The Bill-Brokers.
Under every system of banking, whether that in which the reserve is
kept in many banks, or one in which it is kept in a single bank
only, there will always be a class of persons who examine more
carefully than busy bankers can the nature of different securities;
and who, by attending only to one class, come to be particularly
well acquainted with that class. And as these specially qualified
dealers can for the most part lend much more than their own capital,
they will always be ready to borrow largely from bankers and others,
and to deposit the securities which they know to be good as a pledge
for the loan. They act thus as intermediaries between the borrowing
public and the less qualified capitalist; knowing better than the
ordinary capitalist which loans are better and which are worse, they
borrow from him, and gain a profit by charging to the public more
than they pay to him.
Many stock brokers transact such business upon a great scale. They
lend large sums on foreign bonds or railway shares or other such
securities, and borrow those sums from bankers, depositing the
securities with the bankers, and generally, though not always,
giving their guarantee. But by far the greatest of these
intermediate dealers are the bill-brokers. Mercantile bills are an
exceedingly difficult kind of security to understand. The relative
credit of different merchants is a great 'tradition'; it is a large
mass of most valuable knowledge which has never been described in
books and is probably incapable of being so described. The subject
matter of it, too, is shifting and changing daily; an accurate
representation of the trustworthiness of houses at the beginning of
a year might easily be a most fatal representation at the end of it.
In all years there are great changes; some houses rise a good deal
and some fall. And in some particular years the changes are immense;
in years like 1871 many active men make so much money that at the
end of the year they are worthy of altogether greater credit than
anyone would have dreamed of giving to them at the beginning. On the
other hand, in years like 1866 a contagious ruin destroys the
trustworthiness of very many firms and persons, and often,
especially, of many who stood highest immediately before. Such years
alter altogether an important part of the mercantile world: the
final question of bill-brokers, 'which bills will be paid and which
will not? which bills are second-rate and which first-rate?' would
be answered very differently at the beginning of the year and at the
end. No one can be a good bill-broker who has not learnt the great
mercantile tradition of what is called 'the standing of parties' and
who does not watch personally and incessantly the inevitable changes
which from hour to hour impair the truth of that tradition. The
'credit' of a person--that is, the reliance which may be placed on his
pecuniary fidelity--is a different thing from his property. No doubt,
other things being equal, a rich man is more likely to pay than a
poor man. But on the other hand, there are many men not of much
wealth who are trusted in the market, 'as a matter of business,' for
sums much exceeding the wealth of those who are many times richer. A
firm or a person who have been long known to 'meet their
engagements,' inspire a degree of confidence not dependent on the
quantity of his or their property. Persons who buy to sell again
soon are often liable for amounts altogether much greater than their
own capital; and the power of obtaining those sums depends upon
their 'respectability,' their 'standing,' and their 'credit,' as the
technical terms express it, and more simply upon the opinion which
those who deal with them have formed of them. The principal mode in
which money is raised by traders is by 'bills of exchange;' the
estimated certainty of their paying those bills on the day they fall
due is the measure of their credit; and those who estimate that
liability best, the only persons indeed who can estimate it
exceedingly well, are the bill-brokers. And these dealers, taking
advantage of their peculiar knowledge, borrow immense sums from
bankers and others; they generally deposit the bills as a security;
and they generally give their own guarantee of the goodness of the
bill: but neither of such practices indeed is essential, though both
are the ordinary rule. When Overends failed, as I have said before,
they had borrowed in this way very largely. There are others now in
the trade who have borrowed quite as much.
As is usually the case, this kind of business has grown up only
gradually. In the year 1810 there was no such business precisely
answering to what we now call bill-broking in London. Mr.
Richardson, the principal 'bill-broker' of the time, as the term was
then understood, thus described his business to the 'Bullion
Committee:'
'What is the nature of the agency for country banks?--It is twofold:
in the first place to procure money for country bankers on bills
when they have occasion to borrow on discount, which is not often
the case; and in the next place, to lend the money for the country
bankers on bills on discount. The sums of money which I lend for
country bankers on discount are fifty times more than the sums
borrowed for country bankers.
