Conclusion.
I know it will be said that in this work I have pointed out a deep
malady, and only suggested a superficial remedy. I have tediously
insisted that the natural system of banking is that of many banks
keeping their own cash reserve, with the penalty of failure before
them if they neglect it. I have shown that our system is that of a
single bank keeping the whole reserve under no effectual penalty of
failure. And yet I propose to retain that system, and only attempt
to mend and palliate it.
I can only reply that I propose to retain this system because I am
quite sure that it is of no manner of use proposing to alter it. A
system of credit which has slowly grown up as years went on, which
has suited itself to the course of business, which has forced itself
on the habits of men, will not be altered because theorists
disapprove of it, or because books are written against it. You might
as well, or better, try to alter the English monarchy and substitute
a republic, as to alter the present constitution of the English
money market, founded on the Bank of England, and substitute for it
a system in which each bank shall keep its own reserve. There is no
force to be found adequate to so vast a reconstruction, and so vast
a destructions and therefore it is useless proposing them.
No one who has not long considered the subject can have a notion how
much this dependence on the Bank of England is fixed in our national
habits. I have given so many illustrations in this book that I fear
I must have exhausted my reader's patience, but I will risk giving
another. I suppose almost everyone thinks that our system of
savings' banks is sound and good. Almost everyone would be surprised
to hear that there is any possible objection to it. Yet see what it
amounts to. By the last return the savings' banks--the old and the
Post Office together--contain about 60,000,000 L. of deposits, and
against this they hold in the funds securities of the best kind. But
they hold no cash whatever. They have of course the petty cash about
the various branches necessary for daily work. But of cash in
ultimate reserve--cash in reserve against a panic--the savings' banks
have not a sixpence. These banks depend on being able in a panic to
realise their securities. But it has been shown over and over again,
that in a panic such securities can only be realised by the help of
the Bank of England--that it is only the Bank with the ultimate cash
reserve which has at such moments any new money, or any power to
lend and act. If in a general panic there were a run on the savings'
banks, those banks could not sell 100,000 L. of Consols without the
help of the Bank of England; not holding themselves a cash reserve
for times of panic, they are entirely dependent on the one Bank
which does hold that reserve.
This is only a single additional instance beyond the innumerable
ones given, which shows how deeply our system of banking is fixed in
our ways of thinking. The Government keeps the money of the poor
upon it, and the nation fully approves of their doing so. No one
hears a syllable of objection. And every practical man--every man who
knows the scene of action--will agree that our system of banking,
based on a single reserve in the Bank of England, cannot be altered,
or a system of many banks, each keeping its own reserve, be
substituted for it. Nothing but a revolution would effect it, and
there is nothing to cause a revolution.
This being so, there is nothing for it but to make the best of our
banking system, and to work it in the best way that it is capable
of. We can only use palliatives, and the point is to get the best
palliative we can. I have endeavoured to show why it seems to me
that the palliatives which I have suggested are the best that are at
our disposal.
I have explained why the French plan will not suit our English
world. The direct appointment of the Governor and Deputy-Governor of
the Bank of England by the executive Government would not lessen our
evils or help our difficulties. I fear it would rather make both
worse. But possibly it may be suggested that I ought to explain why
the American system, or some modification, would not or might not be
suitable to us. The American law says that each national bank shall
have a fixed proportion of cash to its liabilities (there are two
classes of banks, and two different proportions; but that is not to
the present purpose), and it ascertains by inspectors, who inspect
at their own times, whether the required amount of cash is in the
bank or not. It may be asked, could nothing like this be attempted
in England? could not it, or some modification, help us out of our
difficulties? As far as the American banking system is one of many
reserves, I have said why I think it is of no use considering
whether we should adopt it or not. We cannot adopt it if we would.
The one-reserve system is fixed upon us. The only practical
imitation of the American system would be to enact that the Banking
department of the Bank of England should always keep a fixed
proportion--say one-third of its liabilities--in reserve. But, as we
have seen before, a fixed proportion of the liabilities, even when
that proportion is voluntarily chosen by the directors, and not
imposed by law, is not the proper standard for a bank reserve.
Liabilities may be imminent or distant, and a fixed rule which
imposes the same reserve for both will sometimes err by excess, and
sometimes by defect. It will waste profits by over-provision against
ordinary danger, and yet it may not always save the bank; for this
provision is often likely enough to be insufficient against rare and
unusual dangers. But bad as is this system when voluntarily chosen,
it becomes far worse when legally and compulsorily imposed. In a
sensitive state of the English money market the near approach to the
legal limit of reserve would be a sure incentive to panic; if
one-third were fixed by law, the moment the banks were close to
one-third, alarm would begin, and would run like magic. And the fear
would be worse because it would not be unfounded--at least, not
wholly. If you say that the Bank shall always hold one-third of its
liabilities as a reserve, you say in fact that this one-third shall
always be useless, for out of it the Bank cannot make advances,
cannot give extra help, cannot do what we have seen the holders of
the ultimate reserve ought to do and must do. There is no help for
us in the American system; its very essence and principle are
faulty.
