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diff --git a/.gitattributes b/.gitattributes new file mode 100644 index 0000000..d7b82bc --- /dev/null +++ b/.gitattributes @@ -0,0 +1,4 @@ +*.txt text eol=lf +*.htm text eol=lf +*.html text eol=lf +*.md text eol=lf diff --git a/LICENSE.txt b/LICENSE.txt new file mode 100644 index 0000000..6312041 --- /dev/null +++ b/LICENSE.txt @@ -0,0 +1,11 @@ +This eBook, including all associated images, markup, improvements, +metadata, and any other content or labor, has been confirmed to be +in the PUBLIC DOMAIN IN THE UNITED STATES. + +Procedures for determining public domain status are described in +the "Copyright How-To" at https://www.gutenberg.org. + +No investigation has been made concerning possible copyrights in +jurisdictions other than the United States. Anyone seeking to utilize +this eBook outside of the United States should confirm copyright +status under the laws that apply to them. diff --git a/README.md b/README.md new file mode 100644 index 0000000..69ec4bf --- /dev/null +++ b/README.md @@ -0,0 +1,2 @@ +Project Gutenberg (https://www.gutenberg.org) public repository for +eBook #63449 (https://www.gutenberg.org/ebooks/63449) diff --git a/old/63449-0.txt b/old/63449-0.txt deleted file mode 100644 index 9efc74f..0000000 --- a/old/63449-0.txt +++ /dev/null @@ -1,5681 +0,0 @@ -Project Gutenberg's The Story of the Bank of England, by Henry Warren - -This eBook is for the use of anyone anywhere in the United States and most -other parts of the world at no cost and with almost no restrictions -whatsoever. You may copy it, give it away or re-use it under the terms of -the Project Gutenberg License included with this eBook or online at -www.gutenberg.org. If you are not located in the United States, you'll have -to check the laws of the country where you are located before using this ebook. - -Title: The Story of the Bank of England - A History of English Banking, and a Sketch of the Money Market - -Author: Henry Warren - -Release Date: October 13, 2020 [EBook #63449] - -Language: English - -Character set encoding: UTF-8 - -*** START OF THIS PROJECT GUTENBERG EBOOK THE STORY OF THE BANK OF ENGLAND *** - - - - -Produced by Graeme Mackreth and The Online Distributed -Proofreading Team at https://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - - - - - - - -[Illustration: THE BANK OF ENGLAND.] - - - - - THE STORY - - OF THE - - Bank of England - - (A History of English Banking, and - a Sketch of the Money Market) - - BY - - HENRY WARREN - - AUTHOR OF - - "YOUR BANKERS' POSITION AT A GLANCE" - - ETC. - - - JORDAN & SONS, LIMITED - 116 AND 120 CHANCERY LANE, LONDON, W.C. - - 1903 - - - - - LONDON: - PRINTED BY JORDAN AND SONS, LIMITED, - 120 CHANCERY LANE, W.C. - - - - -CONTENTS - - - CHAPTER PAGE - - I. The Period of Monopoly, 1708 to 1826 1 - - II. Before and After the Act of 1844 24 - - III. The Bank's Weekly Return 48 - - IV. The Issue and Banking Departments 63 - - V. The Store in the Issue Department 74 - - VI. Weekly Differences in the Return 85 - - VII. The Bank as Agent of the Mint 94 - - VIII. The Principal Currency Drains 101 - - IX. Banks and the Creation of Credit 113 - - X. The Battle of the Banks 126 - - XI. The London Money Market 139 - - XII. The Bank Rate and Stock Exchange Securities 154 - - XIII. The Banks as Stockbrokers 161 - - XIV. The Short Loan Fund and the Price of Securities 169 - - XV. Panic Years 177 - - XVI. The Banks and the Public 224 - - XVII. Bank Stock 240 - - - - -CHAPTER I. - -The Period of Monopoly, 1708 to 1826. - - -The Bank of England, which is managed by a Governor, Sub-Governor, and -twenty-four Directors, was incorporated in 1694 at the suggestion of a -Scotsman, William Paterson, a man of roving disposition, whose Darien -expedition proved a miserable fiasco, cost Scotland some £400,000, and -shattered the health of Paterson, who died in London at the beginning -of 1719, if not in poverty at least stripped of nearly all his fortune. - -Schemes relating to the Isthmus of Darien (or Panama), that narrow -little strip of land which unites the two Americas, have proved -fruitful in disaster. France's great canal venture, we all remember, -resulted in huge loss and grave scandal; and Paterson lived to bitterly -regret his colonisation scheme, devoutly wishing that he had pinned -his faith to his finance company, the Bank of England, for a finance -company it then was in every sense of the word. - -Little is known of William Paterson's early career, the various -accounts relating thereto being meagre and conflicting, his enemies -describing him as a mere adventurer, and his friends declaring that -he was actuated by the worthiest of motives. However, when it is -remembered that his second great venture (the Darien scheme) involved -thousands in ruin, it is evident that had the man been a saint he would -not have lacked detractors, and though his public utterances sound -quaintly pious to the modern ear, it seems probable that he was only an -enterprising merchant, whose morality was neither better nor worse than -that of the times in which he lived. - -The son of a Scotch farmer, Paterson left home at an early age, and, -after settling for a short time in the West of England, set sail for -the West Indies, returning to Europe about 1686 with the Darien scheme -in his brain. Receiving but scant encouragement in England, despite the -fact that his bank had been successfully floated, he concentrated his -energies upon Scotland, where his scheme fired the public imagination, -almost every Scotsman with a few pounds to invest eagerly taking the -money to the company, convinced that Panama was the natural commercial -centre of the world, and that gold would be rained therefrom upon -fortunate Scotland. The whole nation went almost frantic with the -fever, for Panama, with its gold mines and its world-wide trade, -was going to make Scotland rich beyond the dreams of avarice. It is -estimated that nearly half the capital of the country was sunk in the -Darien scheme. - -Chartered by the Scottish Parliament in 1695, three vessels sailed -from Leith in July, 1698, with some twelve hundred settlers on board, -Paterson and his wife among the number. All Edinburgh flocked down to -Leith to wish the members God-speed, and then returned to their homes -to dream of the streams of gold with which Scotland was to be flooded. -In a few years everybody would be rich, and Edinburgh would be the -greatest and proudest city in the world. Trade, however, was destined -to flow to a city a little farther south. - -The scheme proved a dismal failure. England and Holland opposed the -new colony; the East India Company treated it as a rival, and Spain -was actively hostile. The climate did the rest. Before the close of -1699 "New Edinburgh" was deserted, and the colonists, decimated by -want of provisions and disease, set sail for New York. To make matters -worse, a second company meanwhile had sailed from Scotland, where the -utmost enthusiasm still prevailed; but the new arrivals found the town -deserted, and themselves at the mercy of the Spanish warships. Mad with -rage at the lack of success of their national adventure, the Scotch -openly accused the English Government of treachery, declaring that its -conduct in withholding food supplies was as discreditable to it as was -the butchery of Mac Ian and his clan at Glencoe in 1692, when neither -old man nor child was spared, and fugitives were allowed to perish of -hunger and exposure in the mountains. - -Paterson's faith in Panama must have been profound. His wife died -in the new colony, and he himself suffered severely in health; yet, -after his return towards the end of 1699, directly his health began -to improve, we read of his approaching William with a fresh Darien -venture. The King naturally refused to risk a second disaster, and -Paterson, like all great speculators who have risked everything and -lost, could not again persuade the public to share his enthusiasm, for -that mysterious entity seldom trusts a man after a cloud has obscured -his "star." Once his spell of so-called good luck is broken, the public -desert him in a body, when the adventurer, if he be wise, retires into -obscurity with his spoil. - -Paterson lived to discover that it is only a rising star, radiating -success, that can obtain a sufficiently large following to finance -a great scheme, and though he strove manfully to promote the new -venture, his sanguine predictions were received sceptically. Nor did -his subsequent schemes meet with a better reception. But he must still -have retained some influence, for, after the Act of Union in 1707, -he was returned to Parliament by a Scotch burgh. His chief claim to -distinction, however, undoubtedly rests upon the fact that he founded -the Bank of England, of which he was appointed one of the first -directors. - -The Bank of England, from its inception down to the present day, has -never been a Government institution. It was originally simply a company -that advanced money to and transacted business for the Government, -which, in return, granted it certain privileges and concessions; but -the connection between the Government and the Bank was so close, and -their interests so identical, that public opinion connected the one -indissolubly with the other. From this conception sprang the erroneous -impression that the Bank is a Government establishment, when, in -reality, it is no more so than is the National Provincial Bank of -England or the London and County Bank. - -In 1694, the Government of William III., which was generally in a state -of monetary tightness, found that the war with France was draining -its resources, and, having failed to raise sufficient funds by the -imposition of taxes, it resolved, apparently as a kind of _dernier -ressort_, to accept Paterson's financial scheme, which had been shelved -some three years earlier; and on 27th July, 1694, a charter was granted -to the "Corporation of the Governor and Company of the Bank of England." - -The capital of the company, £1,200,000, was subscribed by some forty -London merchants, and lent to the Government. It is only reasonable to -assume that the subscribers were supporters of the Government, and that -they were Whigs, whose aim, in supplying William with the sinews of -war, was the crushing of James, whose pusillanimity had disgusted even -his own followers at the battle of the Boyne in 1690. - -Then, again, the commercial morality of the Stuarts was notoriously bad -in the City. Charles I., when the City of London refused him a loan, -took forcible possession of £200,000 deposited by the Goldsmiths in -the Exchequer; and Charles II., in 1672, robbed them of considerably -over £1,000,000. The Goldsmiths, in those days, were the private -bankers with whom the London merchants left their cash, receiving an -acknowledgment or receipt in return, promising payment on demand, and -the Goldsmiths deposited their surplus cash in the Exchequer, just as -the banks of to-day do with the Bank of England. Through this act of -spoliation the Goldsmiths were unable to meet their liabilities, and -many of them, together with their customers, were involved in common -ruin in consequence. James II. added to the financial sins of his house -by debasing the currency: so small wonder that the merchants of London -had had enough of the Stuarts, whose theory of the "Divine right" of -kings did not even stop short at the pockets of their subjects--always -their most vulnerable point. - -The Bank of England, which to-day is quite outside party politics, was -at its inception a Whig finance company, incorporated solely for the -purpose of lending its capital to the Government at the rate of eight -per cent. per annum; and out of this creation has evolved the present -"Old Lady of Threadneedle Street," whose career, if chequered, has been -one of unquestionable integrity. - -It is difficult even in imagination to picture to oneself the England -of 1694; but it is easy to understand that in those days great -storehouses of capital were non-existent--non-existent, that is to -say, in the modern sense. Our huge credit institutions, which are -indispensable in the twentieth century for the proper carrying on of -trade, and which dive by means of branches into almost every corner of -the land, thereby collecting millions of pounds of loanable capital, -would have spread their tentacles in vain during the seventeenth -century, when neither the money nor the facilities for its profitable -employment existed in the country. - -Capital was scarce--consequently the rate of interest was high--and -eight per cent. was a rate at which even the Government could not -borrow in the City in 1694, from ten to thirteen per cent. per annum -being about the value of loanable capital, while the commission paid -was oftentimes exorbitant. The Bank, which was established by the -Whigs, was naturally bitterly opposed by the Tories, who saw in its -success the destruction of the cause they had at heart. The capitalist -class disliked it for selfish reasons; and the Goldsmiths, recognising -a formidable opponent, joined issue with its enemies. - -Holders of stock and everybody connected with the Bank were looked upon -as enemies of the House of Stuart, which, were it restored to power, -would naturally wreak its vengeance upon a company that had helped to -finance William--for forgiveness is one of those abstract attributes -with which only brave and wise men are blest, and James II. had not -given proof of possessing either courage or wisdom. Small wonder then -that the City should support the Dutchman. - -The National Debt, too, was founded during the reign of William, the -first loan of £1,000,000 being raised in 1693, and those persons who -held it were bound by the strongest of ties--commercial ties--to -William. The fund-holders were Liberal; the Bank was Liberal; and as -its very life was dependent upon the existence of the Government, it -seems only natural that, in the popular mind, it should have been -looked upon as a Government institution, though there is but little -excuse for so classing it now. The fact that so many people still share -this illusion, however, clearly proves that a large proportion of the -public is unacquainted with the Bank's history. - -The Bank of England's charter was renewed in 1697, and again in 1708, -when, in order to prevent the establishment of similar institutions, -it was granted the monopoly of Joint Stock Banking in England. This it -retained until 1826, when an Act was passed permitting the formation -of Joint Stock Banks of Unlimited Liability beyond sixty-five miles of -London, provided they had no branches in the Metropolis. - -It is a long jump from 1708 to 1826, and, of course, the charter was -renewed many times between the two dates, the Government generally -taking advantage of each extension to force some concession from the -Bank, which, as its credit and business expanded, had increased its -original capital by many millions; but 1826 was the year of reform, and -the intervening period possesses little interest except to the student. - -Between 1826 and 1829 the Bank opened eleven provincial branches, but -those which were established at Gloucester, Swansea, Exeter, and -Norwich have since been closed. Joint Stock Banks were then started in -the provinces, though not with very happy results, for in 1832 their -reckless trading was severely stigmatised by Lord Overstone; but it -was not until 1834 that the first joint stock bank, the London and -Westminster, was started in London, a clause having been inserted in -the Act when the charter of the Bank of England was renewed in 1833, to -the effect that, provided a joint stock bank did not issue notes, it -was at liberty to carry on business in the City. - -Both the Bank of England and the London private bankers opposed the -new bank with acerbity, the former refusing to open an account for it -in its books, and the latter declining to admit it into the Clearing -House. Not satisfied with this, the Bank brought an action against the -Westminster. But it was quite natural that the newcomer should have -been received in this fashion, for innovations, however necessary and -useful, are seldom accepted rapturously in this country, which appears -to have almost a Chinese dislike of the unusual. Besides, it is not the -custom of the country, even for the sake of appearances, to receive a -trade rival with open arms, and it would have been a little surprising -had the Bank surrendered its monopoly of joint stock banking in -England without a struggle, whilst its desire, after being stripped of -some of its privileges, to annoy its despoilers, was, if not laudable, -eminently human. - -In 1836 the London Joint Stock Bank followed the example of the -Westminster, and in 1839 the Union Bank of London, which has recently -amalgamated with Messrs. Smiths, opened its doors, while such -well-known banks as the National Provincial Bank of England and the -London and County Bank were formed in 1833 and 1836 respectively. The -trade of the country had by that time far outgrown the resources of the -Bank of England, which was quite unable to minister to the increasing -demands of a prosperous and progressive England; and to-day the only -monopoly which the Bank enjoys is that left to it by the Act of 1844. - -From William and Mary to Victoria, in whose reign the Act of 1844--that -Magna Charta of the banking community--was introduced, covers a most -interesting period in the history of the nation, whose development had -been retarded by the "Divine right" of the Stuarts, which cost Charles -I. his head and James II. his throne. The theory is much in evidence -to-day, though it now takes the form of a great abstract idea, not -compatible with practical politics, and which has found a resting place -in the heart, rather than in the head, of the people--for the practical -twentieth century has a strange trick of banishing disproved theories -from the head to the heart; and perhaps it is this national trait which -saves the country from violent revolutions. - -It would be a mistake to assert that commerce had declined under -the Stuarts. It increased rapidly in spite of them; but, after the -"Glorious Revolution," the "Divine right" of kings became a mere theory -in this country, and the power of the Crown was made subservient to the -will of the people. In short, the rule of Parliament began. The trade -of the country gradually expanded, and with it the influence of the -Bank. - -In order that we may thoroughly grasp the position previously occupied -by the Bank of England, and the influence given to it by its connection -with the Government, it will be better, before briefly discussing the -Act of 1844, to revert to the days when the sway of the Bank of England -was absolute. - -In 1708, we know, the Bank was granted the monopoly of joint stock -banking in England, and, further, it was made illegal for any private -firm, whose partners were more than six in number, to conduct the -business of a banker. This restriction was not removed until 1857, when -the partners in a private bank might consist of ten, and it will be -seen from the following facts that this limitation was harmful to the -best interests of the country. - -One result of this hard-and-fast enactment was the encouragement of -small private banks in every county of England; but the fact that the -number of their partners was limited to six effectually checked their -expansion, and finally brought hundreds of them to the ground; for -they could not strengthen themselves, and add to their resources, by -amalgamation as is now possible. - -As the population of the country increased, the position of the private -bankers, as a class, became precarious, especially in rapidly growing -commercial centres, because their supply of loanable capital was -insufficient to meet the increasing demands of their clients. In their -attempt to finance their customers they neglected to maintain adequate -reserves, and consequently failures were numerous directly any very -considerable demand was made upon them. - -Instead of a few large and powerful banking companies, there existed -numerous weak private firms, which, in many instances, had advanced out -of all proportion to their total working resources, thereby sacrificing -security to large profits. So long as times were good all went merrily; -but, unfortunately, the great impetus given to trade by the conclusion -of peace with France and the United States in 1783 did not last more -than five or six years. - -The year 1789 brings us to the French Revolution, and in 1793 we were -at war with France again. Then came the reaction. Country bankers -failed in every direction; but in 1797 Mr. Pitt came to the rescue in -order to relieve the Bank of England, and the directors of the Bank -were allowed to issue notes at their discretion, cash payments being -suspended. Between 1792 and 1820 over one thousand private bankers put -up their shutters; and during the 1825 crisis sixty-five banks closed -their doors, hundreds of their customers being ruined in consequence. -The panic of 1825, which almost emptied the Bank's tills, thoroughly -convinced the Government that the country had outgrown the monopoly of -the Bank of England. - -By limiting the partners in private banking companies to six in number, -and prohibiting the establishment of joint stock banks in opposition -to the Bank of England, the Government sanctioned a policy which could -not but result in disaster. Like most monopolies, that of the Bank -of England was framed to exclude powerful rivals, and to keep those -in opposition small and weak; and the result was disaster and ruin -in every direction. The greater the trade of the country, the more -apparent became the evil, until even the Government was compelled to -decide that the monopoly of the Bank of England must forthwith be -curtailed. - -Small tradesmen were quick to realise the possibilities attached to an -unlimited issue of notes, and hundreds of them combined the business of -banking with their retail trades, for, although the law placed every -obstacle in the way of sound banking, it encouraged small men, who -possessed little or no capital, to engage in a business which should be -conducted with much capital and great caution. The country was flooded -with the notes of these so-called bankers, who, directly their notes -were presented for payment in large numbers, failed by the dozen. - -A system which encouraged all that was bad, and excluded everything -that was sound and secure, was naturally doomed to extinction; and -small wonder that in 1826 the era of country joint stock banking began. -Like most fresh ventures which cannot be guided by precedent, it began -disastrously, for the simple reason that those who were responsible for -the guidance of the new companies had to learn from experience--a very -bitter school. But the new banks laboured under fewer disadvantages -than the old private bankers, and the Bank Act of 1844, we shall see, -clearly defined their position. - -We can now understand why the private banker was never a great success -in this country. He was of course sacrificed to the monopoly of the -Bank of England; for although six very rich capitalists could conduct -a large banking business, the resources at their command would not -be sufficient to enable them to extend their branches throughout the -country. Consequently, before the advent of the joint stock banks we -find the private banker, broadly speaking, confining his connections to -a particular district or county. - -It is true that he enjoyed free trade in banking down to 1844; but the -regulation as to the number of partners in his business necessarily -confined his offices or branches to a limited area, and effectually -prevented his expansion on a large scale; so we get influential houses -in the various counties, such as the Gurneys in Norfolk and Suffolk, -the Smiths in Nottingham, and so on. It is noticeable, however, that -both these well-known private firms, recognising the applicability -of the joint stock system to the times, have surrendered their note -issues, and taken a place in the modern movement, evidently foreseeing -that, in order to progress, they must adopt the methods of their more -successful rivals. - -Undoubtedly, the country was not ripe for such a movement until the -beginning of the nineteenth century; and though the number of partners -in private banking firms was extended to ten in 1857, this concession -by no means placed the private banker on an equal footing with the -joint stock companies, which could increase their members or partners -by the issue of additional capital whenever it became apparent that -their business was rapidly progressing. The private banker, had he -desired to farm some dozen counties, would have been compelled to find -a few large capitalists to join hands with him, whereas the joint -stock banks had only to obtain hundreds of very small ones, and it is -quite evident that the companies possessed infinitely the easier task. -In fact, down to 1844 the monopoly of the Bank of England prevented -their rapid growth. Then came the period of, so to speak, free banking; -but not for the private firms. - -People are constantly asking: Why did not the private bankers establish -themselves firmly in the country and progress? They were first in the -field, and, had they been well managed, surely they would have been as -progressive as their joint stock rivals. - -But we know that the law never gave them the remotest chance. How could -they progress on a really gigantic scale when their partners were -limited to six? The law literally forced them to stand aside; and in -1826 and 1833 only the joint stock system profited by the concessions -wrung from the Bank of England, because by that system alone could -sufficient capital be obtained to enable a bank to farm the country -from south of the Tweed to Land's End. - -Of course the private banker was at liberty to adopt the joint stock -system at an earlier date, but he did not at first believe in the new -movement, and, consequently, clung to his own system until he was far -outdistanced by his competitors, for directly the country was relieved -from the incubus in the shape of the Bank of England's monopoly, and -the joint stock system was given a free hand, that system, as might -have been expected, instantly began to forge ahead, and in a very short -space of time the private banker, who to this day cannot admit more -than ten persons into partnership, was left hopelessly behind by a -system which was unfettered by legal restrictions and allowed fair play. - -The Bank of England's monopoly reduced the private banker to impotency. -It fostered in every county of England dangerously small firms, which -disappeared in hundreds as soon as credit became bad and a state of -panic caused their notes to be presented for payment in unusually large -numbers, and it made really great private banking companies impossible -in England; while but for the fact that public opinion wrenched this -power from the hands of the directors, the Bank and its monopoly, which -encouraged a dangerous form of banking, might both have been swept away -in a bad financial crisis. - -Fortunately, public opinion won the day; and though the private banker -could not compete successfully against the joint stock system on -account of the smallness of his capital compelling him to concentrate -his energies in a particular district, that system, being unrestricted, -soon covered the land with its branches. The private bankers were at -first held in check by the Bank of England's monopoly. Now they are -simply being smothered out of existence by the extension of a system -of which, in a manner, though, of course, not in the modern sense, the -Bank was the first exponent; for a banker, at the beginning of the -nineteenth century, was largely dependent upon his note circulation for -his profit, our present system of deposit banking being then in its -infancy. In fact, the one evolved out of the other. - -If a person held one hundred pounds in bank notes, it could not but -occur to him that he was in reality lending the issuer one hundred -pounds entirely free of interest; and as he possessed sufficient -confidence in the banker to lock up the notes in his cash box, it was -only going one step farther to deposit his money at his bank and draw -out the cash as he required it. Obviously, too, if he exchanged the -notes for a deposit receipt, he would receive some interest upon his -money; and as the receipt could be held equally as safely as the notes, -he naturally adopted the plan that was the more profitable to himself. -So, although in 1826 the joint stock banks in the country attached -great importance to their circulation, their notes rather took the form -of an advertising medium for attracting deposits, or, at least, became -a means to that end, for the progressive banks did not hesitate to -sacrifice their note issues in order that they might open branches in -London. - -We find, then, that the joint stock banks at first attempted to place -as many of their notes as possible among the public, and that, by the -process already explained, the holders of their notes gradually began -to deposit with them, until, by degrees, our present system of deposit -banking obtained a firm hold upon the habits of the people. As the -trade of the country expanded, the cheque rapidly drove out a large -proportion of the bank notes in circulation; and though the issue of -notes certainly introduced deposit banking in this country, modern -requirements have made cheques and bills of exchange the media for -the transference of credit. Such being the case, the note issues of -the larger joint stock banks became of secondary importance to them; -and, rather than remain outside the Metropolis, we have seen that they -sacrificed their notes to the monopoly of the Bank of England. - -From 1708 to 1826 the Bank of England owed its predominant position -entirely to monopoly, and enough has been written to show that its sway -was not an unmixed blessing to the country. The private banker, without -a shadow of doubt, can trace his lack of progress to the restrictions -placed upon his business by the Bank charter; and the joint stock -companies may certainly be said to have succeeded in spite of the -Bank; yet no greater compliment can be paid to any institution than to -assert that it has earned the respect, if not the love, of its enemies; -and such undoubtedly may be truthfully affirmed of the "Old Lady of -Threadneedle Street," even when her rule was autocratic and her rivals' -dislike of her intense. - - - - -CHAPTER II. - -Before and After the Act of 1844. - - -We have seen that part of the Bank of England's monopoly was annulled -in 1826, and that in 1833 a clause was inserted in the charter to the -effect that joint stock banks of unlimited liability could open in -London, provided they did not issue notes; and though the state of the -law still allowed the Bank to harass and annoy the new companies, its -power was thoroughly broken, and its monopoly of joint stock banking -gone--fortunately for ever. - -The country enjoyed a period of prosperity from 1833 to 1836, but the -speculative fever soon began to develop, and by the end of 1835 it was -burning fiercely, for men and women possessed an extraordinary faith -in those much advertised short cuts to wealth in the early thirties. -No path, if it were sufficiently short, was too precipitous. Hope was -boundless, credit was unlimited, and companies in profusion were formed -by the philanthropists and dreamers of those times. - -Then came the crisis of 1837, when the Bank's policy rose almost to the -verge of madness. Just at a critical moment, when it was imperative -that no untoward incident should occur to disturb the already depressed -state of credit, the Bank of England refused, and persisted in its -refusal, to discount bills bearing the endorsement of the joint stock -banks. - -The action of the Bank added to the confusion, and, as speculation in -America had been rampant, it dealt a final blow to the houses engaged -in the American trade by issuing instructions that their bills also -should not be discounted. Then, as might have been expected, the fury -of the storm beat against the Bank itself; and by the end of February, -1837, its bullion was reduced to £4,077,000. In 1839 another crisis -occurred, and the bullion declined to £2,522,000. Upon this occasion -£2,500,000 was borrowed from the Bank of France, and the discount rate -of the Bank of England was gradually advanced to six per cent. - -These constantly recurring panics thoroughly alarmed the Government, -which, having stripped the Bank of England of its monopoly of joint -stock banking, now turned its attention to the currency, and by the -Bank Act of 1844 secured the convertibility of the note. In fact, the -chief aim of the Act was to reduce the issues of the country bankers, -who, by forcing large numbers of their one pound notes into circulation -and neglecting to maintain a sufficient proportion of cash in hand to -meet them on presentation, helped to finance the gamble of 1824. Some -of the banks paid the penalty in the year following, and disappeared -from the scene. - -In 1821 the Bank of England, after a period of restriction, began to -pay off its notes under the value of £5, but the Government allowed the -country bankers to continue issuing their small notes until the expiry -of the Bank Charter in 1833. In 1826 an Act was passed prohibiting the -stamping of notes under £5, and forbidding the circulation after April, -1829, of those then current. - -The Bank Act of 1844 confirmed the alterations of 1826 and 1833, and, -in addition, made great alterations in connection with the currency. -The Issue Department of the Bank of England was to be kept entirely -distinct from the Banking Department. Notes, to the extent of -£14,000,000, might be issued against the debt owing by the Government -to the Bank and against other securities, but coin and bullion must be -deposited in the Issue Department against every note issued in excess -of that sum. - -Notes issued by the Bank of England are, therefore, secured principally -by specie, and by the Government debt, which amounts (1902) to -£11,015,100; and as every note is a warrant entitling the holder to -gold on demand, a Bank of England note is really and truly equivalent -to gold. However, under certain possible, if improbable, conditions, -the Bank could not fulfil its obligations or promises to pay cash -on presentation, for if all its notes in circulation were presented -simultaneously there would not be sufficient coin in the Issue -Department to meet them; but that is a most unlikely contingency. - -Further, these notes are "legal tender" in England. In other words, -a debtor can compel his creditor to accept them in discharge of his -debt; but nobody is obliged to give out change should the value of the -notes tendered exceed the amount of the sum owing. In Scotland and -Ireland Bank of England notes are "current" but not "legal" tender. -Neither are they by the Bank itself, nor by any of its branches, and -sovereigns, though not half-sovereigns or silver, may be demanded in -exchange. All notes are convertible at the London Office of the Bank, -whose branches, however, are only responsible for those notes issued -therefrom. - -The Bank still retains the monopoly of issuing notes in London and at a -distance not greater than sixty-five miles from the Metropolis. No new -bank of issue may be formed; and as the private bankers in London had -ceased circulating their notes prior to 1844, the Act practically gave -the Bank the monopoly of note issue within the prescribed area. This -monopoly alone is of great value; but when we remember that its notes -are legal tender in England as well, it is evident that the Bank of -England still enjoys a most important concession. - -The private bankers of London, and the joint stock banks in London and -within sixty-five miles of it, were debarred by the Act of 1844 from -issuing notes. Of course the private bankers who still issued notes -within the prescribed space retained their privilege, but they were no -longer able to circulate as many as they could persuade the public to -accept. - -Bankers, both joint stock and private, who claimed the privilege of -issuing notes were compelled to make a return of their issues for a -period of twelve weeks to a given date, when the average amount was -ascertained, and the extent of the future issue of