action is at once
barred on the ground of expense. At whose cost is the reserve to be
held? £15,000,000 at 3 per cent. is £450,000 a year, and this must
almost inevitably come out of somebody’s pocket. Bank of England
stockholders and ordinary bank shareholders would be mulcted, or
would think they were, to the extent, say, of a second income tax
of 1_s_. in the pound on their dividends. Of course, the question
is, in its essence, of national importance, but the Treasury of this
country never allows itself to be influenced by considerations of this
character—nor, indeed, have the English people for the last fifty
years expected either Government help or Government interference in
their financial or commercial affairs. Pardon the interjection, but
I, for one, say long may this country be not only self-reliant, but
free; free to trade as each member of it shall choose, unshackled and
uninfluenced by Government restrictions or Government encouragements!
We may, perhaps, cherish a faint hope that the new Chancellor of the
Exchequer may realise that he has taken with him from the Post Office,
liabilities as a banker, £144,605,088 in respect of Post Office Savings
Banks, and finds in his new office a further sum of £52,505,081 in
respect of Trustee Savings Banks, making together £197,110,169, liable
to be repaid in gold; and realising this as a banker, may be less
obdurate than his predecessors. But it would not be wise to expect
much from Downing Street: if the thing is to be done we must do it
ourselves. That a solution of the question is supremely necessary I am
convinced, however great the initial difficulties may be; and that it
is not beyond attainment if the best energies and the best brains of
the banking community be devoted to it, I am also persuaded. Mr. R.
H. Inglis Palgrave gives in his new book, _Bank Rate and the Money
Market_—a book which every banker should possess and read—page 104, the
following table:—
Proportion per
cent. of
Capital, Deposits, Average Reserve, Reserve at
and Circulation. Bank of England. Bank to Liability
as of
all Banks to
the Public.
1872 £584,000,000 £12,100,000 2·06
Deposits, Current
Accounts and Circulation
of all Banks publishing
accounts in the
United Kingdom
were:—
1894 £721,400,000 £25,800,000 3·58
1895 794,600,000 29,900,000 3·75
1896 797,700,000 34,600,000 4·33
1897 816,400,000 25,100,000 3·07
1898 838,300,000 22,900,000 2·73
1899 869,300,000 21,200,000 2·44
1900 889,600,000 21,400,000 2·41
1901 888,100,000 24,046,000 2·71
[5]1902 904,100,000 24,166,000 2·67
[Footnote 5: _Banker’s Magazine._]
“The Bank of England reserve, which constitutes the only real reserve
of the country, is shown here in its true light from our present
point of view. A further outside reserve of, say, £15,000,000 would
only, it is true, serve to restore the proportion to that of the year
1896, but it would ensure the present maximum becoming, in effect,
the future minimum, and here would be a great gain in an extra sense
of security in troublous times. Should a gold panic at any time
seize upon the public, it would matter little whether the ratio of
Bank of England reserve to the aggregate liabilities were 2·50 or 5
per cent., suspension of cash payments would ensue. A credit panic,
as distinguished from a gold panic, can usually be assuaged by a
suspension of the Bank Act and an overissue of bank-notes. A further
object of an increased gold reserve is that not only the periodic and
well-recognised, but the unexpected and perhaps heavy withdrawals of
gold may be met without recourse to violent measures such as those to
which the market is too often subjected. If this were clearly seen to
be not only the intention, but the practical working of the fund, an
objection which, I admit, is of great weight would be fairly met, and
minor objections would almost disappear.
“The objection to which I refer is this. Gold is meant to circulate,
not to be hoarded, and any proposal permanently to withdraw such an
amount as £15,000,000 from circulation and, as it were, entomb it again
in the bowels of the earth, stands self-condemned. No such entombment
is suggested, as far as I know, but the formation of a fund for use—a
fund which, on occasions, would pass into circulation—international,
if not national—and would have a steadying effect on the pulse of the
Empire, the Bank of England rate. How can we set about securing it? Let
us glance at the tabulated bank balance sheets of the country. From
which of the items on the assets side could such a sum be withdrawn?
