THE ENGLISH BANKING SYSTEM
FOUNDATION AND GROWTH OF THE BANK OF ENGLAND
[150]About the year 1691 the Government of William and Mary experienced
considerable difficulty in raising the necessary funds to prosecute the
war with France; but "the hour brings the man." The man on this occasion
was William Paterson, a merchant of Scotland, who had been educated for
the Church, but had led a varied and adventurous life. The scheme he
presented for the consideration of the Government for the relief of the
situation was the foundation of a public joint-stock bank; which, in
return for certain powers and privileges to be conferred, should advance
money to the Government....
... the bill establishing the Bank of England was successfully carried
through Parliament, and obtained the royal assent on the 25th April,
1694.
The basis of the bill was that L1,200,000 should be voluntarily
subscribed by the public, and that the subscribers should be
incorporated into a body, to be known as "The Governor and Company of
the Bank of England."
The whole of the sum forming the capital of the bank was to be lent to
the Government, for which the bank was to receive interest at the rate
of 8 per cent. per annum, together with an allowance of L4,000 per annum
for management and expenses; making in all L100,000 per annum. It was
also provided that the sum of L300,000 was to be raised by public
subscription, for which the contributors were to receive certain
terminable annuities.
By its first charter, which was for ten years only, the Bank of England
was not allowed to borrow or owe more than the amount of its capital;
which meant that it could issue notes to the extent of its capital and
no more. If this amount were exceeded the members were liable for such
excess, in their private capacities, in proportion to their holding of
stock.
The capital of the bank was subscribed in a few days, and when duly paid
up, the agreed sum of L1,200,000 was handed in to the Exchequer....
The charter originally granted to the bank was for ten years only, as we
have already seen; but this charter has from time to time been renewed,
and also varied--sometimes in favour of the bank and sometimes
curtailing its privileges. The monopoly of joint-stock banking was not
granted to the bank by its first charter, but this monopoly was
practically conferred on it in 1708. The act passed in that year
provides:
That during the continuance of the said corporation of the
Governor and Company of the Bank of England, it shall not be
lawful for any body politic or corporate whatsoever, created
or to be created (other than the said Governor and Company
of the Bank of England), or for any other persons
whatsoever, united or to be united in covenants or
partnership, exceeding the number of six persons, in that
part of Great Britain called England, to borrow, owe, or
take up any sum or sums of money on their bills or notes,
payable at demand, or at a less time than six months from
the borrowing thereof....
We pass on now to the end of the eighteenth century, when the country
was plunged into the throes of war and financial difficulty. Up to this
time the bank, since its foundation, had succeeded in meeting its notes
when presented; but in the year 1796 a steady drain on the reserve of
the bank commenced, owing to the fear of invasion. This drain began to
assume a very serious aspect in the early part of 1797, and it appeared
probable that the bank would be subjected to the danger and humiliation
of a temporary stoppage. The directors, fully aware of this danger ahead
of them, laid the position before the Government, and left the solution
of the difficulty in its hands. After due consideration, an Order in
Council was issued on the 26th February, 1797, requiring the bank not to
pay its notes in gold.... It was not until 1823 that the restriction was
entirely withdrawn, although as a matter of fact the bank really
resumed paying in cash on demand on May 1, 1821, deeming it then safe to
do so.
Although a period of safety and prosperity then appeared to have dawned,
the bank was not quite clear of its troubles. The very prosperity of the
times led imperceptibly to another period of distress and danger,
culminating in the panic of 1825....
In 1826 the Bank of England, by arrangement with the Government, agreed
to establish branches in various parts of the country, and gave up their
monopoly of joint-stock banking, except within a radius of sixty-five
miles of London.
The year 1833, however, saw a further restriction in the powers of the
bank, when, after protracted negotiations, and in return for a further
renewal of its charter, the bank surrendered its monopoly of joint-stock
banking entirely, provided that no bank having more than six partners
might issue notes within the sixty-five-mile limit of London.
It is a curious point that the charter of the bank never did restrict
joint-stock banking in its present accepted form, but only the issue of
notes by joint-stock bankers or banks having more than six partners. Up
to this time the issue of notes by a bank had been thought to be its
main business; so much so, that it was believed to be useless to attempt
to conduct a bank without power of issue, and consequently no
joint-stock bank had been founded. But about this time the need of such
institutions began to be felt, and the presumed monopoly of the Bank of
England was called in question--largely by Mr. Gilbart, the founder of
the London and Westminster Bank. The bank tried to assert their
monopoly, but without success, and in order to settle the matter
effectually, the following clause was inserted in the act passed in 1833
dealing with the bank charter:
Be it therefore declared and enacted, that any body politic
or corporate, or society, or company, or partnership,
although consisting of more than six persons, may carry on
the trade or business of banking in London, or within
sixty-five miles thereof, provided that such body politic or
corporate, or society, or company, or partnership, do not
borrow, owe or take up in England, 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, during the
continuance of the privileges granted by this Act to the
said Governor and Company of the Bank of England.
It may be noted that this act of 1833 constituted Bank of England notes
a legal tender, except by the bank itself or its branches....
PEEL'S ACT OR THE BANK CHARTER ACT OF 1844, AND ITS SUSPENSIONS
[151]After the renewal of the charter in 1833, the directors of the Bank
of England laid down as a principle on which their future operations
were to be guided, that one-third of their liabilities should be kept in
cash and bullion, and the remaining two-thirds in securities. If this
principle had been acted on, the bank would have been saved from many of
the troubles which shortly assailed it; but though the intentions of the
directors were good, circumstances were too strong for them, and the
actual proportions of cash and securities to liabilities, respectively,
often differed materially from the standard laid down. This was notably
the case during the periods of financial pressure which were experienced
in the years 1836 and 1837.
In the year 1839 matters assumed a very serious aspect. In the early
part of this year the amount of cash held by the bank was about
one-third of the amount of securities, but during the year the amount
invested in securities increased at the expense of the amount held in
cash; and by September we find that securities stood at nearly
L29,000,000, while the cash was reduced to a tenth of that figure, and
stood at L2,936,000 only. In order to avert a calamity which appeared to
be impending, the bank arranged loans in Paris and Hamburg to the extent
of between three and four millions.
This manifest exhibition of weakness on the part of the bank led to the
appointment of a committee of the House of Commons to inquire into the
matter. The committee condemned the principles on which the bank was
working, but were powerless to effect any alteration, owing to the
charter of the bank not expiring till 1844.
On the expiry of the charter, however, Sir Robert Peel brought forward
his famous act for remodelling the bank, and regulating the issues of
the country banks throughout. England and Wales.
The act was passed on the 19th July, 1844, and continues without
alteration to the present day. The main provisions enacted thereby,
briefly stated, are as follows:
I. The issue department and the ordinary banking department of the Bank
of England were to be entirely separated as from the 31st August, 1844.
II. On such separation taking place, securities to the value of
L14,000,000 (including the [book] debt due to the bank from the
Government) were to be transferred to the issue department, together
with so much gold coin and bullion that the total so transferred should
equal the total amount of notes then outstanding. Thereafter (with the
exception noted below) the issue department must not issue any notes in
excess of a total of L14,000,000 except in exchange for gold coin or
bullion.
III. The issue department might not at any time hold more silver than
one-fourth part of the gold held. As a matter of fact the issue
department holds no silver.
IV. Notes might be demanded from the issue department by any person in
exchange for gold at the rate of L3 17_s._ 9_d._ per standard ounce.
V. If any banker having the power of issue on the 6th May, 1844, should
relinquish such issue, the issue department may be authorised to
increase its issue of notes against securities to the extent of
two-thirds of the issue so relinquished; but all the profits on such
increased issue against securities were to belong to the Government.
VI. The bank must issue a weekly statement of the position of both its
issue and banking departments, in a prescribed form.
VII. Bankers having the right to issue their own notes on the 6th May,
1844, might continue such issue under certain conditions, and to an
agreed amount; but no provision was made compelling such bankers to keep
any reserve either in cash or securities against their issues. If any
issue lapsed, from any cause, it could not be resuscitated; and no
institutions could acquire the right of issue in the future.
