CHAPTER XXII

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.