We must therefore, I think, have recourse to feeble and humble
palliatives such as I have suggested. With good sense, good
judgment, and good care, I have no doubt that they may be enough.
But I have written in vain if I require to say now that the problem
is delicate, that the solution is varying and difficult, and that
the result is inestimable to us all.
APPENDIX.
Note A.
Liabilities and Cash Reserve of the Chief Banking Systems.
The following is a comparison of the liabilities to the public, and
of the cash reserve, of the banking systems of the United Kingdom,
France, Germany, and the United States. For the United Kingdom the
figures are the most defective, as they only include the deposits of
the Bank of England, and of the London joint stock banks, and the
banking reserve of the Bank of England, which is the only cash
available against these liabilities is also the only cash reserve
against the similar liabilities of the London private banks, the
provincial English banks, and the Scotch and Irish banks. In the
case of England, therefore, the method of comparison exhibits a
larger proportion of cash to liabilities than what really exists.
(1) ENGLISH BANKING.
Liabilities.
Deposits of Bank of England, less
estimated Joint Stock Bank balances, at December 31, 1872 L 29,000,000
Deposits of London Joint Stock Banks
at December 31 1872 (see 'Economist,' February 8, 1873) L 91,000,000
------------
Total liabilities L 120,000,000
=============
Reserve of Cash
Banking Reserve in Bank of England. L 13,500,000
=============
Making proportion of cash reserve to liabilities to the public about
11'2 per cent.
(2) BANK of FRANCE (FEBRUARY, 1873).
Liabilities
Circulation L 110,000,000
Deposits L 15,000,000
-------------
Total liabilities L 125,000,000
=============
Reserve of Cash.
Coin and bullion in hand L 32,000,000
Making proportion of cash reserve to liabilities to the public about
25 per cent.
(3) BANKS OF GERMANY (JANUARY, 1873).
Liabilities
Circulation L 63,000,000
Deposits L 8,000,000
Acceptances and Indorsements L 17,000,000
------------
Total liabilities L 88,000,000
============
Reserves of Cash
Cash in Hand L 41,000,000
============
Making proportion of cash reserve to liabilities to the public about
per cent.
(4) NATIONAL BANKS OF UNITED STATES (OCTOBER 3, 1872).
Liabilities
Circulation L 67,000,000
Deposits L 145,000,000
-------------
Total liabilities L 212,000,000
=============
Reserve of Cash
Coin and legal tenders in hand L 26,000,000
============
Making proportion of cash reserve to liabilities to the public about
12.3 per cent.
SUMMARY
Liabilities Cash held Proportion of cash
to the public to liabilities per
cent
Bank of England and London
Joint Stock Banks 20,000,000 13,500,000 11.2
Bank of France 125,000,000 32,000,000 25.0
Banks of Germany 88,000,000 41,000,000 47.0
National Banks of
United States 212,000,000 26,000,000 12.3
Note B.
Extract from Evidence Given by Mr. Alderman Salomons before House of
Commons Select Committee in 1858.
1146. [Chairman.] The effect upon yourselves of the pressure in
November was, I presume, to induce you to increase your reserve in
your own hands, and also to increase your deposits with the Bank of
England?--Yes, that was so; but I wish to tell the Committee that that
was done almost entirely by allowing the bills of exchange which we
held to mature, and not by raising any money, or curtailing our
accommodation to our customers. Perhaps it may be interesting to the
Committee to know that on the 11th of November we held discounted
bills for brokers to the amount of 5,623,000 L. Out of those bills,
2,800,000 L. matured between the 11th of November and the 4th of
December, and 2,000,000 L. more between the 4th of December and the
31st. So that about 5,000,000 L. of bills matured between the 11th
of November and the 31st of December; consequently we were prepared,
merely by the maturing of our bills of exchange, for any demands
that might possibly come upon us.
1147. I understand you to say that you did not withdraw your usual
accommodation from your own customers, but that you ceased to have
in deposit with the bill-brokers so large a sum of money as you had
before?--Not exactly that; the bills which we had discounted were
allowed to mature, and we discounted less; we kept a large reserve
of cash.
