CHAPTER VII
THE BANK RETURN
We will now examine the weekly “Return” issued by the Bank of England in accordance with the requirements of the Act of 1844, and consider the significance of the various items appearing therein. The Return is made up to the close of business on every Wednesday, and is published on Thursday. Though the figures given always attract attention, and are regularly made the subject of analysis and criticism in the financial articles of the Press, yet the interest taken in the Return varies considerably from time to time. During periods of financial quiescence this interest is somewhat of an academical character; but in times of doubt and distrust a very real and practical interest is exhibited, not only by the group of bankers, bill-brokers, and merchants constituting the “Money Market,” but by that section of the general public who have financial transactions at stake, and who possess the requisite knowledge to understand the true import of the figures of the Return.
For the purpose of our analysis we will take the Return of the 2nd September, 1903.
ISSUE DEPARTMENT --------------------------------+------------------------------ £ | £ Notes issued 51,831,835 | Government debt 11,015,100 | Other securities 7,434,900 | Gold coin and | bullion 33,381,835 ---------- | ---------- £51,831,835 | £51,831,835 ========== | ==========
BANKING DEPARTMENT --------------------------------+-------------------------------- £ | £ Proprietors’ capital 14,553,000 | Government securities 18,260,841 Rest 3,740,209 | Other securities 24,969,260 Public deposits 7,393,580 | Notes 22,322,875 Other deposits 41,872,061 | Gold and silver coin 2,119,339 Seven-day and | other bills 113,465 | ---------- | ---------- £67,672,315 | £67,672,315 ========== | ==========
ISSUE DEPARTMENT
In a previous chapter we saw that under the Act of 1844 the Issue Department was to be separated from the Banking Department, and that it was at liberty to issue £14,000,000 of notes against securities, of which the Government Debt, amounting to £11,015,100, was to form a part. Any issue of notes above this amount of £14,000,000 was to be secured by an equal amount of coin or bullion, with the proviso, however, that the issue of notes against securities might be increased from time to time to the extent of two-thirds of the amount of any lapsed country issue.
In the return before us we see the result of nearly sixty years of the working of the Act. The notes issued stand at £51,831,835, and are secured by the Government Debt of £11,015,100 (as at the passing of the Act) and other securities amounting to £7,434,900 (against £2,984,900 in 1844), the balance being made up of gold coin and bullion, no silver being now held. We thus see that advantage has been taken of the lapsing of country bank issues to increase the issue against security by £4,450,000; but it must be remembered that the net profit on this additional issue against securities is credited to the public account.
The actual amount of notes issued, as shown in the returns of 1844 and 1903 respectively, as shown on pages 32 and 33, has increased by the sum of £23,480,540; but if we compare what is called the “Active Circulation” now with that of 1844 we see that the increase is only £9,332,690.
The Active Circulation is arrived at by deducting the amount of notes held by the Banking Department from the total of notes issued by the Issue Department, and it represents the notes actually in the hands of the public. This increase in the Active Circulation is a fluctuating one, but at any time it is totally out of proportion to the expansion of our trade and financial system which has taken place during the last fifty years. The comparative insignificance of the increase is explained by the fact that during the period under review our manner of effecting payments has changed so vastly, cheques having almost completely taken the place of notes in settling our various transactions, both in business and private affairs.
The old idea that a note issue was of vital importance to the life of a bank, and that a mere bank of deposit could not be profitably and usefully conducted, was exploded in the early part of last century, as already explained. The new ideas which then began to prevail, and which led to the formation of our joint-stock banks, have expanded and developed in a manner that was probably not anticipated by the banking pioneers, who successfully assailed the Bank’s presumed monopoly of joint-stock banking.
In such a manner have these new ideas and methods expanded, that the use of the bank-note has practically been done away with, except for special reasons and in certain cases.
These exceptions divide themselves into two heads. Firstly, the large number of Bank of England notes held in place of actual coin in the tills of our banks; and secondly, notes used in settling certain transactions when it is not the custom, or it is not convenient, to pass cheques; such as the settlements arising from the purchase of property, travelling expenses, and for effecting payments and purchases with the non-banking class—a class which is diminishing day by day under our present system of banking.
The amount of notes held by bankers as “till money” is of paramount importance in point of amount compared with the amount of notes in circulation for the other purposes mentioned. The average amount held by bankers from time to time usually remains at a fairly steady figure, whereas the amount of notes in the hands of the people varies considerably; increasing at the end of each month on account of salaries paid by notes, at the end of quarter for payment of rents, etc., and largely increasing during the holiday season by reason of notes carried by travellers to the Continent and elsewhere.
As regards the items appearing on the credit side of the Issue Department’s weekly balance sheet, the _Government Debt_ stands at the same figure as at the passing of the Act.