'Do you send London bills into the country for discount?--Yes.
'Do you receive bills from the country upon London in return, at a
date, to be discounted?--Yes, to a very considerable amount, from
particular parts of the country.
'Are not both sets of bills by this means under discount?--No, the
bills received from one part of the country are sent down to another
part for discount.
'And they are not discounted in London?--No. In some parts of the
country there is but little circulation of bills drawn upon London,
as in Norfolk, Suffolk, Essex, Sussex, &c.; but there is there a
considerable circulation in country bank-notes, principally optional
notes. In Lancashire there is little or no circulation of country
bank-notes; but there is a great circulation of bills drawn upon
London at two or three months' date. I receive bills to a
considerable amount from Lancashire in particular, and remit them to
Norfolk, Suffolk, &c., where the bankers have large lodgments, and
much surplus money to advance on bills for discount.'
Mr. Richardson was only a broker who found money for bills and bills
for money. He is further asked:
'Do you guarantee the bills you discount, and what is your charge
per cent?--No, we do not guarantee them; our charge is one-eighth per
cent brokerage upon the bill discounted, but we make no charge to the
lender of the money.
'Do you consider that brokerage as a compensation for the skill
which you exercise in selecting the bills which you thus get
discounted?--Yes, for selecting of the bills, writing letters, and
other trouble.
'Does the party who furnishes the money give you any kind of
compensation?--None at all.
'Does he not consider you as his agent, and in some degree
responsible for the safety of the bills which you give him?--Not at
all.
'Does he not prefer you on the score of his judging that you will
give him good intelligence upon that subject?--Yes, he relies upon
us.
'Do you then exercise a discretion as to the probable safety of the
bills?--Yes; if a bill comes to us which we conceive not to be safe,
we return it.
'Do you not then conceive yourselves to depend in a great measure
for the quantity of business which you can perform on the favour of
the party lending the money?--Yes, very much so. If we manage our
business well, we retain our friends; if we do not, we lose them.'
It was natural enough that the owners of the money should not pay,
though the owner of the bill did, for in almost all ages the
borrower has been a seeker more or less anxious; he has always been
ready to pay for those who will find him the money he is in search
of. But the possessor of money has rarely been willing to pay
anything; he has usually and rightly believed that the borrower
would discover him soon.
Notwithstanding other changes, the distribution of the customers of
the bill-brokers in different parts of the country still remains
much as Mr. Richardson described it sixty years ago. For the most
part, agricultural counties do not employ as much money as they
save; manufacturing counties, on the other hand, can employ much
more than they save; and therefore the money of Norfolk or of
Somersetshire is deposited with the London bill-brokers, who use it
to discount the bills of Lancashire and Yorkshire.
The old practice of bill-broking, which Mr. Richardson describes,
also still exists. There are many brokers to be seen about Lombard
Street with bills which they wish to discount but which they do not
guarantee. They have sometimes discounted these bills with their own
capital, and if they can re-discount them at a slightly lower rate
they gain a difference which at first seems but trifling, but with
which they are quite content, because this system of lending first
and borrowing again immediately enables them to turn their capital
very frequently, and on a few thousand pounds of capital to discount
hundreds of thousands of bills; as the transactions are so many,
they can be content with a smaller profit on each. In other cases,
these non-guaranteeing brokers are only agents who are seeking money
for bills which they have undertaken to get discounted. But in
either case, as far as the banker or other ultimate capitalist is
concerned, the transaction is essentially that which Mr. Richardson
describes. The loan by such banker is a re-discount of the bill; that
banker cannot obtain repayment of that loan, except by the payment
of the bill at maturity. He has no claim upon the agent who brought
him the bill. Bill-broking, in this which we may call its archaic
form, is simply one of the modes in which bankers obtain bills which
are acceptable to them and which they re-discount. No reference is
made in it to the credit of the bill-broker; the bills being
discounted 'without recourse' to him are as good if taken from a
pauper as if taken from a millionaire. The lender exercises his own
judgment on the goodness of the bill.