1148. That is to say, you withdrew from the commercial world a part
of that accommodation which you had previously given, and at the
same time you increased your deposits with the Bank of England?--Yes,
our deposits with the Bank of England were increased. We did not
otherwise withdraw accommodation.
1149. [Mr. Weguelin.] Had you any money at call with the
bill-brokers?--A small amount; perhaps about 500,000 L. or less, which
we did not call in.
1150. [Chairman.] What I understand you to say is, that the effect of
the commercial pressure upon you was to induce you upon the whole to
withdraw from commerce an amount of accommodation which in other
times you had given, and at the same time to increase your deposits
with the Bank of England?--So far only as ceasing to discount with
strangers, persons not having current accounts with us.
1151. Or to give the same amount to the bill-broker?--For a while,
instead of discounting for brokers and strangers, we allowed our
bills to mature, and remained quiescent with a view to enable us to
meet any demand that might be made on ourselves.
1152. Except what you felt bound to your own customers to continue
to give, you ceased to make advances?--Quite so; perhaps I might say
at the same time, that besides a large balance which we kept at the
Bank of England, which of course was as available as in our own
tills, we increased our notes in our tills at the head office and at
all the branches.
1153. I suppose at that time large sales of public securities were
made by the London joint stock banks, which securities were
purchased by the public?--It is understood that some joint stock and
other banks sold, but I believe it is quite certain that the public
purchased largely, because they always purchase when the funds fall.
1154. Are you prepared to give the Committee any opinion of your own
as to the effect, one way or the other, which the system of the
joint stock banks may have produced with regard to aggravating or
diminishing the commercial pressure in the autumn of last year?--I
should state, generally, that the joint stock banks, as well as all
other banks, in London, by collecting money from those who had it to
spare, must of necessity have assisted, and could not do otherwise
than assist commerce, both then and at all other times.
1155. You say that your discounts, either at your own counter or
through the bill-brokers, are ordinarily very large, but that at the
time of severest pressure you contracted them so far as you thought
was just to your own immediate customers?--Yes; but the capital was
still there, because it was at the Bank of England, and it was
capable of being used for short periods; if we did not want it,
others might have used it.
1156. [Mr. Weguelin.] In fact, it was used by the Bank of England?--
Undoubtedly; I should suppose so; there is no question about it.
1157. You, of course, felt quite certain that your deposits in the
Bank of England might be had upon demand?--We had no doubt about it.
1158 You did not take into consideration the effect of the law of
1844, which might have placed the Banking Department of the Bank of
England in such a position as not to be able to meet the demands of
its depositors? I must say that that never gave us the smallest
concern.
1159. You therefore considered that, if the time should arrive, the
Government would interfere with some measure as they had previously
done to enable the Bank to meet the demands upon it?--We should always
have thought that if the Bank of England had stopped payment, all
the machinery of Government would have stopped with it, and we never
could have believed that so formidable a calamity would have arisen
if the Government could have prevented it.
1160. [Chairman.] The notion of the convertibility of the note being
in danger never crossed your mind?--Never for a moment; nothing of the
kind.
1161. [Mr. Weguelin.] I refer not to the convertibility of the note,
but to the state of the Banking Department of the Bank of England?--If
we had thought that there was any doubt whatever about it, we should
have taken our bank-notes and put them in our own strong chest. We
could never for a moment believe an event of that kind as likely to
happen.
1162. Therefore you think that the measure taken by the Government,
of issuing a letter authorising the Bank of England to increase
their issues of notes upon securities, was what was generally
expected by the commercial world, and what in future the commercial
world would look to in such a conjunction of circumstances?--We looked
for some measure of that nature. That, no doubt, was the most
obvious one. We had great doubts whether it would come when it did,
until the very last moment.
1163. Have you ever contemplated the possibility of the Bank
refusing to advance, under circumstances similar to those which
existed in November, 1857, upon good banking securities?--Of course I
have, and it is a very difficult question to answer as to what its
effect might be; but the notion appears to me to be so thoroughly
ingrained in the minds of the commercial world, that whenever you
have good security it ought to be convertible at the Bank in some
shape or way, that I have very great doubt indeed whether the Bank
can ever take a position to refuse to assist persons who have good
commercial securities to offer.
1164. [Mr. Cayley.] When you say that you have come to some fresh
arrangement with regard to your allowance of interest upon deposits,
do you speak of yourselves as the London and Westminster Bank, or of
some of the other banks in combination with yourselves?--I think all
the banks have come to an understanding that it is not desirable,
either for their proprietors or for the public, to follow closely at
all times the alterations of the Bank. I believe it is understood
amongst them all that they do not intend following that course in
future.