Loans and discounts? No. Investments? No. Buildings? No. Money at call?
No. Cash in hand and at Bank of England? This, _ex hypothesi_, is the
item to be increased. The reasons I need not give, but it appears
tolerably plain that no plan involving a permanent diminution of any
item on the asset side would meet with a favourable reception from
practical men. Is it possible, if these items cannot be conveniently
decreased, to obtain the amount by a fresh creation of credit, an
addition to loans and discounts, and an equivalent addition to the
other side of the account? Please understand that I am considering the
case quite apart from the Bank of England.
“Here I am directly and once again challenging critics, who do not
agree in my view of the non-elasticity of the Money Market, to show
how, in their view, the alleged elasticity of the market may be
utilised to produce a fund of £15,000,000. My contention is that only
by the increase of the note issue or by increase of capital can it be
reached. Suppose the bankers were authorised to issue £15,000,000 of
£1 bank-notes. How could these be kept in circulation unless they were
legal tender? Of what use would they be if they took the place of gold
in our tills? This plan, under which alone could credit be created,
would be futile to attain our end. There remains only the creation of
new capital, unless our friends, whom I am challenging, and to whom we
are looking to give us a discussion which cannot fail to be interesting
under the auspices of Mr. A. C. Cole, who has undertaken to read a
paper on ‘Notes on the London Money Market,’ can show us some adequate
alternative. If each bank of the kingdom increased its paid-up capital
20 per cent. by an issue of a Three per cent. Preference Gold Stock,
the fund could be attained. The proceeds should be devoted in each
individual case to the acquisition of a corresponding amount of gold,
in addition to present holdings, and this gold should be deposited
at the Bank of England, but not merged in the Bank figures, so as to
stand week by week intact, and shown under a separate heading in one
aggregate, though, of course, the absolute property of each bank in
detail. Carefully thought out arrangements whereby, under a joint
committee of the bankers and the Bank of England, whenever occasion
arises, a percentage of each holding should be transferable to the
credit of each bank in the books of the Bank of England should be
made, the gold thus forming an addition to their reserve until again
withdrawn and added to the Bankers’ Gold Fund.”
Needless to say, this suggestion, coming from such an authority,
caused much comment in monetary circles, and was generally received as
a valuable contribution to the various schemes having for an end the
settlement of this important matter.
In certain quarters, however, the scheme was held to be an
impracticable one; and at a subsequent meeting of the Institute of
Bankers, Mr. Cole, a director of the Bank of England, spoke as follows:—
“As regards the proposal to increase the capital of the
banks, my reply is that the floating of a loan in this
market of £15,000,000, or of £100,000,000, will not add
one single golden sovereign to the bankers’ cash reserves.
“We can only increase our stock of gold in this country by
getting it from abroad. To do that we must offer to the
holders of gold abroad something that they will take in
exchange for their gold.
“A loan in this market to increase the capital of the
banks, to be subscribed for by the public who have
deposits with them, is merely transferring a liability
now existing on the part of the bankers to the public,
from their depositors to their shareholders. The only way
the bankers can increase their cash in hand, or balances
at the Bank of England, is by following the method now
pursued, namely, calling in their short loans so that the
market has to borrow at the Bank of England. To put their
position permanently on a sounder basis they must agree
that instead of calling in their loans temporarily, they
must all keep permanently larger balances at the Bank of
England. Then the gold reserves of the country will be
increased, provided that the Bank of England maintains
its usual ratio of cash to liabilities. Taking that as
45 per cent.—the average proportion for the last twenty
years ending 31st December, 1903, has been 46·6 per
cent.—a permanent increase of £15,000,000 to the bankers’
balances would increase the gold reserve of the country by
£6,750,000, and bring the average holding of the Bank of
England in the Banking and Issue departments combined up
to about £40,000,000. The reason for desiring to have a
rather larger stock of gold at the Bank is that the export
then of a few millions is of relatively less importance.