But in modern bill-broking the credit of the bill-broker is a vital
element. The lender considers that the bill-broker--no matter whether
an individual, a company, or a firm--has considerable wealth, and he
takes the 'bills,' relying that the broker would not venture that
wealth by guaranteeing them unless he thought them good. The lender
thinks, too, that the bill-broker being daily conversant with bills
and bills only, knows probably all about bills: he lends partly in
reliance on the wealth of the broker and partly in reliance on his
skill. He does not exercise much judgment of his own on the bills
deposited with him: he often does not watch them very closely.
Probably not one-thousandth part of the creditors on security of
Overend, Gurney and Co., had ever expected to have to rely on that
security, or had ever given much real attention to it. Sometimes,
indeed, the confidence in the bill-brokers goes farther. A
considerable number of persons lend to them, not only without much
looking at the security but even without taking any security. This
is the exact reverse of the practice which Mr. Richardson described
in 1810; then the lender relied wholly on the goodness of the bill,
now, in these particular cases, he relies solely on the bill-broker,
and does not take a bill in any shape. Nothing can be more natural
or more inevitable than this change. It was certain that the
bill-broker, being supposed to understand bills well, would be asked
by the lenders to evince his reliance on the bills he offered by
giving a guarantee for them. It was also most natural that the
bill-brokers, having by the constant practice of this lucrative
trade obtained high standing and acquired great wealth, should
become, more or less, bankers too, and should receive money on
deposit without giving any security for it.
But the effects of the change have been very remarkable. In the
practice as Mr. Richardson described it, there is no peculiarity
very likely to affect the money market. The bill-broker brought
bills to the banker, just as others brought them; nothing at all
could be said as to it except that the Bank must not discount bad
bills, must not discount too many bills, and must keep a good
reserve. But the modern practice introduces more complex
considerations. In the trade of bill-broking, as it now exists,
there is one great difficulty; the bill-broker has to pay interest
for all the money which he receives. How this arose we have just
seen. The present lender to the bill-broker at first always used to
discount a bill, which is as much as saying that he was always a
lender at interest. When he came to take the guarantee of the
broker, and only to look at the bills as a collateral security,
naturally he did not forego his interest: still less did he forego
it when he ceased to take security at all. The bill-broker has, in
one shape or other, to pay interest on every sixpence left with him,
and that constant habit of giving interest has this grave
consequence: the bill-broker cannot afford to keep much money
unemployed. He has become a banker owing large sums which he may be
called on to repay, but he cannot hold as much as an ordinary
banker, or nearly as much, of such sums in cash, because the loss of
interest would ruin him. Competition reduces the rate which the
bill-broker can charge, and raises the rate which the bill-broker
must give, so that he has to live on a difference exceedingly
narrow. And if he constantly kept a large hoard of barren money he
would soon be found in the 'Gazette.'
The difficulty is aggravated by the terms upon which a great part of
the money at the bill-brokers is deposited with them. Very much of
it is repayable at demand, or at very short notice. The demands on a
broker in periods of alarm may consequently be very great, and in
practice they often, are so. In times of panic there is always a
very heavy call, if not a run upon them; and in consequence of the
essential nature of their business, they cannot constantly keep a
large unemployed reserve of their own in actual cash, they are
obliged to ask help of some one who possesses that cash. By the
conditions of his trade, the bill-broker is forced to belong to a
class of 'dependent money-dealers,' as we may term them, that is, of
dealers who do not keep their own reserve, and must, therefore, at
every crisis of great difficulty revert to others.