VIII. Banks consisting of more than six partners, though within the
sixty-five-mile radius of London, might draw, accept, or endorse bills
of exchange not being payable to bearer on demand.
The first return issued by the bank in accordance with the regulations
of the new act was that of the 7th September, 1844, and was as follows:
ACCOUNT OF THE LIABILITIES AND ASSETS OF THE BANK OF ENGLAND
For the Week ending 7th September, 1844
DR. ISSUE DEPARTMENT CR.
Notes issued L28,351,295 Government debt 11,015,100
Other Securities 2,984,900
Gold coin and bullion 12,657,208
Silver bullion 1,694,087
----------- -----------
L28,351,295 L28,351,295
DR. BANKING DEPARTMENT CR.
Proprietor's capital 14,553,000 Government securities 14,554,834
Rest 3,564,729 Other securities 7,835,616
Public deposits 3,630,809 Notes 8,175,025
Other deposits 8,644,348 Gold and silver coin 857,765
Seven-day and other
bills 1,030,354
----------- -----------
L31,423,240 L31,423,240
... Taken as a whole the act has worked well, and has succeeded, in
combination with greater knowledge and foresight, in maintaining our
banking system in a sound condition....
The main point of contention between the supporters and opponents of the
act lies in its want of elasticity in time of need. Under no
circumstances can the bank increase its issue of notes against
securities beyond the prescribed limit, without a breach of the law; but
on three occasions in the past the law has been broken, though with the
consent of the Government, and subsequent confirmation of Parliament....
We will now briefly review the ... occasions on which the Bank Act was
suspended, and the effect of such suspensions.
The first of these occasions was during the panic in the year
1847--known as the "railway panic." Shortly previous to this year a
great accumulation of capital had led to a demand for new investments,
which were duly provided for the public by those concerned with such
matters. Added to this, interest rates had ruled low for some time, and
this conduced to a period of speculative activity. Too much capital was
put into fixed investments--chiefly railways--and in one session of
Parliament sanction was asked for various railway schemes involving a
total capital of L340,000,000. Wild gambling in railway stocks ensued,
credit was inflated above all reason, and then the turn came. This was
primarily due to a bad harvest and potato crop, causing a heavy
importation of corn, and consequent export of gold.
During the panic which ensued, the reserve of the Bank of England fell
to L1,600,000, but when the panic was at its height, the act, passed
only three years before, was suspended. The bank was authorised to
increase its accommodation to the public by exceeding, to an indefinite
extent, the limit fixed for the issue of notes not secured against gold.
The effect of this suspension of the act was immediate and complete. The
fear that "there was not enough to go round" passed from men's minds. As
a matter of fact, the issue on this occasion did not exceed the normal
limit, the mere knowledge that the bank was empowered to exceed this
limit proving sufficient to allay the panic.
The second suspension of the Bank Act was due to the crisis of 1857, a
crisis that was brought about by reckless overtrading, and came upon the
public very suddenly and with practically no warning....
The third suspension of the Bank Act took place in 1866.[152] Many
elements of disturbance to the money market had been in force during two
or three preceding years. The Civil War in America had resulted in gold
being sent to this country; but the stoppage of the supply of cotton
from America, owing to the war, disorganised one of our staple national
industries, and supplies of cotton had to be obtained from elsewhere at
high prices, and paid for in cash. Hence a drain of gold set in on a
large scale. In addition, a large speculation had been built up on
credit in the stocks and shares of the many new limited liability
companies which were formed at that time.
General uneasiness began to prevail towards the end of 1865; in January,
1866, the bank raised its discount rate to 8 per cent., and a crisis
began to develop rapidly....
On the 9th May the bank rate was raised to 9 per cent. On the 10th May
the failure of Overend, Gurney, and Company--for upwards of ten
millions--was announced, and the bank rate went to 10 per cent. This
failure was not made known till after business hours, so it was not till
Friday, the 11th May, 1866--known as "Black Friday"--that the crisis
reached its height.
The stoppage of this large house affected the whole world, and general
failure seemed imminent, when, in the afternoon of the day on which the
failure became known, it was announced that the Bank Act was again
suspended, and calm began to take the place of mania. But though the
panic was allayed, many failures shortly took place, which delayed the
quick restoration of a sense of security....
From the above brief records of the financial tragedies of the past, we
see that on each occasion reckless speculation and overtrading had been
allowed to reach a dangerous height before any steps were taken to check
them, and on each occasion the check came too late. But we also see the
marvellously quick effect which the suspension of the act had on the
situation....
THE FUNCTIONS OF THE BANK OF ENGLAND
[153]The distinctive functions of the Bank of England consist in its
acting as:
1. Banker to the British Government.
2. Banker to the joint stock and private banks.
3. (a) Sole possessor of the right to issue notes which are legal tender
in England; (b) sole possessor, among joint stock banks with an office
in London, of the right to issue notes at all.
4. Provider of emergency currency.
5. Keeper of the gold reserve for British banking.
6. Keeper of the gold reserve which is most readily available for the
purposes of international banking.
These various functions fit into and supplement one another, and though
their diversity is sometimes pointed to as throwing too much
responsibility onto one institution, it in fact enables the bank to
carry out its duties with extraordinary ease, and with the least
possible disturbance to the financial community. By the fact that it
keeps the balances of the other banks, the Bank of England is enabled to
conduct the payment of the interest on the British debt largely by
transfers in its books. By the fact that it keeps the balances of the
Government and has the monopoly of the legal-tender note issue, the Bank
has a great prestige in the eyes of the general public, which it
communicates to the other banks which bank with it. There is an
impression that the Government is always behind the bank, and that the
bank is always behind the other banks, and this feeling has certainly
done much to foster the confidence of the British public in its banking
system.
A credit in the books of the Bank of England has come to be regarded as
just as good as so much gold; and the other banks, with one exception,
habitually state their "cash in hand and at the Bank of England" as one
item in their balance sheets, as if there were no difference between an
actual holding of gold or legal tender and a balance at the Bank of
England. It thus follows at times when an increase of currency is
desirable, it can be expanded by an increase in the balances of the
other banks at the Bank of England, since they thus become possessed of
more cash to be used as the basis of credit. For currency in England
chiefly consists of cheques, and customers who apply to the banks for
accommodation, by way of discount or advance, use it by drawing a cheque
which is passed on and so creates a deposit; and expansion of currency
thus consists chiefly in expansion of banking deposits. This expansion
is only limited by the proportion between deposits and cash which the
banks think fit to keep, and as long as they can increase their cash by
increasing their credit in the Bank of England's books the creation of
currency can proceed without let or hindrance. Their balances can be
increased by borrowing from the Bank of England, which is generally
carried out not by the banks themselves but by their customers from whom
they have called in loans, and the Bank of England is thus enabled to
provide emergency currency with great ease, by means of loans and
discounts which are used to swell the balances of the other banks, which
thus show an increase of the cash at the Bank of England which they use
as a basis for credit operations. The elasticity of the system is thus
remarkable, and the merchants and bill brokers of London can by taking
approved security to the Bank of England, increase the basis of English
credit in a few minutes by borrowing.
1. Examining these functions of the Bank of England in closer detail we
find that its first and most obvious one, which originally brought it
into being, of financing the British Government and acting as its
banker, is now perhaps its least difficult and important duty. Apart
from the prestige which it thus acquires and its close touch with the
Government and the officials of the Treasury, the bank's position as
government banker is of little direct material advantage. Its duties as
such, besides the normal relation between a bank and a customer, consist
chiefly in making advances to the Treasury in the shape of "deficiency
advances" when the government balances are too low to admit of the
payment of the quarterly interest on the British debt without
replenishment, or against "ways and means" advances at times when the
revenue is coming in more slowly than government expenditure is
proceeding. It also, when the Government has to borrow to a greater
extent, manages its issues of Treasury bills, or any loan operation that
the Government may have to undertake.