each bank settled -in accordance therewith. The issues, in other words, were fixed, and -they could not exceed the sum authorised without breaking the law, -and exposing themselves to a fine equivalent to the average excess -during any one month. The Government, anxious to avoid a repetition of -the scandals of 1825 and 1836, was evidently determined to limit the -note circulations of the country banks, and there seems little doubt -that, when the Act was framed, one of its aims was the slow but sure -extermination of the country bank note. - -Banks which intend giving up their note circulations may compound with -the Bank of England, which is then allowed to increase its own issue by -two-thirds of the disappearing issues. The Government, however, takes -all the profit accruing from such arrangements. - -The result of these regulations can be seen in the accretions made -from time to time to the Bank's authorised issue of £14,000,000, which -has now increased to £18,175,000. The majority of the issues of the -private bankers fixed by the Act of 1844 have since lapsed; and the -same may be said of the more progressive of the country joint stock -banks, which, as their deposits grew, opened branches in London, -thereby sacrificing their note circulations to the monopoly of the Bank -of England, whose notes are fast driving those of the small country -bankers out of circulation. Broadly speaking, it may be said that Bank -of England notes are the only notes accepted readily by the English -public; but the mere fact of their being legal tender ensures that. - -Readers who are not acquainted with the history of Banking must not -assume that the Act of 1844 affects either Scotland or Ireland. The -note circulation of both those countries is regulated by the Act of -1845, but in neither country are the provisions identically the same as -those affecting England. - -Any person may demand of the Issue Department notes in exchange for -gold bullion of standard fineness at the rate of £3 17s. 9d. per ounce. - -The Bank Act of 1844, according to its framers, would make panics and -crises evils of the past; but, as a matter of fact, it was a new broom, -and its sweeping powers were greatly overestimated. Its provisions, we -can see, related entirely to currency reform; and though the country -bankers could no longer borrow on their notes to an unlimited extent, -it must be remembered that Sir Robert Peel's famous Act, if it fixed -the maximum amount of their issues, did not take the precaution to -also fix the minimum reserve of cash in hand to be held against them. -Obviously, no Act could strengthen the position of the banks against -panics unless it laid down the minimum or legal reserve of cash to be -maintained against deposits, and we shall see that, in this respect, -the Act of 1844 did not realise expectations. - -Controversy raged furiously around Peel's Act, and, needless to say, it -became the bone of party contention. Whenever a subject reaches that -stage in this country, its merits are forced into the background. Sides -are taken, critics and politicians range themselves upon either the -one or the other, and the subject, consequently, speedily gets all the -truth lashed out of it. The number of people who really understand the -question thoroughly is infinitesimal; and they, as a rule, by a strange -irony of fate, do not dabble in politics. The important subject is -therefore handed over to the tender mercies of the multitude, which, -quite ignorant of its underlying principles, splits itself into two -hostile camps, beats out the dust with sticks, and then returns a man -to Parliament to vote on this side or on that. - -When in 1847, three years after the passing of the Act, another crisis -occurred, public opinion attached all the blame to Peel's Act; but -public opinion was wrong. Public opinion is usually based upon instinct -rather than upon reason, and, consequently, carried away by a sense of -indignation or wrong, it rushes madly at what it considers the cause of -the mischief. In this case its bugbear was Peel's Act. The real reason -was to be found in the simple fact that neither the Bank of England nor -any of the large banks held a sufficient proportion of cash in hand -to meet those sudden demands for gold which may be made upon a banker -at any moment, and to which his business is peculiarly exposed during -periods of bad credit. - -It was the old, old story, which in these days seems hardly to require -an explanation. After a period of exceptional prosperity, there almost -invariably follows a lean year or two, when loanable capital is -cheap and the prices of commodities depressed. Then is the company -promoter's opportunity, and schemes, wise and otherwise, are brought -to the notice of the public. Presently there comes a gradual expansion -of enterprise, and rising prices beget confidence, when a whisper goes -round to the effect that good times are coming. - -At first business improves slowly and surely. Then, as prices mount -higher and higher, every producer increases his output, anxious to -share in the general prosperity. Suddenly, just before the end, there -is a boom. Prices rush madly upwards, until every prudent man sees -that business has degenerated into a mere gamble, and that he must act -quickly if he does not wish to be caught by the receding tide. Unless -the banks are strong at that moment, disaster is inevitable; and as -they had not taken the necessary precaution in 1847, the result was a -crisis. - -Capital was cheap during the last quarter of 1844, the Bank rate -remaining stationary at two-and-a-half per cent. from September of that -year to October, 1845. Cheap money gives the promoter his opportunity; -and in 1845 the railway mania was at its zenith. England was in the -hands of the surveyor, and the "boom" began in real earnest. As usual, -everybody was to become immensely rich, and, as usual, most people -were again bitterly disappointed. By a strange process of reasoning, -experience does not count in finance. Hope, after a very little while, -drives out of the memory of human beings the nightmare of disaster; -so, in an astonishingly short space of time, they are gambling again. -The crisis of 1837 had lost all its significance by 1845; and then, of -course, the Bank Act was to prevent commercial panics in the future! - -At the end of 1846 the Bank rate was raised to four per cent., and in -October, 1847, it touched eight per cent. The speculation in railways -naturally resulted in a gamble in iron; and, after the terrible famine -in Ireland of 1846, when thousands died of fever and want in their -wretched hovels and even on the roadsides, the suspension of the Corn -Laws led to large importations of foreign grain. A sudden fall in -prices immediately followed the increased supply, and the merchants in -Mark Lane began to fail. Then people looked gravely at one another, and -inquired what would happen next. - -Credit is the disposition of one person to trust another; therefore -as business gradually expands, credit or confidence increases at -precisely the same ratio; and when prices are high and profits large, -the impression prevails that everybody is making money--consequently, -confidence begins to drive out caution; so, towards the end of a -period of prosperity the acquisitive fever burns fiercely. Everybody -is in mad haste to get rich; caution is flung to the winds; and we -get a _débâcle_. Then follows a time of bad credit. That is to say, -immediately after the reaction, everyone is disposed to be sceptical -of his neighbour's position, to wonder whether he were hit by the -recent upheaval, and to be extremely cautious in granting credit to his -customers. This took place after the crisis of 1847. For a little while -everybody was afraid to trust his neighbour; but by 1857 speculation -was in full swing again, and the inevitable collapse followed. These -periods of good and bad times, or good and bad credit, run their course -with the regularity of a fever. - -So it was in 1847. Directly a few failures were announced, the public -became alarmed, and speculation received a check. The failures -continued, and every holder of bills, anxious to have money at his -credit at the banks, tried to discount them. But the banks were -totally unprepared for this sudden demand, and in Liverpool and -Newcastle some of them closed their doors. The London bankers refused -their customers ordinary accommodation, and the Bank of England at -first declined to advance against securities. Bills, consequently, -could not be met at maturity, and the result was panic and a run on the -banks. - -The situation was saved by the suspension of the recently passed Bank -Act, and on 25th October, 1847, the Government authorised the Bank -of England to issue notes at its discretion, until the feeling of -apprehension had subsided. The Bank thereupon advanced on bills and -stock, and, although the rate of discount was eight per cent., the fact -that money could be obtained on good bills and first-class securities -speedily allayed the panic, and by 23rd November following the Act was -again in force. Further, the amount issued by the Bank beyond the limit -imposed thereby did not exceed £400,000, although its reserve, by 23rd -October, was reduced to £1,547,000. - -Perhaps we shall now be better able to understand the Act of 1844, and -to see that, though it effected a most useful reform in the currency, -and prevented a host of weak country bankers inundating the provinces -with their doubtful paper, it does not contain a single clause which -would either prevent or alleviate a panic. Indeed the paradox is that -during a crisis relief can only be obtained by breaking the Act, and -allowing the Bank of England to advance notes freely against the -better-class securities. The power to issue notes was taken out of the -hands of numerous weak banks, and confided to one strong one. Perhaps, -however, it would be more correct to say that the power for evil of the -small country bankers was "fixed" by the Act; and, as we have seen, -the Bank of England's notes are gradually driving those of the English -provincial banks out of circulation. Then, again, the extinction of the -country issues gave a marked impetus to our modern system of deposit -banking. The cheque soon became the principal credit document in -circulation, and the country joint stock banks relied absolutely for -their advancement upon their ability to attract deposits to their books. - -So long as the Bank of England's notes can be exchanged for gold -on demand, it is impossible for them to depreciate in value, and -they cannot drive more gold out of the country than is equal to the -Bank's fixed or authorised maximum, because, against every note -issued in excess, specie for a like amount must be deposited in the -Issue Department. Certain writers urge that this limitation is an -interference with the freedom of the banker; but, seeing that our -modern system of banking rests upon so small a cash basis, surely it -is absolutely essential that our currency at least should be above -suspicion in times of falling credit. The public does not require notes -then. It wants credit; and this it obtains in the books of the banks. - -The currency, certainly, should be left absolutely to the laws of -supply and demand; and though it is true that the Bank of England -sometimes has to protect the convertibility of its notes by raising its -rate of discount, still, our present system approaches very near to -perfection in so far as the exchange of the note for gold is concerned, -and it certainly does not seem desirable to have the country again -flooded with paper money which may, or may not, be paid on presentation. - -Any person who possesses gold can have it turned into coin immediately; -so, under our present system, every addition to the currency must come -either direct from the mines or else be received in settlement of the -balance of indebtedness owing by foreign nations to this country. We -are, therefore, spared those evils which result from an over-issue -of paper, and which were sometimes so greatly in evidence before the -passing of the Act of 1844. - -The absurdity of the attack on the Act must now be apparent, inasmuch -as the only reform it could possibly effect was a currency reform, -which was certainly badly needed. Viewed in that light it must surely -be acknowledged that the Bank Act of 1844 is one of the soundest -financial Bills that has ever become an Act of Parliament. The fact -that, in spite of the great change in our banking system--which may be -said to have been revolutionised since 1844--the Act has successfully -stood the test of time, is also proof positive (if proof were required) -that it was framed with great skill and judgment. - -Had the Act further decreed that every bank should maintain a ratio -of, say, at least eighteen per cent. of legal tender against its -public liabilities, even panics might have been avoided. At any rate, -the banks would have been better prepared to meet drains upon their -resources, though even then--as has been pointed out is the case with -the Act itself--the law would have to be broken directly a run was -made on the banks by their customers. For all that, such a regulation -would keep the banks in a fair state of preparedness during normal -times, and consequently every bank in the land would be ready to face a -panic. - -Our system of credit is based on a small cash reserve; and it would be -impossible to devise any workable scheme which would afford bankers -absolute security, because it would prove too costly both to the banks -themselves and to their customers, who would have to pay much higher -rates in proportion as the depositors' money was secured. The most -prudent banker can only insure his business up to a certain point, as, -if he kept more than a certain proportion of cash in hand, he would -conduct his business at a loss; so if a panic take possession of his -customers and they rush for gold, he is lost if the demand should drain -his reserve and encroach on his till-money. No system in the world -could possibly save him then. The most our banks can do, therefore, -is to be prepared to a certain extent, and, viewed in the light of -past history, it is criminal of directors not to take the ordinary -precautions. A clause in the Act, as already suggested, would at least -ensure a fair state of preparedness in all our banking companies, and -beyond that it is impossible to go. - -It has been shown that the Act works most effectively in a time of -panic when it is broken. It is, perhaps, interesting to recall that -the Bank of Germany, in order to remedy this defect, is allowed to -issue notes beyond the authorised amount at its own discretion; but -the German Government, in order to check abuses, makes over-issue an -unprofitable transaction for the Bank by imposing a fine of five per -cent. on any amount issued in excess of the authorised limit. Were our -own Government to adopt the same expedient, the Bank of England, during -a time of stress and excitement, could meet all demands automatically, -and the Act would be almost perfect of itself. On the other hand, the -Government might not like to see so much power pass into the hands of -the directors of the Bank, though there can be little doubt that they -would use it with the greatest moderation and to the public advantage. - -The object of this chapter is to show that panics were not lessened -in any degree by the Act, and perhaps it may be said that the fact -has been dinned into one's ears to the verge of irritation. But an -ardent reformer's feelings are strong, and it is difficult to make -this subject clear to those who are not conversant with the history of -Banking, and who, perhaps, are disposed to think the subject both dry -and uninteresting. - -The panic of 1847 was followed by another in 1857, and in 1866 the -Overend and Gurney crisis occurred. From 1866 down to the present day, -unless we include the Baring scare in 1890, the country has been free -from these scourges, and the reason is not very far to seek. - -The Act of 1844 placed the currency of the country on a sound basis, -and experience, by teaching the banks caution, did the rest. The -large banking companies, after the terrible panic of 1866, plainly -recognised that advances must be made with great discretion, and that, -if they valued their own safety, speculation must be either kept -well within bounds or discouraged entirely. Merchants and traders -who require capital for speculative purposes can only obtain it by -making application to the banks, which, in the very great majority of -instances, now refuse to make advances unless tangible securities be -deposited to cover their loans. - -Merchants, therefore, unless their credit be exceptionally good, or -unless they possess first-rate stocks and shares, cannot speculate -to the same extent as was possible forty years ago and, of course, -those persons who possess marketable securities, which bring them in -incomes, are the last people in the world to risk an assured position -for possible great future gain. They are accustomed to the good things -of this earth, and though they may earnestly desire a large accretion -to their wealth, the thought that, in the event of failure, they may -lose what they already possess, checks the impulse to finance a scheme, -which, while holding out promises of great success, is also not without -possibilities of grave disaster. As a rule, only small men will take -such risks, and the banks will not finance them at any price. - -By refusing to accommodate weak speculators, the banks have kept -business in a healthy channel, and have largely confined speculation -to those people who can afford to pay their losses--always a cautious -class. The rank speculator, therefore, has been driven to outside -houses, and such houses, we know, are constantly failing; but Lombard -Street, having weeded this dangerous element out of its system, is now -more stable. - -Recognising that their system of credit is always exposed to possible -disaster, and having had the fact brought forcibly home to them upon -so many occasions, the banks, since 1866, have gradually accumulated -larger and larger cash reserves in order to be better prepared to deal -immediately and effectively with those cataclysms which from time to -time are certain to assail them; and though it is an open question -whether their reserves are even now sufficient, the most casual -observer must acknowledge that, with a few exceptions, our banking -companies are in a better state of preparedness at the moment than -perhaps during any other period of their history. - -By compelling the schemers to deposit securities against their loans -and advances the banks secure themselves against large bad debts; and -by accumulating fair cash reserves they insure their business against -suspension during panics. Having taken these precautions, it is not -surprising that their path has been rendered comparatively smooth -during recent years; and, further, the more prudent manner in which the -business of a banker is now conducted makes the shares of the large -banking companies less speculative holdings, and greatly reduces the -risks of shareholders in connection with their liabilities on the -uncalled portion of their shares, though that liability should by no -means be forgotten or accepted in any other light than that of serious -responsibility. - -This brings us to another point in their history. It was not until 1858 -that banks could be registered as limited liability companies, and, -needless to say, no unlimited bank has been formed since that date; -whilst every joint stock bank now in existence (although, in the great -majority of instances, the members are liable for certain known sums on -each share held by them) has limited the liability of its shareholders, -those companies formed prior to 1858 having since taken the necessary -steps. - -Naturally, persons of wealth would not risk their fortunes by holding -shares in an unlimited bank, but now that the exact liability is known -the responsibility is accepted with a lighter heart, and, consequently, -this class of security is considered a desirable investment by those -who can afford to take a little risk in return for higher interest than -that yielded by the so-called "gilt-edged" variety of securities. - -The reader cannot but be struck by the gradual evolution of our banking -system; and it must be evident to him that the present more secure -position is the outcome of a bitter struggle with adversity. It is -usual, when discussing the Bank of England's position in the money -market, to degenerate into abuse, and to show that the Old Lady of -Threadneedle Street has committed every conceivable folly in dealing -with questions of finance. No doubt the accusations are true in the -light of past experience. But they were the follies of her times, and, -if we are to believe the critics, we are not greatly in advance of our -own. Then is it not a little unreasonable to expect the Bank directors -of 1825 to be in advance of the financial opinion then current in the -City? They had the very best advice of the day at their disposal, and -had the present-day critics lived in 1825 they would have urged the -Bank directors to take the very course that was then adopted. - -English history, at a certain period, seems an account of one long -struggle between the will of the people and the power of the Crown; and -Banking history, prior to 1844, reads like one long struggle between -the banks and the Bank of England. But there is this distinction, to -wit, the sterling honesty of the Bank. Surely, in the whole world's -history there is not another such instance of unbroken faith on the -part of a financial institution which has enjoyed a life of more than -two hundred years. While anxious to give an accurate account of the -Bank's history, and to explain all its faults and all its failings, it -is impossible, the closer one examines its actions, not to be the more -impressed by its honesty of purpose. - -Every new movement gropes its way out of the darkness into the light. -The process is, however, a slow one; and if, in the future, there are -new problems to be solved, then future generations will have to learn -the laws affecting them in the school of experience. Despite their -increased knowledge, they will probably make the same mistakes as those -recorded in these chapters, for it is astonishing, as our environment -changes, how short a distance we can see in front of our noses. Banking -in 1950 will in all probability be very different to banking in -1902--especially if population increases at its present rate all the -world over. - - - - -CHAPTER III. - -The Bank's Weekly Return. - - -For the nonce we have finished with history, and will turn our -attention to the Bank of England as it now stands in the centre of the -Money Market. The joint stock banks publish their balance sheets either -annually or half-yearly; but the Bank of England, in compliance with -the Act, compiles a weekly statement to the close of business each -Wednesday. This Return or Balance Sheet is submitted to the directors -on the following day, and, when passed by them, is exhibited on the -wall of the Bank to an expectant crowd of messengers and officials, -whose business it is either to criticise or copy it. But by far the -greater number of the persons there assembled merely wish to know -whether any alteration has been made by the directors in the Bank's -discount rate, and, that ascertained, the crowd rapidly thins. - -The following is a copy of the Return or Balance Sheet for the week -ended Wednesday, 1st October, 1902:-- - -ISSUE DEPARTMENT. - - £ | £ - | - Notes Issued 51,792,330 | Government - | Debt 11,015,100 - | - | Other Securities 7,159,900 - | - | Gold Coin and - | Bullion 33,617,330 - ------------- | ------------- - £51,792,330 | £51,792,330 - ============= | ============= - -BANKING DEPARTMENT. - - Liabilities. | Assets. - | - £ | £ - - Proprietors' | Government - Capital 14,553,000 | Securities 15,826,080 - | - Rest 3,816,736 | Other Securities 31,837,516 - | - Public Deposits | Notes 21,391,145 - | - (Including Exchequer, | Gold and Silver - Savings' Bank, Commissioners | Coin 2,225,084 - of National | - Debt, and Dividend | - accounts) 10,025,973 | - | - Other Deposits 42,695,526 | - | - Seven-day and | - other Bills 188,590 | - ------------- | ------------- - £71,279,825 | £71,279,825 - ============= | ============= - -A glance at the right hand side of the statement relating to the Issue -Department tells us that every note, either in the hands of the public -or held in reserve in the Banking Department, is covered by securities -and specie deposited in the Issue Department. The amount of the notes -in circulation is, of course, obtained by deducting the notes in hand -in the Banking Department from the total amount of Notes Issued on the -left-hand side of the Issue Department. The difference, £30,401,185, -is called the "circulation," and represents the sum which the Bank of -England had borrowed from the public on its notes on the 1st October -last. - -Each department is distinct, and has, in fact, a separate existence; -so if the Banking Department requires gold, it must, like an ordinary -individual, exchange some of its notes in hand at the Issue Department, -obtaining therefrom the additional coin to satisfy the demands of its -customers in the Banking Department. - -The Bank has transferred the Government debt and other securities, -which together amount to £18,175,000, to the Issue Department, and this -sum is called the "authorised issue," for the simple reason that the -Government allows the Bank to issue notes for a like amount against -these securities, which are mortgaged to the holders of its notes. -Gold coin and bullion, we know, must be deposited against every note -issued in excess of this sum; and as both sides of the statement agree, -it is evident that this has been done. These £51,000,000 of gold and -securities, then, are hypothecated to the holders of the Bank's notes, -and, in the event of the Bank of England being wound up, the creditors -in the Banking Department could not touch either the securities or the -gold. But we see that the Bank holds £21,391,145 of its own notes in -the Banking Department, and, of course, these notes are secured in the -same manner as those held by the public; consequently, this department -enjoys similar rights and privileges in respect of them. Add the notes -in hand in the Banking Department to the "circulation," and it will be -found that the total equals the amount issued. - -It follows that the Bank only makes a profit on the authorised portion -of its note issue, for, as gold is deposited against the remainder, -it must lose thereupon to the extent of the cost of production of the -notes issued in excess. Obviously, then, the Act does not limit the -note issue of the Bank, but it does limit that portion which is not -covered by gold, and, consequently, it removes the probability of our -seeing Bank of England notes at a discount, as was the case during the -early part of the nineteenth century, for the fact that the Bank of -England is compelled to redeem its notes in gold on demand prevents -depreciation of its paper. - -Of course, the amount of notes in circulation varies from day to day, -and so, too, does the amount of notes issued, which rises and falls -as the stock of bullion in the Issue Department is either increased -or diminished. Every note paid is immediately cancelled, and no note, -after it has been changed at the Bank, ever goes into circulation -again. Hence the reason why Bank of England notes present such a marked -contrast to the notes of the country bankers, who issue their paper -over and over again, until it becomes quite unpleasant to handle, and -distinctly malodorous. - -The Bank of England may be said to perform four separate functions. -Its Issue Department, as we have seen, is responsible for the -notes. Secondly, the Bank manages the National Debt on behalf of -the Government. Thirdly, in consequence of its holding the bankers' -reserves, it acts as agent for the Mint. And, fourthly, it conducts an -ordinary banking business, but it includes among its customers the -largest and most influential depositor and borrower in the Kingdom, to -wit, the British Government. - -The Banking Department, which we will next discuss, stands quite by -itself. The first entry on the left-hand side of the balance sheet, -we can see, consists of the Bank's capital. Then follows the "rest" -or reserve fund, which is never allowed to fall below £3,000,000, the -accretions made thereto from time to time representing the profits of -the Bank, which are distributed among the stockholders in the shape of -dividend after the close of each half-year on the 5th April and the 5th -October. - -The third entry on the statement, Public Deposits, is made up of the -various Government balances; and Other Deposits, which form by far -the largest debit in the balance sheet, comprise current account and -bankers' balances, the latter largely predominating. Since 1877 the -Bank has not published the sum standing to the credit of the London -bankers in its books; and as this deposit represents the reserve upon -which the bankers might have to draw in the event of a panic, it seems -an error of judgment not to give publicity to the figures, even if they -do show how largely the Bank of England is dependent upon the other -banks for its own working resources. - -Public or Government Deposits and Other Deposits stand in a very -peculiar relation to each other, and, before discussing the October -return, it is perhaps desirable to illustrate this relation. The fiscal -year ends on the 5th April; consequently, the Government is busily -engaged in collecting the revenue during January, February, and March. -"Other Deposits" are often referred to as the market fund of cash, and -as those persons who pay their taxes draw cheques upon their bankers, -it follows that during these months huge sums are transferred from the -bankers' balances (Other Deposits) to the credit of Public Deposits, -which are consequently swollen appreciably. - -Bankers' balances being reduced, the banks have therefore less to -lend; and if the demand for loanable capital is brisk at the time, -borrowers are driven to the Bank of England, which sometimes has to -raise its rate of discount in order to protect its reserve. Payment of -instalments upon Government loans and large issues of Treasury bills -produce a like effect. - -On the 5th October (four days after the date of the return under -discussion) a quarterly instalment on the National Debt is due. Then -credit flows from Government Deposits back to Other Deposits. The banks -can lend freely again, and the Bank of England, in order to attract -borrowers, may even have to lower its rates. Undoubtedly, this is a -somewhat artificial state of affairs, because money at times is made -either cheap or dear, not solely as the result of demand and supply, -but partly according to the personality of the holders of the loanable -capital when the demand arises. - -A glance at the return shows us that there is a balance of over -£10,000,000 against Government Deposits. This implies that the Bank -has control of the money market, that many of the bill brokers, -finding Lombard Street empty, have been compelled to borrow from the -Bank, which puts on the screw as demands upon its resources increase. -Further, rates are not likely to be easier until money is released by -the Government. Were the banks to keep their own reserves, and did the -Government deposit with three or four of the strongest of them, then -this constantly recurring tightness would not occur; but under our one -reserve system it is unavoidable. However, it by no means follows -that the average rate of discount would be lower under such a system. -Indeed, the probability is that it would be much higher, because the -banks would be compelled to keep larger reserves, and, consequently, -would have less to lend. - -The last amount on the liability side of the statement is £188,590, -which is owing by the Bank on bills in circulation. Shortly after the -passing of the Act, and before the joint stock banks had accumulated -their vast deposits, the Bank of England issued a much larger volume -of these post bills; but since the country banks have been able to -draw upon their London agents and head offices in London, the Bank's -bills in circulation have gradually dropped from well over £1,000,000 -to their present figures. The last three entries, when added together, -give us the amount of the Bank's indebtedness to the Government and -to the public; and the aggregate, £71,279,825, represents the total -liabilities of the Banking Department. But a company, if it be solvent, -must possess assets for a like sum, and these we find on the right hand -or credit side of the statement. - -Nearly £16,000,000 are invested in Government securities; and though -any advances made to the Government by the Bank on deficiency bills -are included therewith, the description is correct, as a loan to the -British Government is as safe as Consols. Just before the dividends on -the funds fall due the balance in the Exchequer is often insufficient -to meet requirements, and it is then that money is borrowed from the -Bank of England on deficiency bills. Of course the Bank also advances -to the Government for other purposes, and the extent of these loans may -be seen in the statement issued by the Chancellor of the Exchequer each -week. - -The next entry on the Assets side, "Other Securities," is extremely -misleading, or, at least, it embraces such a wide variety of assets as -to make the entry practically useless to all who wish to ascertain the -real position of the Bank. Included therein are (1) All the investments -of the Bank other than Government securities; (2) Loans to customers -and to the Stock Exchange, and bills of exchange discounted for -customers and for the bill brokers; (3) The book value of its various -premises, unless, of course, its head office and branches have been -paid for out of the profits of previous years, on which subject the -return does not enlighten us. - -The balance sheets of some of the minor joint stock banks are -disgracefully compiled, but, with respect to this one entry, the Bank -of England return runs them very close, and it seems a pity that so -powerful a corporation does not set a better example. The Bank, because -it holds the bankers' reserves and keeps the Government accounts, is -often able to corner the outside market; therefore the least it can do -is to issue a plain statement, which will enable the public to see the -exact situation created by the unique position it occupies. - -The return is badly worded, and essential information is certainly -withheld, while distinctness is not by any means one of its good -points, for nobody, unless he studied the statement with the greatest -care, could possibly divine the meaning of some of its quaint, -old-world phraseology. But, as we all know, "great men and great things -are never in a 'urry"; and the Bank of England, which is great in the -best sense of the word, like the Government whose account it keeps, -has never been known to anticipate a new development. A pedigree -person always swears by the old. But the time has surely arrived when -public opinion should compel the directors to issue a fuller and less -ambiguous weekly statement. The present form was no doubt a model of -lucidity in 1844; but it is woefully behind the times in 1902. - -The last two entries on the Assets side form the Bank's reserve -of legal tender. Strictly speaking, a bank's cash reserve is that -sum which it has set aside to meet possible demands of an abnormal -character, and as the Bank of England's till-money is included in the -two entries in question, the total, £23,616,229, cannot be considered a -true reserve, as a certain deduction has first to be made therefrom to -provide for the ordinary demands made upon its resources in the usual -course of business. Further, the Bank, because it is the bankers' bank, -is peculiarly exposed to large drains of specie and notes. It follows, -therefore, that to ascertain its true reserve, a very large amount -would have to be deducted from the sum in question. A true reserve -is a sum set apart for a particular purpose, of which no portion is -used in the business it is intended to guarantee. It is a fund apart. -Consequently, a banker's real reserve is obtained by deducting from -his legal tender in hand the sum he requires for the conduct of his -business. The Bank of England, however, needs more till-money than an -ordinary banking institution. - -Glancing at the liability side of the statement, we see that the first -two entries represent working capital. In other words, £18,369,736 is -a fixed sum, against which it is not necessary to hold one penny in -reserve, because no withdrawals can be made therefrom during a time of -bad credit. Such an immense amount of working capital makes the Bank -of England more independent of its depositors than is the ordinary -joint stock bank, and, therefore, its strength as a banking company is -increased appreciably thereby, for the weakness of our banking system -is due entirely to a fear of possible sudden demands on the part of -depositors. - -Still keeping on the same side, the last three entries give us the -Bank's liabilities to the Government and to the public; and as large -demands upon this sum of £52,910,089 may be made at any moment, a sum -of notes and coin is held in the Banking Department to meet them. This -sum, the Bank's so-called reserve, amounts, we know, to £23,616,229, -and we next have to ascertain the ratio per cent. it bears to the -liabilities in question. The following sum will supply the answer: - -(£23,616,229 × 100) / (£52,910,089) = £44·6% - -The Bank, then, on 1st October last, held £44·6 in notes and specie in -the Banking Department to meet each £100 it owed to its customers. Yet -we say "as safe as the Bank of England," when, as a matter of fact, -the Bank could not pay its debts on demand; and, paradoxical as it may -seem, so the Bank _is_ safe, because its credit is so good that no man -in England would ever dream of questioning its stability, for, if he -did, he would only be laughed at for his pains. Again, comparatively -speaking, the Bank of England is certainly safer than its rivals, and -when we consider, in so far as its customers are concerned, the huge -amount of its capital and reserve, it is evident that it is by far the -safest bank in the land for depositors, as the larger the capital of a -bank the greater is the guarantee of the customer against loss. - -We have seen that the notes and coin in the Banking Department work out -at a ratio per cent. of 44·6 to deposits; but as notes are not legal -tender by the Bank of England, its creditors can refuse to accept them -in discharge of a debt. This £21,391,145 of notes might, however, have -been exchanged for gold with the Issue Department at any moment, so -that the Bank could have paid off 44·6 per cent. of its liabilities on -the day in question--a huge proportion. - -It may be objected that, as a certain portion of its gold is held in -bars, which would have to be sent to the Mint for coinage, the Bank -could not discharge its debts quite so rapidly, and the contention -would be perfectly true. But, assuming this exchange were made, -£12,226,185 in gold would remain in the Issue Department to meet -£30,401,185 of notes in circulation. The Bank, of course, could not -then pay one half of its notes were they presented; but such a demand -is almost outside the bounds of probability. Still, it is one of those -extremely remote possibilities which no prudent Board of Directors can -afford to forget; and we may be quite sure that this fact has not been -overlooked by the Bank, which can always protect its gold by raising -its discount rate. - -In the next chapter another view will be taken of the Bank of England's -weekly balance sheet. - - - - -CHAPTER IV. - -The Issue and Banking Departments Combined. - - -In the preceding chapter the Issue and Banking Departments of the Bank -of England have been discussed separately. Strictly speaking they can, -of course, only be so treated, as each division stands alone; yet the -notes in the Banking Department undoubtedly form a connecting link -between the two divisions, seeing that they make the one department -by far the largest single creditor of the other. Therefore it is -intended in this chapter to discuss the return as a whole, to place -the totals in the Issue Department back in the Banking Department, and -to ascertain the Bank's exact state of preparedness to meet all its -liabilities. The following table will enable us to do this: - -ISSUE AND BANKING DEPARTMENTS. - - £ | £ - Capital 14,553,000 |Specie and Bullion 35,842,414 - Rest or Reserve Fund 3,816,736 |Government Debt 11,015,100 - Notes in Circulation 30,401,185 |Other Securities 7,159,900 - Public Deposits 10,025,973 |Government Securities 15,826,080 - Other Deposits 42,695,526 |Loans, Bills Discounted, - Seven-Day Bills 188,590 | Securities, etc. 31,837,516 - ----------- | ----------- - £101,681,010 | £101,681,010 - =========== | =========== - -_1st October, 1902._ - - ============+============+=======+============+ - | Ratio % of | | | - Ratio % of |Investments |Total |Ratio % of | - Specie and | and |Liquid |Capital to | - Bullion to |Government |Assets.