BANKING WEALTH
Having proceeded so far we may now be able to test, perhaps, with
more sureness the kind of wealth a bank does transform, and the kind
of wealth it should transform. On the character of the wealth sound
banking should depend.
Wealth has degrees. There is the highest wealth and the lowest wealth,
with infinite degrees between. How are we to distinguish the highest
from the lowest wealth, to know the quality of that product which comes
into being from the satisfaction of desire? I think it is _time_ that
will enable us to judge. That is to say, wealth is to be judged by its
enduring qualities. The highest wealth is permanent, or lasting wealth;
the lowest is fleeting, or transient wealth.
The most permanent wealth is food and air, because without this wealth
humanity would perish, and banking systems with it. But air cannot be
transformed, from reasons well known; but food can, and food satisfies
the most lasting of human desires. Only universal death can destroy
that desire.
Let us examine with closer scrutiny the typical bank balance sheet
given in a former chapter. First of all comes gold. Now we regard gold
as the most permanent form of economic wealth. What alone gives it this
permanency is the law. It is not inherently permanent; inherently, it
is no more permanent than are diamonds or corals. We know that the
quantity of gold in the earth is limited, and that gold is perishable,
and that it cannot be got below certain depths, because men cannot live
beyond those depths. The time will come when gold will be exhausted,
and it will then be necessary to find another substance to perform the
functions allotted to it. As law has made it permanent wealth, so law
could to-morrow, by its arbitrary decree, make it impermanent wealth.
If gold were allowed to be, like diamonds, a mere commodity, then it
would come in a low degree of wealth.
It is important, therefore, to be conscious of the arbitrary power
that makes this low degree of wealth permanent wealth. Because law has
decreed that it shall be in the highest class of wealth, then it comes
first amongst a bank’s assets, because this is the class of wealth that
in certain circumstances would have to satisfy the strongest of human
desires. Is it the wealth that a bank transforms? It is transformed,
because though it lies in a bank’s vaults, it is transformed into
the same substance as other wealth and thereby becomes fruitful. In
this manner it is able to multiply itself, not into gold, but into
other forms of wealth. It multiplies itself into gold indirectly by
stimulating and helping the production of it. When gold is brought to
the Bank of England and converted into notes, it performs the same
services as when it is taken to banks and is converted into that other
form of paper currency, cheques. The gold gets into circulation, and is
just as fruitful though it be circulated in the form of coin, instead
of notes. It makes no difference whether this gold is retained in the
vaults of the joint stock banks, or is placed in the keeping of the
Bank of England. In fact, if it is placed in the keeping of the Bank
of England, it can be made more fruitful, for the Bank of England
re-utilizes it, and increases the potential amount of currency based
upon it.
The next asset is the money at call and short notice. The money at
call is, as already explained, practically the money lent to bill
brokers, and forms a part of what is called a bank’s liquid reserve.
If in a time of grave urgency the bank “calls” this money from the
bill brokers, it simultaneously “calls” in its loan deposits. It
is understood that in those moments the brokers would be unable to
repay their loans if they could not get the money from the banks. If,
therefore, they cannot get the money from the banks, how can this
portion of the deposits be withdrawable from the banks? If they were
withdrawn, they would have to be paid in again the moment they were
withdrawn.
We know that in those times, however, the loans would be called and the
bill-brokers would have to borrow the money from the Bank of England.
And this money being paid over to the creditor bank, the deposits would
automatically fall, and the proportion of the gold reserve to the other
deposits would automatically rise.
It is a conviction in Lombard Street that in those times the
bill-brokers could get no money from the joint stock banks. That being
so, what is called the credit superstructure does not appear to be so
unwieldy as it looks.
The money at short notice presumably represents the money lent to the
Stock Exchange at settlement times. Those to whom the money is lent owe
the money to the bank, and when the bank asks for repayment the money
must be got elsewhere, and it can only be got from the Bank of England
on a certain class of security. Against these two classes of loans,
security is lodged with the lending bank.
What class of wealth is this? The security for the money at call is of
a higher class than the security for the money at short notice. The
latter security consists of all kinds of Stock Exchange securities.
The most fleeting kind of wealth we may call the wealth brought into
existence by speculation. It is nevertheless wealth, for it satisfies a
desire and is exchanged. But as this desire is quickly destroyed, then
the wealth is either totally destroyed or partially destroyed with it.
Even war produces wealth, but as this wealth satisfies only a fleeting
desire its reproductive power is transient. It is like scattering
seed on the rocky ground, little of which is able to take deep root.
The harvest is scanty, and like all scanty harvests, it brings want
and ruin in its train. It lessens the reproductive and, therefore,
the consumptive power of labour, and thus directly affects harvests
elsewhere.
Banks, therefore, in selecting the wealth constituted in Stock Exchange
securities must carefully discriminate between the lasting wealth and
the fleeting wealth; in other words, between high-class investment
securities and speculative stocks and shares. This, of course, calls
for intimate knowledge and sound judgment. These are qualifications
all bank managers must possess. If they possess the qualifications and
exercise the soundest judgment in selecting the highest type of wealth,
then they put into practice all the principles of sound banking.
Now, there is no suspicion that these qualifications are not possessed
and that this sound, selective judgment is not shown by the managers of
our great banking institutions. This, therefore, is the basis of the
community’s confidence in them. That confidence is justified.
We need not minutely examine the bank’s “investments.” Not only do
these constitute wealth of the highest class, but it is wealth not
represented by loans and immediate liabilities. They may justifiably
and safely be placed secondary only to the bank’s gold, forming a
portion of its liquid reserve. In the hour of danger or peril to the
community, it should be the duty of the Government, should the need
arise, immediately to transform this wealth into legal tender money.