2. The second of the Bank of England's distinctive functions--its acting
as banker to the rest of the English banking community--is the one which
throws upon it its most serious responsibilities and gives it most of
its actual power and ease in working. The Government gives it prestige
in the eyes of the multitude, which considers that governments are
omnipotent; the other banks give it the power of providing emergency
currency by making entries in its books, and so acting as the easily
efficient centre of a banking system in which elasticity and the economy
of gold are carried to a perfection which is almost excessive.
Nevertheless, it pays heavily for its apparently privileged position as
bankers' bank. At first sight it would appear that these customers,
keeping a regular balance of twenty-odd millions, which varies little
and on which the Bank of England pays no interest, were a source of
comfortable income and no anxiety to it. But in the first place it is
obvious that a liability which is regarded as cash by the rest of the
banking community requires special treatment by its custodian, and in
practice it is so specially treated that the Bank of England maintains a
proportion of cash to liabilities which is fully twice as high as that
of the strictest of the other banks. This proportion rarely is allowed
to fall below 33 per cent. and generally ranges between 40 and 50 per
cent., and it need not be said that this high level of cash holding
tells heavily on the earning power of the Bank of England. Moreover, it
is its position as bankers' bank that exposes the Bank of England to the
responsibility of maintaining the gold reserve for English banking and
being prepared to meet, in gold, any draft on London that any one abroad
who has acquired or borrowed the right to draw wishes to turn into metal
to be shipped to a foreign country.
The amount of the bankers' balances is not separately stated, but is
wrapped up in the total of the other deposits in the Bank of England's
weekly return. It is believed to average about 22 millions in these
days, and it is often contended that valuable light would be thrown on
the monetary position if this item were separated from the balances of
the other customers of the bank. Many of the outer bankers are in favor
of this change, but there is a serious practical objection to it, in
that a dangerous impression might be created in the public mind if at
any time it were seen that the bank's cash reserve was below its
liability to its banking customers; and the separate publication of the
bankers' balances might thus check the readiness with which the Bank of
England creates emergency credit. Another suggestion that is sometimes
made by the many critics of the existing order of things in English
banking is that the banks should keep their cash reserves themselves;
but this very revolutionary change would deprive the system of its two
great advantages, a centralised organisation with a centre which
specialises on the duties involved by acting as centre, and the extreme
elasticity with which the present arrangements work. At the same time it
must be admitted that the system by which the other banks treat their
balances at the Bank of England as cash leads to the existence of a vast
amount of "cash" in England which on being looked into is found to
consist of paper securities or promises to pay.
3. The Bank of England's monopoly of note issue, which once gave it the
monopoly of joint-stock banking in London, is now a matter of
comparatively minor importance, owing to the change in English banking
habits by which the cheque has ousted the bank note for the purpose of
daily commercial payments, and the regulations which were imposed on the
note issue by the Bank Act of 1844. This monopoly was conferred on the
bank in 1706 and was maintained until 1826, when the implied monopoly in
joint-stock banking was restricted to a sixty-five-mile radius around
London. In 1833 joint-stock banks were established in London itself,
since it had been discovered that the Bank of England's alleged monopoly
only reserved to it the privilege of note issue, and the private bankers
in London had already found that it was more convenient to banker and
customer to work by the system of deposit and cheque.
The development of this system was quickened by the provisions of Peel's
act of 1844, which, under the influence of banking disasters that had
arisen out of reckless note issuing by private banking firms in the
counties, laid down an iron rule for the regulation of note issues in
England. None of the other note issuers were allowed to increase their
issues under any circumstances, and the Bank of England, for every
additional note issued beyond L14,000,000, was to hold metal in its
vaults. Under the terms of Peel's act one-fifth of this metal might be
silver, and in the early returns issued by the bank under the act a
certain amount of silver is found among the assets of the issue
department. But since 1853, no silver has been held in the issue
department of the bank, and in 1897, when the influence of the
bimetallists on the existing Government led to a proposal that the
proportion of silver allowed by law should be held by the bank as
backing for its note issue, public opinion expressed itself so
vigorously that the suggestion was promptly buried. The bank's fiduciary
note issue, thus fixed at L14,000,000, was only allowed to increase by
the lapse of the issues of the existing issuers, the bank being
empowered to increase it by two-thirds of the amount lapsed. The lapsing
process has proceeded steadily by the amalgamation of country banks with
banks which have London offices and so are prohibited by the bank's
monopoly. And the bank's fiduciary issue has thus been raised from the
original L14,000,000 to L18,450,000. Above this line it can not go
except by means of the suspension of the Bank Act, which has been found
necessary occasionally in the past. The English currency system is thus,
as far as the law can rule it, entirely inelastic, but it has already
been shown that even when the law of 1844 was passed, the cheque
currency, over which the law exercises no restriction, was already
driving out the note, and banks without any right of note issue had been
eleven years established in London. The Bank of England's note issue is
now chiefly used by other banks as "till money," or part of the store of
legal-tender cash they keep to meet demands on them. It has thus become
part of the basis of credit in England, since the other banks roughly
base their operations on their holding of cash in hand and at the Bank
of England. Their cash at the Bank of England has already been discussed
above: their cash in hand consists of coin and notes, and since the
latter have thus become part of the foundation on which the deposit
liabilities of the other banks are based, there is reasonable ground for
the contention often put forward by practical expert critics of the
English system, that the fiduciary note issue should be reduced by the
repayment by the Government of the whole or part of a government debt of
L11,000,000 to the bank, which backs the greater part of it, and its
replacement by gold. It is evident that the amount of metallic backing
for a note issue which is intended to circulate as currency is a
different matter from that required in the case of a note issue which is
held by bankers as a reserve and used by them as a foundation for a
pyramid of credit operations.
4. By the ease with which the Bank of England provides emergency
currency, it gives the English banking system the great advantage of
extreme elasticity and adaptability; and it is enabled to do this by the
fact that it acts as banker to the other banks, and that every credit
which they have in its books is regarded by them and by the rest of the
community as "cash" to be taken as practically equal to so much gold.
This cash at the Bank of England in the hands of the rest of bankers can
be multiplied as rapidly as the Bank of England is prepared to make
advances, and as the mercantile and financial community can bring it
bills for discount or securities to be borrowed on. There is no legal
restriction of any sort or kind, and the close relations between the
bank and its borrowing customers enable the necessary operations to be
carried through with a celerity which is unrivalled, at any rate in the
eastern hemisphere. The process works as follows: In every English bank
balance sheet there will be found an item among the assets "cash at call
or short notice," though in a few cases the slovenly habit is adopted of
including this entry along with the cash in hand. This "cash," as it is
called, really consists chiefly of loans made by the banks to the
discount houses, and regarded by the banks as the most liquid of their
resources. As such, it is at once made use of when for any reason, such
as the many payments which have to be made on quarter days, or at the
end of the half year when the preparation of balance sheets by firms and
companies require an abnormal amount of cash for more or less ornamental
purposes, the banks are subjected to extra pressure by their customers,
who both withdraw actual currency from them for smaller payments, and
require advances in order to show cash with bankers in their balance
sheets.
The banks in order to meet this pressure, and at the same time to
preserve an adequate amount of cash in their own statements, call in
their loans from the discount houses; the discount houses, at a point,
can only repay them by borrowing from the Bank of England and
transferring the credit raised with it to the bankers, whose cash at the
Bank of England is thus increased. This book entry takes the place in
their balance sheets of the legal-tender cash that their customers have
withdrawn, and is used as the basis for the increased deposits that have
been created by the loans of the bankers to their customers for
ornamental purposes. Similarly at the time of year when the transfer of
the taxes to the Government's balance reduces the cash at the Bank of
England held by the other banks the gap is filled by the loans made by
the Bank of England to the customers of the other banks. In short, by
discounting and making advances the Bank of England can at any time
create book credits, which are regarded as cash by the English banking
community, and on which the latter can base the credits which give the
right to draw cheques, which are the most important part of the English
currency. The extent to which the Bank of England can create this credit
is a matter for its own discretion, but any creation of it diminishes
the proportion that it shows in its own weekly returns between its
reserve and liabilities. Consequently when it is applied to for amounts
which bring that proportion too low the Bank of England has to take
steps to reinforce its cash reserve.