|Liabilities.| - Liabilities.| Debt to | | | - |Liabilities.| | | - ------------+------------+-------+------------+ - | | | | - 43·02 | 40·81 | 83·83 | 17·46 | - | | | | - ============+============+=======+============+ - - ============+========+=============+ - | | Ratio % of | - Ratio % of | Total | Loans, | - Rest to |Working |Bills, etc., | - Liabilities.|Capital.| to | - | |Liabilities. | - | | | - ------------+--------+-------------+ - | | | - 4·58 | 22·04 | 38·21 | - | | | - ============+========+=============+ - - -It may be urged that as the gold and securities in the Issue Department -are mortgaged to the holders of Bank of England notes, they cannot -be treated as ordinary assets, and that is true enough; but when -we remember that upon the day in question the Banking Department -could have exchanged notes to the value of £21,000,000 for gold, the -objection loses much of its force. - -However, assuming the Banking Department made the exchange, then specie -to the extent of over £12,000,000 and the second and third items on -the right-hand side of the balance sheet would be mortgaged to the -holders of the notes in circulation, and the Bank, were it in need, -could legally neither sell the securities nor apply the £12,000,000 in -question to the liquidation of any other debt. - -But, practically, there is small likelihood of the Bank of England -being drained of specie by its notes, which have always been accepted -without demur, even during the most troublous years of its history; -and, while remembering that the notes in circulation are secured in -the manner aforesaid, we may safely consider the Bank's state of -preparedness to meet its total public indebtedness from the point of -view that its liquid assets would be more than sufficient to discharge -all probable demands made by both holders of notes and depositors. - -On the 1st October last the Bank owed on its Notes in Circulation, -Public and Other Deposits, and Bills, the huge sum of £83,311,274, -which we will call its "Liabilities to the Public." Against this it -held £35,842,414 in specie and bullion, which, a glance at the table -shows, works out at a ratio per cent. of 43·02. The Bank had, then, -£43·02 of the precious metals in hand to meet each £100 it owed to its -customers. There is not another bank in the kingdom able to publish a -balance sheet showing such a splendid proportion of cash in hand to -liabilities--but we must also remember that there is not another bank -in the country whose responsibilities are so great and so multifarious. - -In the previous chapter it was shown that the Banking Department -possessed £44·6 in notes and coin to meet each £100 of the public -liabilities included therein, and, moreover, this would be the ratio -given by the critics; but we now see that, when the two departments -are united, the ratio only works out at £43·02. Strictly speaking, -the larger ratio is correct; yet the smaller gives a much truer idea -of the Bank's ability to pay off its creditors in cash on demand. -Further, as the Bank cannot compel its customers to accept its own -notes in discharge of a debt, the ratio £43·02 certainly gives one a -more accurate impression of the Bank's position in relation to all its -creditors. - -The Government Debt, Other Securities, and Government Securities amount -to £34,001,080, which works out at a ratio per cent. to liabilities of -£40·81, making the ratio of total liquid assets £83·83. A debt owing -by the British Government is rightly included with the liquid assets -of the Bank, for when the credit of the Government ebbs our banking -companies, which hold huge amounts of Consols, will no longer be -solvent institutions; but no reasonable man imagines that an edifice -which has been centuries in building, and which is still far from being -either complete or perfect, will "go under" in a day, though all know -that it cannot last for ever in its present form. We, however, only -live sixty years or so, and therefore each generation of business men -considers what will last out its time, and troubles itself but little -about what the state of commerce will be fifty years later, as though -dimly conscious that, in the end, man will have to go back to the land. - -The Bank, we see, possesses £83·83 in cash and the very best securities -to meet each £100 it owes to the public. Such figures cannot fail to -impress one, for they prove indisputably that, on its merits, the -Bank of England is by far the strongest banking company in the three -kingdoms. They should not, however, blind our eyes to the fact that the -Bank is a credit institution, and that were its creditors to go for -gold in a body it would inevitably "smash," for, as we can see from the -figures in the first column of the table on page 49, it never keeps a -supply of the precious metals equal to its liabilities on demand. But, -for all that, the Bank is splendidly prepared to meet every probable -demand; and one cannot ask more of its directors. - -It would be easy enough to write an indictment against the Bank, -proving that its policy is all wrong, that it could not discharge its -obligations under certain given conditions, and that, therefore, it is -a menace to the solvency of the country. But such deductions, which -have already been made by more than one critic, are crass nonsense, -and only testify to the critics' ignorance of the subject. We know -that the Bank's system is not by any means a perfect one, but, surely, -the person who advertises an infallible financial system is either a -great rogue or a great simpleton; for why is he not himself rich beyond -desire? - -The Bank of England, it is admitted, cannot meet its liabilities on -demand, and most people would think that its directors had gone mad if -they prepared to, while the stockholders would certainly threaten to -turn out those directors who proposed a policy which would reduce the -value of their stock considerably below parity. - -The question seems to be: Is the Bank of England sufficiently prepared -to meet all likely withdrawals of gold by its customers and by the -holders of its notes? - -The two columns, which give us the amount of the Bank's liquid assets, -tell us plainly enough that the Bank of England was well prepared on -the 1st October. We can see that it held a good supply of coin and -bullion, and, secondly, a valuable list of convertible securities; but -as the securities are only convertible so long as the Bank, which holds -the reserves of cash of all the banks in the United Kingdom, is in a -position to meet all probable demands upon its store of gold, it is -evident that the first ratio is of paramount importance. - -The Bank of England, which possesses the only large store of the -precious metals in this country, has to meet both the home and foreign -demands for gold. It follows, therefore, that its ratio per cent. -of Reserve to Liabilities is eagerly scrutinised each week on the -publication of the return, because it indicates whether or not loanable -capital is likely to be dear or cheap. The means at its disposal for -maintaining an adequate supply in reserve will be discussed later on. - -Should the said ratio fall below, say, forty per cent., then it -is prudent to inquire the reason; and should it recede to, say, -thirty-three or thirty-four per cent., then there may be cause even for -apprehension; but so long as the Bank of England keeps a fair ratio -of reserve to its public indebtedness, there is no cause for alarm: -though a bank which holds the national reserve must always be extremely -cautious, even when credit is good and there is not a breath of -suspicion in the air, for the proverbial little cloud gathers strength -with incredible speed when once it does appear. - -Undoubtedly our banking system is exposed to the gravest dangers, but -as it brings us cheap money we accept the risks; and unless a critic -can produce a workable scheme which will eliminate the hazard and -retain the blessing of cheap loanable capital, he had better by far -confine his attention to those safeguards that reduce the risks of our -present system, which _is_ workable, to a minimum. Provided the Bank of -England keeps an adequate reserve in the Banking Department, we have at -least the satisfaction of knowing that all that can reasonably be done -to ensure safety has been done, and that those risks, which a credit -bank cannot avoid under any system, have at least been insured against -under our own. - -No doubt the Bank's large working capital of over £17,500,000 has -contributed very considerably to its ascendancy, and helped it, -especially since 1844, to more than hold its own against all comers; -for despite the fact that we occasionally hear sneers--no doubt -prompted by jealousy--at its so-styled omnipotence, an examination of -its return soon convinces the sceptical that it is still the largest -and safest bank in England. Further, it has occupied this enviable -position for over two hundred years. - -The ratio per cent. of Advances (loans, bills discounted, securities, -&c.) to Liabilities is only 38·21--a proportion, especially when it -is remembered that an unknown amount of investments is included -therewith, which clearly informs us that the Bank is fully alive to the -responsibilities of its unique position, and that its directors, while -they are no doubt anxious to make as much net profit as possible for -the proprietors, have not lost sight of the fact that they also have -duties to perform towards the public. - -But it must not be thought that the directors discharge their duties -towards the public so well from philanthropic motives. Even from a -selfish standpoint it pays them to keep the Bank thoroughly prepared, -as, should they allow the reserve to sink too low, an anxious period -would be certain to follow, when additional profits, made by trading -with too large a proportion of the deposits, would speedily be swept -away by the expense incurred by borrowing back at high rates in order -to strengthen the cash in hand. For a little while the interest upon -the increased loans would swell the profits, but directly the foreign -exchanges moved against this country, and gold began to flow abroad, -even an inexperienced director would realise the folly of risking a -panic for the sake of seeing the dividends rise, and he would not make -such a doubtful experiment a second time. - -Perhaps, before bringing this chapter to a close, it may be interesting -to compare the total indebtedness of the Bank of England to the public -and its stockholders with that of Lloyds and the National Provincial -Bank of England to their customers and shareholders. The following -table will supply the figures:-- - - ======================================================== - Name of Bank. | Total Liabilities. - ------------------------------------+------------------- - | £ - Bank of England | 101,681,010 - Lloyds | 58,411,041[A] - National Provincial Bank of England | 56,444,126[A] - ------------------------------------+------------------- - [Footnote A: Balance Sheet dated 31st December, 1901.] - ======================================================== - -We can now see how much larger are the working resources of the Bank -of England than those of either of the other above-mentioned banking -institutions, though, as the joint stock banks keep their reserves of -cash with the Bank of England, the comparison loses a little of its -force. Still, the preponderance of the Bank of England is most marked, -a fact one is not, perhaps, so apt to realise when the Issue and -Banking Departments are considered apart. - - - - -CHAPTER V. - -The Store in the Issue Department. - - -We next have to consider the amount of gold coin and bullion in the -Issue Department--to wit, £33,617,330, and we must remember that this -accumulation is the national store, that the cash reserves of all the -banks in England, Scotland, and Ireland are dependent thereupon, and -that, consequently, the solvency of the nation is decided thereby. - -The indebtedness of the English, Scotch, and Irish Banks to the public -at December, 1901, as shown by their balance sheets, upon current -accounts, deposit receipts, and notes in circulation, amounted to -nearly £910,000,000. The liabilities of the Bank of England and of -those private bankers who publish balance sheets are included in this -huge total. - -This £910,000,000 may be called the "floating capital" of the -country. It is deposited or left with the banks, who invest a certain -proportion of it in securities, in short loans to the bill brokers -and stockbrokers, in making advances and loans to their customers, -and in discounting bills for them; and, as the said millions are left -at either call or short notice, the banks also have to maintain a -sufficient supply of legal tender to meet all probable demands upon -this immense debt. It is with this "floating capital" that the present -chapter is principally concerned. - -Stored in their strong rooms the banks keep sufficient legal tender -(Bank of England notes and specie) with which to conduct their -business. The sum thus held may be called their "till money"; and -it probably would not exceed five per cent. of the £910,000,000 in -question--viz.: £45,500,000. A large part of this till money is, -however, held in Bank of England notes, which are warrants for gold -upon the store in the Issue Department, but as creditors cannot refuse -the notes they are quite as valuable to a banker as gold. All a banker -has to consider is whether he has a sufficient supply of legal tender -to discharge his public indebtedness; and if he have, he need take no -thought for the morrow. - -Deducting £45,500,000 from £910,000,000, we get £864,500,000. Though -this is an accumulation of credit in the books of the banks rather -than of cash, their customers can demand the equivalent from them in -legal tender; yet we see that, were the banks drained of £45,500,000, -they would then be entirely dependent upon their reserves at the Bank -of England. - -The reserves are included in Other Deposits, £42,695,526; and seeing -the magnitude of the amount it seems a pity that the Bank of England -does not tell us each week what portion of this total belongs to the -other banks. Further, the Bank of England employs these balances in -its own business; and, though it generally maintains a very large -ratio per cent. of reserve to liabilities, the fact remains that a -certain proportion of the cash reserves of our banks is lent out to -the public--a somewhat startling position at first sight. The banks -accumulate a reserve against those dangers from which their business -is never free, and the Bank of England advances some of it to its own -customers! Apparently, what could be more absurd? But in finance things -are so often not what they seem. - -We now come to the store of gold coin and bullion in the Issue -Department--£33,617,330. A certain proportion of this must be retained -in order to secure the convertibility of the notes of the Bank, and the -remainder may perhaps be called the national store or accumulation. -The banks of the United Kingdom are indebted, roughly speaking, to -the public to the extent of £910,000,000. But we have seen that, say, -£45,500,000 of this sum is secured by legal tender in hand, so the -unsecured portion amounts to £864,500,000. Our position, then, stands -as under:-- - - Indebtedness of the Banks of - the United Kingdom to the - public £910,000,000 - - _Less_ covered by legal tender - (say) 45,500,000 - ------------ - £864,500,000 - - Gold and bullion at the Bank - of England £35,800,000 - -As a matter of fact, we are looking on the bright side of the picture, -for seeing that a large amount in Bank notes would be held among the -£45,500,000 deducted, it follows that the store in the Issue Department -might be appreciably reduced were a considerable number of these notes -presented for payment; and then again, the indebtedness of those -private bankers who do not publish balance sheets has been omitted. -Suppose we say that the banks hold £35,500,000 in specie. This, -added to the store at the Bank, gives us £71,300,000. Then our banks -owe £910,000,000; but there is only £71,000,000 of specie in their -possession with which to pay their huge debt. On the other hand, many -of the banks do not hold nearly five per cent. of their liabilities -to the public in legal tender on their premises; and, were the truth -known, it is more than probable that in some instances three-and-a-half -to four-and-a-half per cent. would be nearer the mark. - -England, after all, is only a gigantic workshop, and so long as her -shops are busy there is no danger. But have those people who live on -incomes invested solely in British securities ever reflected that, were -there no work for her shops, this system of credit would collapse like -a castle of cards, when their incomes would be gone? Our solvency as -a nation depends absolutely upon the skill and ability displayed by -British manufacturers, and upon the muscles and intelligence of their -workmen. Given a high standard of efficiency and adaptability on the -part of our producers, then trade flows to this country, and by trade -alone can we support our credit and pay our debts. Small wonder, then, -that thoughtful people are becoming alarmed at the apotheosis of Games -in this country, and at the large number of idlers who do not take a -part in production, but are dependent upon the interest received from -investments, which can only be productive so long as our commerce is -flourishing. - -The capital of this country has been computed by a competent authority -at about £10,500,000,000, but doubtless these figures are very wide of -the mark. Still, the amount of fixed capital invested in the country -must be immense. By "fixed" capital, as distinguished from the floating -or loanable capital deposited with the banks and kindred institutions, -those investments of a more permanent character are implied. A -depositor can demand his money back from his banker, but bank shares -he would have to sell on the Stock Exchange--therefore the one is -"floating" and the other "fixed" capital. It is the same with Consols, -railway shares, and with the shares of all companies in which there is -a market. When there is not a market, then the capital is fixed indeed; -and there would not even be a market for Consols were the Bank of -England drained of its gold. Moreover, during normal times the demand -for loanable capital at the banks will help to determine the price -an investor will receive should he desire to sell any of his fixed -investments. - -It consequently amounts to this: The fixed capital of the country -cannot be converted or sold unless the banks maintain large cash -reserves; so we may truthfully assert that about £10,000,000,000 of -capital is erected on a basis of about £71,000,000 of cash. This cash, -in its turn, can only be kept in the country while our workshops are -busy; therefore it at once becomes apparent that the national aim -should be to increase our trade, for the yield, and consequently the -value, of British securities is bound to either increase or diminish -in proportion as the trade of the country is either flourishing or the -reverse. Even the Government can only meet the interest on Consols -while the people are in a position to pay their taxes. - -Such a statement may come as a shock to those persons who are -accustomed to draw their dividends each half-year or year, and to -imagine that unless the world came to an end these dividends could -not cease; but they would cease were this country to fall hopelessly -behind in the race for trade. This is not the old Socialist maxim that -"Labour supports the world" put into a new print dress. It is evident -that the fixed capital of this country, as represented by stocks and -shares, would be mere waste paper unless the banks held sufficient -gold to ensure a market for them: and as this gold cannot be kept in -the country unless our workshops are able to compete successfully with -those of other nations, it follows that the position of those persons -who draw incomes from British securities is entirely dependent upon -the brains and abilities of the men who direct our industries. How -important, then, that the very best talent the nation possesses should -be used in trade; and what folly it is on the part of those so-called -"superior" persons to sneer at the trader--at him who, without doubt, -enables them to draw their incomes regularly! - -There was a time when capital, broadly speaking, could only be obtained -in London; but since then population has increased all the world over, -and as capital is only the savings of labour, it naturally follows that -it can now be obtained abroad, and that London is less necessary to the -foreign borrower; and, as the world fills up, it must surely become -less and less necessary. Yet our gilded youth affects to despise trade. -This is somewhat absurd, when it is trade that enables him to live in -idleness; and British pride, unless it recognises this fact, may have a -bad fall. - -The banks of the United Kingdom, roughly speaking, are indebted to the -public to the extent of £910,000,000. They only keep till-money in -their safes, and are dependent upon the store in the Issue Department -of the Bank of England for their reserves of cash. In other words, this -£33,000,000 of specie is the foundation stone upon which £910,000,000 -of credit rests. It has already been shown in what relation the fixed -capital of the country stands to this fund. - -The smaller of the provincial banking companies keep their cash -reserves with their London agents, who also place their reserves with -the Bank of England. Consequently, as the agents include the reserves -of these banks with their own deposits, they, like the Bank of England -in relation to the bankers' balances, lend out a percentage of the -reserves of the smaller banks. It follows, therefore, that the bankers' -balances in the hands of the Bank are smaller than would be the case -if each bank kept its reserve with it. The London agents are dependent -upon the Bank, and the smaller banks upon the agents. - -As the store in the Issue Department is the only large collection of -specie and bullion in the three kingdoms, and as the amount therein -is always extremely small when compared with the huge liabilities -which, under certain conditions, it might be asked to liquidate, any -considerable depletion of this store makes the owners of large bank -balances nervous; for if the Bank of England cannot pay the bankers, -then their bankers will not be able to pay them. - -Again, the liabilities of the banks are so immense in comparison -with their reserves that a very small diminution of the fund in the -Issue Department makes owners of capital anxious, whilst a serious -drain would probably create a panic; and unless means were devised to -allay the panic, it might develop into a revolution; for we are very -commercial in these days, and are beginning to realise that mere glory -may be bought too dearly. Commercialism, however, is not exactly a -fascinating virtue. - -We are constantly being told that the money market is an extremely -sensitive organisation. And no wonder! The banks owe hundreds of -millions on demand and short notice. Considerably over eighty per cent. -of these millions is invested and lent, and as the banks' reserves of -gold are small, every sudden demand for large supplies of the precious -metals is liable to disorganise the market; and the Bank, which holds -the final reserve, is therefore compelled to raise its rate of discount -in order to protect the bullion in its Issue Department. - -But for this very reason capital may generally be borrowed more cheaply -in London than elsewhere; and though cash is perhaps dangerously -economised, credit is proportionately the more easily obtainable, and -the price of a loan is cheaper than would be the case were the banks to -maintain a higher ratio of cash to liabilities. They would then have -less to lend, and in times when trade was brisk demand would drive up -the rate of interest to higher figures than those which prevail under -our present system, and reduce the profits of borrowers. The average -rate, too, would be greater. - -The dangers of our system are very apparent, but so are its advantages; -and though we consider it pays us to take the risks, it is evident that -we cannot afford to neglect the necessary precautions. - - - - -CHAPTER VI. - -Weekly Differences in the Return. - - -It were better, before proceeding further, to give a copy of the Bank -Return as it appears in the daily papers each Friday, when comparisons -are made with the figures of the preceding week, and the various -differences carried into distinctive columns. That for the week ended -Wednesday, 1st October, 1902, has been selected, in order that the -figures may be the same throughout this volume. The statement is given -below: - -Issue Department. - - ========================================================================= - 2 Oct., | | 24 Sept. | 1 Oct., |Increase.|Decrease. - 1901. | | 1902. | 1902. | | - -----------+-----------------+-----------+-----------+---------+--------- - £ | £ | £ | £ | £ | £ - 36,080,595| Gold and Bullion| 35,109,950| 33,617,330| ... |1,492,620 - 53,855,595| Notes Issued | 53,284,950| 51,792,330| ... |1,492,620 - 30,546,875| Circulation | 29,198,845| 30,401,185|1,202,340| - ========================================================================= - - -Banking Department. - - ========================================================================== - 2 Oct., | | 24 Sept.,| 1 Oct., |Increase. |Decrease. - 1901. | | 1902. | 1902. | | - ---------+---------------------+----------+----------+----------+--------- - £ | Liabilities. | £ | £ | £ | £ - | | | | | - 3,790,617|Rest | 3,804,611| 3,816,736| 12,125| ... -10,874,581|Public Deposits | 8,301,490|10,025,973| 1,724,483| ... -41,204,129|Other Deposits |40,373,382|42,695,526| 2,322,144| ... - 143,965|Seven-Day Bills | 192,886| 188,590| | 4,296 - ---------+---------------------+----------+----------+ | - £ | Assets. | £ | £ |Decrease. |Increase. - | | | | | - 8,022,103|Government Securities|14,594,260|15,826,080| ... | 1,231,820 - 7,158,440|Other Securities |26,302,606|31,837,516| ... | 5,534,910 - 3,308,720|Notes |24,086,105|21,391,145| 2,694,960| - 2,077,029|Gold and Silver | 2,242,398|2,225,084 | 17,314| - | | | +----------+---------- - | | | |£6,771,026|£6,771,026 - 48⅝% |Ratio | 53·87% | 44·6% | - 3% |Bank Rate | 3% | 4% | - =========================================================================== - -Why, it may be asked, is so much importance attached to this return, -and why do the critics, each week, endeavour to state precisely -how much the "market" has borrowed from, or repaid to, the Bank, -and to explain the cause of the various accretions and diminutions -in the different assets and liabilities? With regard to the latter -attempt, each critic, it is said, is quite convinced that he alone -understands the true inwardness of the various movements which result -in the increases and decreases recorded in our table; but it is just -whispered that those persons at the Bank of England who _know_ the -cause laugh at their deductions. - -The return is of the greatest moment to the public, for the simple -reason that it shows the ratio per cent. of the Bank's reserve of notes -and cash in hand to its liabilities, and, also, the amount of coin and -bullion in the Issue Department. The Bank holds the final reserve; and -if demand is brisk and the other bankers have advanced largely to the -outside market, the bill brokers are driven to the Bank. As the banking -companies have advanced all their spare capital, demand can only be -supplied from the reserve at the Bank of England; and the Bank, which -must protect its gold, checks demand by charging high rates to all who -borrow. - -The return, then, tells us whether loanable capital is likely to be -cheap or dear. If the ratio to liabilities be small, and the store of -gold diminishing, we know that demand has reached the Bank, and that -money will be dear. When money is dear, Consols and other so-called -gilt-edged securities are almost certain to fall in value. If it -become really scarce, then the banks, which lend huge sums on the -Stock Exchange, charge the brokers enhanced rates, and "carrying over" -becomes difficult. Numerous speculative accounts have to be closed, and -securities, consequently, fall in price. - -Now, a glance at the return of 1st October, 1902, shows that the ratio -on that date is 44·6 per cent., and the Bank's discount rate four per -cent. The bullion in the Issue Department decreased £1,492,620, and -the Bank, in order to arrest this drain, raised the rate from three -to four per cent. The political unrest in France, which at first -threatened to disturb the London money market, and the tightness -of money in New York, were, undoubtedly, two factors which largely -influenced the decision of the directors, who, no doubt, also took into -their consideration the fact that the autumn demand for currency might -further reduce their reserve. Noticing that Consols were at 93⅛, -and believing that the stringency was only temporary, one might feel -disposed to buy, trusting that cheaper money during the earlier part of -the new year would drive them up to 96 or so. - -The weekly return of the Bank of England, then, is the barometer which -tells us whether loanable capital is either scarce or abundant, -dear or cheap; and, when read with the Board of Trade returns -and the foreign exchanges, it enables us to guess, with more or -less _uncertainty_, but still intelligently, and with a degree of -probability, whether or not money is likely to be in future demand. The -Railway and Bankers' Clearing House returns, too, indicate the course -of trade, and are of more than academic interest. It is, however, -always wise to remember that finance is not an exact science, for if it -were the theorists would be fabulously rich; and we know that they are -generally so hard up as to be compelled to write books and financial -articles for a living. - -Now we can see why the Bank of England's weekly balance sheet is keenly -interesting to every person who possesses capital either to lend or to -invest, to dealers in bills and securities, and to every speculator -on the Stock Exchange, as a strong or a weak return may make all the -difference to the rates charged on "contango" day. Borrowers and -lenders are equally concerned, for the rate of interest does not depend -upon the caprice of any individual or of any bank, but is solely the -outcome or result of demand and supply; and demand, when the banks -have exhausted their supplies of spare capital, then centres itself -fiercely upon the Old Lady of Threadneedle Street simply because she -holds the final reserve of cash, and for no other reason whatsoever. - -Reverting to our statement, we find that the increases and decreases of -the various totals balance each other; and if the differences agree, -then the assets and liabilities, on adding the Bank's capital of -£14,553,000 to the latter, must also balance each other, for the simple -reason that the Bank keeps its books by double entry. The best system -of bookkeeping which can possibly be adopted is the simplest system, -because the very fact of accounts being complex and involved is sure -to result in a multiplicity of mistakes, which prove that the system -is faulty. In double entry there must be a debit for every credit; so -every sum debited to one account in the books of