1165. Is that from a feeling that it is rather dangerous under
particular circumstances?--I cannot admit as to its being dangerous,
but there can be no doubt of this, that there is a notion in the
public mind which we ought not to contend against, that when you
offer a high rate of interest for money, you rather do it because
you want the person's money, than because you are obeying the market
rate; and I think it is desirable that we should show that if
persons wish to employ their money, and want an excessive rate, they
may take it away and employ it themselves.
1166. You think that there is now a general understanding amongst
the banks which you have mentioned, to act upon a different
principle from that on which they acted during last October and
November?--I think I may say that I know that to be the case.
1167. Was not it the fact that this system of giving so high a rate
of interest upon money at call commenced very much with the
establishment of some banks during the last year or two, which,
instead of demanding 10 days' or a month's notice, were willing to
allow interest upon only three days' notice; did not that system
begin about two years ago?--I do not think it began with the new
banks; I think it began with one of the older banks; I know that as
regards my own bank, that we were forced into it; I forgot to say,
that with regard to ourselves in taking money on deposit, the
parties must leave the money a month, or they lose interest. We do
not take money from any depositor at interest unless upon the
understanding and condition that it remains a month with us; he may
withdraw it within the month, but then he forfeits interest; it will
not carry interest unless it is with us a month, and then it is
removable on demand without notice.
1168. Is it or is it not a fact that some of the banks pay interest
upon their current accounts?--Yes, I think most of the new banks do
so; and the Union Bank of London does it.
1169. At a smaller rate than upon their deposits, I presume?--I think
at a smaller rate, but I believe it is a fixed rate on the minimum
balance for some period, either six months or one month, I do not
exactly know the period. I think I ought to add (and I believe it is
the case with all the banks) that the London and Westminster Bank,
from the day of its first institution until the present day, has
never re-discounted a bill. No bill has ever left our bank unless it
has been for payment.
1170. Is not that generally the case with the London joint stock
banks?--I believe it is the case.
1171. [Mr. Weguelin.] But you sometimes lend money upon bills
deposited with you by bill-brokers?--Yes.
1172. And you occasionally call in that money and re-deliver those
securities?--Yes; but that we do to a very small extent.
1173. Is not that equivalent to a re-discount of bills?--No; the
discount of a bill and the lending money on bills are very different
things. When we discount a bill, that bill becomes our property; it
is in our control, and we keep it and lock it up until it falls due;
but when brokers come to us and want to borrow, say 50,000 L. on a
deposit of bills, and we let them have the money and afterwards
return those bills to them and we get back our money, surely that is
not a re-discount.
1174. When you want to employ your money for a short period, do you
not frequently take bills of long date, and advance upon them?--But
that is not a re-discount on our part. Very often brokers in
borrowing money send in bills of long date, and afterwards we call
in that loan; but that is no more a re-discount than lending money
upon consols and calling in that money again. It is not an advance
of ours; we do not seek it; they come to us and borrow our money,
and give us a security; when we want our money we call for that
money, and return their security. Surely that is not a re-discount.
1175. [Mr. Hankey.] Is there not this clear distinction between
returning a bill on which you have made an advance and discounting a
bill, that if you have discounted a bill your liability continues
upon the bill until that bill has come to maturity?--Yes.
1176. In the other case you have no further liability
whatever?--Certainly.
1177. Should you not consider that a very important distinction?--I
think it is an important distinction. Take this case: suppose a
party comes to us and borrows 50,000 L., and we lend it him, and
when the loan becomes due we take our money back again. Surely that
is not a discount on our part.
1178. Is there not this distinction, that if you re-discount you may
go on pledging the liability of your bank to an almost unlimited
amount, whereas in the other case you only get back that money which
you have lent?--Undoubtedly.
1179. [Mr. Cayley.] The late Chancellor of the Exchequer stated
before the adjournment, in a speech in the House of Commons, that
during the Monday, Tuesday, Wednesday, and Thursday of the panic,
the Bank was almost, if not entirely, the only body that discounted
commercial bills; how can you reconcile that with what you have
said, that you gave as much accommodation as usual to your
customers?--I am not responsible for what the Chancellor of the
Exchequer said; I am responsible for what I am now stating as to the
course of our bank, that our advances to our customers on the 31st
of December were nearly 500,000 L. higher than they were on the 1st
of October. With regard to our not discounting for other parties, it
was in consequence of the discredit which prevailed, that it was
necessary we should hold a portion of our deposits in order that
they should be available in case persons called for them; a certain
number of persons did so; in the month of November we had a
reduction of our deposits, and if we had gone on discounting for
brokers we should have had to go into the market ourselves to raise
money on our Government securities, but we avoided that by not
discounting, and leaving our money at the Bank of England.