5. It has been shown that the Bank of England keeps the balances of the
other banks, and from this it follows that the latter look to it for
gold or notes at times when the local commercial community requires an
extra supply. At the end of every month, especially at the ends of the
quarters or at times of national holidays, the bank's note circulation
expands and coin is taken from it. The duty is thus thrown upon it of
keeping an adequate supply of cash for home purposes, and, as has been
already stated, its normal proportion of cash to liabilities is very
much higher than that of the other banks. But these movements are tidal
and regular, and though times of active trade increase slightly the
demand for coin and note currency in England, the extensive and
ever-growing use of the cheque reduces the importance of this part of
the bank's duties.
6. Much more important is the Bank of England's duty as custodian of the
gold store for international banking. London is the only European centre
which is always prepared to honor its drafts in gold immediately and to
any extent. Consequently the Bank of England has to be prepared to meet
demands on it at any time from abroad, based on credits given to
foreigners by the English banking community, and it has thus to observe
the signs of financial weather in all parts of the world and to regulate
the price of money in London so that the exchanges may not be allowed to
become or remain adverse to a dangerous point. The difficulties of this
task are increased by the extent to which the English banking community
works independently of it, by accepting and discounting finance paper,
and giving foreigners credits at rates which encourage their further
creation. For the low and wholly unregulated proportion of cash to
liabilities on which English banking works, enables the other banks to
multiply credits ultimately based on the Bank of England's reserve,
leaving the responsibility for maintaining the reserve to the bank. This
it does by raising its rate when necessary, and so, if it has control of
the market and its rate is "effective"--a phrase which will be explained
later--raising the general level of money rates in London.
When its rate is not effective, the Bank of England finds itself obliged
to intervene in the outer money market--consisting of the other banks
and their customers--and control the rates current in it. This it does
by borrowing some of the floating funds in this market, so lessening
their supply and forcing up the price of money. By means of this
borrowing it diminishes the balances kept with it by the other banks,
either directly or indirectly--directly if it borrows from them,
indirectly if it borrows from their customers who hand the advance to it
in the shape of a cheque on them. The result is that so much of the
"cash at the Bank of England," which the English banking community uses
as part of its basis of credit, is wiped out, money--which in London
generally means the price at which the bankers are prepared to lend for
a day or for a short period to the discount houses--becomes dearer, the
market rate of discount consequently tends to advance, the foreign
exchanges move in favor of London, and the tide of gold sets in the
direction of the Bank of England's vaults, and it is enabled to
replenish its reserve or check the drain on it. That the Bank of England
should have to go through this clumsy ceremony of borrowing money that
it does not want, in order to deprive the outer market of a surplus
which depresses discount rates in a manner that is dangerous owing to
its effect on the foreign exchanges, arises from the want of connection
between bank rate and market rate. In former days the London money
market never had enough money to work without help from the Bank of
England. Bagehot, in his great work on Lombard Street, published in
1873, says that "at all ordinary moments there is not money enough in
Lombard Street to discount all the bills in Lombard Street without
taking some money from the Bank of England."
As long as this was so, bank rate--the price at which the bank would
discount bills--was at all times an important influence on the market
rate. Since then, however, the business of credit making has been so
quickly and skillfully extended that Lombard Street is frequently able
to ignore bank rate, knowing that it will easily be able to supply its
needs from the other banks, at rates which are normally below it.
Currency in England consists of cheques drawn against deposits which are
largely created by the loans and discounts of the other banks. There is
no legal limit whatever on the extent to which these loans and discounts
can be multiplied, and the only limits imposed are those of publicity,
which is applied rarely in all cases and in some not at all, and of the
prudence with which the banks conduct their business. Hence it follows
that competition between the banks often impels them to continue to make
advances or discount bills at low rates when the Bank of England, as
custodian of the English gold reserve, thinks it advisable in the
interests of the foreign exchanges to impose a higher level. This it
does by borrowing some of the credit manufactured by the other banks, in
order to create artificial scarcity of money, and make its own official
rate effective.
It thus appears that the Bank of England's official rate is often
through long periods a mere empty symbol, bearing no actual relation to
the real price of money in London; and only becomes effective, and a
factor in the monetary position (1) when the trade demand for credit is
keen enough to tax the credit-making facilities of the other banks to
their full extent, (2) when the payment of taxes transfers large sums
from the other banks to the Government's account at the Bank of England,
so reducing the "cash at the bank" on which they build credit
operations, and (3) when, owing to foreign demands for gold, the Bank of
England takes measures, by borrowing, to restrict credits in the open
market and to make its rate effective. In other respects its official
rate differs materially from the rates quoted by ordinary dealers in
credit. It does not fluctuate according to the supply and demand for
bills, but is regularly fixed once a week at the meetings of the Bank of
England court on Thursday morning. It is extremely rare for any change
to be made in the Bank of England rate on any day except Thursday.
Instances occur rarely when some sudden change of position makes it
essential, as at the end of 1906, when the bank rate was raised to 6 per
cent. on a Friday morning. In normal times the rate which is fixed on
one Thursday is maintained until the next, though the rate is only a
minimum and the Bank of England occasionally takes advantage of this
fact and refuses to discount at its minimum, which still remains
ostensibly the bank rate, while the bank actually makes a rather higher
charge, which is usually made the official rate on the next Thursday.
But it must not be supposed that when bank rate is ineffective the Bank
of England is doing no business. It discounts bills and makes advances
at market rates at its branches, and also at its head office to its
private customers. Bank rate may be described as the price at which the
bank is prepared to discount in its official capacity as centre of the
London market, and it is because appeal is only made in exceptional
circumstances to the bank to provide credit in this capacity that bank
rate is often ineffective.
THE JOINT-STOCK BANKS
The most obvious function of the joint-stock banks of England is the
business of taking care of money for customers and meeting cheques drawn
against their balances. Customers place money with them either on
current or deposit account. On current account it can be withdrawn at
any time and earns, as a rule, no interest. Many banks make it a
condition that unless the current account is maintained at a certain
figure, generally L100, a charge shall be made for keeping it. A usual
charge is L1 5_s._ 0_d._ each half year, but arrangements vary according
to the terms agreed with different customers, and the keen competition
now prevalent enables many to obtain the convenience of a bank account
for nothing. Sums left on deposit are generally placed for a week or
longer, and if placed for a week the rate paid on them by the banks is
generally 1-1/2 per cent. below bank rate.
Out of this function of meeting checks drawn by customers against the
sums deposited has grown the banker's chief duty, which is now the
provision of cheque currency for the mercantile and financial community.
Currency in England consists of coins, notes, and cheques. The note
issues are almost obsolete as currency, the Bank of England's being used
chiefly as reserve by the other banks, while the issues of the country
banks are so small as to be negligible. Most of the commercial and
financial transactions of England to-day are settled by cheques drawn on
the banks by their customers. These cheques are not legal tender, since
it would obviously be impossible that a cheque drawn by an individual on
a bank could be legally made acceptable by a creditor whether he wished
to take it or not.
There is no legal obligation of any sort on them to maintain any regular
proportion between cash and liabilities, and as their position in this
respect is only subjected to occasional publicity they are not obliged
to consider even the effect upon their customers of any considerable
variation in the proportion between cash and liabilities which they
keep. The system thus works with extreme elasticity and banking
facilities can be provided in England with extraordinary ease. It has of
late years been frequently contended that the ease and elasticity with
which it works have carried the English banking machinery to a somewhat
extreme length in the matter of the economy of gold and legal tenders
and the extent of the credit pyramid which it builds up on them. After
the crisis of 1890, Lord Goschen seems to have been strongly imbued with
the conviction that the system had been carried too far. He therefore
urged upon the London banks that they should make a monthly statement of
their position, and this suggestion was adopted by the majority of them.