the Bank of England is -credited to another or to others; and as the assets and liabilities in -the statement tally, therefore the balances in the last two columns, -which are the result of multitudinous debits and credits made during -the week, must agree also. But how is it possible for an outsider -to follow these internal movements? He simply cannot. Consequently -his deductions made from the differences shown week by week are -sometimes very wide of the mark, and, for his own reputation's sake, -it would be wiser if he were to confine his remarks principally to the -all-important questions of the ratio in the Banking Department and the -bullion in the Issue Department. - -For instance, simply with the differences in question to go upon, it -may be said that the return shows that the market has borrowed largely -from the Bank, "Other Securities" being up over £5,000,000. Part of -this amount increased "Other Deposits," and a transfer was also made -to "Public Deposits" in order to pay the Government for £2,000,000 of -Treasury bills, while the accretion to "Government Securities" seems to -indicate that the Government borrowed a certain sum from the Bank on -Ways and Means, and that loans were made to the market on this class of -security. - -In London the "loan account" system is greatly in evidence among the -banks. That is to say, when a customer is granted a loan for, say, -£10,000, his current account is credited £10,000, and a loan account, -opened in his name, is debited £10,000. The interest is calculated -upon the loan account, and the advantage resulting to the banks is too -evident to call for explanation in these pages. - -When loans are made by the Bank of England, accounts which increase -"Other Securities" are debited, and other accounts, which increase -"Other Deposits" are credited--if the loans are made to the public. -Should the loans be made to the Government, "Public Deposits" and -"Government Securities" also increase proportionately from the same -cause. The Bank, because it keeps the bankers' accounts, occupies a -peculiar position in relation to these entries, and that position will -be discussed in a later chapter. - -The notes in the Banking Department have decreased £2,694,960 and the -specie £17,314, so, if we add these two sums together, the total, -£2,712,274, represents the diminution in the reserve. A glance at the -Bank's liabilities shows us that they have increased appreciably, and -as the reserve has shrunk considerably, it follows that the ratio is -very much smaller than that of the previous week. Indeed, the reserve -had not fallen so low since May; and the monetary outlook being -uncertain, the directors, as a precautionary measure, raised the rate -of discount. - -Next, suppose that we wish to ascertain the amount of cash which has -been withdrawn from the Bank to meet the demand within the country. The -bullion in the Issue Department is £1,492,620 down, and the coin in the -Banking Department £17,314; so the Bank has lost £1,509,934 in coin -and bullion. But £730,000 was exported during the week; therefore, if -we deduct £730,000 from £1,509,934, the difference, £779,934, is the -amount that is gone into home circulation. - -But, it may be asked, how can one ascertain the amounts of the exports -and imports of the precious metals? Late in the afternoon of each day -the Bank exhibits a statement on its walls giving this information, -and it was from these placards that it was ascertained that the sum in -question had been sent abroad. Hence it is possible to learn how much -cash was withdrawn from the Bank for home requirements during the week, -or, better, the amount of the efflux on the day of the publication of -the return. - -But, as has already been explained, these deductions are not always -reliable. - - - - -CHAPTER VII. - -The Bank of England as Agent of the Mint. - - -In theory any person can take gold bullion to the Mint, which, under -the Coinage Act, is compelled to give him in exchange sovereigns -containing an equal quantity of gold to that left; but nobody ever -does, and practically the Bank of England acts as the Mint's agent. -By the Bank Act he receives £3 17s. 9d. per ounce, instead of £3 17s. -10½d., the full Mint price, the deduction of 1½d. being about -equal to the loss of interest incurred, for the Mint does not bargain -to pay out coin immediately on delivery of bullion. - -All the bankers in the United Kingdom, we know, obtain their supplies -of cash from the Issue Department of the Bank of England, which, as a -natural consequence, supplies the currency requirements of the nation. -Possessing the only large store of bullion, it can, so to speak, feel -the pulse of the whole trading community; and, directly a demand -sets in for specie, it sends bullion to the Mint for conversion into -coin. This it can do without any loss of interest whatever, for, of -course, the bullion is lying idle in the Issue Department. A bank -which keeps the Government accounts, and stands in this relation to -the other bankers, must of necessity become the agent of the Mint, -which, even in its output of silver and bronze coins, relies absolutely -upon information received from the Bank of England. The Bank, in fact, -supplies both the London and country bankers with these token coins. - -As an illustration of this one of those little social amenities which -take place between bankers and their clients about Christmas time may -be mentioned. Naturally I am not alluding to the higgling occasioned by -the increase of advances and bills discounted to meet a growing demand -at this period of the year. But many persons, just before the festive -season sets in, like to obtain supplies of bright new silver coins -with which to anoint the palms of their humbler fellow-subjects, whose -manners about that time become aggressively pleasant and ingratiating. -These coins they get from their bankers, who receive them from the -Bank of England and its branches, either directly or through their -agents. As soon as the bankers run short of silver coins, they apply to -the Bank, which, being in close touch with every source of demand, is -able to guide the Mint on a question of supply. - -The Bank of England does not possess a legal monopoly, but occupies -this position solely because it holds the final reserve of cash. If -the Government and all the bankers keep accounts with the Bank of -England, then the Bank must act as the agent of the Mint so long as -this state of affairs continues, because its Issue Department has to -meet all demands for cash made upon it by the Bank's customers and -the holders of its notes; and as these customers, either directly or -indirectly, include every large dealer in gold in the land, it supplies -the currency as a matter of course. Dealers do not send their bullion -to the Mint, because it is more convenient to sell it outright to -the Bank, which settles with them immediately, thereby removing all -uncertainty as to the length of time coinage will occupy. - -It follows, therefore, that the Bank of England has to meet all demands -for gold, whether for home or foreign requirement; but it is when gold -is leaving the country in large quantities that drastic measures have -to be taken in order to stop the depletion of the Bank's reserve of the -precious metals, for some of the home drains are only of a temporary -nature, and unless capital be greatly in demand at the time they do not -affect the rate of interest, as the money flows back to the Bank after -a short interval. - -The Bank of England on 5th January, 5th April, 5th July, and 5th -October pays the quarterly dividends on the National Debt. The -Government, which at the present time has to provide over £6,000,000 -each quarter, has a huge sum standing to its credit before one of these -payments matures, and the sudden release of so much capital often -causes the rate of discount to fall, especially during those years when -trade is good, and the demand for loanable capital consequently brisk. -If times are dull, then the rate will not ascend when the Government is -taking money off the market, as the demand upon the reduced resources -of the banks will not be sufficiently keen to drive a large number of -borrowers to the Bank of England. - -We have an illustration of this in the fact that from February, 1894, -to September, 1896, trade was so inactive, and demand therefore so -small, that the Bank rate stood at two per cent. during the whole -period. In other words, we had two and a half years with the Bank rate -at two per cent. With trade bad and money cheap, speculation soon -became rampant. The gilt-edged variety of securities yielded less, -because trade was less productive, and consequently capital, instead -of being kept idle in the banks, was transferred to the better class -securities, which returned less to the investor in proportion as -increased demand forced up prices. With incomes reduced and balances -lying idle at the banks, the public developed a speculative mania, and -one result was the Stock Exchange boom of 1895, for investment business -and speculation always increase when trade is bad. Bad times, in fact, -at first add to the business of the House. - -Traders keep large balances with the banks for the same reason that the -banks themselves have huge sums standing to their credit in the books -of the Bank of England, because they are bound to accumulate credit in -order to meet their engagements, and, also, to maintain a surplus in -case of accidents, such as bad debts and the inability of customers to -pay their debts immediately on maturity. When trade slackens and prices -fall, producers reduce their output, and the result is an accumulation -of credit in the books of the banks. Moreover, a certain proportion of -these balances is not then required to finance and guarantee commercial -undertakings. Hence the movement to which attention has already been -drawn. - -But the holders of gilt-edged securities require some inducement in -order to persuade them to sell; and this is forthcoming in the shape -of accretions to the capital value of their stocks and shares as a -result of the increased demand. But the floating capital of the country -is not decreased by this exchange. It is left at precisely the same -figures. The buyers draw cheques upon their bankers, and the sellers -pay the same cheques to their own credit; consequently, the floating -capital in the hands of the banks is always about the same, be the -times good or bad, so long as speculation or investment is confined to -British securities. When, however, foreign securities are purchased, -gold sometimes has to be sent out of the country to help pay for -them; and it is then that the situation may cause apprehension--for -capital is leaving the country. Should the drain prove serious, the -Bank would have to raise its rate; and were it to prove continuous, -notwithstanding an abnormally high Bank rate, we might have a crisis. - -Returning to the dividends on the funds, "Public Deposits" are -increased before the above-mentioned dates, and when this money is -released, the result is a large addition to "Other Deposits," because -most of the money returns to increase the bankers' balances. A small -part, however, is taken by the fund-holders in cash; so we may notice a -decrease in the Bank's reserve of notes, and, consequently, an increase -in the circulation, together, perhaps, with a fall in the bullion, -representing the small proportion withdrawn in actual cash. Should the -banks, in consequence of this increase in their deposits, be taking -bills from the brokers at cheaper rates, then "Other Securities" would -also lessen, because the bill brokers would pay off the Bank and borrow -in the cheaper market. The converse occurs when the Government is -collecting the revenue, issuing a new loan, or borrowing on Treasury -bills. - -The principal currency drains will be discussed in the following -chapter. - - - - -CHAPTER VIII. - -The Principal Currency Drains. - - -The principal currency drains occur during the holiday season and at -harvest time, more especially during the latter period, when large -amounts of cash are sent into the country to satisfy the requirements -of labour. Early in November a demand for gold arises in Scotland, -owing to the fact that rents there fall due at Martinmas (11th -November); and as the Scotch banks, by the Act of 1845, are compelled -to hold gold against notes circulated in excess of their authorised -issues, a rather heavy call is made upon the Bank of England, whose -returns then show a noticeable decrease in the reserve and bullion. -During years of active trade, and, consequently, of brisk demand for -loanable capital, these autumnal drains of gold generally force up -the rate of interest, thereby making the last quarter of the year the -dearest for borrowers. - -But we are discussing internal demands only, and as, so long as -gold does not leave the country, it is merely a question of certain -sums flowing from the London money market and drifting back to it -again, this ebb and flow, which is shown by the various ups and downs -occurring from time to time in the items of the Bank return, does not -create any apprehension. Indeed, these movements occur so regularly -at certain times of the year that large borrowers often anticipate -them in order that they may tide over such periods with the minimum -of inconvenience. It is, however, otherwise when gold is leaving the -country in large quantities in order to settle the balance of our -indebtedness to other nations, for that _may_ not come back. How it is -again enticed to these shores I will endeavour to explain. - -We now come to a foreign drain of gold; and this depletion of the -currency, we know, flows from the store at the Bank of England into -the hands of the foreign creditors of the nation. We export to, and -import from, other nations on a gigantic scale, and as our imports -are invariably in excess of our exports, it follows that the balance -of indebtedness on this score is always very considerably against us; -but there are other debts due to this country which from time to time -turn the balance in favour of England, and the prices quoted for bills -on the various Exchanges are the indexes which tell us whether gold is -likely to be either received from, or sent to, the great commercial -centres of the world. - -Other debts due to this country have been mentioned--debts which either -tend to reduce or turn in our favour the balance we owe to foreign -countries. England has immense sums invested in foreign securities, and -the interest received therefrom acts in this direction. So, too, does -the huge sum earned by her ships in the shape of freights. Then, again, -London, still earns a large amount in the shape of commissions, even if -her position as the Clearing House of the world is now less powerful -than formerly, owing to large accumulations of capital in other centres. - -On the other hand a considerable amount of foreign capital is invested -in English securities, which, when sold on the Stock Exchange, give the -foreigner a claim on our stock of gold; and though we, by similar sales -of foreign securities, can prevent this temporary drain of specie, the -enormous dealings in stocks and shares on the various Exchanges are -most keenly watched by the directors of the Bank of England, lest huge -realisations of British securities by foreigners should drain the Bank -of its gold, with which international indebtedness can alone be settled. - -This brings us to the markets for bills of exchange, the prices of -which, like those of every other security, are settled by supply -and demand. If, at a given date, this country owes a foreign nation -considerably more than it has to receive, then bills on England will be -plentiful in that country; and, further, they will be cheap, because, -as debtors to England have less to remit than the aggregate of bills -on England offered for sale, the supply will be in excess of the -demand, and English bills, consequently, can be bought at a discount. -Conversely, the supply of bills in London on the foreign country will -be smaller than the sum English debtors owe therein, and in order -to save the expense of exporting gold, such bills will be eagerly -sought after, and, as the supply is smaller than the demand, buyers -soon drive them to a premium, when the rate of exchange is said to be -"unfavourable" to England. - -As the balance of our international indebtedness must be cancelled by -gold, it follows that the fewer the bills offering the higher will be -the prices paid for them; and when, just towards the end, it becomes -evident that the supply is limited the bidding is often spirited; but -the premium paid cannot exceed for any considerable length of time the -expense incurred by exporting and insuring the precious metals between -any two countries, as the debtor always has the choice of despatching -gold to his foreign creditor, and, naturally, he chooses the cheaper -expedient. - -The extreme fluctuations are called "gold points," and they mark the -limit to premiums procurable on bills of exchange. The table given -below will show us those points at which gold will probably either -leave or reach this country: - - ============================================================ - Exchange. | Mint Par. | Gold | Gold - | of Exchange. | Exports. | Imports. - -----------------+------------------+-----------+----------- - London on Paris | Francs 25·22½ | 25·12½ | 25·32½ - Berlin | Marks 20·43 | 20·34 | 20·52 - New York | Dollars 4·87 | 4·84 | 4·90 - ============================================================ - -When the rates are near those given in the second column, the Bank, -if its reserve be low, begins to consider the advisability of raising -its rate of discount, for it is evident that foreign bills are at a -stiff premium, and that a demand for gold may be made upon it at any -moment. Of course the difference between the "gold points" gives -scope for speculation, and some cambists gamble in bills for the rise -or the fall just as speculators do in securities. Then, again, the -arbitrageurs largely influence prices by buying and selling securities -which are dealt in on the Stock Exchanges of more than one country. -Wars, revolutions, panics, and social upheavals also cause abnormal -fluctuations in the rates. - -Let us assume that a drain is threatened from Paris. The gold in an -English sovereign is, we can see, worth about 25·22½ francs, and if -only 25·12½ is being offered on 'Change, it follows that bullion -will soon be exported to France. This the Bank wants to prevent. The -cost of transmission of bullion between the two countries is about one -half per cent.; therefore, in order to induce French capitalists to -invest in English bills of three months' date, the rate of interest -in London must be more than two per cent. in excess of that in Paris -before it will pay them to ship bullion to this country, if it be the -intention of the purchasers to withdraw their capital when the bills -mature, as the gain of two per cent. per annum for three months only -just balances the loss of 10s. per cent. incurred on specie shipments, -while no margin is left to defray possible loss through unfavourable -exchanges at the time of withdrawal. Were a purchase of six months' -bills contemplated, the difference in the two rates would only have to -exceed one per cent. before bullion could be exported profitably. - -When, therefore, the Bank of England wishes to influence the foreign -exchanges, it raises its rate by one, instead of by one half as is -usual when the drain is caused by the currency requirements of this -country, or by an increased demand for loanable capital when trade -is active and the foreign exchanges favourable. One constantly hears -the question: Why has the Bank of England raised the rate by one -instead of by one half as it did last time? A glance at the foreign -exchange tables will generally supply the answer. If the expenses -for transporting and insuring bullion between any two countries are -appreciable, then were the Bank rate raised by one half (remembering -that an addition of one half per cent. per annum gives a profit of -only 2s. 6d. per cent. on a transaction in three months' bills) it is -evident that the inducement is not sufficient to attract gold over here -for that consideration alone. - -By raising its rate, and, if necessary, borrowing in the market in -order to bring the market rates in touch with its own, the Bank makes -an investment in English bills a profitable transaction; and the -greater its excess over foreign rates, the stronger is the inducement -to send money to England. Of course, were this country really living on -its capital, this influx of gold would only postpone the inevitable day -of settlement, for a bankrupt does not increase his wealth by borrowing -from one person in order to pay off another. But our receipts do not -always coincide with our payments; and when, for instance, gold is sent -to the United States in the autumn to help to pay for crops imported -here, the Bank of England, by raising its rate of discount, and making -that rate a representative one, attracts gold from the Continent, in -order to tide over the interval between debts payable by us immediately -and debts due to us at a future date. - -English bills being a profitable investment, the price of paper on -England at once begins to rise, and when the so-called gold point is -reached the precious metals are shipped to these shores, because the -premium on bills on England is in excess of the cost of despatching -bullion. Every rise in the rate of discount here induces foreign -holders of long-dated paper on England to retain their purchases. If -they bought three months' bills on England when the Bank's discount -rate was three, interest at the rate of three per cent. per annum was -deducted from the face value of the bill to make it equivalent to a -bill due at sight. Should the minimum rate be raised to four per cent., -and were the holders then to remit the bills to this country to be -discounted, they would have to submit to a deduction at the rate of -four per cent. per annum. In other words, they would lose one per cent. -per annum on the transaction. Long-dated bills would therefore be held -until near maturity in order to avoid this loss. - -An accretion to the Bank rate, then, not only attracts gold or capital -here, but it also induces foreign holders of long-dated bills on -England to keep them in their cases. On the other hand, a fall in the -Bank's rate of discount from, say, three to two per cent. might not -only slacken the demand for English bills, but it would also cause a -considerable number of long-dated bills on England to be sent over here -to be discounted, as the foreign holders would naturally be anxious to -secure the profit between the three per cent. per annum paid to them, -and the two per cent. per annum at which they would then be taken from -them. The result might possibly be a temporary drain of gold from this -side. - -But it is when a home and a foreign efflux of gold occur at the -same time that the situation becomes serious, and unless immediate -action is taken by the directors of the Bank of England to check the -outflow, there is always the danger--so small is our gold reserve when -contrasted with our exports and imports--that a balance against us at -an unlucky moment may create an awkward tension, which, unless speedily -relieved, may possibly produce a crisis. - -We like to flatter ourselves that England is always safe; but so large -is the amount of bills offering from day to day in the London money -market that the very doubt of there not being sufficient capital in -the possession of the banks to discount them creates uneasiness; and -if it were thought that the Bank of England, which holds the few -millions of reserve upon which hundreds of millions of credit rest, -could not retain its gold, excitement would reach fever pitch in this -country, for everybody's income would be in danger, and the Government, -whose supineness allowed such a state of affairs to develop, would -be in danger too. But we know that, in the rate of discount, the -directors of the Bank possess an effective instrument to prevent such a -catastrophe, and have the experience to use it to advantage. - -Money begins to leave the Bank for internal circulation during the -summer months in order to meet the demands created by the holidays and -the harvest, and then in October there is always the probability of a -large outflow of gold to the States to help pay for the crops imported -therefrom; while the movement of specie to Scotland in November, -occurring as it does just at a critical moment, is likely to cause some -apprehension, should the Bank's reserve have been depleted earlier, -unless the fact that it is merely a temporary transfer to enable the -Scotch banks to comply with the Act of 1845 be thoroughly grasped. - -The October drain of gold from the Bank when the New York exchange is -unfavourable has in it an element of danger, especially if it happen at -a time when the reserve at the Bank of England is unusually low; and -if loanable capital be then abnormally scarce there is always the risk -that the end of the year requirements may produce a tension, which, -should credit be bad at the time, may develop into a panic. - -If the Bank manage well, however, it fortunately often foresees that -the autumnal demands may possibly impose a severe temporary strain -upon its resources, and by raising its rate in anticipation of a short -period of exceptional demand, it attracts gold to itself in order to -be thoroughly prepared for possible large depletions of currency later -on, for it is easier to accumulate gold before the event than to check -an outflow when the movement is beginning to create uneasiness, and to -attract attention to the lack of preparedness on the part of the Bank -to meet large withdrawals of specie for export. - -It is not my intention to write a treatise on the foreign exchanges, -and I am quite well aware that I have only touched on the fringe of a -great subject; but if these illustrations help, however slightly, to -elucidate certain of those undercurrents which determine prices, then -the sole aim of this chapter has been attained. - - - - -CHAPTER IX. - -Banks and the Creation of Credit. - - -We have seen how the Bank of England came to occupy so commanding a -position in the money market, and we now have to consider why its rate -of discount is still a fairly reliable index to the value of loanable -capital. Its advent was extremely distasteful to the private bankers, -who then reigned supreme in London, and who were not slow to recognise -in the new corporation a formidable competitor, for a company which -financed the Government was obviously to be feared. Before 1826 the -Bank of England was the only joint stock bank in the country. Its -notes gradually drove those of the London bankers out of circulation, -and until its joint stock rivals firmly established themselves in the -Metropolis, the Bank was in every sense the most powerful institution -of its kind in the land. - -Being by far the largest lender of capital in the country, it was only -natural that its rate should accurately interpret those forces which -make loanable capital dear or cheap, as the case may be. But the Bank -could not arbitrarily fix the value of money for a very considerable -period, even when it was able to issue notes without let or hindrance, -any more than it can now. Supply and demand must settle that -ultimately; and whenever the Bank inflated prices by the over-issue -of paper, we have seen that the reaction produced thereby invariably -threatened its existence. This is easily explained. - -Persons borrow money in order that they may trade with it; and sudden -loans of large amounts of capital in the shape of notes immediately -stimulate the markets, and the increased demand engendered thereby -causes the prices of commodities to rise. Rising prices, whether -of securities or goods, give a marked impetus to speculation--so -hopeful are traders directly markets begin to improve; and increased -speculation causes further rises in the prices of both commodities -and loanable capital. Everybody wants to borrow, and to share, in the -coming period of great prosperity. - -With prices rising here, imports naturally increase, as foreigners -are anxious to sell their goods in the best market. On the other -hand, the English markets have become less profitable to buyers, and, -consequently, exports fall off, the result being that the balance of -our indebtedness to other nations is largely increased. The foreign -exchanges soon begin to move against England, and the Bank of England -(we will assume) which had created the speculation by large issues -of notes, suddenly finds that it is threatened with a foreign drain -of gold, and is compelled to raise its rate in order to protect its -reserve. - -Since 1844 this power has, of course, been taken out of the hands of -the Bank; but it is evident that, even before that date, the Bank of -England could not fix the rate of discount, for whenever it made the -attempt it failed signally. The above illustration fully explains the -reason why. Both before and after the Act the Bank of England would -have suspended payment upon more than one occasion, when it neglected -to keep an adequate reserve, but for Government intervention; and -it will be in the same plight again if it trade with too large a -proportion of its resources. - -The Bank was then by far the largest dealer in credit, and from time -to time it stated the minimum rate at which it would lend or discount. -But the private bankers were at liberty to underbid it; and although -it could, by making sudden advances, cause money to fall in value, -its power was not of a lasting character, and the rise which followed -was quite beyond its control. Its rivals are now much more powerful, -and the Bank is only one large dealer among many--therefore it has to -either raise or lower its rate according to the demands made upon its -resources; but from its position in the centre of the money market it -still possesses a latent power for possible evil, which appears to have -escaped the attention it deserves. - -This brings us to the vexed question of the creation of credit by a -bank, and though it is stoutly maintained that an ordinary banking -company cannot create credit, I venture to think that, given certain -conditions, it does. But perhaps, before proceeding further, it will be -better to briefly discuss the Clearing House system. - -Cheques and bills, we all know, pour up to London in a constant stream -to the numerous banks, and are presented by them either to the firms -upon whom they are drawn or to their agents at the Lombard Street -Clearing House. As every bank which is a member of the Clearing House -keeps an account with the Bank of England, the debit and credit -balances (the result of this exchange) are adjusted in the books of -the Bank at the end of each day, and so, though the balances standing -to the credit of the various banks are diminished or increased, the -total sum to the credit of all the clearing bankers remains unaltered. -In other words, the balances, which are the outcome of the exchange -of credit documents at the Clearing House, are finally arranged by -transfer entries in the books of the Bank of England. - -Every cheque presented in the House is debited to one bank and credited -by another, therefore the totals of the debit and credit entries must -agree; and if the totals are the same, then the debit and credit -balances must agree also. In the smaller towns the banks exchange the -local cheques between themselves, and settle the balances in cash or -by payments through London. But Birmingham, Bristol, Leeds, Leicester, -Liverpool, Manchester, and Newcastle-on-Tyne have Clearing Houses of -their own at which local cheques and bills are presented. - -We can now approach the question of the creation of credit by a bank. -Suppose a bank suddenly increases its advances to its customers by -£1,000,000, and that the customers pay away the whole sum by cheques. -The said cheques are, say, paid by the recipients to the credit of -their accounts with other banks, which present them at the London -Clearing House. The balance of the bank which made the advance is -thereby reduced £1,000,000 at the Bank, and the accounts of other -banks are credited to the same extent; so the deposits at the Bank of -England are not reduced one penny by the transfer. But £1,000,000 has -been added to the working resources of the other banks; and as the -liabilities of the bank that made the advance have not been reduced, -surely this is a creation of credit? Of course, the bank which made the -loan has lost £1,000,000 in "cash" at the Bank of England, and that -asset would then be merged in "advances," which are up £1,000,000; -and though the bank has not created credit in its own books, it has -in those of its rivals. Surely, then, every bank which makes a new -advance to a customer, who employs the sum placed to his credit to -cancel certain debts of his own, creates credit in the books of other -institutions. But the Bank of England can also create credit in its own. - -On the other hand, say, Bank A calls in £1,000,000 from the bill -brokers, who obtain credit to the extent of £1,000,000 from, say, -Bank C, and draw cheques thereupon, and hand them to Bank A, which -takes them to the Clearing House. C's balance at the Bank is reduced -by £1,000,000, and A's is increased by a like sum; but in neither -case is the "liabilities" side of the balance sheet affected. It is -a mere transfer of credit from one account on the "assets" side to -another on the same side, while the bankers' balances at the Bank of -England remain the same. However, should Bank A advance £1,000,000 to a -customer, who draws cheques against it, then the creation of credit in -the books of other banks begins, as illustrated by our first example. - -Again, take the case of a bank which sells securities, say Consols, to -the amount of £1,000,000. It receives cheques upon other banks for a -like sum; and these it takes to the Clearing House, where it presents -them to those banks upon which they are drawn. The result is that the -selling bank's balance at the Bank is up £1,000,000, and that the -accounts of the other banks are down £1,000,000; but their liabilities -also are down £1,000,000, whereas the liabilities of the selling bank -are precisely the same. It has simply transferred £1,000,000 from -Consols to "cash" at the Bank of England on the "assets" side of its -balance sheet. Such a sale has reduced the floating capital of the -banks by £1,000,000. Further, could not a little "window dressing" be -done in this manner were a bank to find itself short of "cash" at the -end of the half-year? By lending the sum so obtained the selling bank -could create an amount of credit in the books of its rivals similar to -that which it had previously destroyed. By buying stock back, too, it -would produce exactly the same effect as if it made a loan. - -Now we come to the creation of credit by the Bank of England in its own -books. Were the Bank to suddenly lend £3,000,000, the "Other Deposits" -would be up to that extent, and "Other Securities" would also be up to -a like amount, because the Bank would credit its customers and debit -the loans. Both sides of its return are increased, but, so far, credit -has not been created by these mere book entries, though the way for -its creation has been prepared. The customers or persons to whom the -advances have been made begin to draw upon their accounts by cheques, -and as these cheques are returned by the other bankers to the credit -of their accounts (bankers' balances) it follows that "Other Deposits" -are not reduced at the Bank. The Bank, then, has created £3,000,000 -of credit in its books, and though it can no longer make sudden loans -by a huge issue of notes as was possible prior to 1844, yet, because -it holds the bankers' balances, we can see that it is able to produce -precisely the same effect by means of another instrument. - -If the Bank lends £3,000,000 to the Government, "Public Deposits" and -"Government Securities" advance proportionately. When the Government -begins to pay out, then a large part of this sum returns to "Bankers' -Balances," and credit is created at the Bank of England to the extent -of the sum so returned. But the banks (Lombard Street) have more to -lend; therefore