1180. Then you did not discount as much as usual for your customers
during that period?--Yes, we did, and more.
1181. But not to strangers?--Not to strangers; I make a distinction
between our transactions with our customers, who of course expect us
to give accommodation, and discounts for brokers, which is entirely
voluntary, depending upon our having money to employ.
1182. How would it have been if the letter had not issued at the
last moment? That is a question which I can hardly answer.
1183. What do you mean by that general expression of yours?--It is
impossible to predicate what may happen in time of panic and alarm.
A great alarm prevailed certainly amongst the commercial world, and
it could never have been alleviated, except by some extraordinary
means of relief. We might probably have been in the state in which
Hamburg was, where they have no bank-notes in circulation.
1184. [Mr. Spooner.] What did you mean by the expression, 'the last
moment'? You said that the letter came out at the last moment; the
last moment of what?--It was late in the day; it was a day of great
distress. For two days there was a great deal of anxiety, and
everybody expected that there would be some relief; and it was when
expectation, I suppose, was highly excited that the letter came, and
it gave relief.
1185. Cannot you tell us what your opinion would have been, if that
last moment had happened to have elapsed, and the letter had not
come?--It is very difficult to say; it is too much to say that it
could not have been got over. There can be no doubt whatever that
what created the difficulty existed out of London, and not in it;
and therefore it is much more difficult for me to give an opinion. I
believe that the banking interest, both private and joint stock, was
in a perfectly sound condition, and able to bear any strain which
might have been brought upon it in London.
1186. [Mr. Hankey.] Can you give the Committee any idea as to what
proportion of deposits you consider generally desirable to keep in
reserve?--You must be very much guided by circumstances. In times of
alarm, when there are failures, of course all bankers strengthen
their reserves; our reserve then is larger. In times of ordinary
business we find, both as regards our deposits at interest as well
as those which are not at interest, that there is a constant
circulation; that the receipts of money very nearly meet the
payments.
1187. You probably keep at all times a certain amount of your
deposits totally unemployed; in reserve?--Yes.
1188. In a normal state of commercial affairs, is there any fixed
proportion, or can you give the Committee any idea of what you would
consider about a fair and desirable proportion which should be so
kept unemployed?--I think the best idea which I can give upon that
subject is to give our annual statement, or balance sheet, for the
31st of December.
1189. Does that show what amount of unemployed money you had on that
day?--Yes. I will put in a statement, which perhaps will be the best
means of meeting the question, showing the cash in hand on the 30th
of June and the 31st of December in every year, as shown by our
published accounts, together with our money at call and our
Government securities; that will be perhaps the best and most
convenient way of giving the information you desire to have. (See
Table below.)
1190. Do you consider that when your deposits are materially on the
increase it is necessary to keep a larger amount of money in reserve
than you would keep at other times?--I may say that, as a general
rule, our reserve would always bear some proportion to our deposits.
_Total Lodgments with London and Westminster Bank; also Amount of
Cash in Hand, Moneys with Bill-Brokers at Call, and Government
Securities held by the Bank._
DATE Deposits Cash Money Government TOTAL.
in Hand at Call Securities
L L L L L
31 December 1845 3,590,014 563,072 628,500 1,039,745 2,231,317
31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352
31 December 1847 2,733,753 7,231,325 350,108 791,899 1,863,332
30 June 1848 3,170,118 588,871 159,724 1,295,047 2,043,642
31 December 1848 3,089,659 645,468 176,824 1,189,213 2,011,505
30 June 1849 3,392,857 552,642 246,494 964,800 1,763,936
31 December 1849 3,680,623 686,761 264,577 973,691 1,224,029
30 June 1850 3,821,022 654,649 258,177 972,055 1,884,881
31 December 1850 3,969,648 566,039 334,982 1,089,794 1,990,815
30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932
31 December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301
30 June 1852 5,245,135 861,778 136,687 1,054,018 2,122,483
31 December 1852 5,581,706 855,057 397,087 1,119,477 2,371,621
30 June 1853 6,219,817 904,252 499,467 1,218,852 2,622,571
31 December 1853 6,259,540 791,699 677,392 1,468,902 2,937,993
30 June 1854 6,892,470 827,397 917,557 1,457,415 3,202,369
31 December 1854 7,177,244 694,309 486,400 1,451,074 2,631,783
30 June 1855 8,166,553 722,243 483,890 1,754,074 2,960,207
31 December 1855 8,744,095 847,856 451,575 1,949,074 3,248,505
30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165
31 December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216
30 June 1857 13,913,058 967,078 687,730 3,353,179 5,007,987
31 December 1857 113,889,021 2,226,441 1,115,883 3,582,797 6,923,121
1191. Do you employ your money in the discounting of bills for other
persons than your own customers?--Discount brokers.
