CHAPTER XIV

CONCLUSION

In the course of this book we have briefly surveyed the rise and development of the banking system of England. We have studied the establishment and growth of the Bank of England, the gradual elimination of the private banker, and the wonderful development of joint-stock banking, and we have noted the causes which led to London becoming the financial centre of the world, and also the various factors which constitute our Money Market.

From a weak beginning we have seen our system of finance develop into a mighty machine; but we have seen that, although it is mighty, it is a machine of very delicate construction, and that it needs the most careful attention on the part of those connected with its working. A breakdown in one of its parts may mean wreck for the whole concern, and bring with it, not only unparalleled individual distress, but actual danger of an acute form to the whole nation.

The weakest spot of our system arises from the custom of the cash reserves of the bankers being kept with the Bank of England, that is, the one-reserve system. The total deposits held by the banks of the kingdom may be roughly estimated at one thousand million pounds, and practically the whole of this vast sum is repayable in cash on demand. But banks conduct their business on the law of averages, assuming that the demands for cash will be met by the deposit of cash—that what is paid out to one set of customers will be paid in by another set; and, while keeping sufficient till money to tide over the variations of demand and supply from day to day, they maintain no other reserve of cash, beyond the balance at the Bank of England,—or with a London agent, through whom such balances are in effect passed on to the Bank of England. Thus the Bank of England is the reservoir from which all banks expect to be able to draw cash in time of need.

When we turn to the Bank Return, what cash do we find is retained to meet such a heavy contingent liability? In the figures of the “Return” given in chapter vii., the “Reserve” stands at about twenty-five million pounds only; and with regard to this Reserve, it must be remembered that the Bank is peculiarly open to foreign demands in addition to home demands. Such a reserve is slender, to say the least of it, and the strengthening of the “Reserve” to a figure more in keeping with our increased liabilities is, or should be, constantly before the authorities who have the control of our banks. This matter will have to be faced some day, and the longer action is delayed the more difficult will it become to grapple with it.

Various schemes for increasing our reserve have been put forward from time to time: one suggestion was that banks should retain a safety reserve of gold in their own keeping; another that a bankers’ bank should be established, to hold the reserves of other banks in place of the Bank of England; a third, that each bank should maintain a larger balance with the Bank of England, on the understanding that that institution should increase its reserve in respect of such increased balances. These schemes have each their advocates and opponents, but with each the result to the banks would be a loss of profit, for each would involve more money lying idle. This loss of profit is at the root of the whole difficulty.

This brings us to consider the question of competition among bankers, which at present is very keen, and which quite conceivably may lead to dangerous results unless kept within reasonable bounds.

The tendency of the time is towards the absorption of the smaller and weaker banks of the country by the large joint-stock banks. In itself, this is not an undesirable feature, in that it places the banking system, as a whole, on a sounder footing. Another feature is the establishment of branch offices throughout the length and breadth of the land. This gives facilities for capital to flow readily from one part of the country where it may be in excess, to another where it is in demand.

The joint-stock banks, however, are keen competitors among themselves, new branches being established wherever the possibility of securing new business exists, or where existing connections are threatened by the incursions of some other bank.

This multiplication of banking offices is of decided convenience to customers; it saves them the trouble of sending long distances to pay in, or to draw wages, etc.

In the race for business, however, rates are cut down to attract custom, and risks are perhaps undertaken which would not be entertained if competition were not so keen. These risks may not be large individually, but collectively they may amount to a large sum. They possibly tend to lock up resources in _one class_ of security, which, as we have seen, is a source of danger. This is especially the case in new and growing districts, where much accommodation is asked for on the security of house property, and for the purpose of developing new estates. There is, in fact, a growing tendency at the present day to transfer to banks business which formerly went to building societies; and if this system is encouraged, it is likely to result in a large portion of a bank’s advances becoming of a fixed nature and unavailable in case of need.

Mr. F. E. Steele, in a lecture recently delivered to the students of the London Chamber of Commerce, called attention to another danger resulting from undue competition. He said:—

“There is another phase of competition which should be touched upon. This phase I do not remember to have seen specifically dealt with in treatises on banking. I refer to the growing tendency on the part of banks to ear-mark, for the benefit of particular depositors, securities which should form a free asset; a security to the general body of its depositors. You will find now in some balance sheets, either in the investment column or as a footnote, that a certain portion of the bank’s investments are held for public bodies, such as county councils, borough councils, corporations, etc. In order to secure the accounts of these bodies the banker hypothecates to them certain securities, such as Consols, which would otherwise be held for the benefit of its depositors in general. This tendency to tie up assets which should be free should be narrowly watched by the public, and carefully controlled by bankers. That it should be resorted to in some cases seems inevitable. It is done by some of the best and soundest banks. But it is a course which should be resorted to as little as possible.”