money is made artificially cheap. - -On the other hand, the Government sometimes borrows in the open market -on Treasury bills. Credit is then transferred at the Bank through the -medium of the Clearing House from "Bankers' Balances" to "Public -Deposits." The resources of Lombard Street are reduced, and until -Government disbursements are made, and credit thereby transferred to -Lombard Street, money becomes tight, and borrowers are often driven to -the Bank. - -We have seen that in the end an over-issue of notes is certain to -reduce the Bank's reserve to a dangerously low level, and that, -therefore, directors who know their business would hesitate to make so -risky an experiment. The same argument is equally applicable to the -creation of credit by sudden large loans on the part of the Bank in its -own books. Such loans, we have seen, increase both sides of the return; -but the Bank's reserve of notes and coin in the Banking Department -remains at the same figures, consequently, its ratio per cent. to -liabilities shows an ominous decline, which is, of itself, a warning -that something is wrong. - -Let us assume that the Bank suddenly lends £5,000,000. Money is thereby -made artificially cheap, and the market rate for bills must fall in -consequence. But the bankers' balances have been increased in the books -of the Bank of England, and Lombard Street is not going to quietly -look on while Threadneedle Street does all the business. Consequently, -the bankers lend a portion of their balances at lower rates still, -in order to attract business to themselves, and the market rate falls -again. Here we have a situation analogous to that described in the -earlier part of this chapter. - -Now suppose this movement took place in October, and that a drain of -gold occurred outwards. The Bank, in order to arrest the said drain, -would have to raise its rate, and to bring the market rate in touch -with its own it would be compelled to sell Consols, thereby reducing -the bankers' balances in its books, and, of course, lessening the power -of the banks to lend. But such a process is an expensive one, for -the Bank is in reality borrowing back at panic prices the capital it -created during a time of temporary ease. - -Although the Bank undoubtedly possesses this power, the directors -are not likely to abuse it, because the risk incurred is out of -all proportion to the possible gain if the deal is carried through -successfully; so we may say that their power to create credit in their -books is limited or regulated by the ratio per cent. of the Bank's -reserve to its liabilities. - -Of course, it may be asked: Is it safe to entrust such power to a board -of directors who have to earn dividends for a body of stockholders? - -That is a difficult question to answer, and one, moreover, to which -there is no occasion to reply in this work. It may safely be said that -no director who understands his business would take the risk upon any -consideration; but there is the remote chance that an incompetent -Governor might be placed at the helm, and in that event, however -improbable, should he lose sight of everything but the dividends, he -might create a terrible panic throughout the land. On the other hand, -all who see the Bank return from week to week may read the signs, and -should the ratio fall abnormally low the critics would flagellate the -Governor unmercifully, and the business man, who is unaccustomed to the -pleasantries of criticism, unless he be a most hardened member of his -species, squirms under such a lash, fearful that his friends may read -just what the Press thinks of him; so he takes heed. - -Though the Bank's rate is not always the same as the market rate, it -is seldom very much out of touch therewith. When the directors find -that their rate of discount is too high to attract custom, then, if -the reserve be also high, they lower their minimum in order to get a -fair share of the business that is doing. Their other alternative, of -course, is to borrow on stock, and in that manner to compel the bill -brokers to pay them a reluctant visit. - -The policy of the Bank has never been one of "grab," though the bill -brokers often grumble; but its position, in relation to the market, -is an extremely difficult one, so difficult at times as to be fraught -with great anxiety; and remembering the power that devolves upon it -by reason of its holding the bankers' balances, its policy seems one -of enviable restraint and moderation. But that is only what everybody -expects of the Bank of England. - - - - -CHAPTER X. - -The Battle of the Banks. - - -But little has hitherto been said concerning the relations of the Bank -of England with its rivals in the money market, and in order to trace -the movement from its beginning we must return to 1826, in which year -joint stock banks could be established in England at a greater distance -than sixty-five miles from London. The Bank stoutly resisted this -innovation, but the Government, in consequence of the constant failures -of the country private bankers, passed the Act of 1826, and the thin -edge of the wedge once inserted, the Bank's monopoly in London soon -disappeared. - -The London and Westminster, despite the determined opposition of the -Bank of England, opened business in London during 1834, and the Bank's -monopoly of banking was gone. All that then remained to it was the -exclusive privilege of issuing notes in and within sixty-five miles -of London, the only legal monopoly it still enjoys. Unable to keep the -joint stock banks out of London the Bank actively opposed them, as also -did the private bankers, who, while the Bank refused to open accounts -for the new companies in its books, declined to admit them into the -Clearing House, which was founded by the London bankers about 1775. The -irony of Fate! They are now a feeble minority in a house of their own -building. But history--both domestic and economic--can supply parallel -instances. - -Although the new system was destined to drive out the old, the joint -stock banks made a bad start, and failures were at first so frequent -that the public began to share the opinion of the Bank and to look upon -them as anything but safe institutions. They were born in disaster, and -their policy did not provide an antidote to the old evils; but, like -the Bank of England itself, they were taught prudence by a series of -panics and upheavals which threatened to wipe them out of existence. -They were, in short, licked into shape, and that cautious prudent -policy which now distinguishes our great banking companies is the fruit -of a very bitter experience. - -Towards the middle of the nineteenth century the manufactures of Great -Britain began to increase by leaps and bounds, and population, which -always augments rapidly when food is cheap and abundant, kept pace with -the country's unprecedented commercial activity. In 1801 the population -of London was less than one million. In 1837 it had increased to about -two millions; and at the present time Greater London contains over six -and a half millions. - -It is quite evident that the Bank of England could not alone minister -to the increasing wants of London, and both in the Metropolis and in -the provinces its joint stock rivals rapidly accumulated credit. In -June, 1854, the new banks were admitted into the Clearing House, and -since that date they have carried all before them. They shared in -the almost magical increase in the volume of British trade, but they -neither created nor provided the incentive to that remarkable outburst -of national prosperity which was the result of Free Trade, and which -made this country the workshop of the world. Since then, however, the -world has filled up. - -The population of the United States in 1870 was 38,500,000; in -1900, 75,500,000. In 1871 the population of the German Empire was -41,000,000. In 1901 it had increased to 56,000,000. During the same -period the population of the United Kingdom increased from 31,500,000 -to 41,500,000. There are more people in the world to be fed, and as the -earth fills up the struggle for existence must surely become fiercer. -Noticing this, people naturally inquire whether, seeing the changed -environment, Free Trade is suitable to the times. Some years ago, when -trade was bad, the bimetallic controversy was raging, but since 1895 -its advocates have been dumb, for the simple reason that people will -not listen to theorists when times are good. They are then too intent -upon making money. They think they may not get the chance again. - -No doubt, when the depressed portion of the cycle came round -bimetallists would have been heard again. But in the place of -Bimetallism we now find Protection, and, in all truth, the question is -serious enough; for, when the present wave of prosperity dies out in -the States, there seems every probability that the huge American trusts -will endeavour to swamp our markets with their goods. Free traders make -quite a profession of faith of their commercial opinion. They declare -that they are free traders with the same fervour they might infuse -into the avowal that they were Protestants or Roman Catholics. But -modern Christianity is eminently adaptable to every fresh situation. Is -Free Trade? - -The worse the times become, the louder, probably, will grow the -controversy between the free traders and the protectionists; and when -we remember that our workshops support our credit, and upon what an -amazingly small reserve of the precious metals that credit is based, it -is evident that the question ought to be approached with the greatest -caution; for a decision that emptied our workshops would ruin the -nation. - -As the savings of the country increased, the joint stock banks -accumulated credit with astonishing rapidity, and the Bank of England, -slow to recognise the power of the new system, which was so admirably -suited to the changed environment, was compelled to receive its hated -rivals into the fold. The companies possessed no vaults for the storage -of the precious metals on a large scale, and they were therefore glad -to avail themselves of the facilities at the disposal of the Bank, -whose premises were much better protected than their own. And then, -again, as the Bank's notes were legal tender, the companies could send -them from the head offices to the branches cheaply, while they were a -convenient form in which to keep a certain proportion of their cash in -hand. - -The evolution of the Bank of England, we can see, has not proceeded -smoothly; but it is remarkable that an institution, which owed its -pre-eminence entirely to monopoly, did not gradually begin to sink into -a second-rate banking company directly its exclusive privilege of joint -stock banking was abrogated and free trade in banking established in -England. So conservative was the Bank's policy that it seems little -short of marvellous that its joint stock rivals should have quietly -endured its studied insults. The new movement was then, however, -not only in its infancy, but was under a cloud as well, and through -the companies grouping themselves around the Bank they enabled that -institution to retain its position in the centre of the money market. -The power incident to that position has been fully explained in the -previous chapter. - -The London private bankers, whose lack of enterprise can only be -attributed to the fact that they were imbued with those narrow City -traditions which make London the home of Conservatism, also quite -failed to grasp the situation, and allowed the new companies to expand -in every direction, confident that so sudden a change must end in -disaster, and, therefore, they were content to look on, to shake their -heads sadly at the unprofessional conduct of those new banks, and to -soothe their feelings by ever and anon declaring, with due solemnity, -that joint stock banking would ruin the country. - -Certainly, the new companies did not manage well at first, and a few -of them were wiped out in consequence; but, in spite of mistakes, they -progressed, because their system was adaptable to the requirements of -a growing England. In these times it is the fashion to apotheosise -man--to picture him as a kind of demi-god; therefore, it is asserted -that man makes his mark on the times. But it is surely more rational -and logical to assume that the times gradually mould the particular -cast of brain that is adaptable to a constantly changing environment, -and that the man who chances to possess that cast of brain goes with -the tide--which takes him a long way. At any rate, such was the case -with the joint stock banks, which owe their success entirely to the -adaptability of their system to a changing market. Moreover, that -market is still changing. - -The old-fashioned London bankers found, to their great surprise, that -they had not read the signs of the times aright; but the orthodox -seldom play the _rôle_ of a prophet successfully, because they have -lived too long in one groove, and so are apt to forget that England is -not the world, which is steadily increasing in population. Instead of -failing, the joint stock banks merely occupied the ground, and, by so -doing, confined the business of the London private banker to the one -street in which he was established and in which his father lived before -him. They had no respect for age--those new companies! - -The joint stock banks spread their tentacles north, south, east, and -west of his sacred City, thereby effectually preventing his expansion, -and "concentrating" his energies in the one street aforesaid, just -as the nations of Europe have "concentrated" the kingdom of the -unspeakable Turk. Great movements seldom originate within London, which -is strikingly lacking in originality, and that new blood from the -provinces which flows in an ever-increasing stream towards the great -City, and alone arrests decay, also seems to bring with it the new -ideas. - -The London private bankers waited in vain for the expected -disappearance of their rivals, who, despite severe panics and crises, -continued to add rapidly to their resources, until, surrounded by rival -branches, profitable expansion became difficult for the private banker, -whose business is now so localised as to render effective competition -with the companies impossible. He cannot make rapid progress because he -does not possess the branches through which alone the necessary credit -can flow to the central office, and therefore the extinction of private -banking in its present form seems only a question of time, for the -wealthy are certain to deal with those banks whose vast accumulations -are at least the outward and visible sign of the confidence the public -has in their stability. - -But the joint stock banks did not confine their energies to London. The -London and South Western Bank, which was established in 1862, began a -vigorous crusade in the London suburbs, with the happiest results to -its shareholders; and the London and Provincial Bank, which was formed -two years later--in 1864--established small suburban branches in every -direction, with equally satisfactory returns for its enterprise; while -the London and County, larger and, perhaps, more cautious than either, -also recognised the advantages of suburban expansion. A branch bank -belonging to one of these three banks is now to be found in almost -every London suburb. - -The London and Westminster Bank (established in 1834) was the first -in the field, but the atmosphere of the City is not favourable to -progress, and the Westminster, though an exceptionally strong and -well-managed bank, undoubtedly failed to move with the times. So, -too, did the London Joint Stock Bank and the Union Bank of London, -which has recently somewhat altered its name. It was not until the -provincial joint stock banks invaded London that these companies began -to realise the opportunity they had missed; Lloyd's and Parr's Banks -however, evidently taking in the situation, adopted the new system, and -by skilful amalgamations rapidly forced themselves to the front. The -country banks, in short, practically took possession of Lombard Street. - -Why the Bank of England did not share the same fate as the private -bankers has already been demonstrated. It certainly was not one whit -better informed than they; and it sympathised with them in their -distrust of the intruders, whose speedy downfall it quite expected to -witness. That the joint stock banks must come to grief was the opinion -of the majority of City men in 1834, and the then directors of the Bank -were City men imbued with those tenets which found credence within the -sacred square mile. - -The bank which keeps the Government account must always be a great -power in the land. Had that account been removed in 1844, together with -the last vestige of monopoly, the Bank--the directors of which shared -to the full in that tenacity and narrow-mindedness characteristic of -wealthy City merchants, whose businesses, and therefore whose ideas, -flow in the narrowest of grooves--must have ceased to be a progressive -institution. But no Government has ever hinted at deserting the Bank, -whose record, though bristling with mistakes, is one of unbroken -integrity; and the public has always looked upon its management as -above suspicion. Especially was this the case during the first few -decades of the new movement. - -The Bank of England had public opinion behind it; and the joint stock -banks, concerning whose stability opinion was divided, were not then -strong enough to keep their own reserves and to defy the Bank; but when -their system had stood the test of time, the Bank opened its doors to -them, and the companies meekly bowed to the inevitable--for they were -not the power in Lombard Street in those days that they are now. - -In the first instance, we found the private bankers grouped around -the Bank; and now we see our huge joint stock banking companies in a -similar relation to her. They kept their reserves with her when their -system was in its infancy, when the Bank of England, as a result of -monopoly, was the greatest credit institution in the country. As the -companies spread their tentacles throughout the land, accumulating -credit at an extremely rapid pace, those reserves grew proportionately, -until, to-day, we find the Bank of England in the centre of a system -which owes over £910,000,000 in _cash_ to the public. - -Our modern credit system has developed around the Bank, which, as -the holder of the bankers' reserves, now occupies an almost national -position. That position is, undoubtedly, the indirect result of a -monopoly which, prior to 1826, enabled the Bank of England to build -up a huge business unopposed by others of its kind. In other words, -it had a start of 132 years. The greater, consequently, attracted the -smaller. But united Lombard Street is now a much greater power than -Threadneedle Street--therefore it is always wise to remember that the -Bank of England can only retain its position in the centre of the money -market so long as Lombard Street is agreed that it shall. - -The banks are not legally obliged to keep their reserves with the Bank -of England. Were they so inclined, they could withdraw them to-morrow -and accumulate stores of the precious metals of their own. It follows, -therefore, that the best of feeling should exist between the "Old Lady" -and Lombard Street. Obviously she is not now in a position to dictate -her own terms, as her greatest power is derived from the "bankers' -balances" on the left-hand side of her balance sheet. - -Perhaps it is now easier to understand that the Bank of England, when -it from time to time states the lowest rate at which it will discount -bills for outsiders, occupies the position of a most important lender, -whose minimum rate, though not always the market rate, is seldom either -greatly above or below those of its rivals. - - - - -CHAPTER XI. - -The London Money Market. - - -It is usual, when describing the Money Market, to assert that it -consists of the numerous banks in the City of London; but it seems to -me that, in reality, the money market extends throughout the United -Kingdom, for wherever there is a bank or a branch bank there is a -market for money. Moreover, the demand arising for loanable capital -in the provinces largely influences the rates of interest ruling from -time to time in London, because, if demand is brisk in the country, the -banks have less to lend in London, consequently the rate advances there. - -When reference is made to the money market the London short loan -fund is invariably meant, and we now have to consider how this fund -is formed. The banks, which are liable to the public for huge sums -of money at call and short notice, are obliged to keep a certain -proportion of cash in their tills and strong rooms and with the Bank of -England in order to be prepared for any sudden demand that may be made -upon them. - -Their cash in hand is, of course, required to meet the ordinary demands -of a banking business, and that deposited with the Bank of England is -held as a reserve fund against those risks of withdrawal from which a -credit institution owing immense sums at call is never free. Roughly -speaking, a well-managed bank would keep, say, six per cent. of its -public liabilities in legal tender on the premises, and a further ten -to twelve per cent. at its credit in the books of the Bank of England. -The latter accumulation might be called the bank's _real_ reserve, for -it is upon this that it would have to rely during a run. - -Secondly, from eighteen to thirty per cent. of its liabilities to -the public would be invested in first class securities. Those of and -guaranteed by the British Government are in great request for this -purpose, as the Bank of England would not hesitate to advance against -such investments should a company find itself compelled to meet a -sudden drain upon its resources. Every prudent banker therefore takes -care that a large proportion of these securities is included in his -list, which would also contain Metropolitan and other Corporation -Stocks, English Railway Debentures, Colonial Government Securities, and -so on. A banker's list, in short, should be a so-called "gilt-edged" -one. - -Thirdly, a banker lends a certain proportion of his deposits in the -London money market. Some banks have eight per cent. there, some -fourteen per cent., and others from fifteen to twenty per cent., though -the larger and better managed companies generally employ from seven -to fourteen per cent. therein. A certain amount of this "call money," -however, represents money which has been lent to jobbers and brokers -on the Stock Exchange for "carrying over" purposes at the various -settlements, but by far the larger part of it is money which has been -lent to the bill brokers and discount houses. - -In no sense can this asset in the balance sheets of the banks be looked -upon as a reserve. It is money invested in the London short loan -market--money lent to the bill brokers, who, in times of bad credit, -might not be able to repay it on demand. Just at the very moment -when bankers are most in need, this asset is the least available; -therefore, it is about the worst possible form in which the reserve of -a credit institution, owing large sums at call, can be invested. - -As a credit bank's debts are due at call and short notice, a true -reserve can only consist of legal tender, and the till money, which -is required in the ordinary course of business during normal times, -certainly cannot be classed with that reserve. When considering what -is a bank's real cash reserve, we ought to deduct from four to five -per cent. from the ratio of cash in hand and with the Bank of England -to liabilities, for a trader would not include the cash required from -day to day in his business with any reserve he might accumulate against -accidents. - -Reverting to investments, we might take Consols as an illustration of -their liquidity. During normal times Consols can be sold for cash at -any moment, but it is otherwise in a time of panic, when practically -everybody wants either to sell them or to borrow upon them. The market -is then disorganised, and people require either gold or large credits -at their bankers--not securities. Hence, even Consols are unsaleable -when a panic develops into a crisis. - -As the Bank of England holds the cash reserve of the nation, it alone -can advance against securities in the midst of a crisis, and those -banks which were caught short would then have to apply to the Bank -for help. The Bank certainly would not lend upon any but gilt-edged -securities during a time of stress, and if their customers then made a -call upon them those companies which held second-rate investments would -have to close their doors, as they could not obtain assistance from any -other source. A strong list of securities is, therefore, essential to -every bank that is anxious to protect its customers against disaster. - -These three assets (cash in hand and at the Bank of England, money at -call and notice, and investments) constitute a bank's so-called liquid -assets. The ratio of total liquid assets to liabilities maintained by -the best English banks ranges from 43 to 78 per cent. The last-named -figures, which are quite exceptional in their strength, were published -by Stuckey's Banking Company. The remainder of a bank's resources is -employed in making advances and loans, and in discounting bills for its -clients, whilst a small proportion is locked up in premises. - -We can now form some idea as to what the short loan fund of the London -money market really is. Immense sums are collected at the head offices -of the banks in London through their metropolitan and provincial -branches; and, as the demands of trade are always uncertain--now brisk, -then slack--it is impossible for them to invest all their surplus -capital in securities; consequently, a certain portion of it finds -remunerative employment in this channel. - -A huge stream of credit is constantly circulating through the three -kingdoms, and London, so to speak, is the heart of the system. In years -of active or good trade this stream increases in volume, and during -years of depression it contracts; yet it is difficult to say whether or -not the resources of the banks (the floating capital of the country) -are appreciably lessened during a period of temporary depression, -although the national turnover unquestionably is, as may be seen by the -Clearing House returns. During years of rising prices and increasing -trade activity profits are augmented, and, consequently, the resources -of the banks are swollen; but when the profits are invested within the -country, a similar amount of credit is returned to the banks by those -who have sold their securities, and though less capital is created -when trade is dull, it is questionable whether the resources of the -banks then shrink very greatly, unless foreign securities are largely -purchased. - -We have seen that this stream of credit flows to London, and as demand -throughout the country is not sufficiently strong to attract it all -back again, a large fund of loanable capital accumulates in the hands -of the London banks, and flows from them to the bill brokers, who -employ it in discounting bills of exchange. But though by far the -greater part of the London short loan fund is accumulated in this -manner by the banks, other firms and companies also discharge their -surplus capital into it. The pool, of course, is not a stagnant one, -for capital is constantly flowing in and out. - -The India Council, for instance, lends large sums in the London short -loan market. The numerous foreign and colonial banks in London do -the same, and so, too, do many of the large insurance companies and -merchants, while during slack times money finds its way from the -Stock Exchange to the bill broking houses. At first sight it seems -strange that bankers should advance money to the bill brokers, and so -provide their rivals with capital with which to compete against them, -especially as the banks have discount departments of their own. - -Let us, however, consider the position of the bill broker in relation -to the Bank of England and the money market. - -Towards the beginning of the nineteenth century the broker acted as -agent for the country bankers, but this connection was naturally -severed when the country firms opened accounts with the London bankers, -and the broker, whose knowledge of bills was extensive, then transacted -business for himself. Through holding out for high rates, the London -private bankers drove a large amount of business into the hands of the -bill brokers, who, by confining their attention solely to this class -of credit document, came to be largely trusted by the joint stock -companies, which could not obtain servants with the special training of -their rivals. - -In no other country has the bill broker such influence as in -England. In Paris, for instance, the customer discounts with his -banker, who re-discounts with the Bank of France; but in London, for -reasons already stated, bills find their way to the bill brokers, -who re-discount either with the banks or with the Bank of England. -Moreover, all the best bills get into the hands of the bill brokers, -who, at one time, only discounted the acceptances of the banks and the -larger houses; but they now take small trade bills, and, should the -banking business grow less profitable, it is questionable whether the -banks might not endeavour to dispense with the middleman whom they now -encourage. - -We next have to consider the London money market as a whole. First we -find a system which comprises Lombard Street and Threadneedle Street. -In other words, the London banks, by keeping accounts with the Bank -of England (Threadneedle Street), have placed that institution in the -centre of the system, and we know the Bank derives great power from -this situation; but its power is not innate--it is derived through and -is dependent upon Lombard Street. This group we will call "the money -market" or "the market." - -Then we have the bill brokers, of whom we will speak as "the outside -market." Every morning the bill broker goes from bank to bank inquiring -at what rates he can borrow; and if Lombard Street (the London banks) -cannot supply him with all the capital he requires, then he is -compelled to apply to the Bank of England, which, however, he always -endeavours to avoid, because the Bank invariably charges him a higher -rate than do the other banks. - -The Bank of England is a great bank of discount: consequently, the -brokers are its rivals; so it is hardly reasonable to expect the Bank -to charge the same rates to them as to its own clients, seeing that -the brokers, by their competition, reduce the Bank's business. When -trade is brisk loanable capital is in considerable demand, and the -banks, therefore, have less money to lend to the bill brokers, who -consequently are then driven to the Bank, which holds the bankers' -balances. - -But the Bank of England's position is an extremely delicate one; and -when the resources of Lombard Street are temporarily exhausted and -demand centres upon itself, it has to take care that its ratio of -reserve of notes and cash in the Banking Department does not sink -too low in proportion to its liabilities. Should the demand upon its -resources prove considerable, it raises its rate until the pressure -is reduced. As a large part of the trade of this country is conducted -through the medium of bills of exchange, it is absolutely essential -that there should always be a market for good bills. Otherwise, panic -and failures would be the result; so, were the Bank to refuse to take -bills from the brokers at a price, our credit system would collapse at -once, unless the banks themselves, determined to crush the brokers, -offered to deal direct with the holders. But the experiment would be -a most risky one to make. Moreover, it could not be attempted at a -critical moment. - -When Lombard Street is not lending freely, or cannot lend further with -comparative safety, the Bank, by raising its rate of discount from time -to time, reduces the merchant's profit on each transaction, until at -last money becomes so dear that he finds that he is making little or -no profit on his goods. He therefore produces less, and, consequently, -discounts less, when the pressure upon the Bank relaxes. - -So long as money may be obtained, let the price paid for it be what -it may, a sense of security pervades the community; but were it -whispered during a period of temporary tightness that the Bank refused -to discount good bills at any price, our credit system would be in -imminent danger, for the trade of the country would be at a standstill. -Further, did such a state of affairs continue for many days, the crash -would come, and the Bank of England would then be swept away with the -rest of the market. Our present system is so delicately poised that the -Bank simply dare not refuse to take good trade bills from the brokers. - -We next come to the other side of the picture. The broker, when he goes -his rounds, sometimes finds that the surplus resources of the banks -are abundant, and that they are ready to let him have even more than -he requires. When he makes this discovery, he begins to higgle, to try -to ascertain the lowest rate certain banks are prepared to accept; for -the difference between the rate at which he discounts bills for his -own customers and the rate at which he re-discounts or borrows, is -his margin of profit, and he is naturally anxious to make it as wide -as possible. (The poor man, be it remembered, does not visit Lombard -Street simply because he finds the air pure and the society of bank -officials congenial.) He therefore does his best to discover those -banks which are in funds, and, having found them, to induce them to -lend as cheaply as possible. This he can do when loanable capital is -cheap and abundant, and the Bank of England probably doing but little -business. Possibly, though the Bank rate is at two and a half, bills -are being taken by the brokers at one and a half. Then the Bank, in -order to get business, either lowers its rate of discount or else, by -selling stock, endeavours to lessen the resources of Lombard Street. - -If the Bank adopt the latter expedient, it usually sells Consols for -cash, and buys them back for the account, thereby temporarily reducing -"bankers' balances," and attracting business to itself. The banks, -having less to lend, raise their rates, which then approximate more -closely to the Bank rate. - -The brokers often complain bitterly of this interference by the Bank -of England with the market's supply of loanable capital, asserting -that this artificial enhancement of rates by the reduction of bankers' -balances through the sale of stock affects their business injuriously, -and benefits the Bank but little; and it certainly is difficult to see -how the Bank of England can make a profit out of the transaction. - -On the other hand, when the market rate is appreciably below the Bank -rate, it is impossible to attract foreign gold to London; and the Bank, -by borrowing on Consols, and making its rate representative, is acting -in the public interest, should it be desirable either to attract gold -to this country or to prevent its leaving these shores. - -We can now see that the Bank of England, though it states its minimum -rate, is often powerless to transact business thereat; and, recognising -that its own rate is out of touch with the market rate, the Bank often -discounts bills for its own customers at the rates ruling in the open -market, as, were it to refuse to do so, its clients would naturally -take their bills to the cheapest house. When, however, Lombard Street -is empty, and the bill brokers are compelled to approach the Bank -which holds the final reserve, the Bank of England is frequently in a -position to charge its rivals one per cent. above its declared minimum, -and the bill brokers quite naturally feel a little sore. For this -reason they try every source of supply before making application to the -Bank. - -As security against loans made to them the brokers usually deposit -either bills which they have discounted in the ordinary course of their -business or gilt-edged securities, but sometimes the bill broker's -credit is so good that the banks lend him money at call practically -without security. When securities are deposited they are of course -returned directly the loan is paid off. - -There is also another little point to which attention may be