1192. Only to discount brokers? Yes.
1193. Not to strangers who are in the habit of bringing you in
bills; commercial houses?--I should say generally not. We have one or
two houses for whom we discount who have not accounts with us as
bankers, but generally we do not discount except for our customers
or for bill-brokers.
1194. Do you consider that any advantage can arise to the public by
the Bank of England advancing to a greater extent than can be
considered strictly prudent on the soundest principle of banking,
under the idea of their affording aid to the commercial world?--As I
said before, as long as there are good bills in circulation, that
is, bills about which there would be no doubt of their being paid at
maturity, there should be some means by which those bills could be
discounted.
1195. And do you think that it is part of the functions of the Bank
of England to discount a bill for anybody, merely because the party
holding the bill wishes to convert it into cash?--As I said before,
the Bank of England will have great difficulty in getting rid of
that inconvenient idea which there is in the mind of the public,
that the Bank of England is something more than an ordinary joint
stock bank. I think it must depend very much upon circumstances
whether you can or cannot refuse the discount of good bills which
are offered to you.
Note C.
Statement of Circulation and Deposits of the Bank of Dundee at
Intervals of Ten Years between 1764 and 1864.
Year Circulation Deposits
L L
1764 30,395 --
1774 27,670 --
1784 56,342 --
1794 50,354 --
1804 54,096 157,821
1814 46,627 445,066
1824 29,675 343,948
1834 26,467 563,202
1844 27,504 535,253
1854 40,774 705,222
1864 41,118 684,898
The Bank did not begin to receive deposits until 1792, in which year
they amounted to 35,944 L.
Note D.
Meeting of the Proprietors of the Bank of England.
September 13, 1866.
(From 'Economist,' September 22, 1866.)
A General Court of the Bank of England was held at the Bank at
twelve o'clock on the 3th instant, for the purpose of declaring a
dividend for the past half-year.
Mr. Launcelot Holland, the Governor of the Bank, who presided upon
the occasion, addressed the proprietors as follows: This is one of
the quarterly general courts appointed by our charter, and it is
also one of our half-yearly general courts, held under our bye-laws,
for the purpose of declaring a dividend. From a statement which I
hold in my hand it appears that the net profits of the Bank for the
half-year ending on the 31st of August last amounted to 970,014 L.
17s. 10d.; making the amount of the rest on that day, 3,981,783 L.
18s. 11d.; and after providing for a dividend at the rate of 6 L.
10s. per cent, the rest will stand at 3,035,838 L.. 18s. 11d. The
court of directors, therefore, propose that a half-yearly dividend
of interest and profits, to the amount of 6 L. 10s. per cent, without
deduction on account of income tax, shall be made on the 10th of
October next. That is the proposal I have now to lay before the
general court; but as important events have occurred since we last
met, I think it right I should briefly advert to them upon this
occasion. A great strain has within the last few months been put
upon the resources of this house, and of the whole banking community
of London; and I think I am entitled to say that not only this house
but the entire banking body acquitted themselves most honourably and
creditably throughout that very trying period. Banking is a very
peculiar business, and it depends so much upon credit that the least
blast of suspicion is sufficient to sweep away, as it were, the
harvest of a whole year. But the manner in which the banking
establishments generally of London met the demands made upon them
during the greater portion of the past half-year affords a most
satisfactory proof of the soundness of the principles on which their
business is conducted. This house exerted itself to the utmost--and
exerted itself most successfully--to meet the crisis. We did not
flinch from our post. When the storm came upon us, on the morning on
which it became known that the house of Overend and Co. had failed,
we were in as sound and healthy a position as any banking
establishment could hold; and on that day and throughout the
succeeding week, we made advances which would hardly be credited. I
do not believe that any one would have thought of predicting, even
at the shortest period beforehand, the greatness of those advances.
It was not unnatural that in this state of things a certain degree
of alarm should have taken possession of the public mind, and that
those who required accommodation from the Bank should have gone to
the Chancellor of the Exchequer and requested the Government to
empower us to issue notes beyond the statutory amount, if we should
think that such a measure was desirable. But we had to act before we
could receive any such power, and before the Chancellor of the
Exchequer was perhaps out of his bed we had advanced one-half of our
reserves, which were certainly thus reduced to an amount which we
could not witness without regret. But we could not flinch from the
duty which we conceived was imposed upon us of supporting the
banking community, and I am not aware that any legitimate
application for assistance made to this house was refused. Every
gentleman who came here with adequate security was liberally dealt
with, and if accommodation could not be afforded to the full extent
which was demanded, no one who offered proper security failed to
obtain relief from this house. I have perhaps gone a little more
into details than is customary upon these occasions, but the times
have been unusually interesting, and I thought it desirable to say
this much in justification of the course adopted by this house of
running its balances down to a point which some gentlemen may
consider dangerous. Looking back, however, upon recent events, I
cannot take any blame to this court for not having been prepared for
such a tornado as that which burst upon us on the 11th of May; and I
hope the court of proprietors will feel that their directors acted
properly upon that occasion, and that they did their best to meet a
very extraordinary state of circumstances. I have now only to move
that a dividend be declared at the rate of 6 L. 10s. per cent for
the past half-year.