_Other Securities_ have risen in accordance with the provisions of the Act, and are doubtless of a first-class character, although no information is vouchsafed to us as to the actual securities held.
The remaining item of _Gold Coin and Bullion_ of course fluctuates with the amount of notes issued; the department is something like an automatic machine in this respect—you put in gold and take out notes, and you put in notes and gold comes out. The Issue Department is not only compelled to issue notes in exchange for sovereigns, but also for gold bullion—in bars or foreign coin—at the rate of £3 17_s._ 9_d._ per ounce of standard fineness. Any bullion the Bank acquires in this manner it is at liberty to send to the Mint and have converted into coin; but as a matter of fact, a large amount is retained in the form in which it is received, that is, in bar gold and foreign coin. If an export of gold is in progress the exporter can, of course, obtain five sovereigns for every £5 note he presents; but it frequently suits his purpose better to draw bar gold or foreign coin in exchange for his notes, and the Bank is at liberty to charge what it likes for so accommodating him. The price usually charged by the Bank for its bar gold is £3 17_s._ 10½_d._ per ounce, but if the demand is pressing it will raise its price to perhaps £3 17_s._ 11_d._ Above this figure it is not effectual to raise the price, or sovereigns would, in that event, be drawn and melted down. A similar course as regards sale is in vogue for dealing with foreign coins, and the Bank makes a small profit on such transactions.
BANKING DEPARTMENT
Turning now to the return of the Banking Department, the first item which appears is _Proprietors’ Capital_, which stands at the enormous figure of £14,553,000—enormous in itself, and enormous in comparison with the capitals of other and competing banks. From the original sum of £1,200,000 with which the Bank commenced business in 1694, the capital has gradually increased until it amounted to the present figure in 1816, since which year there has been no alteration.
The _Rest_ in the Bank of England Return is an accumulation of undivided profits, and compares with the Reserve Funds of other banks. It now stands at about the same figure at which it stood in 1844; and it is never reduced below the sum of £3,000,000. The Bank has also a further reserve in the valuable asset of its premises in the City—the very finest site in London—no credit being taken for the value of this item.
Taking the Proprietors’ Capital and Rest together, we see that the Bank has a total working capital of about seventeen and a half millions, which is far above that of any other Bank, both in amount and in proportion to liabilities. This large capital forms, of course, an element of great strength, but the profit which is earned is so spread out on such a sum, that the actual dividend paid is small in comparison with that of many ordinary joint-stock banks. The dividend paid during the last ten years has averaged 9½ per cent., having been at the rate of 10 per cent. since the end of 1896. The price of Bank Stock has fluctuated between 311 and 367 during the same ten years.
_Public Deposits_ include the balances of the Exchequer, Savings Banks, Commissioners of the National Debt, and Dividend Accounts. This is a very variable item, and its fluctuations at certain seasons of the year have a marked effect on the Money Market. On the 14th of January, 1903, Public Deposits stood at just over eight millions, and on the 25th March, 1903, at over sixteen millions, this increase being due to the collection of taxes at this season of the year, which gradually sweeps away a portion of the balance of other banks, and draws a large sum from the pockets of the people. The increase of the balance of Public Deposits reaches a maximum about the end of March, when the collection of taxes comes to an end.
This gradual accumulation of an extra sum of £8,000,000 in the hands of the Bank of England naturally affects the amount of money which other bankers have at their disposal for lending purposes, and money being thus scarcer, borrowers have to pay more for the use of it. Hence it follows that during this season of the year a tightening of the rates charged by bankers for accommodation is generally seen. After the end of the financial year on the 5th April, the Government generally commences to disperse its large balance by paying its various bills; and this disbursement, together with the dividends on public stock which are paid at the beginning of April, quickly alters the position; money becomes plentiful in the hands of ordinary bankers, and the rates charged for the use of it consequently fall away. From this time on to about the beginning of December, Public Deposits gradually decrease, although there is generally a slight rise at the end of each quarter, followed by a fresh fall immediately after the quarter, this movement being due to the payment of dividends.
_Other Deposits_ include the balances of the ordinary customers of the Bank, both in London and the country, and also the balances kept by bankers with the Bank of England. The balances of the ordinary customers of the Bank are subject to the same conditions and fluctuations as are the balances of the customers of other banks, but the bankers’ balances are of another class. Every “clearing” bank _must_ keep an account with the Bank of England, in accordance with the rules of the Clearing House, as will be explained later. Most other London bankers also keep an account there, as well as many country bankers. The aggregate of the bankers’ balances forms a large proportion of the “Other Deposits.” Up to the year 1877 the total of bankers’ balances was stated as a separate item in the Weekly Return, but this practice was discontinued at that time. In the year 1877—the last year of separate publication—these bankers’ balances averaged about nine and a half millions, but the amount has doubtless largely increased since that time.