In a natural state of banking, that in which all the principal banks
kept their own reserve, this demand of the bill-brokers and other
dependent dealers would be one of the principal calls on that
reserve. At every period of incipient panic the holders of it would
perceive that it was of great importance to themselves to support
these dependent dealers. If the panic destroyed those dealers it
would grow by what it fed upon (as is its nature), and might
probably destroy also the bankers, the holders of the reserve. The
public terror at such times is indiscriminate. When one house of
good credit has perished, other houses of equal credit though of
different nature are in danger of perishing. The many holders of the
banking reserve would under the natural system of banking be obliged
to advance out of that reserve to uphold bill-brokers and similar
dealers. It would be essential to their own preservation not to let
such dealers fail, and the protection of such dealers would
therefore be reckoned among the necessary purposes for which they
retained that reserve.
Nor probably would the demands on the bill-brokers in such a system
of banking be exceedingly formidable. Considerable sums would no
doubt be drawn from them, but there would be no special reason why
money should be demanded from them more than from any other money
dealers. They would share the panic with the bankers who kept the
reserve, but they would not feel it more than the bankers. In each
crisis the set of the storm would be determined by the cause which
had excited it, but there would not be anything in the nature of
bill-broking to attract the advance of the alarm peculiarly to them.
They would not be more likely to suffer than other persons; the only
difference would be that when they did suffer, having no adequate
reserve of their own, they would be obliged to ask the aid of
others.
But under a one-reserve system of banking, the position of the
bill-brokers is much more singular and much more precarious. In
fact, in Lombard Street, the principal depositors of the
bill-brokers are the bankers, whether of London, or of provincial
England, or of Scotland, or Ireland. Such deposits are, in fact, a
portion of the reserve of these bankers; they make an essential part
of the sums which they have provided and laid by against a panic.
Accordingly, in every panic these sums are sure to be called in from
the bill-brokers; they were wanted to be used by their owners in
time of panic, and in time of panic they ask for them. 'Perhaps it
may be interesting,' said Alderman Salomons, speaking on behalf of
the London and Westminster Bank, after the panic of 1857, to the
committee, 'to know that, on November 11, we held discounted bills
for brokers to the amount of 5,623,000 L. Out of these bills
2,800,000 L. matured between November 1 and December 4; 2,000,000 L.
more between December 1 and December 31; consequently we were
prepared merely by the maturing of our bills of exchange for any
demand that might come upon us.' This is not indeed a direct
withdrawal of money on deposit, but its principal effect is
identical. At the beginning of the time the London and Westminster
Bank had lent 5,000,000 L. more to the bill-brokers than they had at
the end of it; and that 5,000,000 L. the bank had added to its
reserve against a time of difficulty.
The intensity of the demand on the bill-broker is aggravated
therefore by our peculiar system of banking. Just at the moment
when, by the nature of their business, they have to resort to the
reserves of bankers for necessary support, the bankers remove from
them large sums in order to strengthen those reserves. A great
additional strain is thrown upon them just at the moment when they
are least able to bear it; and it is thrown by those who under a
natural system of banking would not aggravate the pressure on the
bill-brokers, but relieve it.
And the profits of bill-broking are proportionably raised. The
reserves of the bankers so deposited with the bill-broker form a
most profitable part of his business; they are on the whole of very
large amount, and at all times, except those of panic, may well be
depended upon. The bankers are pretty sure to keep them there, just
because they must keep a reserve, and they consider it one of the
best places in which to keep it. Under a more natural system, no
part of the banking reserve would ever be lodged at the brokers.
Bankers would deposit with the brokers only their extra money, the
money which they considered they could safely lend, and which they
would not require during a panic. In the eye of the banker, money at
the brokers would then be one of the investments of cash, it would
not be a part of such cash. The deposits of bill-brokers and the
profits of bill-broking are increased by our present system, just in
proportion as the dangers of bill-brokers during a panic are
increased by it.
The strain, too, on our banking reserve which is caused by the
demands of the bill-brokers, is also more dangerous than it would be
under a natural system, because that reserve is in itself less. The
system of keeping the entire ultimate reserve at a single bank,
undoubtedly diminishes the amount of reserve which is kept. And
exactly on that very account the danger of any particular demand on
that reserve is augmented, because the magnitude of the fund upon
which that demand falls is diminished. So that our one-reserve
system of banking combines two evils: first, it makes the demand of
the brokers upon the final reserve greater, because under it so many
bankers remove so much money from the brokers; and under it also the
final reserve is reduced to its minimum point, and the entire system
of credit is made more delicate, and more sensitive.