drawn: to -wit--that, although the market we are discussing is a special market, -yet if a borrower's credit be good it is generally possible to obtain -an advance either at or about Bank rate. - - - - -CHAPTER XII. - -The Bank Rate and Stock Exchange Securities. - - -At the present time large advances are made by the banking companies to -members of the Stock Exchange, and it is supposed that at the beginning -of 1894, when the Bank rate fell to two per cent., and an investment -of surplus funds in the London short loan market brought in very poor -returns, the banks, tempted by higher rates, largely increased their -loans to the Stock Exchange. In 1890 rumour had it that a few of the -banks made rather heavy losses in connection with the South American -gamble, which brought down the firm of Barings; and the unanimity -they displayed, under the leadership of the late Mr. Lidderdale, in -supporting the tottering structure, certainly lends force to the -suggestion; for philanthropists are not to be found either in Lombard -Street or in Gorgonzola Hall. - -The same rumour was circulated after the Kaffir boom in 1895, and -a little later it was whispered that some of the banks intended -curtailing their loans to the Stock Exchange, and that in future mining -shares would be received with the greatest circumspection. So close -is the connection between the banks and the "House" that the utmost -consternation prevailed when it was feared that the banks would not -touch certain stocks and shares of a fluctuating character. The mere -rumour created almost a panic among those dealers whose books were full -of the tabooed securities. - -But 1895 was a bad year for the banking companies, and, from a dividend -point of view, 1896 was little better, for the Bank rate did not touch -two-and-a-half per cent. until September of that year. The short loan -market, therefore, was not a tempting place into which to pour surplus -deposits, so the banks apparently thought better of their decision (if -it were a decision), and continued their loans to the Stock Exchange on -the same liberal scale, because such loans yielded a much better return -than those to the bill brokers. - -The very rumour that the banks intended increasing their margin on, -say, American Rails, would cause those securities to fall, and were -the threat actually executed, then, unless strong support came either -from the public or from New York, the result would be failures of weak -jobbers in that particular market, and a heavy fall in the prices of -American Railway securities. There is the same link between the other -markets of the Stock Exchange and the banks, and, such being the case, -it naturally follows that the prices of securities are influenced by -the abundance or scarcity of loanable capital, and that, therefore, -continuation rates fluctuate with the Bank rate. - -But a very considerable proportion of the transactions conducted on the -Stock Exchange is of a speculative or gambling nature, in which those -mysterious persons called "bulls" and "bears" figure largely, and whose -object it is, not to invest savings in particular stocks and shares, -but to receive a cheque from their broker representing differences -due to them on the rise or fall of the securities in which they are -temporarily interested. - -The "bull" buys stock because he believes that it will rise, and -that he will be able to sell it at a profit before the fortnightly -settlement comes round, but he does not pay for it; and if his sanguine -anticipation is not realised, so human and hopeful is he, that he -endeavours to obtain a loan on his stock through his broker in order -to carry it over to the next settlement, trusting that he will be able -to sell at a profit before contango day again comes round. The broker -sometimes obtains an advance on the stock through his banker, and so is -enabled to accommodate his client, whom he charges both interest and -commission. Again, the broker may carry over the stock through a jobber -or with a money broker who is a member of the "House," as the Stock -Exchange is colloquially called. - -It has been suggested that some of these money brokers are in reality -agents of the banks--that, in short, they are the middlemen between the -banks and those who want to borrow on the Stock Exchange, just as the -bill broker is the middleman between the banks and those persons who -possess bills. The bill broker deposits the bills he has discounted for -his customers as security against a loan from the banker, and the money -broker deposits the stocks and shares against which he has advanced to -members of the Stock Exchange as security for a loan from the banker to -himself. His profit, therefore, like that of the bill broker, would be -the difference between the rate at which he borrows from the banker -and the rate at which he lends in the House. When large sums are -advanced in this manner the prices of stocks and shares are forced up -to fictitious figures in the hope that the public will come in and buy. -Yet the Stock Exchange Committee preaches about the iniquities of the -outside broker! Far be it from me to defend the possibly questionable -methods of the latter; but, to an unbiased observer, it sounds somewhat -like the pot calling the kettle black. - -Huge sums of money are advanced every fortnight by the banks to the -money brokers and jobbers, principally against sold stocks and shares, -which are awaiting the arrival of _bonâ fide_ investors. The banks, of -course, require a good margin in order to cover themselves against loss -through any possible depreciation in the hypothecated securities, and -when the settlement or day of reckoning arrives, fresh loans are made, -or old advances are renewed, and the securities carried over to the -end of the account. A high rate of interest naturally makes "carrying -over" from account to account a very expensive operation, whilst an -abnormally high rate renders the process prohibitive. - -When, therefore, the Bank rate is high and money is dear, a check is -immediately given to speculation on the Stock Exchange, because those -persons who have bought securities for a rise prefer to sell at a loss -before the settlement rather than pay excessive contango rates. It -follows, then, that dear money greatly reduces the dimensions of the -accounts open for the rise. - -The banks, too, often become alarmed by the magnitude of the account, -and having demands upon them for capital elsewhere, they grow nervous -and lend less freely, at greatly enhanced rates, and then jobbers and -money brokers have to refuse a large number of applicants. The result -may be either a fall in the securities dealt in by a particular market -or a general depression throughout the House. Then the "bears" come in -and buy, take their profits, and are jubilant. - -Conversely, a plethora of money and a low Bank rate encourage -speculation, as was the case before the boom of 1895. Continuation -rates are low, and capital comes out of trade into the better-class -securities, which begin to rise in consequence. Then, for a little -while, the "bulls" have it all their own way. But why does the -Committee pose as the friend of the _bonâ fide_ investor? It is a -little difficult to see where he comes in, unless it be in at the top -and out at the bottom. As a matter of fact, there is so much gambling -in securities taking place in the House that the genuine investor, if -he do not understand the market, falls an easy prey to the "bulls" -and "bears," who, by studying the habits of his kind, anticipate -their requirements, and, after taking a large bite, pass on their -hypothecated shares. On the other hand, the investor who studies the -markets sometimes waits patiently for exhausted "bulls" or sells to -frightened "bears." So, to those who know the game it is about as broad -as it is long. - - - - -CHAPTER XIII. - -The Banks as Stockbrokers. - - -Were business on the Stock Exchange solely of an investment nature, it -has been suggested that that institution could dispense with over fifty -per cent. of its members, for, during recent years, a large amount of -the investment business of the country has drifted to the banks, which -place their orders in the hands of a few brokers, with whom they divide -the usual one-eighth per cent. commission. The large banking companies -are outside brokers, and so eager are some of them to attract this -class of business that they offer their clerks half the commission -received from the broker upon all business introduced by them. Seeing -that the average bank clerk is absolutely without experience of the -markets, touts of this variety are a source of danger to the public. - -The banker who divides his share of the commission with the clerk who -introduces the business is satisfied with one-thirty-second per cent. -commission; but the broker, who only gets one-sixteenth instead of -one-eighth per cent., is, probably, less eager to make a close bargain -for a customer of the bank than for one of his own. On the other hand, -the volume of investment business which flows through the banks to the -Stock Exchange is so large that those brokers who are favoured with the -banks' custom must earn considerable sums by way of commission. Whether -orders from customers of the banks receive that individual attention -which the brokers give to those from their own clients is, however, -another matter. - -Most of the banks have Stock Departments, to which orders are sent by -their country branches. These orders are steadily increasing, and the -tendency seems to be for a large number of the provincial public to do -their investment business through the banks. This class of business is, -therefore, gradually drifting to the banks, and doubtless, as time goes -on, the banking companies will become the recognised channel for the -_bonâ fide_ country investor. - -It follows that the non-speculative business is getting into a few -hands, with the result that a large number of brokers on the Stock -Exchange are, so to speak, "starved," and consequently obliged to -turn their attention to the demand created by the more speculatively -disposed members of the public. Yet, strange to say, in spite of -the fact that orders are now diverted to the Stock Departments of -the London banks and that, therefore, fewer brokers are required -to transact the investment business of the country, the members of -the Stock Exchange are increasing numerically. Seeing that the safe -business is drifting through the banks into the hands of a few large -brokers we may well ask how the smaller men obtain a living from their -business? - -The ground, year in year out, is being farmed assiduously by the -banks, whose large capital and established credit inspire widespread -confidence; and in the face of such competition the small broker's -chance of success does not seem encouraging. How can he make a -business? The banks, who place their orders with strong brokers, -guarantee those customers who deal through them against the -insolvency of both the broker and the jobber, and such a guarantee is -unquestionably worth having. The small broker, as a rule, possesses -very little capital; whereas the person who instructs his banker -either to buy or to sell is conscious that he is dealing through an -institution whose credit is practically unlimited, and whose resources -amount to many millions. He has not, therefore, to ask himself whether -his broker is safe, and this sense of security, inspired by a bank's -millions, undoubtedly causes many people who would rather do business -direct with a member of the Stock Exchange to deal with the banks. -Moreover, a bank official is quite well aware of this advantage, and -when a customer, who is undecided whether or not to employ a broker, -asks what inducement the bank holds out to him, he quietly replies: -"You have the bank's credit upon which to rely." Such an answer makes -a customer reflect. Further, it seldom fails to effect its purpose, -because, in the first place, it instils a doubt in the client's mind -regarding the means of his broker; and, in the second place, because he -cannot fail to recognise the greater security the bank affords him. - -It is evident, then, that the small broker's path is bestrewn with -almost insuperable difficulties, and that it is extremely hard for him -to attract safe business. But the banking companies do not arrest the -flow of speculative orders to his books. - -The banks, which have a horror of speculation, confine their attention -to the buying and selling of stocks and shares through their brokers. -Were they to encourage gambling in securities they are fully aware -that the result would be disastrous to the business of banking, for -a certain number of their customers would be sure to neglect their -business in the hope of snatching differences on the Stock Exchange, -and such a policy would end in a crisis that would bring the country to -the verge of ruin. For this reason alone the banks firmly and wisely -refuse to foster speculation among their clients. - -Capital, we all know, is the savings of labour; consequently the -greater the profits made in trade during any one year, the larger is -the fund awaiting investment. Now, if the banks were to incite the -gambling fever among their customers, this fund would tend to diminish -each year, and, seeing that the prosperity of the country is entirely -dependent upon its trade, bankers, customers, and stockbrokers would -speedily become involved in common ruin. Small wonder, then, that our -large banking companies, which are responsible to the public for -millions of money--a large proportion of which they must be prepared to -return at any moment--decline to open speculative accounts for their -clients. It would be madness on the part of such institutions to divert -their customers' attention from trade to speculation in securities; and -for this reason the bank clerk as amateur commission agent seems a step -in the wrong direction. - -Moreover, in this respect the policy of the banks appears -contradictory. Recognising the temptations to which their clerks are -exposed, it is their practice to instantly dismiss those men who -indulge a passion for betting; yet some of them deliberately encourage -their servants to tout for investment orders, apparently unconscious -of the fact that once their attention is drawn to the markets, some -of the clerks are almost certain to end by gambling for differences -on their own account. Helping themselves to the money of the banks is -probably the next step. Were not the question so serious, the fact -that directors cannot make so palpable a deduction would be positively -humorous, for it is evidently quite as undesirable, from their point of -view, that a clerk should bet upon a stock as upon a horse. - -The modern credit system, it will be seen, places a very large part of -the safe or investment business in the hands of a minority of brokers, -who, like the bankers, much prefer to do a good commission business, -and to leave speculation to the smaller brokers, who have less to lose -than they. These favoured brokers have grown accustomed to sleeping -comfortably o' nights, undisturbed by the vision of settling day on -the morrow; and, quite blind to the cause of their enviable freedom -from care, they are disposed to be loud in their abuse of the risky -manner in which some of the smaller brokers conduct their business. -But, seeing that the non-speculative orders flow from the banks to -themselves, it would be interesting if they would attempt to explain -how the army of small brokers can live unless they cater for the wants -of the speculator. As a rule their capital is small, consequently they -cannot afford to wait years while they slowly build up a connection; -so, as the safe business is cornered, they accept the risky. This -they do, not from choice, but from necessity; and the Stock Exchange -Committee, in order to prevent additions to the ranks of these -undesirables, should take steps to reduce the number of members of -the Stock Exchange very considerably. Already the investors of this -country have to support a small army of over four thousand of them. - -Of course, after every period of excitement, numerous weak members of -the Stock Exchange are weeded out, and, in a sense, the _bonâ fide_ -investor is the pigeon that is plucked by the speculator. The bulls buy -in the fond hope that the investor will come in and relieve them of -their stock; and the bears sell securities which they do not possess, -trusting that investors will also sell, thereby enabling them to buy -at a low figure and to pass on their securities at a profit to those -to whom they have previously sold. The position is therefore often an -artificial one, created by operators for the rise or fall, and the -investor, unless he thoroughly understands the markets, is like a -pigeon among hawks. - -The larger the number of members of the House, the greater is the -risk run by the investor who deals with a small broker; and as the -investment business of the country flows largely in a particular -channel, it is more than probable that, unless the Committee decides to -admit new members sparingly, a large number of small brokers will one -day be "hammered" after a period of intense excitement. - - - - -CHAPTER XIV. - -The Short Loan Fund and the Price of Securities. - - -A certain proportion of the capital which flows into the London -short loan fund is invested in securities by the bill brokers and -the discount houses, and, as the said securities are deposited with -the bankers from time to time against temporary advances, it follows -that their choice is largely restricted to those of and guaranteed by -the British Government, because the margin exacted on the so-called -gilt-edged varieties is considerably less than that demanded upon the -more fluctuating stocks and shares. - -The bankers themselves invest largely in the same class, and they also -employ vast sums in the short loan market; so that when the market rate -for bills is higher than the interest received upon, say, Consols, -the bankers are disposed to sell some of their Consols in order to -obtain the higher rates ruling in the outside market. Obviously, then, -any accretion or diminution in the short loan fund at once affects the -prices of gilt-edged securities. If the Bank rate be high, and also -representative, Consols ought to fall, and, conversely, if the Bank -of England's rate be low, trade dull, and the market rate of discount -smaller than the return on Consols, gilt-edged securities should rise. - -If this be the case, a low Bank rate must give an immediate incentive -to speculation in securities, and, therefore, the condition of the -short loan fund is intimately connected with the prices of stocks and -shares, but more particularly with those securities in which lenders in -the money market largely invest. The banks--let the condition of the -money market be what it may--must, of course, always invest a certain -proportion of their resources in Consols, but the sum so invested is -not constant. - -Again, powerful business firms and companies hold Government stock as -reserves against contingencies. The Government makes large purchases -in the Consol market on account of the Post Office Savings Bank and -the Sinking Fund, while numerous other "bull" points could be given. -However, the fact remains that cheap money provides a strong inducement -to large speculative purchases of Consols. - -The large capitalists and those persons whose credit is good can borrow -at, and sometimes even slightly below, Bank rate on Consols from -the banks, which are satisfied with a small margin against possible -depreciation on Government securities. If, therefore, we examine the -period between February, 1894, and September, 1896, when the Bank rate -was stationary at two per cent., it will be possible to illustrate -this tendency. Day-to-day money was then sometimes quoted at one per -cent. and under, and this state of affairs occasionally extended over -protracted periods. - -Now, suppose a person invested £20,000 in Consols at 112, and that his -banker agreed to advance £18,000 against them at, say, seven days' -notice at one per cent. per annum. Two-and-three-quarter Consols at -112 return £2 9s. per cent. (about). His annual income, therefore, on -£20,000 would amount to about £490; but he owed his banker one per -cent. on £18,000. Hence £180 must be deducted from £490. Upon a capital -of £2000 he therefore earned £310; and a return of fifteen-and-a-half -per cent. per annum on Consols is surely an excellent reward for his -skill. Of course, we must not forget possible depreciation; but seeing -that the banker's advance released £18,000, which he can use, he can -afford to take some risk. - -The following example, however, affords a more practical illustration -of the possibilities of speculation in Consols during the depressed -portion of a cycle, when the prices of commodities are low and -loanable capital is cheap. First, we want to ascertain the movements -in this security from, say, 1894 to 1896, and of these the table given -hereunder supplies a good idea:-- - - ========================================================================= - | 1894. | 1895. | 1896. | - Goschen's +----------+----------+----------+Bank rate from - Two-and-three-quarters | Highest. | Highest. | Highest. |22nd Feb., 1894, - per cent. | 103⅝ | 108⅛ | 114 | to 9th Sept., - (Two-and-a-half | | | | 1896. - per cent. | Lowest. | Lowest. | Lowest. | - after | 98⅜ | 103½ | 105⅛ | Two per cent. - 5th April, 1903) | | | | - ========================================================================= - -Let us assume that a person invested £20,000 in Consols at parity in -1894, and arranged with his banker for a loan against them at Bank -rate, and that the banker's margin was to be ten per cent. on the -purchase price. He received, then, a loan of £18,000 from his banker, -so the amount of his own capital remaining in the venture was £2000. -Very probably, especially if his credit were beyond doubt, he would -have made a closer bargain with his banker, and thus have reduced the -margin slightly--but this is by the way. - -Upon his £20,000 in Consols he obtained two-and-three-quarters per -cent., so that his annual income therefrom was £550. But as he had -to pay his banker two per cent. per annum on £18,000, £360 must be -deducted from £550. His capital in the speculation being £2000, he made -£190 thereupon. This gain works out at nine-and-a-half per cent. per -annum, and nine-and-a-half per cent. on Consols may surely be classed -among the minor forms of temptation. Moreover, as the Bank rate stood -at two per cent. for slightly over two years and a half, he had a long -run for his money. - -But we see that he bought at parity, and that in 1896 Consols touched -114. Had he sold at 110 during that year, his £20,000 in Consols would -have realised £22,000. He, however, owed his banker £18,000, so there -remained £4000 to his credit. As his own capital in the speculation was -£2000 he would have exactly doubled it, and nine-and-a-half per cent. -per annum upon £2000 in Consols for close upon two years, with a bonus -of £2000 at the finish, is painfully reminiscent of those financial -dreams which so very seldom materialise; yet huge blocks of Consols -were actually bought during this period of two per cent., and dealt -with in the manner aforesaid. - -Of course, the results were not always so satisfactory as those given -in the above illustrations, and no doubt many such ventures ended in -a loss, for prizes of this description are for the lucky few; though -it is usual to dwell upon them to the mortification of the mutable -many. The snatching of profits in this fashion requires skill and -considerable patience, and those persons who receive specious pamphlets -telling them how money is to be made in a marvellously short space of -time by an infallible system may appreciate the plausibility of my -illustrations, but yet should remember that they may find the results -of similar speculations in Consols very disappointing. - -The demand for Government securities created by these speculative -operations is one of the causes which drive up the price of Consols -during periods of cheap money, but it is not by any means the only -cause. When the Bank rate advances, and capital can be employed more -advantageously in the London short loan market, this period soon comes -to an end, and consequent sales depress the Consol market. - -Very many of the better class securities such as Colonial Government -stocks, Foreign Government securities, and so on, yield from three to -five per cent., and when the Bank of England rate is at from two to -two and a half, though the margin demanded upon such stocks is wider -than that required upon Consols, the difference between the interest -received in the shape of dividends and that paid as the price of a loan -often makes speculative dealings in them decidedly profitable. As the -Bank rate increases, and the speculator's profit margin consequently -narrows, the tendency is for stocks and shares so "carried" to fall in -value. The holders or gamblers then begin to sell, and as the increased -supply of such securities is certain not to be met by an enhanced -demand on the part of investors, prices must fall. Seeing the better -class securities declining in value, those investors who had previously -held aloof are tempted to come in, and the greater the reaction, the -stronger is the inducement to buy; consequently, the lower prices -recede the larger becomes the number of purchasers, until demand -overtakes supply and prices again begin to move upwards. - -Broadly speaking, it is evident that, unless the markets are -disorganised by panic or by some disquieting political occurrence, the -prices of the so-called gilt-edged securities are influenced by the -conditions prevailing in the London short loan money market. - - - - -CHAPTER XV. - -Panic Years. - - -When in 1667 a Dutch fleet sailed up the Medway, demolished a fort -at Sheerness, and, forcing a way into Chatham Docks, burnt all the -ships assembled therein, to the consternation of the inhabitants of -London, there was a run upon the banks; but a Stuart regarded both -events with equanimity, for "Old Rowley" had a mind above trifles of -this description, possibly because he had learnt many bitter truths -in a world seldom understood by Kings. Cynics are not born--they are -made; and Charles II. had drunk from that cup which sharpens the -understanding. - -France, during 1719 and 1720, was in the throes of the Mississippi -scheme, which was engineered by that notorious Scotsman, John Law; and -England, in 1720, witnessed the collapse of the South Sea Company, -which Sir Robert Walpole, with rare insight and unerring financial -instinct, had demonstrated was a mere gamble, that, at the best, could -only enjoy a temporary success, which was absolutely dependent upon a -rise in the company's stock; but the Government turned a deaf ear to -his warning. - -Scotland, we have seen, had its Darien venture in 1699; and in 1720 all -England went mad over the South Sea Company, which offered to relieve -the Government of part of the National Debt, and entered into an insane -competition with the Bank of England for that purpose. Then occurred -some spirited bidding between the two companies for this privilege; -but the directors of the Bank proved themselves the less mad, and left -their rival in possession of the incubus and the road to ruin. - -The result of the bidding gave the necessary stimulus to the South Sea -Company's stock, and, seeing it going up, the public at once rushed in, -when the stock rose faster than ever. In a very short space of time -the fever for speculation infused itself into the blood of the whole -nation. The pace became so furious that the more thoughtful among the -gamblers began to see the end and to sell, with the result that, upon -a memorable morning, everybody wanted to dispose of his stock--and then -the bubble burst. - -In June, 1720, the £100 stock of the South Sea Company was rushed up to -£890, and a little later it touched £1000. Then the tide turned, and, -as is invariably the case, all were as anxious to sell as a few days -before they had been eager to buy. Every hour intensified the panic, -until at length the stock fell to £175, and the difference between the -highest and lowest quotations is eloquent of the loss inflicted upon -the community, for everybody who had money to invest was interested in -this gigantic gamble. - -Widespread misery and ruin followed. Suicide was of daily occurrence, -and, after a momentary lull in the storm, popular indignation lashed -itself into fury against the directors, for whom, it was openly -declared, hanging was too good a fate. The Government, thoroughly -alarmed, turned to the one strong man who had consistently opposed the -scheme, and who, in consequence, was at that moment the most popular -man in England; so Sir Robert Walpole stepped into the breach, and -stemmed the tide of popular indignation and national disaster. - -At first Walpole was disposed to resort to half-measures, but when it -became apparent that the South Sea Company was rotten to the core and -that it must go at any price, he devised a scheme by which the East -India Company and the Bank of England took over £18,000,000 of South -Sea stock. The Bank directors, throughout this trying period, acted -with a strange lack of caution, and the situation was only saved by -Walpole's better judgment. - -The period was one of mad speculation, and no venture was too absurd -to foist upon a public, which, until the crash came, did not display -a gleam of intelligence or discernment, so blinded was it by greed. -Naturally, those bankers who had advanced against South Sea stock -did not escape loss, and many of the goldsmiths and private bankers -were ruined by the reaction, while the Bank of England itself barely -escaped. It is interesting to notice that, even in 1720, the public -could only be tempted by a rising market; and it has remained true to -this instinct, as, for some unaccountable reason, the "bear" is always -looked upon as an undesirable kind of person. - -The next disturbance of credit occurred in 1745, when the Young -Pretender, "Bonnie Prince Charlie," after defeating Sir John Cope at -Prestonpans, resolved to march on London, and penetrated as far as -Derby. The news of his arrival there reached London on the 4th December -(Black Friday), and the City was seized with so severe a panic that -business was suspended. Some of the citizens actually left the country, -and even the King made preparations for flight. Everybody then wished -to possess himself of gold, and a run at once began upon the Bank -of England, which was taken completely by surprise, and only saved -the situation by resorting to the expedient of paying its notes in -sixpences--a somewhat lengthy proceeding, but one which enabled it to -gain time. Nobody, however, would trust a Stuart, and the panic very -quickly subsided. - -Learning that the Duke of Cumberland was advancing to meet him, -Charles was compelled by his followers to beat a hasty retreat towards -Scotland, and by the 23rd December the Highlanders had crossed the -border again. In January, 1746, they defeated General Hawley at -Falkirk, but in the following April the Prince lost the battle of -Culloden, which dealt the final blow to the hopes of the House of -Stuart. - -The panics and crises between 1745 and 1857 have been discussed in -Chapters I. and II. of this book--principally in Chapter II. - -The Crimean War, through which this country muddled, was brought to -a close in 1856, at a cost to the nation of £33,000,000; and it may -perhaps be interesting to compare this sum with the £230,000,000 which -has been expended in the South African struggle. Even for a Balaclava -£33,000,000 seems a dear price to pay. But £230,000,000 for a Colenso! -Glory makes a poor national asset. - -In 1848 Lord Dalhousie carried out a policy of annexation in India -in a ruthless manner, and the native princes, thirsting for revenge, -insidiously propagated a rumour among the native soldiery of the East -India Company to the effect that the British Government was anxious to -Christianise them, knowing that the unsophisticated Hindu preferred his -sacred cow to the God of his conquerors, though he had probably little -faith in either. - -At any rate, the princes appealed to the patriotism of the native -soldiers, who, in May, 1857, replied by refusing to accept the famous -"greased" cartridges, and in a few days the insurrectionary movement -was ablaze in India. The massacre at Cawnpore sent a thrill of horror -and indignation through the country, and Sir Colin Campbell (afterwards -Lord Clyde) was ordered post haste from England to take command of the -British troops. Naturally, our trade with India was disorganised; and, -speculation having exceeded all bounds in America, the grave news from -that country, combined with the outbreak in India, hastened on the -crisis of 1857. - -Quite an epidemic of crime swept through England about the middle of -the nineteenth century, and many names well known in the City were -smirched, whilst even the firm of Overend and Gurney, whose credit was -then at its zenith, were said to have compounded a felony in order to -avoid a bad debt. Financial morality, which is at all times peculiar, -was at this period at its lowest ebb. So small wonder that when the -American banks failed by the dozen in 1857, a feeling of distrust -should make itself felt in this country, which was then engaged in a -fierce struggle in India. - -Merchants and houses engaged in trade with India and America began -to fail, and in a very little while there was a run upon some of the -banks. Then followed the collapse of the Borough Bank, and Dennistoun's -of Liverpool. In Scotland the Western Bank and the City of Glasgow -Bank put up their shutters; and the failure in London of Sanderson -& Co., the well-known bill brokers, accentuated the grave condition -of credit, forcibly reminded the public that the rotten state of the -American railroads had ruined thousands of speculators in this country, -and generated in the public mind a feeling of positive alarm. The -result was a panic, which by 12th November culminated in a crisis. The -country then looked to the Government and to the Bank of England. - -Both 1855 and 1856 were years of unusually high Bank rates, and during -1857 the demand for loanable capital became so pronounced that the Bank -of England, in order to protect its dwindling store of bullion, had to -raise its rate still further. The year opened with six per cent. In -July it fell to five-and-a-half per cent., but by 19th October it had -reached eight per cent. On 5th November nine per cent. was recorded; -and upon the 9th of the same month it was hurriedly raised to ten per -cent. Lombard Street had then practically arrived at the end of its -available resources; and demand, of course, centred itself upon the -bank which held the bankers' cash balances. - -The Bank of England, as usual in those days, was quite unprepared to -meet a crisis, and made application for assistance to the Government. -Had help then been refused, it must inevitably have closed its doors, -for the reserve in its Banking Department on 13th November, 1857, -had fallen to £957,000, while it was rumoured that, at the close of -a particular day, the reduction was appreciably greater. In plain -English, the Bank of England was practically broken. - -On 12th November the Government consented, for the second time since -1844, to the suspension of the Bank Charter Act; and when it became -known that the Bank of England was in a position to increase its -circulation to an unlimited extent, and to advance notes against the -better-class securities, the nervous tension created by the numerous -failures throughout the country instantly relaxed, and in a few days a -comparative calm followed the storm. Indeed, before the close of 1858 -the Bank rate was down to two-and-a-half per cent. - -The suspension of the Act during a crisis creates a market for -securities at the Bank of England. Furthermore, at so critical a moment -the Bank is the only market in existence; consequently those securities -in which it decides to deal are alone saleable, and we know that it -confines its advances solely to the so-called gilt-edged securities -and to good bills. Of course, if the public only thought, it would -instantly perceive that the more notes the Bank issues