The result was that they published a monthly statement showing how they
stood on one day at the end of each month, and it thus followed that on
one day at the end of each month the banks showed a proportion of cash
to liabilities which they considered sufficiently adequate to stand the
light of publicity. But the system has long been seen to be faulty, and
a certain amount of abuse has grown up round it. It is strongly
suspected, for example, that some of the banks which publish these
statements make preparations for them by calling in loans or reducing
their discounts for the day on which the statements are drawn up. As far
as this is done the statement is to a certain extent misleading, and
this practice of "window dressing," as it is called in Lombard Street,
has been subject to frequent criticism, so much so that one of the
leading London banks--the London and County--adopted early in 1908 the
practice of showing its daily average cash holding, thus demonstrating
that it was not in the habit of preparing a statement which did not
represent its position fairly throughout the month. It has been stated
by a president of the English Bankers' Institute that the proportion of
cash to liabilities shown by country banks ranges down to a point as low
as 2.2 per cent. No one can contend that this is an adequate cash basis
for banking to work on, and as long as certain members of the banking
community conduct their business on these lines an obvious hardship is
involved on those which keep a more prudent and strong reserve of cash.
It is contended by the big strong banks that their smaller brethren
compete with them by providing more credit than they have any right to
create, relying on their assistance in times of difficulty.
Apart from this danger of the over-multiplication of credit on an
inadequate cash basis, the complete absence of any legal or other
restrictions on the operations of English banking enables it to work
with extraordinary ease and readiness. As long as good unpledged
security, whether in the form of bills of exchange, commodities, or
Stock Exchange securities, are available in the hands of customers the
banks can advance against them to any extent that they consider prudent.
Prudence dictates in the case of a great majority of them that a certain
proportion of cash to liabilities shall be maintained, but, as was shown
above in dealing with the Bank of England, the cash of English banking
consists partly of credits with the Bank of England. These credits with
the Bank of England, and consequently the cash credits of English
banking, can be multiplied as rapidly as the Bank of England is prepared
to make advances or discount bills, and so give credit in its books. The
Bank of England must publish its account weekly, and it watches over its
proportion of cash to liabilities with a vigilance which is greater than
that of the rest of the banking community as a whole. Nevertheless, its
prudence in this respect is the only restriction on it, and we thus
arrive at the conclusion that the chief function of the English joint
stock banks, that of providing the mercantile community with currency
and credit, can be carried out to any extent as long as their customers
have security to offer and their proportion of cash remains adequate to
their sense of prudence. And further, their proportion of cash can be
increased as rapidly as the Bank of England is prepared to make
advances, which it can and does to an extent which again is only limited
by its own prudence.
Besides this absence of outside regulation, the English monetary system
is also distinguished by a remarkable lack of cohesion and co-operation
among the members of its own body. Except to a certain extent in the
country districts, where the rates allowed to depositors and charged to
customers are to a certain extent a matter of convention, English
banking works almost entirely at the mercy of very keen internal
competition. This extreme development of competition leaves the market
liable to pronounced depression in rates at times when slackness of
trade or other causes decrease the demand for credits. At these times
the adroit bill brokers and discount houses, which are in some respects
the most important borrowing customers of the banks in London, are
enabled by the use of this weapon of competition to obtain loans from
the banks at rates which are often below the price that the bankers are
paying to their depositors. Hence, it follows that in these times of
monetary ease the credit machine goes on turning out its product at
rates which are quite unremunerative and have a detrimental effect on
the market rate of discount, and so on the foreign exchanges, thus
increasing the difficulties of the Bank of England, which at these times
of extreme ease is without any control of the position. Against this
weakness of the system, however, must be set the advantage which the
unrestricted and fiercely competitive manufacture of credit confers on
the mercantile and trading community.
A few words should be said concerning the form of cheques with which the
English banks provide their customers as currency. Legally a cheque is a
bill of exchange drawn on a bank and payable on demand. That is to say,
it is an order signed by a customer of the bank directing it to pay a
certain sum to another party or to himself. The form, however, can be
varied in various methods, increasing or diminishing the ease with which
the cheque can be turned into cash. The cheque can be made payable to A
B or bearer, and in this form can be taken to the bank drawn on and
immediately turned into cash. When drawn to A B or order, a cheque has
to be indorsed, or signed on the back, by A B before the bank drawn on
will pay it. A still further restriction is the English system of
crossing cheques, that is to say, of drawing two lines across the face
of the cheque, by which mark it is shown that the cheque is not to be
paid in cash across the counter by the bank drawn on, but must be paid
into a bank by the payee, and so only becomes credited to him in his own
banking account through the operations of the clearing house. It is
evident that this protection greatly increases the safety of the cheque,
since if it fell into the wrong hands its chance of being made
fraudulent use of is greatly diminished. As the lines drawn across the
face of the check by the bankers' customers are often faint and
irregular, it has been found in practice that they lend themselves to
the ingenuity of the fraudulent, who are easily enabled to erase them
and so obtain possession of money that is not meant for them. Some of
the banks therefore print these crossing lines on all of the cheques
that they issue to their customers to be filled in, and when the
customer wishes to obtain cash from his bank on one of these cheques he
is consequently obliged to write upon it "Please pay cash," and sign
this note upon it. The extensive use of crossed cheques thus tends to
make the cheque still further an instrument which merely transfers
banking credits from the books of one bank to another, since every
crossed cheque implies that it can not be turned into cash directly, but
can only transfer credit with one bank to credit with another. Another
restriction with which custom has protected the English cheque is the
system of writing "Not negotiable" on the face of it. These words do not
mean that the cheque is really not negotiable, but their legal effect is
that the holder of the cheque can not establish a better right to it
than the party from whom he received it. If therefore the party from
whom he received it had no right to it, his claim against the paying
bank is _nil_. With these safeguards, and with the enormous convenience
of being drawn to any amount to fit the exact requirements of each
transaction, the cheque, although not legal tender, has been enabled to
supersede the bank note in English currency.
The chief function of the joint stock banks having thus been shown to be
the provision of currency for the English community, it may further be
noted that a remarkable development of their activity has been the
rapidity with which they have covered England with branch
establishments. It was estimated in 1858 that the total number of bank
offices in the whole of the United Kingdom was just over 2,000; at the
present moment the aggregate branch offices of four of the English joint
stock banks which are richest in respect of branch establishments have
exceeded this total. One bank in England has over 600 offices, one has
over 550, two have over 400, three have more than 200, twelve have more
than 100. This multiplication of branch offices has been carried out
partly by the absorption by the joint-stock banks of the smaller
institutions in the country, whether private or joint stock, and partly
by the rapidity with which they have opened branches in the great
provincial centres and their suburbs, and to a moderate extent in the
small country towns. The result of it is to give the English monetary
system the power of easily supplying the needs of the various parts of
the community as the requirements of others ebb and flow. At the same
time this rapid development increases the competition between the
various English banks, which we have already shown to be carried to an
almost excessive degree, and by the wide local distribution of their
liabilities enhances the possibility of strain on them in times of
difficulty.
Some of the banks include under the heading "cash at call and short
notice" advances which they make to the Stock Exchange for the
fortnightly periods that elapse between its settlements. The funds that
they so use obviously have an important effect upon the marketability
and price of securities in London. On the first day of every settlement
it is usual to see rates quoted as those at which the banks are lending
to their stock exchange clients for the financing of speculative
commitments. In the arrangement of these rates a certain amount of
combination and co-operation among the banks, or some of them, has grown
up as a matter of custom, but since for this class of accommodation the
bankers are subject to competition on the part of the agencies of the
foreign banks and the big finance houses it is often found difficult to
maintain even this amount of harmonious working among the bankers.