Bankers’ balances form, as we shall see, the ultimate reserve on which our banking system rests. Hence the subject is one of great importance. Every “clearing” banker keeps a balance for the purpose of settling the difference which may arise with each day’s settlement at the Clearing House. In addition to this, they, as well as other London and country banks, maintain a large balance at the Bank of England for the purpose of meeting any sudden or extraordinary demands which may be made on them. This is done in place of keeping cash in their tills for the purpose, though of course a sufficient sum in ready cash is kept in hand to meet the ordinary daily requirements. In the case of those country banks which do not keep an account at the Bank of England, the custom is adopted of keeping a reserve balance with a London agent. This reserve swells the amount under the control of the latter, and consequently of the balance he deems it prudent to maintain with the Bank of England. Thus our system is so knitted together that a demand for cash, in whatever part of the country arising, has a prompt effect, to a less or greater degree, on the bankers’ balances at the Bank of England.
From this can be seen the great importance of bankers’ balances, and the great responsibility thrown on the Bank of England of keeping itself strong enough to meet demands from all quarters. The system is certainly a peculiar one, that results in all banks keeping a large part of their surplus funds with another bank, and that not a State bank, though the banker of the State. It is an interesting fact that on many occasions since the passing of the Act in 1844 the “reserve,” or actual cash held by the Bank of England, has been less than the bankers’ balances alone.
This custom of the reserves being held by a central bank has been, and is, the subject of much criticism, principally on the ground that a “one reserve system” is not a sufficient guard against disaster in time of crisis, and that it would be a much safer method were each bank to keep its own special reserve in cash against sudden need. The discussion of the subject during the last few years, combined with other circumstances, has led to some increase in the cash held by bankers in general, and several banks are understood to have commenced keeping a special reserve in cash, on a small scale. The whole subject is a very intricate one, and one that cannot be more than glanced at in the course of this small book.
Taken as a whole, and in ordinary times, “Other Deposits” indicate the state of the Money Market. They rise and fall fairly regularly at certain known seasons of the year; but if they rise above the average for the time of year, it may be taken as an indication that money is abundant, and that bankers and others have funds in hand for which they cannot find profitable employment, and therefore the interest rate charged for the use of money is likely to fall. On the other hand, if “Other Deposits” are below the average, money is evidently in request, and rates are likely to rise. _This is in ordinary times._ In times of trouble, however, “Other Deposits” will rise considerably, and at the same time interest rates will also advance. The reason of this is that on any note of alarm being sounded in the financial world, bankers will at once begin to strengthen their position—to “keep their powder dry”—and consequently will begin to increase their balances at the Bank of England. Owing to the curtailment in their loanable funds resulting therefrom, money will increase in value, and a higher rate will have to be paid for the use of it by borrowers.
Together with the bankers, other large customers of the Bank of England will increase their balances against emergencies, and possibly, if the trouble become acute, money will be transferred to the Bank from other banks for greater safety. Thus in such times we see the “Other Deposits” of the Bank increasing, while the deposits of other banks are decreasing. It is related that during one crisis a customer of a certain bank became alarmed, and drew out his balance. Not knowing what to do with his money when he had got it, he wrote to the financial editor of one of the great daily papers, asking him where it would be safe to put it, and quickly got back the reply, “Put it in the——,” naming the same bank from which the customer had withdrawn it!
The remaining item on the liability side of the Banking Department, namely, “Seven-day and other Bills,” largely explains itself by its title. The item is not a growing one, as can be seen by referring to the first return issued after the passing of the Bank Act in 1844, when the amount under this heading was over one million pounds.
The seven-day bills referred to are what are known as Bank Post Bills, and are practically drafts on the Bank of England. The custom of issuing these bills appears to have originated about the year 1738, when, in response to representations, the Bank announced that it would give “bills payable at seven days’ sight, that, in case of the mails being robbed, the proprietors might have time to give notice thereof.” The changes which have occurred since this date, and even since 1844, amply account for the falling off in this item. It may be noted that the Bank does not take advantage of the customary three days’ grace in respect of these bills.
_Government Securities._—As an ordinary bank in issuing its balance sheet roughly summarises the classes of securities in which its funds are invested, so does the Bank of England in its Weekly Return. The item “Government Securities” comprises, as its name indicates, the amount of all securities held which are guaranteed by the British Government, and it also includes any temporary advances made to the Treasury on “Ways and Means” or “Deficiency Bills.” Advances which are made on the security of “Deficiency Bills” are generally required at the end of each quarter, excepting the March quarter, when, as we have seen, the Public Deposits are large, and the advances are required to meet the interest due on the public funds at the beginning of the ensuing month. The advances are repaid in the course of a few weeks from the incoming revenue. While in force they have the effect of increasing the figure at which Government Securities stand, and also, on the other side of the account, of increasing the total of Public Deposits.