in excess of its -authorised amount the less secure is its position, because the smaller -is the proportion of gold in the Issue Department to its liabilities. -But the British public is led; it does not think. If it did we should -speedily be in the throes of a revolution. - -The public thinks the Government lends its credit to the Bank, but in -reality it does nothing of the kind. It simply authorises the Bank -of England to break the law, and to advance notes at its discretion. -However, the credit of the Bank is so good that the public, seeing -that it has the "moral" support of the Government, possesses absolute -confidence in its stability; and though it trusts the Bank blindly and -unreasonably, that institution has earned its gratitude upon more than -one occasion, and its history, if full of mistakes, certainly entitles -it to this confidence. - -Mention has been made of the failure of the Western Bank of Scotland -in 1857. This institution, besides advancing indiscreetly at home, -helped to finance the gamble in American securities; consequently, -when the crisis occurred in the United States, the bank found itself -saddled with huge blocks of unsaleable stocks and shares. Subsequent -investigation disclosed a most discreditable state of affairs. - -In 1856 the Royal British Bank, after a short life of continual fraud, -came to the ground; and in 1857 the public learned that the notorious -Colonel Waugh had fled to Spain with considerable sums belonging to -the Eastern Banking Company. A little later, when it was discovered -that bank directors and auditors who, for a consideration, would attest -such statements as those issued by the Western Bank, could be found -in Scotland, the public came to the conclusion that a balance sheet -is worth little more than the paper upon which it is printed; and a -run at once began upon the rest of the Scotch banks, which promptly -arrested the panic by guaranteeing the notes of the insolvent Western -Bank of Scotland. The City of Glasgow Bank, though it closed its doors -temporarily during this period of fraud and distrust, succeeded in -weathering the storm, only to fail badly in 1878. - -The relations between England and France were severely strained in -1859. A plot was hatched in London by an Italian secret society -against the life of Napoleon III., whose publication of a denunciation -of British hospitality sent a thrill of passionate resentment through -this country, which replied to his threat of invasion by the inception -of the volunteer movement. The call met with immediate response, for -nothing kindles enthusiasm so quickly as hate, and England, for the -first time in her history, created an army of citizen soldiers. At the -height of the frenzy there were ominous rumours, and for a little while -a state of panic prevailed; but the alarm soon subsided, and the next -year a commercial treaty was enacted with France. - -During 1862 loanable capital was cheap, and in July that year the Bank -rate sank to two per cent., whilst at no time did it exceed three per -cent. With money abundant, the promoter was soon in evidence, and the -speculation fever once more took possession of the public, hundreds of -companies being registered under the Companies Act of 1862 within the -space of a few months, until dear money began to lessen the output of -limited liability concerns and the energies of that arch-enemy, the -promoter. In 1861 the United States was convulsed by civil war, which -caused a cessation of production there on a large scale, and produced a -cotton famine in this country. Lancashire, the centre of the industry, -could not obtain fresh supplies of the raw material when the ports -of the Southern States were blockaded, and early in January, 1863, -hundreds of thousands of operatives were out of employment. Speculation -instantly received a check, and the energies of the country were -concentrated upon raising huge sums for the alleviation of the distress -in Lancashire--for 500,000 unemployed workers might at any moment, -should their attitude become menacing, prove a danger to the State. - -From 1863 to 1865 the Bank of England was undoubtedly face to face -with a serious situation, and, for the first time in its history, its -directors grasped the simple fact that only by maintaining a good -reserve can the country be saved from panics and crises. The year 1863 -was one of high Bank rates, and during the autumn of 1864 pressure -upon the Bank's resources became so severe that a crisis was narrowly -averted. Supplies of cotton from America having practically ceased, -demand centred upon India, and the Bank of England, early in August, -had to support a drain of silver thither to help pay for the cotton -crop. On 4th August the Bank rate was raised to eight per cent., and -again on 8th September to nine per cent., at which figure it remained -until the 10th November, when it fell to eight again. The strain -upon the Bank was severe, but the crises of 1847 and 1857 had taught -their lesson, and by using the "Bank rate" with effect, the directors -succeeded in keeping a sufficient reserve in the Banking Department. - -By about the middle of 1865 capital was cheap, but, towards the end of -that year, a decided stringency manifested itself, and at the beginning -of 1866 many companies which had been registered under the Act of 1862 -failed. The banks, whose reserves were then much smaller than now, -came in for their share of distrust, and the failure of a Liverpool -firm for a large amount made the public uneasy; but when it was known -on the 11th May that Overend, Gurney & Co. had closed their doors, the -City was seized with panic, and streams of depositors rushed to Lombard -Street to withdraw their money from the banks, which, in a very short -time, were paying out at a rate it was impossible to maintain; and it -soon became evident that unless confidence were speedily restored the -banks must break. - -The Bank of England had to meet large demands from the provincial -banks, for distrust was general throughout the country; consequently -at such a moment the country bankers required their reserves of cash -in their safes, so that they could immediately meet the demands of -the more nervous of their customers should necessity arise. The Bank -advanced its rate to seven per cent. on the 3rd May; to eight per -cent. on the 8th of the same month; and to nine per cent. on the -11th; and, the pressure becoming more intense, application was made -to the Chancellor of the Exchequer, with the result that the Bank of -England was authorised to break the Act if necessary, the Government's -condition being that the rate of discount should be ten per cent. while -the Act was in abeyance; so, on the 12th May, the Bank rate was raised -to ten per cent., where it remained until the 16th August following. - -By the 16th May the reserve was reduced to £731,000, but directly it -became known that the Bank was in a position to advance notes against -approved securities the tension relaxed, thereby proving that the -public understood the cure as little as it did the disease--for it -was an act of madness to make the run, and equally as stupid not to -perceive that the issuing of unconvertible notes is at the best only -a quack remedy. However, the remedy proved effective, and the result -enables one to realise that a nation, like an individual, is the slave -of habit. - -The history of the firm of Overend, Gurney & Co. makes sorry reading. -Between this old-established discount house and the Bank of England -there had always existed a spirit of rivalry; and when, after the -crisis of 1857, the Bank stated its intention not to again assist the -bill brokers during a time of panic, and only to make advances to them -at those periods when the Government takes large sums off the market, a -very bitter feeling sprang up between the discount houses and the Bank. - -Overends, determined to show the Bank that it was not omnipotent, -allowed their account at the Bank of England to run largely into -credit, and one day suddenly demanded three millions in cash. Their -ruse failed. Indeed it was as stupid as the resolution which goaded -them into making the effort; for, of course, were the Bank to refuse -to assist the bill brokers during a panic, it would only be adding -fuel to the flames and increasing its own difficulties. Small wonder -then that so absurd a decree created intense irritation, for, upon -examination, it is evident that the Bank of England is as dependent -upon the bankers' balances in a time of panic as are the bill brokers -upon the institution which holds them. Then what folly to advertise -such a decision! - -Naturally, the Bank is not pleased at the thought that it must help -its rivals over the stile, but the peculiarities of our banking system -compel it to, whether it like the task or not. Therefore, it was an -error of judgment on the part of the directors of the Bank to pose as -the champions of the banking community, and to declare that the bill -brokers must, in future, accumulate reserves of their own, when they -knew quite well that the nature of their business utterly precluded -such an attempt. - -During a panic the Bank of England can only save itself by advancing -freely against certain securities and good bills. The credit so -created, however, swells the bankers' balances in its own books, and -consequently the amount standing to the credit of the bankers increases -appreciably. But, at such a moment, the bankers call in large sums from -the bill brokers, and, unless the brokers can obtain advances from the -Bank of England against good bills and gilt-edged securities, they -will be unable to satisfy the demands of Lombard Street. By declining -to advance to the bill brokers, the Bank, in reality, would be refusing -credit to Lombard Street (bankers' balances); and, as the Bank itself -could not live were Lombard Street to withdraw its balances at so -critical a time, it follows that it must lend to the bill brokers in -order to enable them to repay the bankers. It simply dare not refuse -to assist them, for, if it did, the banks might decline to support the -Bank which left them in the lurch just at the height of the storm. -The bill brokers (the outside market) come within our present credit -system, and if, when a state of panic prevails, they were left to their -fate, in every probability the system of which they form a part would -collapse with them. The brokers may not be essential to the system, but -it is always dangerous to "swop horses whilst crossing a stream." - -In 1865 Overend, Gurney & Co. converted their business into a joint -stock company for the same reason that some private firms adopt the -procedure--because their profits were decreasing--though this was not -known until after the crash of 1866. During the panic of 1857 the -Bank of England made large advances to Overends; but when, early in -May, 1866, the firm again applied to the Bank for assistance, the -request was refused. It has been suggested that the Bank's decision -was prompted by malevolence, but at so crucial a moment the directors -of the Bank would have hesitated to make a rod for their own backs, -and, had they believed in the genuineness of Overends' application, -they would have gladly granted the accommodation in order to spare -themselves the panic which they knew must follow their refusal -to assist a firm with liabilities of over £19,000,000. Moreover, -subsequent events confirmed the judgment of the directors of the Bank -of England. - -When the partners of Overend, Gurney & Co. discovered that their books -were full of possible bad debts, they promptly converted the firm -into a company, guaranteed the book debts, and appointed directors. -Shortly afterwards it was noticed that the Gurneys were realising their -property, and suspicion was at once aroused, for it was naturally -assumed that they had incurred heavy losses. When, therefore, the -company appealed to the Bank the next year, the directors were -sceptical, for though Overends still retained the entire confidence -of their country customers, there undoubtedly existed a feeling of -distrust in the City, and the directors of the Bank of England shared -in the opinion there prevailing. - -When the rash speculations of the partners were disclosed the public -was loud in its abuse, and nothing short of a prosecution would satisfy -it; and when, early in January, 1869, the directors of Overends were -committed for trial on the gravest of charges, the crowd manifested its -delight. But the comedy followed. The trial took place at the end of -the year, by which time public opinion had completely veered round, and -when it became known that the accused were acquitted, this same crowd -cheered lustily. Small wonder that a Government, which must be well -aware of the vagaries of crowds, should hesitate to conduct a public -prosecution. - -The panic of 1866, though the suspension of the Bank Act immediately -brought relief, dealt a fearful blow to credit, and the country -recovered from the shock with painful slowness. Foreigners, alarmed by -the disorganisation of the London money market, began to withdraw their -capital, and the Bank, in order to check this drain of gold outwards, -was compelled to keep its discount rate at ten per cent. for three -weary months. - -By the middle of 1867 the Bank rate was at two per cent.; but even the -company promoter had not the audacity to show himself, so depressed -was the public spirit by the disasters of the previous year. The great -railway companies, too, began to find themselves in financial straits, -and their credit was so bad that they could only raise money on -debenture stocks at high rates of interest, for the public then looked -upon their ordinary shares as distinctly speculative holdings. As the -railway directors neglected to borrow with the option of redemption at -certain figures at a future date, it followed that, when their credit -greatly improved at a later period, the companies were saddled with a -huge drain in the shape of high interest on their debenture issues, -whereas, had their directors exercised ordinary prudence, they would -now be paying very much less upon their prior stocks, and consequently -the dividends on their ordinary shares would be proportionately -greater. Evidently, then, the interests of the shareholders were -sacrificed to the holders of the debenture and preferred stocks. - -As the prior stocks absorb so large a share of the profits, and, -moreover, as the amount so absorbed is practically always the same, -whereas the revenue is variable, it follows that the distributions -on the ordinary shares fluctuate considerably. This fact, of course, -has not escaped speculators, who work out the ratio of ordinary share -capital to total capital; and the smaller the ratio the more inconstant -will be the dividends, and the greater the movement in prices. -Investors know that, should the trade of the country be improving -rapidly, a certain railway will earn more; and if its share capital -ratio be small, then the increase in revenue will largely swell the -ordinary dividends thereupon--so they speculate for a rise. - -The Franco-German war, which broke out in 1870 did not at first -exercise any very great effect on the English money market, for though -the Bank raised its rate to six per cent. on the 4th August that year, -it was at two and a half before the end of September. Indeed, after the -panic of 1866 down to the middle of 1870, scarcely a ripple disturbed -the unusual calm of the money market, but the three crises since 1844 -were largely accountable for that. They taught both Lombard Street and -the Bank of England that caution is essential to the successful working -of our banking system, and that fair reserves, however great the -loss of interest incurred thereupon, are indispensable to a banker. -The result of these bitter lessons may be read in the comparatively -peaceful history of English banking since 1866. - -In 1870 specie payments were temporarily suspended by the Bank of -France, and the European demand for the precious metals had to be -met by the Bank of England. A much larger amount of foreign capital, -consequently, was deposited in London, which then became the Clearing -House of Europe, and the accumulation of so much foreign money -unquestionably made the money market more sensitive, and increased the -responsibilities of the Bank, whose store in the Issue Department was -then peculiarly exposed to the danger of a drain outwards. - -The Franco-German war ended disastrously for France in 1871, and the -vanquished had to pay a huge indemnity to the victor. France paid -considerable sums to Germany by bills on England, and although Germany -employed a certain proportion of the capital so obtained in the London -money market, it withdrew large sums in gold, which were required for -purposes of currency reform. During the latter part of 1872 the Bank -rates were decidedly high, and in November, 1873, nine per cent. was -recorded for about two weeks, but by December it was down to four and -a half again. The Bank, no doubt, had its anxious moments during this -period, for the larger the drain outwards the more dependent would -be the bill brokers upon it, and the directors could not refuse to -increase their advances to the brokers, because, had they done so, -there would have been a panic at once. - -We can now see distinctly how our system works. First, we get the bill -brokers or middlemen, who, from the nature of their business, cannot -afford to keep reserves, because their margin of profit is so small; -and secondly there are the bankers, who keep their reserves with the -Bank of England, which is thereby placed, so to speak, in the centre of -the money market. - -The Bank, after it was stripped of its monopoly of joint stock -banking, failed for a time to understand its new environment, and it -would have closed its doors three times since 1844 but for Government -intervention, viz., in 1847, 1857, and 1866. However, when we remember -that its directors were merchants, not trained bankers, and that the -Bank had to adapt itself to entirely changed surroundings, this result -is not remarkable. So little acquainted were the directors with the -laws of banking that they actually believed the Act of 1844 would -prove a panacea for all kinds of financial troubles; but their eyes -were opened very widely indeed in 1847, and they gradually came to the -common-sense conclusion that "the higher the ratio of reserve in the -Banking Department the smaller is the danger of disaster to the Bank -and to the country." - -During 1866 the Bank was fairly well prepared, and, for the first -time in its history, it met a panic in a scientific or common-sense -manner, and advanced without hesitation to all would-be borrowers whose -securities were good. The greatest danger the Bank has to face is the -suspension or stoppage of the credit machine of which it is the heart, -for if the progress of that machine be arrested, then the trade of the -country must also stop, and England will be bankrupt. - -So long as the machine can be kept in motion a catastrophe is -impossible, and experience has taught the Bank that, during a period -of pronounced distrust, this can only be done by advancing liberally -against certain securities, and by a skilful use of the "Bank rate." -The whole credit machine must work smoothly, and it would be madness, -at such a moment, for the Bank to attempt to leave any part of the -machine (the bill brokers for instance) to its fate. This is now fully -recognised, and consequently a better feeling exists between the -various divisions of the money market. - -The credit machine is kept in motion by the workshops; therefore, -during a panic money has to be advanced to discount good trade bills -in order to support the workshops, for if a rumour got about that the -banks were refusing the acceptances of strong firms, the pressure to -borrow would immediately increase, thereby adding a fresh danger to -the situation, and causing nervous depositors to rush in a body to the -banks for their money. - -It follows, therefore, that in order to arrest a panic, and to prevent -a dangerous run upon their resources, the banks must lend freely to -strong clients. In a time of financial stress the weak go to the wall, -for finance is no exception to the rule that only the strong can live -when a storm bursts and causes a struggle for existence. There is no -room for sentiment at such a moment. The fight is bitter and to the -finish. Sentiment comes in afterwards. This state of affairs is one of -the curious products of modern civilisation, and, if you want to alter -it, you must first alter human nature, which changes strangely little -as the centuries roll on. - -At first sight these sudden advances seem highly imprudent, because the -banks are parting with their resources, but unless the workshops are -assisted the banks _must_ break: whereas, by advancing liberally on -the best securities at high rates of interest, the dangerous element -is speedily weeded out, and, provided the reserves of the banks are -fairly large in proportion to their liabilities, a healthy reaction -is practically certain to assert itself long before the end of their -lending power is reached. The Bank, when it advances, of course creates -credit in its books, and so adds to the resources of Lombard Street. -The relief thus obtained is artificial, and, were it intended as a -permanent cure of a disease, it must in the end only aggravate the -malady. But it is temporary assistance during a trying time that the -workshops require, and it is just this which our modern credit system, -when skilfully administered, can give admirably. In fact it possesses -the very machinery for the purpose. This sudden demand for additional -credit (not specie) during a period of pronounced distrust is -fortunately of short duration, and the Bank is, therefore, only called -upon to make large loans for a short time, as, though the depression -following a panic may prove lasting, the acute stage which the Bank has -to face is soon over. - -The dangers of our credit system are apparent to everybody; but when -critics point to the panics which have occurred since the Act was -passed, and make deductions therefrom to the effect that the Bank may -find itself in a similar plight should another such whirlwind develop, -they usually forget that, though the same danger exists, our banking -companies are now much more prudently managed, and that the directors -of the Bank of England, having the misfortunes of the past to guide -them, are thoroughly acquainted with the delicacy of the machine they -manage, and are, consequently, less liable to err. - -We have seen that the joint stock banking movement began in 1826 under -conditions which were far from favourable, and the companies, like the -Bank of England itself, having to learn their business as the movement -progressed, naturally committed many blunders; but when the dangers of -banking were better understood failures became much less frequent, and -after 1866 they were few and far between. The credit of the joint stock -banks vastly improved in consequence, and confidence in their stability -soon began to take the place of distrust. But in 1878 the failure of -the City of Glasgow Bank and of the West of England Bank, together with -some half-dozen private bankers and banking companies, undoubtedly -revived old prejudices and created a feeling of unrest among depositors -and shareholders. - -The City of Glasgow Bank, it will be remembered, was in trouble -during 1857, but in 1878 both its customers and shareholders had -reason to regret that it ever opened its doors again, for the gravest -irregularities were disclosed when its affairs were examined, false -balance sheets having been certified by auditors and directors during a -period of over four years; and once again the public was startled out -of its sense of security by the discovery that some bank directors and -auditors were not less peccant than the majority of the human race when -hazardous speculations landed them in financial difficulties. - -The directors of the City of Glasgow Bank finding themselves out of -their depth, clutched at the proverbial straw, and, like a weak -individual who starts with the best of intentions, they were speedily -sucked into the vortex of crime. By the Act of 1845 the directors were -bound to hold gold against any excess in the amount of the bank's -circulation fixed thereby, but they overcame this difficulty by the -simple expedient of making false returns to the Government. Having once -crossed the line which separates the sheep from the goats the rest was -easy. - -With an utter disregard for the interests of the shareholders, the -directors advanced huge sums to firms in which they were pecuniarily -interested, and, as these firms did badly, they were compelled either -to bolster them up with additional loans or to allow them to fail. -They chose the latter alternative, and, as might have been expected, -the bank's assets rapidly dwindled, millions of pounds in the shape of -bad debts being disguised on the right hand side of the balance sheet -as cash in hand, Government securities, and so on. The business of the -bank soon degenerated into a mere gamble, and during the latter part of -its career the institution was only kept in existence by the continuous -perpetration of frauds. - -Of course the longer the game (it can be dignified by no other name) -continued the more desperate were the efforts it called forth, -and just before the end the directors hit upon the brilliant idea -of conducting a big gamble in Australia, in the vain hope that a -decided success would obliterate the mistakes of the past; but about -this time rumour was active, and when it was noticed that the bank's -acceptances were being hawked all over the City, holders of its paper -became suspicious. The bill brokers naturally do not like putting all -their eggs in one basket, but endeavour to get as many good names as -possible, so that, should a particular firm meet with misfortune, they -may be in a position to bear the loss. When, therefore, the City of -Glasgow Bank's paper was offered freely, they refused to place more of -its bills in their cases, and, inquiries concerning the bank being made -in consequence, the end soon came. - -Though the revelations which followed generated a feeling of intense -nervousness among bank shareholders and depositors both in Scotland -and this country, and undoubtedly caused a slight panic, the country -was spared a crisis. The Scotch banks, in order to prevent the -run extending to themselves, encashed the notes of the delinquent -institution, and advanced liberally to those persons whose money and -securities were held by the City of Glasgow Bank. In this manner a -serious panic was averted. - -The Bank of England raised its rate immediately danger was threatened, -and on the 14th October, 1878, the rate touched six per cent., but it -fell to five per cent. in November, and money was exceptionally cheap -during the next two years. The West of England Bank had also advanced -its resources in a reckless manner, and it failed badly in consequence; -but the Scotch scandals were not repeated, and the public gradually -regained confidence in the banking companies. - -When it was clearly seen after the failure of the Glasgow Bank, how -easily a large bank, unless it be most cautiously and prudently -managed, can ruin its members and customers, the public hesitated to -hold shares in an unlimited banking company. For a time the prices -of bank shares fell considerably, and fiction became tediously full -of heroines and heroes who lost their fortunes by holding just one -share in the Glasgow Bank. It was the "just one share" that proved so -thrilling, and accentuated the sadness and the danger of possessing -shares in an unlimited bank. The risks of a banking business were -discussed on every side; and, after this failure, the unlimited -banking companies took steps which enabled them to affix the desirable -word "limited" to their registered names. - -From the time of the failures of the City of Glasgow Bank and the West -of England Bank until 1890, when the Baring crisis suddenly opened -the eyes of the public to the dangerous gamble which was taking place -in South American securities, the money market enjoyed a period of -comparative calm. Speculation since 1885 had increased in volume, and -the prices of securities steadily rose; but early in 1890 it became -apparent that continuous speculation had inflated prices and created -a situation which could not last. The Bank rate during the autumn of -1889 was exceptionally high, and remained at six per cent. from 30th -December, 1889, to 20th February, 1890, when it gradually descended, -but this fall only proved the lull before the storm, which raged -furiously in the November following. - -England has always speculated largely in both North and South America, -and the result has almost invariably been a panic. In 1890 it was the -Argentine Republic which was to prove an Eldorado for the British -investor, and Baring Brothers were so convinced that this wonderful -land must prove a veritable gold mine that they practically staked the -existence of their firm upon it, but Argentina sadly disappointed its -backers. Having staked their all and lost, there were many who thought -that Barings should have paid the penalty of their mistake, for Fate -certainly was not so kind to some of the smaller losers in the gamble -as was the Bank of England to Baring Brothers. - -In June the Buenos Ayres Western Railway was unable to raise capital in -this country; and when at a later date Baring Brothers failed to place -a new Argentine loan, the worst was feared. Earlier in the year the -United States had increased its circulation of silver currency, thereby -creating a sudden demand for that metal and a proportionate rise in -those securities upon which the interest is payable in silver. A fall -soon followed; and when it was found that the Argentine Government -was in straits, Stock Exchange settlements became difficult. The -banks, which had advanced huge sums to the Stock Exchange on American -securities, increased their margins directly the markets looked -dangerous; consequently high rates of interest, together with the rapid -fall in South American securities, made "carrying over" in the House -an expensive operation. Speculators became alarmed, and sold out at -panic prices in order to cut their losses, and on 7th November pressure -upon the Bank of England became so great that the rate was raised from -five to six per cent. - -Lord Revelstoke, who was a partner in the firm of Baring Brothers, was -also a director of the Bank of England, and, finding that his firm -was in difficulties, he disclosed his position to the Bank directors, -who, when they heard that Messrs. Barings' liabilities to the public -amounted to over £28,000,000, felt that even the Bank of England could -not afford to guarantee so large a sum; so, after much deliberation, -it was decided to invite the co-operation of Lombard Street in the -bolstering up of Barings, and, for the first time in its history, the -directors of our large banking institutions met the directors of the -Bank in their sacred parlour to discuss what steps should be taken in -order to avoid a disturbance of credit which, should the suspension -of Barings be announced, would probably produce a crisis even more -disastrous than that caused by the Overend and Gurney crash in 1866. - -The resources of Lombard Street combined are infinitely greater than -those of the Bank, which, we have seen, largely draws its own power -therefrom, and the directors of the Bank of England, in consulting with -the directors of the joint stock banks, proved that they thoroughly -understood the constitution of the money market. Moreover, this new -step created a precedent which bound the whole market more closely -together, for each division clearly recognised how essential it is that -the great machine should work smoothly. This can only be accomplished -by the best of feeling existing between its constituent parts, and -the wise step taken by the directors of the Bank in November, 1890, -undoubtedly generated a feeling of sympathy which had formerly been -noticeably absent between the various sections of the money market, -and which augurs well for the harmonious working of the system in the -future. Such sympathy may be the outcome of enlightened selfishness, -but it is none the less valuable. - -The directors of the joint stock banks, when the position of Baring -Brothers was revealed to them, instantly recognised the danger of -the position, and, as their advances to the Stock Exchange were -considerable, they were naturally anxious to prevent a catastrophe -which would create a panic in the House, and the end of which it was -impossible to foresee. Barings, who are financiers in the English -sense of the word, not bankers, had at the worst only been guilty of -imprudent speculation, and, as all inquiries were answered in the most -straightforward manner, Lombard Street was as anxious as the Old Lady -herself to assist Baring Brothers over the stile. Undoubtedly Lombard -Street would have liked to make an example of the firm that was caught -short of cash, but it was afraid to leave it to its fate, because it -knew that discrimination is not one of the characteristics of excited -depositors, and that, were Barings to close their doors, the credit of -Lombard Street would next be questioned. - -The outcome of the meeting at the Bank was that the Bank of England -agreed to make advances to Baring Brothers in order to enable them -to meet their liabilities as they matured, and the large banking -companies, on their side, guaranteed the Bank against loss to the -extent of £15,000,000. - -Immense sums had been invested in South America, and when it was -rumoured that the wealthy firm of Barings was tottering, Argentine -securities were practically unsaleable on the Stock Exchange, where -a state of panic prevailed. For a few days the wildest rumours were -noised abroad, and the tension, just at the height of the panic, became -so acute that even the Consol market was idle. The market then turned -in despair to the Bank, which was compelled to borrow £3,000,000 from -the Bank of France as a precautionary measure, and also to accept help -from the Russian Government. - -The British Government, fully alive to the gravity of the Bank's -position, promised to suspend the Act in case of need; but when it -became known that Barings were to be supported, and that the Bank of -England was lending freely on approved securities at high rates of -interest, confidence was restored, though a few days earlier it had -looked as if a dangerous crisis were imminent. The Bank Act, however, -was not suspended, but it is difficult to say what might have happened -had not the Bank of France come to the rescue, for the gold advanced -by that institution at so awkward a time doubtless tended to greatly -alleviate the feeling of apprehension which existed in this country, -and which, at any moment, might have overcome restraint. - -The Bank rate remained at six per cent. until 4th December (a period -of twenty-seven days), when it was reduced to five per cent.; for the -high rates ruling in the market attracted gold to this country, and -increased the reserve of the Bank of England beyond the apprehension -minimum, thereby enabling that institution to make the change in -question. By the middle of the following year (1891) the Bank's rate -of discount was down to two-and-a-half per cent.; but confidence was -not restored for some considerable time; and we all remember the deadly -dull years of 1894 and 1895, when it was predicted that Consols would -never again fall below 100. The financial prophets and the weather -prophets are generally wrong, but though we have acquired the habit of -tapping the glass each morning, a prudent man carries his umbrella all -the same. - -The directors of the Bank of England, when they were informed of Baring -Brothers' position, acted with great tact and ability. They did not -hesitate to assist everybody who possessed good securities, and when it -was found that loanable capital was obtainable, the alarming symptoms -which were at first in evidence soon subsided. Whether or not the -Bank were sufficiently prepared at the time is, however, a matter of -opinion. The directors certainly began the year badly, for the ratio -of the reserve in the Banking Department was under twenty-eight per -cent.