It has been shown that the rate at which the banks make advances to the
discount houses has an important effect upon the market rate of discount
in London, but the banks exercise a still more important and direct
effect upon this discount by being themselves large buyers of bills. It
is impossible to gauge exactly the extent to which they hold bills among
their assets, since many of them in their balance sheets include their
discounts along with their loans and advances. Among the many
suggestions that reformers have put forward in the matter of English
banking, one is that this item of the banks' holding of bills should be
separately stated. But though this obscurity in the statements of the
English banks makes it impossible to know the precise extent to which
they hold bills, there is no doubt their purchases of them are on the
whole the most important influence upon the market rate of discount in
London. Nearly all the discount houses, whose functions will be
described later, buy bills, largely with the intention of reselling
them to customers, among whom the joint-stock banks are the largest and
most important and most regular buyers, and it is contended by the
discount houses that the market rate of discount, for which they
themselves are generally supposed to be responsible, is really and in
fact regulated by the price at which the big joint-stock banks are
prepared to buy. This being so, since the market rate of discount is
perhaps the most important influence on the foreign exchanges and so on
the inward and outward movements of gold, it will be seen that this
function of the bankers is one of the greatest possible importance from
the point of view of London's free market in gold.
Besides thus regulating the price at which bills of exchange can be
discounted in London, the banks have in recent years taken an
increasingly large and important part in the creation of bills of
exchange by placing their acceptances at the disposal of their
customers. The increasing extent to which the bankers have in recent
years intruded into this class of business is a grievance that is
resented rather keenly by the merchant firms, or accepting houses, as
they are often called. It is contended by the latter that the business
of acceptance is a special function for which special training is
required, and that the joint-stock banks rarely have available the
special abilities that make for its proper conduct. On the other hand,
the high standing of the joint-stock banks and their big reserve
resource in the shape of their uncalled capital makes their acceptances
an exceptionally fine credit instrument, and it seems natural enough
that they should, to a certain extent and within moderate limits, place
these facilities at the service of their customers.
Finally it may be added that the English joint-stock banks are now
showing a disposition to engage to some extent in the business of
dealing in foreign exchange which has hitherto been left to the finance
houses and foreign firms established in London. The London and County
and the London City and Midland banks have now established regular
foreign exchange departments. This development is generally welcomed as
a sign of a desire on the part of the banks to widen their horizon and
to come into closer touch with the affairs of the financial world at
large, but, as in the case of the banks' increasing interest in
acceptance, there are some critics who consider that it is better for
the bankers to stick to their obvious and highly important function of
providing the community with credit and currency, and taking care of the
money of their customers.
THE PRIVATE BANKS
Any differences that exist between the private and joint-stock banks of
England lie in their ownership rather than in their functions. Their
functions are the same, but the manner in which they carry them out is
perhaps influenced to a slight extent by the fact, which really
distinguishes them, that the private banks are owned by a few partners
who generally conduct the business for themselves or exert more or less
influence on it, while the joint-stock banks are managed by salaried
directors and officials on behalf of a large body of shareholders formed
into a public company, the shares in which can as a rule be bought and
sold on the London Stock Exchange.
Since private enterprise naturally precedes joint-stock institutions, it
goes without saying that the private banks of England were the pioneers
of the banking business. There are still in existence private firms
which were founded before the Bank of England. A goldsmith called Child
was doing business of a banking character soon after 1660, and Child's
Bank still exists. Hoare's Bank was instituted in about 1680, fourteen
years before the Bank of England received its charter. Modern
developments have almost driven them out of the field, and among the
leading banks in the city of London only two are left which can still be
called private in the old sense of the word. There are one or two other
institutions which are on the borderland: and at the west end of the
town several old firms, including Child's and Hoare's, have retained
their old constitutions.
THE MERCHANT BANKERS AND ACCEPTING HOUSES
The most important function of the merchant bankers is not that of
banking, but of accepting. Banking, in the strict sense of the term,
they do not engage in--that is to say, they are not prepared to meet
claims upon them by an immediate payment of cash or legal tender over
the counter, but by payment of a cheque on one of the banks in the
stricter sense of the term. The function of the London accepting houses,
though of enormous importance, is still to a certain extent subordinate
to the judgment of the English banks. They finally decide whose paper is
most readily negotiable, and, in times when the credit machine is felt
to be somewhat out of gear, the bankers occasionally discriminate
against the paper of firms which they consider to have been giving their
acceptance too freely. In this respect, as in so many others, the Bank
of England remains the final arbiter, since the paper of an accepting
house which is questioned by the other banks can be negotiated at the
Bank of England through a discount house, and the Bank of England has
before now intervened with effect when it considered that questions
raised concerning certain acceptances have been without justification.
This business of acceptance is one into which the other banks have
themselves recently intruded with considerable effect, accepting bills
for their customers, home and foreign, for a commission; and there is a
certain apparent anomaly in the position which makes them guardians of
the volume of acceptance created by the private firms and acceptors
themselves on a steadily increasing scale. Nevertheless, this anomaly
has little or no untoward effect in practice. The bankers are naturally
extremely cautious in raising any question as to the security of general
credit in London, and they are in many ways closely connected with the
private accepting houses, so that the system, which appears to be full
of uncomfortable possibilities on paper, works easily enough in
practice.
Other functions of the merchant firms and accepting houses are their
activity in general finance and in exchange business. Both these
functions arise out of their old business as merchants, which gave them
close connection both with the governments and the business communities
of foreign countries.
THE DISCOUNT HOUSES
The great volume and diversity of the bills of exchange which come into
the London market to be melted and turned into present cash before their
date of maturity has caused the existence of a class of dealers in bills
(bill brokers) who specialise in handling them and may be regarded as
intermediaries between the holders of the bills--that is to say,
originally, the drawers of them, or their representatives, or any one
else into whose hands they may have passed them on--and the bankers, who
are the ultimate buyers and hold them as investments until maturity. It
is the business of the discount houses to buy these bills on a wholesale
scale, using for this purpose funds largely lent them by the banks, and
to meet the requirements of the bankers with regard to the date named
and quality of the bill, providing them out of the store that they keep
constantly replenished.
We have also seen that the discount houses fulfill a very important
function by borrowing funds from the bankers at call and short notice.
These funds are regarded by the bankers, and actually described in their
balance sheets, as cash, cash at call, and short notice. It is a
somewhat elastic extension of the term "cash" to apply it to money that
is being lent to any borrower, even of the highest credit and against
the most liquid possible collateral. But it is always assumed by the
bankers that these funds placed in the discount market can be called in
readily at any moment. That they can be called in is practically a fact;
but it arises chiefly from the ability of the discount houses when
pressed for repayment of these loans by the bankers to fill the gap in
credit by an appeal to the Bank of England and the production of fresh
cash, as it is called, by borrowing from it. The discount houses take
security to the Bank of England and raise with it the right to draw
cheques. These cheques they pay to their bankers, whose cash at the Bank
of England, which we have already seen to be regularly used as a part
of the basis of credit in England, is thus increased.
Besides the money that they habitually borrow for short periods from
bankers, the discount houses also have considerable amounts placed on
deposit with them by other lenders, some of which they employ,
especially in times when the volume of bills is comparatively small, by
loans to the Stock Exchange for financing the speculative commitments of
the public, and by holding or carrying securities of a reasonably liquid
character. They also take some part in the underwriting of new loans and
in the general financial business of the London market.
[154]It is impossible to exaggerate the importance of the functions
which the bill brokers discharge in the London money market. They are
only about twenty in number, including three joint stock companies. One
or two of the brokers work on commission, as your brokers do, but the
majority are really dealers in bills. That is, they buy or discount, and
sell, or rediscount, bills of exchange.
Let me illustrate their method of working: A bank in New York may buy
$1,000,000 worth of sterling bills drawn on England and send them
forward to its London agent to be discounted with the bill broker. The
bill broker will discount these bills at, say, 4 per cent. If he thinks
rates are likely to fall, he will hold the bills; if he thinks them
likely to rise, he will try to sell the bills at about 3-3/4 per cent.
or 3-7/8 per cent. discount, thus making a profit on the transaction of
1/4 per cent. or 1/8 per cent. per annum. Similarly he may discount
large parcels of bills for Eastern and South American banks. Many of
these bills will be bills drawn on and accepted by banks and finance
houses. These are known as "bank bills." But on the other hand, the bill
brokers are free buyers of "trade bills." The trade bill in England
arises in the following way: Trader A sells goods to trader B. He will
draw a draft on trader B at, say, three months date. Trader B will
accept the draft and return it to trader A, who will discount it with
his banker or with the bill broker. The rate of discount for trade bills
is usually 1/2 per cent. per annum higher than the rate for bank bills.