In conclusion, we will turn from the question of the Money Market itself to the army of individuals who spend their lives in the service of the various institutions forming the Money Market. By far the largest number of these individuals are connected with our various joint-stock and private banks. It is commonly thought that the life of a bank clerk is an easy one. Jerome K. Jerome, in his amusing book _Three Men in a Boat_, in referring to the occupation of his friend George, says, “He sleeps in a bank from nine till four, when they wake him up and put him outside.” Common ideas, however, are frequently not quite correct, and though certain members of the fraternity, who happen to be situated in country and suburban districts, do not suffer from overwork, yet as regards those connected with London and the large centres of industry, their life is an arduous one,—often tedious in its sameness,—the hours of work are not short, and the remuneration, although adequate, is not generally on the scale that some time ago was popularly believed to be the happy lot of the bank clerk. Still, one’s life is what he makes it, and the idea embodied in Napoleon’s saying—that every soldier carried in his knapsack a marshal’s bâton—is equally true of the banking profession.

Every junior on entering the service of a bank has before him the prospect of ultimately rising to occupy a position of importance and respect, even to the position of general manager of his bank, if he so equips and conducts himself as to be fit for and worthy of such promotion.

The facilities and inducements to self-improvement placed before bank clerks of the present day are much greater than in bygone times. Many classes are held and lectures given dealing with banking subjects. Examinations are held, and many banks recognise and reward the success of their clerks at these tests of knowledge. Technical knowledge, however, is not everything; common sense, good judgment, tact, and a cool head are also necessary in order to become a successful banker or financier, but these qualities are of much more value when combined with sound and good technical knowledge.

Greatness is not thrust upon any bank clerk, but it is in the power of all, if they will, to achieve it, to a greater or less degree.

APPENDIX

THE GOLD RESERVE

Since the remarks concerning the Gold Reserve were written (chapter xiv.) much interest has been aroused in the matter by a suggestion made by Mr. J. Herbert Tritton, the President of the Institute of Bankers.

At the opening of the last session of the Institute (November, 1903) the President, in his inaugural address, after referring to many current and important topics, passed on to the subject of the visible gold reserves, and made the following novel suggestion. By Mr. Tritton’s courtesy his remarks on this matter are here reproduced in full.

“VISIBLE GOLD RESERVES

“The ever-pressing question of this country’s visible reserves of gold, quiescent during the war, is again attracting attention. Theoretically, everyone would admit that larger reserves of gold in this country are desirable; many would go further and say necessary; but any, even the smallest, step in the direction of action is at once barred on the ground of expense. At whose cost is the reserve to be held? £15,000,000 at 3 per cent. is £450,000 a year, and this must almost inevitably come out of somebody’s pocket. Bank of England stockholders and ordinary bank shareholders would be mulcted, or would think they were, to the extent, say, of a second income tax of 1_s_. in the pound on their dividends. Of course, the question is, in its essence, of national importance, but the Treasury of this country never allows itself to be influenced by considerations of this character—nor, indeed, have the English people for the last fifty years expected either Government help or Government interference in their financial or commercial affairs. Pardon the interjection, but I, for one, say long may this country be not only self-reliant, but free; free to trade as each member of it shall choose, unshackled and uninfluenced by Government restrictions or Government encouragements! We may, perhaps, cherish a faint hope that the new Chancellor of the Exchequer may realise that he has taken with him from the Post Office, liabilities as a banker, £144,605,088 in respect of Post Office Savings Banks, and finds in his new office a further sum of £52,505,081 in respect of Trustee Savings Banks, making together £197,110,169, liable to be repaid in gold; and realising this as a banker, may be less obdurate than his predecessors. But it would not be wise to expect much from Downing Street: if the thing is to be done we must do it ourselves. That a solution of the question is supremely necessary I am convinced, however great the initial difficulties may be; and that it is not beyond attainment if the best energies and the best brains of the banking community be devoted to it, I am also persuaded. Mr. R. H. Inglis Palgrave gives in his new book, _Bank Rate and the Money Market_—a book which every banker should possess and read—page 104, the following table:—

Proportion per cent. of Capital, Deposits, Average Reserve, Reserve at and Circulation. Bank of England. Bank to Liability as of all Banks to the Public.