But we do not want more than is requisite for the easy and
safe working of our system. To sit on a hoard of unused
gold is to do away with the advantages of banking. What
is requisite is for this country to retain the power of
attracting gold when it is required. Neither the system
of banking nor the bankers can give it that power, for it
is dependent, not on them, but on the successful business
energy and activity of the nation. Of course, in order
to attract and retain here the amount of gold mentioned
above, the Bank of England must adjust its rate to
circumstances, but with the increasing supplies of gold,
actual and prospective, a reasonable rate is likely to
suffice.”
These remarks caused some discussion, during which it was pointed out
that under Mr. Tritton’s proposal the banks would collectively form a
gold fund of £15,000,000, at a cost to themselves of £450,000. Under
Mr. Cole’s proposal, however, for the banks to increase their balances
at the Bank of England by the sum of £15,000,000, the extra gold
held in the country would only be increased by the sum of £6,750,000
(according to the proportion of the reserve held to public liabilities,
which has been 45 per cent. on an average for the last twenty years),
while the Bank would make a considerable profit from the remainder of
the increased balances—a profit earned entirely at the expense of the
banks.
It was also pointed out that the requisite gold could be acquired by
offering a slightly higher price for it, thus retaining imports of the
metal which would otherwise be bought up by exporters. Finally, it was
stated by one speaker of eminence in the banking world, that in his
opinion the matter was not one for the banks to deal with alone, the
additional gold not being required for the sole benefit of the banks,
but for the security of the community at large.
The matter here rests for the present, but when it has to be settled,
as doubtless it must at some time, the ideas and suggestions contained
in these discussions will probably become of importance.
INDEX
Active circulation, 59
Advances to customers, 92, 100
Amalgamations, 80, 164
Arbitrage, 131
Bank Act of 1844:
Main provisions of, 29;
suspensions of, 35, 36, 38
— of France, 127, 149
— paper, 139
— post bills, 69
— rate, 74, 139, 143
— return: the first issued, 32
Bankers’ balances, 65, 90
Banking department, 62
Berlin: specie points, 128
Bill-brokers, 51, 90
— — guarantees, 108
Bills under discount, 92, 100
Board of Trade Returns, 154
Branch banks, 80, 164
Buying gold, 149
Call and short money, 50, 94, 147
Cash payments: suspension of, 12
’Change, 134
Circulation: active, 59
Clearing House, 79, 115
— — Returns, 119, 154
Closing prices, 160
Competition, 163
Continental investment in London bills, 140
Country clearing, 117
Course of exchange, 135
Deficiency bills, 70
Exchange: favourable or unfavourable, 128
— long, 136
— short, 136, 139
Exchequer bills, 51, 92
— — closure of by Charles II., 5
Export specie points, 126
Favourable exchange, 128
Fixed price of issue, 159
Floaters, 111
Fluctuations of exchange rates, 129
Foreign bankers, 46, 54, 110, 139
Gold movements, 123, 142
— reserves, 162, 169
Goldsmiths, 4, 19
Import specie points, 127
Indian Government, 52
— price of silver, 152
Investments, 91, 97, 99
Issue department, 57
— at fixed price, 159
— by tender, 158
Joint-stock banks, 19, 21, 49, 77
Limited liability, 79, 145
Liquid assets, 93
Lombards, 3
Long exchange, 136
Mexican dollars, 152
Money market, 47
Monopoly of joint-stock banking, 10, 15, 23, 76
New York specie points, 128
One-reserve system, 67, 162
Par of exchange, 125
Paris: specie points, 127
Post days, 134
Premises, 93-100
Rediscounting, 110
Reichsbank, 34, 128, 149
Reserve, 73, 143
— capital, 83
— funds, 83, 104
Royal Exchange, 132
Short exchange, 136, 139
— loan fund, 49, 113
Silver, 150
Specie points, 126
Stock Exchange, 52, 96, 156
Suspension of cash payments, 12
— Bank Charter Act, 35, 36, 38
Tender system, 158
Till money, 60, 90
Tower of London: seizure of moneys, 4
Trade bills, 106, 139
Traffic returns, 153
Treasury bills, 51, 148, 158
Unfavourable exchange, 128
Visible gold reserves, 169
Ways and means, 70
Window dressing, 95
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