The essential feature of almost all the bills on the market is that they
represent a commercial transaction, such as a sale of goods, where value
passes. It is this that lends them their self-liquidating quality; for
they are usually liquidated by the acceptor out of the proceeds of the
resale of the goods during the currency of the bill.
The bill broker not only employs his own capital in buying bills, but
also money which he borrows from the banks and others at call or at
short notice. Enormous sums are employed in this way.
INTERVIEW WITH THE GOVERNOR AND DIRECTORS OF THE BANK OF ENGLAND
[155]Q. When does your present charter expire?
A. The bank's exclusive privileges of banking continue subject to one
year's notice and to repayment by the Government of the debt of
L11,015,100 and of all other public debt held by the bank at the time.
Q. What is the par value and present selling price of your shares?
A. The bank's capital is in the form of stock, L100 of which is at
present quoted at about L267.
Q. How many stockholders have you?
A. There are at present over 10,000 accounts.
Q. Is the stock fully paid?
A. Yes.
Q. Have your shareholders any liabilities in addition to the ownership
of shares?
A. Legal opinion is to the effect that there is no further liability on
bank stock.
Q. Is there any limit to the number of shares which may be held by any
one person, and is your approval required before a transfer of your
stock can be made?
A. There is no limit--the bank's approval is not required.
Q. Does every share have a vote at shareholders' meetings?
A. To have a vote a proprietor must hold L500 of stock, but no matter
how much additional stock a proprietor may hold he can not have more
than one vote.
Q. Is there any custom restricting the class from which the directors
may be selected?
A. There is no legal restriction as to the class from which directors
may be selected, except that they must be "natural-born subjects of
England, or naturalized," but in actual practice the selection is
confined to those who are, or have been, members of mercantile or
financial houses, excluding bankers, brokers, bill discounters, or
directors of other banks operating in the United Kingdom.
Q. How many branches have you?
A. There are eleven branches--two in London and nine in the provinces.
Q. Is the business conducted at your branches of the same class as at
your main office in London?
A. Yes.
Q. Do your branches have business relations with merchants, farmers, and
all classes of people in their respective localities?
A. There are no restrictions of any kind as to the class of people with
whom the bank has business relations.
Q. Is the Bank of England a member of the London Clearing House?
A. Yes; but "on one side only," as it is termed. The Bank of England
presents, through the clearing house, all drafts drawn on clearing
bankers paid in to it by its customers; but the clearing bankers do not
present, through the clearing house, drafts on the Bank of England paid
in to them by their customers. Such drafts are paid direct to the credit
of their accounts at the Bank of England.
Q. Do you at any time allow interest on special deposits?
A. It is not the practice of the bank to allow interest on any deposit.
Q. Can you state approximately the average length of time and the
average size of bills discounted by you?
A. Time, forty to fifty days; size, probably about L1,000.
Q. What is the distinction between what are known as "prime bills" and
other bills?
A. A "prime" bill we should define as a bill accepted by a London or
provincial bank in first-class credit or a merchant or merchant banker
of the first class whose business it is to grant credits.
Q. Do you discount any prime bills?
A. Yes.
Q. Do you discount to any considerable amount for individuals and
merchants?
A. The bank discounts all approved bills offered to it by persons or
firms having properly constituted accounts.
Q. Is it your custom to employ surplus funds in purchase of bills from
discount houses?
A. No.
Q. Do you rediscount bills for the joint stock or other banks?
A. The bank is always prepared to rediscount for other banks at its
official rate, and does a large business from time to time with the
colonial and foreign exchange banks who are from the nature of their
business always sellers of bills.
Q. Would you charge a merchant house having a good account with you the
bank rate or the market rate for prime bills?
A. The market rate.
Q. To what extent does bank rate govern your discount and loan
transactions?
A. The rates for discount and loan transactions at the bank usually
approximate more or less closely to the bank rate.
Q. Do you at times discount bills for parties having no account with
you?
A. No.
Q. Are a considerable number of your loans on call?
A. None.
Q. When and under what conditions is the bank rate changed?
A. The bank rate is raised with the object either of preventing gold
from leaving the country, and lowered when it is completely out of touch
with the market rate and circumstances do not render it necessary to
induce the import of gold.
Q. Does the bank sometimes borrow money in the open market for the
purpose of raising the market rate?
A. Yes.
Q. Do you sometimes sell consols for the same purpose?
A. Yes; on rare occasions.
INTERVIEW WITH SIR FELIX SCHUSTER, GOVERNOR OF THE UNION OF LONDON AND
SMITH'S BANK LIMITED
[156]Q. Your bank is organised under the General Companies Acts as are
all joint stock banks in England?
A. Yes.
Q. You are not under government supervision or examination?
A. No.
Q. The authorised par of your stock is L100, and L15 10_s._ have been
paid on each?
A. Yes.
Q. Are your shares held by individuals and corporations?
A. By individuals, not by corporations. There are upwards of 8,600
different shareholders.
Q. In the transfer of shares, do you require the name of the transferee
to be submitted and approved before the transfer is made?
A. Yes.
Q. That of course is in order to insure the responsibility of your
stockholder?
A. This is in order to insure the responsibility of our stockholder, and
to prevent one holder from securing too large a holding. Furthermore we
give no single proprietor more than 20 votes, however large his holding
may be. Every 10 shares carry one vote, so the holder of 200 shares has
a maximum number of votes.
Q. Is that the usual custom with the joint-stock banks of England?
A. I am afraid I cannot answer offhand. I suppose it is so in some
cases, but the practice varies.
Q. In London there is usually a difference between the rates charged on
loans and bills in favor of bills, is there not?
A. Yes.
Q. Would you say that that difference is perhaps from one-half to 1 per
cent. in favor of the bill?
A. It depends so very much on the circumstances of the moment that it is
very difficult to generalise. At the present moment I would say a three
months' bill is worth 1-7/8, and a three months' loan would be worth
perhaps 3-1/2.
Q. Were most of your branches organised by you or were most of them
other institutions purchased by you?
A. Some of them were other institutions; some of them were organised by
us; most of them were those old banking firms which were carried on as
private businesses and have since become branches of our bank.
Q. The tendency is for the consolidation of banking in Great Britain, is
it not?
A. Yes.
Q. Very strongly in that direction?
A. Very strongly in that direction, yes.
Q. As a matter of fact, a large part of the commercial banking in
England is done by about a dozen institutions, is it not?
A. In Liverpool and Manchester there are very important local banks.
However, it is no doubt the fact that four or five banks do about half
the banking business.
Q. In the main you believe that the banking situation is stronger and
better and the country is better served through the system of branches
than through the independent banks?
A. I am quite convinced of that, if only for one reason, that I do
believe the indiscriminate granting of credits to the individual is
injurious to himself, the private bankers being too much in the habit of
regarding old family associations and not so careful as the joint-stock
company would be, and he has accustomed people to trade on the credit
that they get from the banker. I do not think that is banking business.
The bank ought never to supply the trader with working capital. I think
it is bad for the trader.
Q. Is it not quite essential to the success of a financial institution
doing a commercial business to become a member of the Clearing House if
it is to meet with a large degree of success?
A. No. After all, there are only seventeen banks, I believe, now in the
Clearing House, but there are a great many other institutions who are
not members of the Clearing House and who do not suffer from that fact.
Scotch banks with branches here who do a large banking business are not
members of the Clearing House. There are all the colonial banks with
head offices or branches in London and other large institutions; those
are not members of the Clearing House. There are Barings and
Rothschilds; they are not members of the Clearing House.
Q. Would you say the Bank of England is in any way a competitor of the
other banks in England?
A. Yes. That is a source of very grave complaint by the other banks.
Q. The Bank of England do not pay interest on any accounts?
A. No; but in some cases they act as intermediaries for lending money.
It is a very subtle distinction.