_Other Securities._—Under this heading are included all the investments of the Bank other than Government Securities—investments in general securities, loans, bills under discount, and advances to bill-brokers.
No particulars are given as to the amount invested in the various items above mentioned; the investments in general securities, and the loans to ordinary customers of the Bank, may be presumed to be fairly steady in amount, as is the case with other banks; but the amount of investments in bills under discount and of advances to bill-brokers are subject to wide fluctuations from time to time. These fluctuations are due to the complicated system of our Money Market. As will be explained later, ordinary banks employ a certain portion of their funds in advances to bill-brokers. These loans are either repayable at “call,” or are fixed for a certain number of days, and the amount lent varies with each particular bank from day to day, and from week to week. In the aggregate, however, the amount advanced in this way by all the banks combined is not subject to much fluctuation, for this reason—what one bank may lose in available lending balance another will gain, and so the total is not materially altered. At certain seasons of the month and of the year, however, or during periods of threatened disturbance in the Money Market, this is not the case. Circumstances may compel several or even all the banks simultaneously to call on the bill-brokers to repay their advances or part of their advances. Thus the aggregate of the money lent in this manner is materially reduced.
The bill-brokers, finding that they cannot obtain the funds from the ordinary sources wherewith to repay the amounts “called” from them, must have recourse to the Bank of England—both for discounting bills and for short loans. These facilities are there granted to them on certain conditions. The accommodation thus granted to the bill-brokers amounts to very large figures when the resources of the Money Market become locked up, owing to some special cause, such, for instance, as the issue of a big loan like the Transvaal loan of May, 1903. For this loan the “application money” alone, in the hands of the Bank of England, amounted to over £35,000,000, the bulk of which had been temporarily taken from the balances of other banks, thus reducing their lending powers and compelling them to call their advances from the bill-brokers.
_Notes, and Gold and Silver Coin._—These two items together form what is known as the “Reserve” of the Bank, and the Reserve is the most important item appearing in the Weekly Return, and the item on which the attention of the Money Market is constantly fixed.
On looking at the balance sheet of one of our joint-stock banks, we find that the first item appearing among the assets of such an institution is “Cash in hand and Balance at the Bank of England”; but it is impossible to tell from this how much is actual cash, and how much balance at the Bank. The average proportion of “Cash and Bank of England balance” to “liabilities to the public” held by our leading joint-stock banks is about 15 per cent., while the proportion of “Cash” (Notes, and Gold and Silver Coin) to “liabilities” with the Bank of England has averaged 50 per cent. during the last ten years, and the fall of its reserve to anything like 15 per cent. would doubtless be coincident with a world-shaking panic. The reason of this great divergence in the proportion of cash in hand held by the Bank of England in comparison with other banks needs explanation, as do also the means taken to maintain the Reserve at a figure of presumed safety.
The “Reserve” is the reserve of the Banking Department only, and has no connection with the Issue Department as regards the convertibility of its notes. The great importance that is attached to the Reserve being maintained at a large figure is due to the fact that not only can this Reserve be drawn upon for home requirements, but that it is open to attack, and serious attack, from abroad.
As regards home requirements, the needs of the public in usual times follow a regular course, and one that is known and can be provided for beforehand; but this is not the case as regards foreign demands, and it is in connection with these demands that most of the changes in the Bank Rate owe their origin. If the directors of the Bank of England had to deal with home demands only, the question of fixing the Bank Rate would be an easy one—that is, of fixing the rate at which they are nominally prepared to discount for the public and for bill-brokers, and the rate which, by custom, governs the interest allowed on deposits and in many cases the rate charged for loans by other banks. But London is the most open market for gold in the whole world, and any country which requires gold for any purpose can draw it from London with more ease than from any other quarter. Hence our stock of gold is peculiarly open to attack, and in fixing the Bank Rate from time to time, the directors have to consider the question of whether gold is coming to us or leaving us. If gold is coming here in large quantities, the Reserve will improve, money will be plentiful with ordinary banks, who will consequently be prepared to lend at cheaper rates—considerably below the advertised rate of the Bank of England—and that institution will gradually lower its rate so as to keep in line with the prevailing conditions. On the other hand, if gold is leaving us in considerable quantities, the Reserve will of course fall, and this will be followed by a gradual tightening of rates in the Money Market, and the Bank Rate will be raised, not only in order to check the export of the metal, but to attract imports. Why a high Bank Rate is likely to attract foreign gold to our shores, and a low rate to have the contrary effect, will be explained in a later chapter dealing with the Foreign Exchanges.