Mr. Hyam said that before the question was put he wished to offer a
few observations to the court. He believed that the statement of
accounts which had just been laid before them was perfectly
satisfactory. He also thought that the directors had done their best
to assist the commercial classes throughout the late monetary
crisis; but it appeared to him at the same time that they were in
fault in not having applied at an earlier period to the Chancellor
of the Exchequer for a suspension of the Bank Act. It was well known
that the demand on the Bank was materially lessened in the earlier
part of the day, in consequence of a rumour which had been
extensively circulated that permission to overstep the limits laid
down in the Act had been granted. That concession, however, had only
been made after the most urgent representations had been addressed
to the Chancellor of the Exchequer at a late hour in the night, and
if it had then been refused he felt persuaded that the state of
affairs would have been much worse on the Saturday than it had been
on the Friday. The fact was that the Act of 1844 was totally
unsuited to the present requirements of the country, which since
that period had tripled or quadrupled its commerce; and he was sorry
to know that the measure seemed to meet with the approval of many of
their directors. Any one who read the speeches made in the course of
the discussion on Mr. Watkins' motion must see that the subject
called for further inquiry; and he trusted that the demand for that
inquiry would yet be conceded.
Mr. Jones said he entirely dissented from the views with respect to
the Bank Act entertained by the hon. proprietor who had just
addressed the court. In his opinion the main cause of the recent
monetary crisis was that, while we had bought 275,000,000 L. worth
of foreign produce in the year 1865, the value of our exports had
only been 165,000,000 L., so that we had a balance against us to the
amount of 110,000,000 L. He believed that the Bank acted wisely in
resisting every attempt to increase the paper currency, and he felt
convinced that the working classes would be the people least likely
to benefit by the rise in prices which would take place under such a
change.
Mr. Moxon said he should be glad to know what was the amount of bad
debts made by the Bank during the past half-year. It was stated very
confidently out of doors that during that period the directors had
between 3,000,000 L. and 4,000,000 L. of bills returned to them.
The Governor of the Bank.--May I ask what is your authority for that
statement? We are rather amused at hearing it, and we have never
been able to trace any rumour of the kind to an authentic source.
Mr. Moxon continued--Whether the bad debts were large or small, he
thought it was desirable that they should all know what was their
actual amount. They had been told at their last meeting that the
Bank held a great many railway debentures; and he should like to
know whether any of those debentures came from railway companies
that had since been unable to meet their obligations. He understood
that a portion of their property was locked up in advances made on
account of the Thames Embankment, and in other ways which did not
leave the money available for general banking and commercial
purposes; and if that were so, he should express his disapproval of
such a policy. There was another important point to which he wished
to advert. He was anxious to know what was the aggregate balance of
the joint stock banks in the Bank of England. He feared that some
time or other the joint stock banks would be in a position to
command perhaps the stoppage of the Bank of England. If that were
not so, the sooner the public were full & informed upon the point the
better. But if ten or twelve joint stock banks had large balances in
the Bank of England, and if the Bank balances were to run very low,
people would naturally begin to suspect that the joint stock banks
had more power over the Bank of England than they ought to have. He
wished further to ask whether the directors had of late taken into
consideration the expediency of paying interest on deposits. He
believed that under their present mode of carrying on their business
they were foregoing large profits which they might receive with
advantage to themselves and to the public; and he would recommend
that they should undertake the custody of securities after the
system adopted by the Bank of France. In conclusion, he proposed to
move three resolutions, for the purpose of providing, first, that a
list of all the proprietors of Bank stock should be printed, with a
separate entry of the names of all those persons not entitled to
vote from the smallness of their stock, or from the shortness of
time during which they held it; secondly, that a copy of the charter
of the Bank, with the rules, orders, and bye-laws passed for the
good government of their corporation, should be printed for the use
of the shareholders; and thirdly, that auditors should be appointed
to make detailed audits of their accounts.