1872 £584,000,000 £12,100,000 2·06

Deposits, Current Accounts and Circulation of all Banks publishing accounts in the United Kingdom were:—

1894 £721,400,000 £25,800,000 3·58 1895 794,600,000 29,900,000 3·75 1896 797,700,000 34,600,000 4·33 1897 816,400,000 25,100,000 3·07 1898 838,300,000 22,900,000 2·73 1899 869,300,000 21,200,000 2·44 1900 889,600,000 21,400,000 2·41 1901 888,100,000 24,046,000 2·71 [5]1902 904,100,000 24,166,000 2·67

[Footnote 5: _Banker’s Magazine._]

“The Bank of England reserve, which constitutes the only real reserve of the country, is shown here in its true light from our present point of view. A further outside reserve of, say, £15,000,000 would only, it is true, serve to restore the proportion to that of the year 1896, but it would ensure the present maximum becoming, in effect, the future minimum, and here would be a great gain in an extra sense of security in troublous times. Should a gold panic at any time seize upon the public, it would matter little whether the ratio of Bank of England reserve to the aggregate liabilities were 2·50 or 5 per cent., suspension of cash payments would ensue. A credit panic, as distinguished from a gold panic, can usually be assuaged by a suspension of the Bank Act and an overissue of bank-notes. A further object of an increased gold reserve is that not only the periodic and well-recognised, but the unexpected and perhaps heavy withdrawals of gold may be met without recourse to violent measures such as those to which the market is too often subjected. If this were clearly seen to be not only the intention, but the practical working of the fund, an objection which, I admit, is of great weight would be fairly met, and minor objections would almost disappear.

“The objection to which I refer is this. Gold is meant to circulate, not to be hoarded, and any proposal permanently to withdraw such an amount as £15,000,000 from circulation and, as it were, entomb it again in the bowels of the earth, stands self-condemned. No such entombment is suggested, as far as I know, but the formation of a fund for use—a fund which, on occasions, would pass into circulation—international, if not national—and would have a steadying effect on the pulse of the Empire, the Bank of England rate. How can we set about securing it? Let us glance at the tabulated bank balance sheets of the country. From which of the items on the assets side could such a sum be withdrawn? Loans and discounts? No. Investments? No. Buildings? No. Money at call? No. Cash in hand and at Bank of England? This, _ex hypothesi_, is the item to be increased. The reasons I need not give, but it appears tolerably plain that no plan involving a permanent diminution of any item on the asset side would meet with a favourable reception from practical men. Is it possible, if these items cannot be conveniently decreased, to obtain the amount by a fresh creation of credit, an addition to loans and discounts, and an equivalent addition to the other side of the account? Please understand that I am considering the case quite apart from the Bank of England.

“Here I am directly and once again challenging critics, who do not agree in my view of the non-elasticity of the Money Market, to show how, in their view, the alleged elasticity of the market may be utilised to produce a fund of £15,000,000. My contention is that only by the increase of the note issue or by increase of capital can it be reached. Suppose the bankers were authorised to issue £15,000,000 of £1 bank-notes. How could these be kept in circulation unless they were legal tender? Of what use would they be if they took the place of gold in our tills? This plan, under which alone could credit be created, would be futile to attain our end. There remains only the creation of new capital, unless our friends, whom I am challenging, and to whom we are looking to give us a discussion which cannot fail to be interesting under the auspices of Mr. A. C. Cole, who has undertaken to read a paper on ‘Notes on the London Money Market,’ can show us some adequate alternative. If each bank of the kingdom increased its paid-up capital 20 per cent. by an issue of a Three per cent. Preference Gold Stock, the fund could be attained. The proceeds should be devoted in each individual case to the acquisition of a corresponding amount of gold, in addition to present holdings, and this gold should be deposited at the Bank of England, but not merged in the Bank figures, so as to stand week by week intact, and shown under a separate heading in one aggregate, though, of course, the absolute property of each bank in detail. Carefully thought out arrangements whereby, under a joint committee of the bankers and the Bank of England, whenever occasion arises, a percentage of each holding should be transferable to the credit of each bank in the books of the Bank of England should be made, the gold thus forming an addition to their reserve until again withdrawn and added to the Bankers’ Gold Fund.”

Needless to say, this suggestion, coming from such an authority, caused much comment in monetary circles, and was generally received as a valuable contribution to the various schemes having for an end the settlement of this important matter.

In certain quarters, however, the scheme was held to be an impracticable one; and at a subsequent meeting of the Institute of Bankers, Mr. Cole, a director of the Bank of England, spoke as follows:—

“As regards the proposal to increase the capital of the banks, my reply is that the floating of a loan in this market of £15,000,000, or of £100,000,000, will not add one single golden sovereign to the bankers’ cash reserves.

“We can only increase our stock of gold in this country by getting it from abroad. To do that we must offer to the holders of gold abroad something that they will take in exchange for their gold.