Q. While the bank rate is fixed and is to-day, say 2-1/2 per cent., is
it not a fact that the Bank of England does some business for its
customers and also purchases bills for their account at a lower rate?
A. That is so, and that is one of the matters of complaint. By fixing
the rate at 2-1/2 per cent., or 3 per cent., or 4 per cent., they can
regulate the rate we fix for our own customers. We regulate our deposit
rate in accordance with the bank rate. We also regulate the rate we
charge for our loans in accordance with the bank rate, and we are bound
by it to a certain extent, and they themselves feel at liberty to depart
from it.
Q. What does the bank rate mean; what does it govern in fact?
A. It means the general charge to the trade of the country, because
although we say that bills in the market are discounted at a lower rate
than bank rate, yet there is a vast number of trade bills which are
purely governed by the bank rate.
Q. We found both in Germany and in France the question of the amount of
reserves, either in specie or in bank, was regarded as of little
importance by the bankers. They depend on the Reichsbank and the Bank of
France for rediscount in times of need.
A. Both in France and in Germany banks are much more dependent on the
central institution than we are here. They lean on their central
institution to a very great extent; for instance, the rediscounting of
bills and borrowing from the central institution is, I believe, quite a
usual occurrence. Here it is an occurrence which would only take place
in the last resort. As far as I am aware this bank has never as long as
it has been in existence had one penny from the Bank of England, whether
by way of advance or by way of a discounted bill. We do not rediscount
our bills in the market either; so every transaction we enter into we
have to see through to the very end.
INTERVIEW WITH MR. CHARLES GOW, GENERAL MANAGER OF THE LONDON JOINT
STOCK BANK, LIMITED
[157]Q. Your capital stock is L100 authorised, L15 paid?
A. Yes.
Q. Does your board pass upon a new stockholder?
A. Yes.
Q. Who really conducts the business of the bank?
A. The managers, who are appointed by the directors; that is to say,
myself and all those belonging to me.
Q. Are most of your acceptances secured?
A. Every one.
Q. How are they secured, generally speaking?
A. They are secured in the great majority of cases by bills of exchange,
by first-class securities with plenty of margin, even by cash in hand to
a moderate extent, and to a very small extent by bills of lading for
produce shipped. That is a very small item.
Q. Can you state the reason for accepting bills instead of furnishing
the cash?
A. We accept those bills because it happens to be the custom of the
particular banks to draw a long bill. The customer himself who buys
cotton in Bombay, or wherever it may be, acts according to the custom
there to draw a bill to a certain usance. Now, for instance, with regard
to an inland bill, we would not give credit of that sort to a man in
London, but wherever there is a regular course of business abroad to
draw at long usance we comply with it.
Q. What is the character of your bills discounted?
A. Those are all marketable bills, trade bills; you know what they are;
they are between the manufacturer and the man to whom he sells.
Q. You always require two names?
A. Always.
Q. What does the form of obligation by the borrowers upon collateral
take?
A. Just the same form as your promissory note.
Q. You have branches, have you not?
A. We have about forty-odd branches all in London and close to London.
Q. You do not then endeavor to acquire a country business through your
branches?
A. For this reason, that we commenced as a purely London bank, and we
have so far kept to that original determination of not launching out
into country business, because, as I say, it differs from the ordinary
London business. Country business is not quite so liquid, and can not
be.
Q. If you had an account of a man running, say, a hat store, his account
was satisfactory in character and had been carried with you for several
years, and he wanted to stock up on hats, there would be no way in which
he could go to you and borrow the money with which to buy those goods
unless it was through a guarantor?
A. No. He would go then to the wholesaler from whom he would buy the
goods, and give that wholesaler his bill, and that bill would be a
discountable article, and that is how the money would be raised.
Q. Do you ever allow overdrafts, as they do in Scotland?
A. They are not unheard of, but not a principle of our business.
Overdraft is a principle of country banking.
Q. My observation leads me to believe that the banking situation in
London is practically controlled by twelve or fourteen of what are known
as the London joint-stock banks, through their offices and through their
branches?
A. Yes; I think that is right. However, there are still independent
banks in the country, and I doubt whether amalgamation will go very much
farther than it has gone. You see, these amalgamated banks have already
become so large that they begin to get a little unwieldy. Lloyds Bank is
an enormous thing, with $350,000,000 of current and deposit accounts.
Q. Would you say that the public are better served through these
branches than they were through the independent banks?
A. Some say that they are not so well served, that accommodations are
curtailed now as compared with what they used to be, and that I can
understand to some extent, because, working a very large concern from
one centre, you see, fiats will go forth, "Cut that man's credit off,"
and not listen to taking a large view. They say, "I have enough of that
kind of accommodation; I have 100 shipbuilders or shipowners; I am not
going to give out more than a proportion of my money into that
particular trade; therefore, I will not have any more," whereas the
independent banks would be perhaps a little more accommodating.
Q. If I were to go to you to-day with a ninety-day trade bill, the
acceptor known to you as good, and also with a loan secured by
Pennsylvania Railroad bonds, my loan to mature in ninety days, what rate
would you charge me on those separate items?
A. The bank rate to-day is 2-1/2 per cent. You are a good customer, and
I should charge you 2-1/2 per cent. for discounting that trade bill, and
I might charge you 3 per cent., or even perhaps 3-1/2 per cent. on the
Pennsylvania Railroad collateral for this reason, that one is not as
realisable as the other. When the bill becomes due it has to be paid, or
I give it back to my customer, and say "Give me the money for that." I
can not quite say the same to him about his collateral.
Q. What per cent. of earnings on your capital did you show last year?
A. Roughly, our net earnings were 20 per cent. It cost us 50 per cent.
of our gross earnings to run the business.
Q. What taxes do you have to pay?
A. We pay income tax on all our earnings, and deduct from our gross
profits. We are entitled to deduct, roughly speaking, our expenses, and
then upon the remainder we have to pay the income tax, or whatever it
is, at 1 shilling in the pound, for instance, now.
Q. Would you say that the Bank of England is a popular banking
institution among other banks in England?
A. Yes, I should say so decidedly. Its popularity goes to this extent,
that it is absolutely indispensable to them. Some of them may grumble at
this proceeding or that proceeding, but they have one and all to own
that the Bank of England is indispensable to them.
Q. As a matter of fact, if you had presented to the Bank of England last
fall some bills which had been negotiated through you which appeared to
be finance bills, do you not think they might have gently hinted that it
was not agreeable to them to have you negotiate any more finance bills?
A. I may say they have that recourse, and they might say to me if I gave
them any just cause for doing it, just the same as anybody else.
Q. In other words, the Bank of England has such a commanding position
here among the financial institutions which control all the finances of
Great Britain that they dominate it when they choose to?
A. When they choose.
Q. It is the custom of the bank to co-operate very cordially with the
other banks, is it not?
A. Oh, yes; we are as free as free can be. There is very little
conference, or anything of the kind; we are all pretty good friends all
round.
FOOTNOTES:
[150] F. Straker, _The Money Market_, pp. 7-16. Methuen and Company.
London. 1904.
[151] _Ibid._, pp. 28-40.
[152] [The fourth suspension occurred August 6, 1914.]
[153] Adapted from Hartley Withers, _The English Banking System_,
Publications of the National Monetary Commission, Senate Document No.
492, 61st Congress, _2nd Session_, pp. 3-64.
[154] James H. Simpson, _Some Leading Features of the London Money and
Discount Markets_, an address delivered at the annual banquet of the
bankers of the city of New York, Jan. 19, 1914. (In Banking and Currency
at Home and Abroad, Distributed with the Compliments of the National
City Bank.)
[155] Adapted from _Interviews on Banking and Currency Systems of
England, Scotland, France, Germany, Switzerland, and Italy_,
Publications of the National Monetary Commission, Senate Document No.
492, 61st Congress, _2nd Session_, pp. 7-29.
[156] _Ibid._, pp. 34-55.
[157] _Ibid._, pp. 60-91.