Mr. Gerstenberg recommended that the directors should take some step
for the purpose of preventing the spread of such erroneous notions
as that which lately prevailed on the Continent, that the Bank was
about to suspend specie payments.
Mr. W. Botly said he wished to see the directors taking into their
consideration the expediency of allowing interest on deposits.
Mr. Alderman Salomons said he wished to take that opportunity of
stating that he believed nothing could be more satisfactory to the
managers and shareholders of joint stock banks than the testimony
which the Governor of the Bank of England had that day borne to the
sound and honourable manner in which their business was conducted.
It was mainfestly desirable that the joint stock banks and the
banking interest generally should work in harmony with the Bank of
England; and he sincerely thanked the Governor of the Bank for the
kindly manner in which he had alluded to the mode in which the joint
stock banks had met the late monetary crisis.
The Governor of the Bank said--Before putting the question for the
declaration of a dividend, I wish to refer to one or two points that
have been raised by the gentlemen who have addressed the court on
this occasion. The most prominent topic brought under our notice is
the expediency of allowing interest on deposits; and upon that point
I must say that I believe a more dangerous innovation could not be
made in the practice of the Bank of England. The downfall of Overend
and Gurney, and of many other houses, must be traced to the policy
which they adopted of paying interest on deposits at call, while
they were themselves tempted to invest the money so received in
speculations in Ireland or in America, or at the bottom of the sea,
where it was not available when a moment of pressure arrived.
Mr. Botly said he did not mean deposits on call.
The Governor of the Bank of England continued--That is only a matter
of detail; the main question is whether we ought to pay interest on
deposits, and of such policy I must express my entire disapproval.
Mr. Moxon has referred to the amount of our debts, but, as I stated
when I took the liberty of interrupting him, we could never trace
the origin of any rumour which prevailed upon that subject. As far
as it can be said to have ever existed it had its origin most
probably in the vast amount advanced by the Bank. It must, however,
be remembered that we did not make our advances without ample
security, and the best proof of that is the marvelously small amount
of bad debts which we contracted. It has never been a feature of the
Bank to state what was the precise amount of those debts; but I
believe that if I were to mention it upon the present occasion, it
would be found to be so inconsiderable that I should hardly obtain
credence for the announcement I should have to make. I am convinced
that our present dividend has been as honestly and as hardly earned
as any that we have ever realised; but it has been obtained by means
of great vigilance and great anxiety on the part of each and all of
your directors; and I will add that I believe you would only
diminish their sense of responsibility, and introduce confusion into
the management of your business, if you were to transfer to auditors
the making up of your accounts. If your directors deserve your
confidence they are surely capable of performing that duty, and if
they do not deserve it you ought not to continue them in their
present office. With regard to the supposed lock-up of our capital,
I must observe that, with 14,000,000 L. on our hands, we must
necessarily invest it in a variety of securities; but there is no
ground for imagining that our money is locked up and is not
available for the purpose of making commercial advances. We advanced
in the space of three months the sum of 45,000,000 L.; and what more
than that do you want? It has been recommended that we should take
charge of securities; but we have found it necessary to refuse all
securities except those of our customers; and I believe the custody
of securities is becoming a growing evil. With regard to railway
debentures, I do not believe we have one of a doubtful character. We
have no debentures except those of first-class railway companies and
companies which we know are acting within their Parliamentary
limits. Having alluded to those subjects, I will now put the motion
for the declaration of the dividend.
The motion was accordingly put and unanimously adopted.
The chairman then announced that that resolution should be confirmed
by ballot on Tuesday next, inasmuch as the Bank could not, under the
provisions of its Act of Parliament, declare otherwise than in that
form a dividend higher than that which it had distributed during the
preceding half-year.
The three resolutions proposed by Mr. Moxon were then read; but they
were not put to the meeting, inasmuch as they found no seconders.
Mr. Alderman Salomons said that their Governor had observed that he
thought the payment of interests on deposits was objectionable; and
everyone must see that such a practice ought not to be adopted by
the Bank of England. But he took it for granted that the Governor
did not mean that his statement should apply to joint stock banks
which he had himself told them had conducted their business so
creditably and so successfully.
The Governor of the Bank said that what he stated was that such a
system would be dangerous for the Bank of England, and dangerous if
carried into effect in the way contemplated by Mr. Moxon.
Mr. P. N. Laurie said he understood the Governor of the Bank to say
that it would be dangerous to take deposits on call, and in that
opinion he concurred.
Mr. Alderman Salomons said that he, too, was of the same opinion.
On the motion of Mr. Alderman Salomons, seconded by Mr. Botly, a
vote of thanks was passed to the Governor and the directors for
their able and successful management of the Bank during the past
half-year, and the proceedings then terminated.