Bills discounted represent another form of the highest wealth of the
community, and the banks still adhere to the soundest principles in
discounting them. These bills represent that class of wealth that has
to satisfy the most enduring desires of the human race. Here, then, we
see the best judgment at work. There are, of course, many varieties
of bills of exchange. They may be placed in different classes, or
categories, according to their endorsements. What is called in the
market the “finest” bills are those endorsed by the leading banks, and
they are called clearing bank acceptances. Banks accept these bills
for small commissions, and they are more readily discounted then in
the market, simply because they have behind them the highest class of
wealth. Then there are bills accepted by merchants and other houses or
firms which are not of the standing of the clearing banks. They are of
an inferior category. The value of the acceptances and endorsements,
and therefore the value of the bills, depends greatly upon the standing
or reputation of the acceptors.
Now the banks discount, as a rule, only the “finest” bills, that is,
the bills with the most reliable acceptances, bills accepted, say,
by other banks. In exercising this discrimination they exercise the
soundest judgment, and nothing higher can be expected of them.
Such bills as these are readily discountable at the Bank of England,
and there is no sound reason why, in certain given circumstances, they
should not be discounted even by the Government through the agency of
the Bank of England. It might be in the interests of the country to do
this, especially as the machinery could immediately be set in motion.
And if the machinery could be set in motion immediately, then the bills
should be as good a reserve as legal tender.
It is to be believed, too, that the soundest judgment is shown in the
selection of the composite wealth aggregated under loans and advances.
These represent the largest aggregate asset, but, at the same time,
they represent the greatest proportion of the loan-deposits, deposits
repayable to the bank. Such loans as these should be made of very short
duration, renewable, of course, but renewable for short periods. Is
it possible to make some kind of legal provision whereby in the event
of a remote disaster such as a panic these deposits, representing
liabilities to a bank, should be discriminated against and not be
withdrawable on demand? Could not the position be made clearer, as I
have hinted already, by segregating the deposit and current accounts?
Were this hint adopted the amended balance sheet would appear somewhat
as follows:--
_Dr._
£ _s._ _d._
Capital Authorized, £30,000,000
Capital Issued 3,000,000 0 0
Reserve Fund 1,125,000 0 0
Current, Deposit and Other Accounts 8,908,141 17 8
Loans on demand and on short notice due by
customers, as per contra 5,644,476 5 1
Bills discounted, as per contra 6,811,870 13 8
Loans and advances due by customers as per
contra 16,218,748 12 6
Acceptances on behalf of customers 3,153,328 7 11
Rebate of interest, etc. 53,807 1 3
Profit 225,676 10 1
----------------------
£45,141,049 8 2
======================
_Cr._
£ _s._ _d._ £ _s._ _d._
Cash in hand and at Bank of
England 5,996,667 14 8
Money at call and short notice
as per contra 5,674,476 5 1
------------------ 11,671,143 19 9
Investments 6,260,705 3 5
Bills discounted as per contra 6,811,870 13 8
Loans, advances, etc., as per contra 16,218,748 12 6
Liabilities for Acceptances as per contra 3,153,328 7 8
Freehold and leasehold premises 1,025,252 10 11
----------------------
£45,141,049 8 2
======================
The answer might be that this would look too modest a balance sheet,
and would give less scope for boasting of the growth of deposits.
The deposits now look attenuated at less than £9,000,000, but look
at the cash reserve against them! Close on £6,000,000! True, this
cash melts at the Bank of England, but it gives the balance sheet a
truer and stronger appearance. If it be sincerely desired to give
greater enlightenment to the public, as many contend, then further
enlightenment can be given in this way, which is by no means the last
word in improving a balance sheet.
But there is too much competition between banks; too deep a jealousy
and too keen a rivalry. This keen and jealous competition may be well
amongst merchants and tradesmen, but it seems neither healthy nor
dignified amongst banks. The work they do for the nation is too vital
for this kind of competition to be encouraged. Perhaps it would be in
the best interests of the nation if banks were nationalized, and made
branches of a National Bank.
The main object of banks should not be that of the ordinary tradesman,
who boasts loudly and sometimes vulgarly of the trade he is doing.
There should be no incitement to this in banking, no incitement to
dilate composite deposits, to swell profits and to strain dividends.
With all this rivalry and incitement, this desire to gratify
shareholders, it is wonderful how cautiously and soundly managed
banks are. There should be no hesitation to perform their functions
within the limits of prudence, but, at the same time, there should
be no undignified display and boastfulness. This does not make the
deep impression some imagine. On the contrary, it tends to generate
the suspicion in many prudent minds that caution and safety are being
unduly strained.
The public have not failed to notice that contrary policies have been
adopted by the great banks in dealing with their profits for the year
of crisis, 1914. Some reduced their dividends and others maintained
them. Some allowed liberally for depreciation, and others allowed for
no depreciation at all. Some provided for the future, others were
content to let the future take care of itself. And what conclusions can
the public draw from such divided counsels and irreconcilable policies?
Able to agree as they often are on common policy, they were unable to
agree on so important a policy as this. As one bank manager said to
the writer, when discussing this matter: “Even if the dividends were
earned, it was a matter of sound expediency in times such as these to
reduce them. It would have strengthened their positions and at the same
time have made a better impression on the public.” And there was much
wisdom in this view.
Applying, as we have done, severe tests to bank management, it emerges
from them with great credit. Sound as the management is no bank
manager and no bank directors would be vain enough to claim that ideal
soundness has been attained.