“A loan in this market to increase the capital of the banks, to be subscribed for by the public who have deposits with them, is merely transferring a liability now existing on the part of the bankers to the public, from their depositors to their shareholders. The only way the bankers can increase their cash in hand, or balances at the Bank of England, is by following the method now pursued, namely, calling in their short loans so that the market has to borrow at the Bank of England. To put their position permanently on a sounder basis they must agree that instead of calling in their loans temporarily, they must all keep permanently larger balances at the Bank of England. Then the gold reserves of the country will be increased, provided that the Bank of England maintains its usual ratio of cash to liabilities. Taking that as 45 per cent.—the average proportion for the last twenty years ending 31st December, 1903, has been 46·6 per cent.—a permanent increase of £15,000,000 to the bankers’ balances would increase the gold reserve of the country by £6,750,000, and bring the average holding of the Bank of England in the Banking and Issue departments combined up to about £40,000,000. The reason for desiring to have a rather larger stock of gold at the Bank is that the export then of a few millions is of relatively less importance. But we do not want more than is requisite for the easy and safe working of our system. To sit on a hoard of unused gold is to do away with the advantages of banking. What is requisite is for this country to retain the power of attracting gold when it is required. Neither the system of banking nor the bankers can give it that power, for it is dependent, not on them, but on the successful business energy and activity of the nation. Of course, in order to attract and retain here the amount of gold mentioned above, the Bank of England must adjust its rate to circumstances, but with the increasing supplies of gold, actual and prospective, a reasonable rate is likely to suffice.”

These remarks caused some discussion, during which it was pointed out that under Mr. Tritton’s proposal the banks would collectively form a gold fund of £15,000,000, at a cost to themselves of £450,000. Under Mr. Cole’s proposal, however, for the banks to increase their balances at the Bank of England by the sum of £15,000,000, the extra gold held in the country would only be increased by the sum of £6,750,000 (according to the proportion of the reserve held to public liabilities, which has been 45 per cent. on an average for the last twenty years), while the Bank would make a considerable profit from the remainder of the increased balances—a profit earned entirely at the expense of the banks.

It was also pointed out that the requisite gold could be acquired by offering a slightly higher price for it, thus retaining imports of the metal which would otherwise be bought up by exporters. Finally, it was stated by one speaker of eminence in the banking world, that in his opinion the matter was not one for the banks to deal with alone, the additional gold not being required for the sole benefit of the banks, but for the security of the community at large.

The matter here rests for the present, but when it has to be settled, as doubtless it must at some time, the ideas and suggestions contained in these discussions will probably become of importance.

INDEX

Active circulation, 59 Advances to customers, 92, 100 Amalgamations, 80, 164 Arbitrage, 131

Bank Act of 1844: Main provisions of, 29; suspensions of, 35, 36, 38 — of France, 127, 149 — paper, 139 — post bills, 69 — rate, 74, 139, 143 — return: the first issued, 32 Bankers’ balances, 65, 90 Banking department, 62 Berlin: specie points, 128 Bill-brokers, 51, 90 — — guarantees, 108 Bills under discount, 92, 100 Board of Trade Returns, 154 Branch banks, 80, 164 Buying gold, 149

Call and short money, 50, 94, 147 Cash payments: suspension of, 12 ’Change, 134 Circulation: active, 59 Clearing House, 79, 115 — — Returns, 119, 154 Closing prices, 160 Competition, 163 Continental investment in London bills, 140 Country clearing, 117 Course of exchange, 135

Deficiency bills, 70

Exchange: favourable or unfavourable, 128 — long, 136 — short, 136, 139 Exchequer bills, 51, 92 — — closure of by Charles II., 5 Export specie points, 126

Favourable exchange, 128 Fixed price of issue, 159 Floaters, 111 Fluctuations of exchange rates, 129 Foreign bankers, 46, 54, 110, 139

Gold movements, 123, 142 — reserves, 162, 169 Goldsmiths, 4, 19

Import specie points, 127 Indian Government, 52 — price of silver, 152 Investments, 91, 97, 99 Issue department, 57 — at fixed price, 159 — by tender, 158

Joint-stock banks, 19, 21, 49, 77

Limited liability, 79, 145 Liquid assets, 93 Lombards, 3 Long exchange, 136

Mexican dollars, 152 Money market, 47 Monopoly of joint-stock banking, 10, 15, 23, 76

New York specie points, 128

One-reserve system, 67, 162

Par of exchange, 125 Paris: specie points, 127 Post days, 134 Premises, 93-100

Rediscounting, 110 Reichsbank, 34, 128, 149 Reserve, 73, 143 — capital, 83 — funds, 83, 104 Royal Exchange, 132

Short exchange, 136, 139 — loan fund, 49, 113 Silver, 150 Specie points, 126 Stock Exchange, 52, 96, 156 Suspension of cash payments, 12 — Bank Charter Act, 35, 36, 38

Tender system, 158 Till money, 60, 90 Tower of London: seizure of moneys, 4 Trade bills, 106, 139 Traffic returns, 153 Treasury bills, 51, 148, 158

Unfavourable exchange, 128

Visible gold reserves, 169

Ways and means, 70 Window dressing, 95

W. BRENDON AND SON, LIMITED, PLYMOUTH

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