The peculiarity, indeed, of the effects of the one reserve is indeed
even greater in this respect. Under the natural system, the
bill-brokers would be in no respect the rivals of the bankers which
kept the ultimate reserve. They would be rather the agents for these
bankers in lending upon certain securities which they did not
themselves like, or on which they did not feel competent to lend
safely. The bankers who in time of panic had to help them would in
ordinary times derive much advantage from them. But under our
present system all this is reversed. The Bank of England never
deposits any money with the bill-brokers; in ordinary times it never
derives any advantage from them. On the other hand, as the Bank
carries on itself a large discount business, as it considers that it
is itself competent to lend on all kinds of bills, the bill-brokers
are its most formidable rivals. As they constantly give high rates
for money it is necessary that they should undersell the Bank, and
in ordinary times they do undersell it. But as the Bank of England
alone keeps the final banking reserve, the bill-brokers of necessity
have to resort to that final reserve; so that at every panic, and by
the essential constitution of the money market, the Bank of England
has to help, has to maintain in existence, the dealers, who never in
return help the Bank at any time, but who are in ordinary times its
closest competitors and its keenest rivals.
It might be expected that such a state of things would cause much
discontent at the Bank of England, and in matter of fact there has
been much discussion about it, and much objection taken to it. After
the panic of 1857, this was so especially. During that panic, the
Bank of England advanced to the bill-brokers more than 9,000,000 L.,
though their advances to bankers, whether London or country, were
only 8,000,000 L.; and, not unnaturally, the Bank thought it
unreasonable that so large an inroad upon their resources should be
made by their rivals. In consequence, in 1858 they made a rule that
they would only advance to the bill-brokers at certain seasons of
the year, when the public money is particularly large at the bank,
and that at other times any application for an advance should be
considered exceptional, and dealt with accordingly. And the object
of that regulation was officially stated to be 'to make them keep
their own reserve, and not to be dependent on the Bank of England.'
As might be supposed, this rule was exceedingly unpopular with the
brokers, and the greatest of them, Overend, Gurney and Co., resolved
on a strange policy in the hope of abolishing it. They thought they
could frighten the Bank of England, and could show that if they were
dependent on it, it was also dependent on them. They accordingly
accumulated a large deposit at the Bank to the amount of
3,000,000 L., and then withdrew it all at once. But this policy had
no effect, except that of exciting a distrust of 'Overends': the
credit of the Bank of England was not diminished; Overends had to
return the money in a few days, and had the dissatisfaction of
feeling that they had in vain attempted to assail the solid basis of
everyone's credit, and that everyone disliked them for doing so. But
though this un-conceived attempt failed as it deserved, the rule
itself could not be maintained. The Bank does, in fact, at every
period of pressure, advance to the bin-brokers; the case may be
considered 'exceptional,' but the advance is always made if the
security offered is really good. However much the Bank may dislike
to aid their rivals, yet they must aid them; at a crisis they feel
that they would only be aggravating incipient demand, and be
augmenting the probable pressure on themselves if they refused to do
so.
I shall be asked if this anomaly is inevitable, and I am afraid that
for practical purposes we must consider it to be so. It may be
lessened; the bill-brokers may, and should, discourage as much as
they can the deposit of money with them on demand, and encourage the
deposit of it at distant fixed dates or long notice. This will
diminish the anomaly, but it will not cure it. Practically,
bin-brokers cannot refuse to receive money at call. In every market
a dealer must conduct his business according to the custom of the
market, or he will not be able to conduct it at all. All the
bin-brokers can do is to offer better rates for more permanent
money, and this (though possibly not so much as might be wished)
they do at present. In its essence, this anomaly is, I believe, an
inevitable part of the system of banking which history has given us,
and which we have only to make the best of, since we cannot alter
it.