--a dangerously low proportion in these times, when huge sums of -foreign capital may be suddenly withdrawn from the market at the least -sign of discredit. Nor are high rates of discount always effective -in immediately attracting gold to the Bank, as the Bank of France, -should it desire to retain its bullion, can always charge a prohibitive -premium on its gold. Certainly, since 1890 the Bank of England has -maintained larger reserves, and the Baring panic unquestionably proved -that such a step was necessary. - -It would seem that the panic of 1890 was the result of a Stock -Exchange gamble, which was only rendered possible by the large loans -on securities made to members of the House by the banks. The Baring -incident brought matters to a climax, and Lombard Street, which was -more involved in the speculation than many persons imagined, had to -save both that firm and the Stock Exchange in order to avoid a crop of -bad debts, which, with numerous failures, and a far greater drop in the -prices of securities, would have inevitably resulted. - -Mr. Lidderdale, who was Governor of the Bank during this period, acted -with great energy, and after the danger was passed congratulations were -showered upon him from every side. - -The Stock Exchange presented an address to Mr. Lidderdale, and in -making the presentation its spokesman said: "If the Bank had not acted -in the way it did, a great disaster would have befallen the mercantile -community." Yes, and that disaster would have been largely caused by -speculation on the Stock Exchange. Further, had not the directors of -the Bank met this incipient panic in a scientific manner, and used -their power as precedent dictated, members of the House would have -failed by the dozen. One is forced to the conclusion that Lombard -Street and the Stock Exchange had a lucky escape, and that the "members -of the mercantile community" were the unfortunates who, after years of -toil, had to wipe out the deficit. - -Now we come to the bright side of the picture. Later on the business -of Baring Brothers was converted into a company, and in 1895 it was -definitely announced that the assets of the firm had been liquidated -without any loss whatsoever to the guarantors. Baring Brothers & Co., -Limited, now publish a strong balance sheet, which entitles the -company to a place among our well-managed institutions, and so short is -the memory of the public when things financial are in question, that -the panic of 1890 is, if not quite forgotten, at least regarded as -ancient history. Indeed, the public hardly seems to realise that, in -November, 1890, the monetary situation was so acute that a quickening -of the public pulse would probably have resulted in one of the most -dangerous crises the country has ever been called upon to face. - -After the Baring crisis the market was unperturbed for a little -while, but in 1893 many of the Australian banks found themselves in -difficulties, and as the people in this country, tempted by the high -rates offered at the London offices of the Australian banks, and by -their agents on this side, had deposited largely with them, a very -bitter feeling soon manifested itself. Australia, like South America, -was to prove an Eldorado for the small investor, but the pace was -forced, and the reaction came in 1893, when many of the banks suspended -payment. Even now some of the Australian banks in London are not any -too strong, and discrimination is certainly desirable. - -On 9th October, 1899, the Boers issued their famous Ultimatum, -to which they immediately received an answer that was brief and -unmistakeable; but, unfortunately, the pen of the Government at first -proved mightier than the sword, and by 3rd November White was shut up -in Ladysmith. Then followed the failures of Methuen and Gatacre, and -on 15th December General Buller was repulsed at Colenso. Thoroughly -roused, the Government sent out Lord Roberts and Lord Kitchener. On -the night of 6th January, 1900, the Boers made a desperate attempt to -take Ladysmith, while Buller again failed to relieve the town on the -22nd, and did not enter it until after Cronje was brought to bay at -Paardeberg at the end of February. - -This period of disaster cast a gloom over the whole nation, which -grew sullen and determined, and, when at last the tide began to turn, -the sudden lifting of the burden immediately metamorphosed a silent -depressed crowd into a cheering multitude, which on Mafeking day turned -London into a veritable pandemonium; but the depression caused by -unpleasant surprises was intense, and, therefore, the joy at finding -the incubus gone was the more irrepressible. Hence the disorderly -scenes upon the day in question. A reaction after the period of -suspense was inevitable, and the greater the gloom the more violent -would be the excitement that followed when the first ray of sunshine -pierced the mist. Yet how little was this understood at the time. - -That financial barometer--the Bank rate--began to reflect the political -situation early in October. Our state of unpreparedness was a by-word -on the Continent, and when in September, 1899, the Boers displayed -an unyielding attitude, which was at first mistaken for bravado, our -overweening confidence in the British soldier blinded our eyes to the -imperfections of our fighting machine. The Continent, which was better -informed than the British Government, believed that the Boers were -determined. On the 3rd October, when the Free State burghers occupied -Van Reenen's Pass, the Bank advanced its rate to four-and-a-half per -cent.; on the 5th October the rate was five per cent., and on the 30th -November six per cent., where it remained until the 11th January, 1900, -when five per cent. was recorded. - -But if the Government was unprepared the Bank of England was not, and -from start to finish, by a judicious use of its rate of discount, an -adequate supply of bullion was maintained in the Issue Department. Long -experience had taught its lesson, and our financial machine, which was -in a good state of preparedness, worked without a hitch. Who can doubt -that if our fighting machine had been as ably handled, it would have -done its work well from first to last? - -There is also another point which is well worth attention. If our banks -neglect to keep good reserves, a panic results immediately there is -any unusual demand upon their resources, and the cost of a panic soon -convinces their directors that it is cheaper to be always prepared. -Will the expenditure of some £230,000,000 teach the Government the -same simple truth? If we must have an army, it is madness not to keep -it--as our banks are kept--ready. Mr. Kruger and his advisers did not -consider the latent potentiality of the British fighting machine. They -ascertained its state of preparedness to strike at a moment's notice, -and, seeing that it was unprepared, the Boers wisely struck the first -blow, hoping to drive the English into the sea before the machine could -be adapted to a new environment. On the other hand, they failed to -realise the resources of the Empire. Had the Boers believed that the -British could land an army of even 150,000 men in South Africa, in all -probability there would have been no war. The Government, which was -caught unprepared, had to pour out money like water, because it had -neglected to take one of the simplest business precautions--to keep the -army ready. - -On 31st May, 1902, peace was declared, and now the country has to face -a domestic problem. In 1899 trade was good, and in 1900 the prices -of commodities were at their zenith; but during 1901 a reaction set -in, and at the present time trade is certainly not active. Reservists -are arriving from South Africa in large numbers; and, as the labour -market is already depressed, a number of them are sure to experience -considerable difficulty in finding employment. War is certainly not a -business that civilises, and if a man has once tasted blood, in however -just a cause, it is difficult to believe that life will seem quite so -sacred to him again. Should the times become really bad, these men who -have returned from the front, and who cannot again find a place in -civil life, will turn instinctively to the weapons upon which they have -learned to depend. Consequently, should there be a severe depression -in trade, an epidemic of crime is one of those possibilities which may -send a thrill of horror through the country. - -Since September, 1899, the money market has certainly had to contend -with great difficulties, and a system which has proved itself more -than equal to the strain surely cannot be so undesirable as certain -critics would have us believe. Again, the more the public understands -the system, the less is the danger of panic; for it must be apparent to -every man who reads this book that, if he study his own interests, he -will select a strong bank, and, having taken that precaution, he will -carefully refrain from rushing for his deposit during a time of stress. - - - - -CHAPTER XVI. - -The Banks and the Public. - - -We have seen that the history of the Bank of England may be divided -into two periods. From 1708 to 1826 the Bank enjoyed the monopoly of -joint stock banking in England. After 1826 it had to adapt itself -to a constantly changing environment. England, in fact, outgrew the -Bank, just as the financial world has outgrown London. The directors -of the Bank of England were City merchants, whose ideas usually run -in a particular groove. It is not, therefore, in the least remarkable -that they stuck to old customs and neglected new opportunities. The -directors of the London and Westminster Bank made the same mistake. So -did those of the Union Bank of London, the London Joint Stock Bank, and -one or two others, simply because their training was of the City: that -is to say, like the streets around the Bank, narrow. - -To a very great extent the Bank of England is dependent upon the -bankers' balances, for, unless it held them, it would not be able to -finance the Government. If its directors had, however, thoroughly -understood the movement of 1826, the Bank would now be a much more -independent institution, and would be a power in every county in -England and Wales. In 1826 the Government expressly desired the -directors of the Bank to open country branches, and by 1830 it -possessed eleven offices in the large provincial towns. But the -innovation was not encouraged by those in authority, and to-day the -Bank of England possesses only nine country and two Metropolitan -branches. Unquestionably a golden opportunity was neglected, for, had -the directors decided to open in the large provincial towns, Bank stock -would probably be worth over five hundred at this moment. - -At first the joint stock bank movement was neither popular nor -successful, but nobody questioned the credit of the Bank of England; -and if that institution had quickly met the wants of the country by -opening branches in the towns, it could have had the pick of the -provincial business, for everybody, including both commercial firms -and the leisured classes, would have been anxious to deal with a -bank which was absolutely above suspicion. And who would dream of -making a run upon the "Government" bank? The Bank would gradually have -accumulated vast deposits, which would have made it independent of -the "bankers' balances"; but the ground is now covered with banking -companies, and the Bank of England's opportunity is gone, never to -return. At present it is a great bank of discount. Had it farmed the -provinces in earnest, it would have become a great deposit bank, -deriving its power from its depositors and the Government account, -instead of from the Government and the bankers, as it now does. But -its directors were not trained bankers, and they failed to realise the -important part that branches or feeders were to play in the new system, -consequently, with the huge capital of the Bank, large dividends on its -stock are now out of the question. - -Our present system is, after all, the result of chance as well as of -skill. It grew. Further it committed all the follies of youth and -inexperience. Then, again, at the beginning, it was as a house divided -against itself, and consequently upon more than one occasion it fell, -for a banking system can only be worked successfully when all the -strong members are pledged either to stand or to fall together. Indeed, -our system would be considerably strengthened if the great banks were -in closer touch with the Bank of England. - -Some few years ago, when there was a somewhat bitter feeling between -Lombard Street and the Bank, it was often suggested that were each bank -to keep its own reserve of cash the rate of discount would be more -stable; but, in the event of such a change, the banks would undoubtedly -have to maintain increased reserves, and a greater proportion of their -resources would consequently be non-productive. As they would then -have less capital to lend, it also follows that, even if rates in the -open market did fluctuate less, the average rate of discount paid by -the public would be higher, because there would be less capital in the -London short loan money market to meet the demands of the bill brokers -and stockbrokers. - -On the other hand, if the banks realised their investments in -proportion as they increased their reserves, and so maintained the same -amount of capital in the London short loan fund, their own profits -would decrease; and the bank proprietors are not philanthropists. -In the one case the public would suffer, and in the other the banks -themselves would lose, whilst in neither instance is the advantage -to be gained at all proportionate to the risk incurred by a sudden -disturbance of credit. - -Our present system, with all its imperfections, has gradually grown -up around the Bank of England, and if Lombard Street were to decide -to keep its own reserve, the result would be confusion, and confusion -might be followed by panic--so great is the faith of the public in -the Old Lady, whose history entitles her to both consideration and -respect. The change might, or might not, result in a run upon Lombard -Street; but the Bank of England, whether or not the money market were -disorganised, would not lose the confidence of the nation, which is -convinced that the Bank cannot fail. - -Lombard Street, we may rest assured, would not risk so drastic a -change. It may be urged that, were the banks to keep their own -reserves, the Bank could not finance the Government, which would then -have to borrow to a greater extent in the open market; and perhaps -such would be the case. But though the Bank of England is at present -largely dependent upon the "bankers' balances," and upon the power -derived from its position in the centre of the system, it must not be -assumed, even if the banks could agree among themselves as to the ratio -of cash each should hold, that the Bank would be compelled to bow to -their decision. - -As a matter of fact, such a decision on the part of Lombard Street -would change the Bank of England from a discount bank into a deposit -bank--a metamorphosis which Lombard Street could not face with -equanimity. The Bank, whatever arrangements it may make with its own -customers, does not at present compete against Lombard Street for -deposits at interest; but were the bankers to withdraw their balances, -the Bank would be compelled to appeal to the public for deposits, and -who can doubt that it could not attract as much capital to its vaults -as it required? The Bank would only have to make its rate of interest -sufficiently attractive, and the public would rush to it with deposits. -Where would Lombard Street be then? - -Unless the Bank rate be unusually high, the banks allow one-and-a-half -per cent. below it upon money left at interest in London. The country -deposit rate, which is somewhat higher, is affected to a certain -extent by competition in the provincial towns and cities. But the -Bank would not confine its efforts to London if its hand were forced. -It would offer high rates at its branches, and might even open fresh -offices. The bankers' deposit rates would then be forced upwards in -order to arrest the drain from themselves to the Bank of England. No; -Lombard Street cannot play fast and loose with the Old Lady; and, -if certain critics will reflect, they will see that the Bank has -less to fear from a change in our present system than have those who -occasionally threaten her. Her position, were the banks foolish enough -to withdraw their balances, is not quite so hopeless as it is sometimes -made to appear upon paper. Indeed, the better the understanding between -the Bank and Lombard Street, the safer is our "one reserve" system, and -consequently the less liable is the country to financial crises--for it -is only by the united action of all the great banks that the situation -can be saved in times of stress. This was clearly proved during the -Baring scare of 1890. - -The "clearing" bankers from time to time fix the deposit rate for -London by the Bank rate, and though their country branches are not -bound by their decision--which is advertised in the newspapers directly -a change is made--the country deposit rate fluctuates with the Bank -rate, though, as a rule, it neither falls so low as the London rate -when capital is cheap, nor advances so far when it is dear. Further, -the rates charged for loans and advances should be regulated to a -certain extent by the Bank rate. However, that is a question which need -not be entered into here. - -Should the bankers decide to keep their own reserves, it is evident -that the Bank of England's rate of discount would immediately cease -to be a representative rate, and that a powerful rival, with a great -history and a clean record, would at once begin to compete against the -bankers for both deposits and advances. Were the Bank of England, so -to speak, to decide to remain outside the system, Lombard Street could -not even fix a minimum deposit rate for London, because the Bank, if it -required capital, would bid against its rivals, and would soon obtain -all it needed. Instead of being more stable, rates in the open market -would move up and down with startling suddenness. Would-be borrowers, -puzzled by such irritating movements, would soon grow nervous, for -the prices of commodities would fluctuate too, and everybody would be -afraid to make large purchases. The closer one examines the question, -the more absurd appears the suggestion of a split between the Bank and -our great joint stock banking companies; and the only wonder is that -any person with the slightest sense of proportion can seriously advance -so dangerous a proposition, which that friend of our youth, "Euclid," -would have at once pronounced "absurd." - -Custom has placed its seal upon our banking system; and the person who -is rash enough to break that seal may discover that he has released -new forces, which, though theory plainly demonstrates that they will -act in a certain direction, are pretty sure to make their way through -an unsuspected flaw which offers less resistance. A system which has -been over two hundred years in the building cannot be changed in a -day--especially a system which, even if it be not understood, has -entered into the daily life of the people. It is because the system is -not understood that the change would be so dangerous--so irritating. -It would be asking the British public to think, to change its habits, -to suddenly adopt new ideas; and as that mysterious body has never -yet been educated up to thinking for itself, it would be found that it -would kick against a new system like the stubborn donkey it is. Here -is the real danger. The change, if the public would adapt itself to -it, might prove beneficial--but the public would not; and as even its -advantages over the present system are doubtful, where is the practical -banker who would suggest the move? His one aim is not to disturb the -money market, and for that reason alone he would hesitate to remove -the Bank of England from its position in the centre of the system; but -when we remember that the Bank, by accepting deposits, could probably -beat Lombard Street at its own game, the change in question need not be -discussed seriously. - -There is one other phase in modern banking which, perhaps, calls for -notice, and that is the fierce competition for safe business taking -place between the banks themselves both in London and the provinces. -Most of our large towns and cities are overbanked. Consequently, the -public has a choice of many markets, as it were; and, quite naturally, -it tries to lend in the dearest and to borrow in the cheapest. It may -be asked: How much longer will this state of affairs exist? And the -answer is: Just so long as the banks decide that it shall; and not a -day longer! - -The better the risks of banking are understood by the public the more -difficult will it be for a weak bank to attract custom; and as the -smaller banks, especially in the manufacturing centres, are unable to -obtain sufficient deposits to meet the demands for advances, it follows -that, when their loans grow out of all proportion to their resources, -they are compelled to amalgamate with a large institution possessing -numerous branches, and therefore in a position to collect huge sums of -loanable capital, and distribute it just where it is wanted. - -For instance, a large bank collects very much more capital in certain -districts than it lends therein; but at branches situated in busy -manufacturing cities the demand for capital, especially when trade is -brisk, approximates much too closely to the sums collected at those -branches to be compatible with sound banking. However, the bank has -accumulated more than it requires in other towns, and is therefore -in a position to transfer the surplus to those places where demand -is strong, and, at the same time, to maintain a good ratio of liquid -assets to liabilities, whereas a local bank in a busy centre can often -only meet the requirements of its customers by advancing to a dangerous -extent. - -The directors of such banking companies are beginning to realise this -danger; and fearful that one day they may be caught short of cash, the -smaller joint stock banks are gradually being absorbed by the greater -companies, whose numerous tentacles enable them to distribute their -capital evenly throughout their system, and to maintain fair cash -reserves against their liabilities. - -As the small banks disappear, competitors are removed from the -market; and there is every probability that banking in this country -will by-and-by be in the hands of a few large and powerful banking -companies. The public could not resist the banks were they to unite -against it. Already the "clearing" banks have fixed the deposit rate -for London, and it is only one step farther to declare the minimum rate -at which they will advance--for what resistance can the public offer to -a combination with more than £910,000,000 in deposits alone behind it? - -Were the banks to hold a conference, and to decide that competition -must be kept within bounds, the public would not have a voice in -the matter. The English banks, like those of Scotland, would, after -having come to some arrangement among themselves, meet from time to -time in order to fix the minimum rates of interest and commission, and -their customers would either have to pay those rates or else obtain -accommodation outside the confederation. Of course, all the banks would -have to close up their ranks before this arrangement would be possible, -and, at the moment of writing, it seems improbable that certain -companies, which make a business of competition, could be persuaded to -come inside. So long as the banks are divided the public will be able -to drive bargains with them, but, directly they fall into line, their -rule will begin, and the quicker the smaller companies disappear the -nearer the reign of the banks approaches. - -Seeing that our banking system can only work smoothly so long as both -Lombard Street and Threadneedle Street work in harmony, it follows -that in time the link which connects the large banking companies will -become stronger, and the relations between them pleasanter, because, in -business as elsewhere, friendship is centred in the head rather than -in the heart. The banks must draw closer together, because, if they -do not, their system is unworkable; and, as they are now compelled -to adopt certain precautions in order to protect themselves against -panic on the part of their customers (who in that respect are their -enemies), it is only natural that they should take steps to put an end -to excessive competition, which weakens their position and prevents -their acting together at a moment when united action alone can restore -confidence in their ability to meet their liabilities. - -We all know the stale apothegm: "Self-preservation is the first law of -nature." It is the religion of the world. We can see the law at work -among our friends, but, being polite, we refrain from comment--though -if we be wise, we reflect; for here is the great unpreached gospel -which governs the actions of men. Self-preservation clearly dictates -that the banks cannot afford to allow competition among themselves to -weaken the system upon which their safety depends; and, should the -danger become pronounced, they are certain to combine against the -public in order to at least agree to certain minimum rates below which -none will do business. - -It may be said: You yourself were the first to point out that certain -customers are in a position to make terms with the bankers, and to -advise them to do so. That is true enough; and so long as the banks are -divided amongst themselves this is possible; but it by no means follows -that, because the customers can make certain bargains this year, they -will be able to make similar arrangements next, for the banks have -their remedy, and when the right time comes they will not neglect to -take it. - -We have dissected that complex machine, which is called the Money -Market, and of which the Bank of England is the heart. As each unit is -dependent upon the strength of the whole, no bank should be allowed -to trade upon the credit of the rest, for obviously it cannot exist -outside the system during a time of stress unless it possess an -adequate reserve of cash. Therefore each unit ought to bear its fair -share of the burden when the sun is shining, and, if it refuse, it -should be made to take the consequences when the storm bursts. - -The closer our banking system is examined the stronger becomes the -conviction that the interests of all the banks are identical, and -that, therefore, if banking is to be conducted in this country with -comparative safety, every bank should be compelled, either by the -law of the land or by public opinion, to keep a fair reserve in legal -tender against its liabilities. Further, the true interests of the -banks are the same as those of the public--for the good business man -is always a cautious man, and if he takes the trouble to study the -risks to which a banking business is exposed, he will hardly care to -place his money with a company unless it be well prepared to face those -storms to which its environment peculiarly exposes it. - -Under our one reserve system the banks must either stand or fall -together during a crisis. The system, therefore, requires the support -of all; consequently, the duties or obligations of each bank should -be clearly defined, and this can only be done by an Act of Parliament -or by an understanding between the banks. The closer the banks draw -together the safer is our system of banking. - - - - -CHAPTER XVII. - -Bank Stock. - - -When the trade of the country is prosperous, we expect to see banking -companies paying high dividends, because rising prices stimulate -borrowing on the part of the public; and, consequently, as the -resources of the banks are limited, the increased demand for loanable -capital sends up rates, with the result that distributions are -enhanced, and that the prices of bank shares advance in sympathy with -improving dividends. - -We all know that there is a link which binds industries together, and -that a depression in one trade, if it prove lasting, must communicate -itself to the rest. Nor is this movement confined to any one nation. -Therefore, when we hear that a depression exists in Germany or in any -other great manufacturing country, it is a matter for regret rather -than otherwise, because the goods of that country are almost certain to -be exported here in large quantities. - -If there be stagnation in Germany, then money will be cheap in that -country, and commodities will be cheap too. Manufacturers, therefore, -will be able to obtain better prices in foreign markets; consequently, -German exports will increase, and prices will soon begin to fall in -England. Again, depression in the States speedily makes itself felt in -the English markets, which become glutted with American goods, with the -result that production lessens at home, and times gradually become, as -we colloquially say, "bad." - -But there is one factor with which we have not reckoned, and that is -time; for though after a period of prosperity prices generally fall -suddenly--as, for instance, during 1901--it usually takes two or three -years before production is again in full swing. In these days, when -commercial ties bind the whole world so closely together, one nation -cannot afford to rejoice at the misfortune of another; and when this -fact is more clearly seen and is better understood, possibly large -standing armies will become an unnecessary evil, for the secret of -true progress is the fact that commerce and civilisation always advance -together. - -The Bank of England, which deals in money and credit like every other -bank, is exposed to the same influences as the rest of its kind; -consequently, when trade is brisk and loanable capital dear, it pays -larger dividends than during the depressed portion of a cycle. The -following table will illustrate the fact:-- - - ======================================================================== - £14,553,000 STOCK. - ---------------------+---------+---------+---------+---------+---------+ - | 1892. | 1893. | 1894. | 1895. | 1896. | - ---------------------+---------+---------+---------+---------+---------+ - | | | | | | - Highest | 344 | 343 | 338 | 336 | 345 | - | | | | | | - Lowest | 325 | 325 | 322 | 322½ | 322 | - | | | | | | - Dividend % per annum | | | | | | - 5th April | 10 | 10 | 8 | 8 | 8½ | - | | | | | | - Dividend % per annum | | | | | | - 5th October | 9½ | 9 | 8½ | 8½ | 10 | - | | | | | | - ---------------------+---------+---------+---------+---------+---------+ - Average Distribution, 9½ per cent. - ======================================================================== - - ====================================================================== - £14,553,000 STOCK. - ---------------------+---------+---------+---------+---------+-------- - | 1897. | 1898. | 1899. | 1900. | 1901. - ---------------------+---------+---------+---------+---------+-------- - | | | | | - Highest | 351½ | 367 | 36½ | 349 | 342 - | | | | | - Lowest | 326 | 341 | 325 | 326 | 319¼ - | | | | | - Dividend % per annum | | | | | - 5th April | 10 | 10 | 10 | 10 | 10 - | | | | | - Dividend % per annum | | | | | - 5th October | 10 | 10 | 10 | 10 | 10 - | | | | | - ---------------------+---------+---------+---------+---------+-------- - Average Distribution, 9½ per cent. - ====================================================================== - -It is at once evident that when its distributions are compared with -those of the large banking companies, the Bank does not excel as -a dividend-payer, and the reason, of course, is because it has to -distribute its earnings over so large an amount of stock or capital; -but, although it pays fluctuating dividends--which are regulated -by the average rate capital may earn during any half-year--it is -noticeable that, since 1899, despite the fact of dividends being -maintained at ten per cent. per annum, the price of Bank stock touched -lower figures than any recorded during the decade, when, according -to every financial rule, prices ought to have been well maintained. -Further, the shares of the joint stock banks did not exhibit this -tendency to any marked extent. Why, then, should Bank stock be an -exception to the rule? - -The years 1894 and 1895 were distinguished by cheap money and -indifferent trade, therefore we should expect to see the Bank's -dividends decrease, and its stock fall in sympathy with diminishing -distributions. If we glance at the table we shall see that our -deductions were realised. In 1896 trade began to improve. Rising prices -lessened the purchasing power of money; consequently the industrial -machine required more capital _after_ the rise, because a given sum -would then purchase _less_. The result was an increased demand for -loanable capital, which at once became dearer; and the Bank of England, -together with the other banks in the country, earned more. Again, as -one would have expected, dividends and stock moved up together. During -1897 the same movements were witnessed; but in 1899 Bank stock began to -fall, although distributions were maintained. This deviation from rule -evidently calls for explanation. Compare, for instance, the prices of -the shares of the undermentioned banks during the period in question:-- - - =============================================================== - | | | | - | 1895. | 1899. | 1900. | - | | | | - | | | | - ---------------------------------+--------+---------+---------+ - | | | | - London and County--_Highest_ | 95½ | 109½ | 107 | - | | | | - " " " _Lowest_ | 89½ | 103 | 101½ | - | | | | - London and Provincial--_Highest_ | 21¾ | 22½ | 22¾ | - | | | | - " " " _Lowest_ | 19¼ | 21 | 21½ | - | | | | - London Joint Stock-_Highest_ | 34¼ | 39 | 37⅞ | - | | | | - " " " _Lowest_ | 30⅞ | 33¼ | 34 | - | | | | - =============================================================== - ======================================================== - | | Dividend % - | 1901. | per annum - | | each year - | | since 1898. - ---------------------------------+---------+------------ - | | - London and County--_Highest_ | 107 | 22 - | | - " " " _Lowest_ | 100¼ | - | | - London and Provincial--_Highest_ | 23⅜ | 18 - | | - " " " _Lowest_ | 20½ | - | | - London Joint Stock-_Highest_ | 37¾ | 12 - | | - " " " _Lowest_ | 34½ | 1900 & 1901 - | | - ======================================================== - -We can see, in the above instances, that where dividends were -maintained, prices moved between much the same figures, whilst in every -case a marked advance is shown on the quotations of 1895, whereas Bank -stock receded further in 1901, when the dividend was ten per cent. -per annum, than it did during 1895, when the distribution for the -year was only eight-and-a-quarter per cent. It is this anomaly which -we have to discuss. The trade of the country from 1896 to the end of -1900 was progressive, and though in 1901 a reaction set in, the large -requirements of the Government, and the state of uncertainty created -by the war, kept loanable capital dear. The banks, consequently, were -enabled to support their huge dividends during 1901, though their being -able to declare the same rates for the last half of the present year -seems doubtful. - -But to return to the fall in Bank stock, which, at the moment of -writing, is quoted at 326. The public, so little does it understand the -position of the Bank of England, still looks upon it as a Government -institution; and, as though to give colour to this illusion, we find -its stock quoted in the same division as "British Funds &c." By The -Trustee Act, 1893, trustees, where they are not prohibited by the -trust deed, may invest in Bank of England stock; and, as a result of -this enactment, there is an increased demand for its stock, which -consequently yields less to a buyer; yet, strictly speaking, Bank stock -cannot be classed with the so-called "gilt-edged" securities, because -the interest it returns is variable. - -It is true that the holder does not incur any liability, and in this -sense Bank stock is a much more desirable investment than shares in -a joint stock bank upon which the member is liable for certain stated -sums in the shape of uncalled capital; but the Government does not -guarantee the dividends of the Bank. Indeed, it is only interested -in the Bank of England in the same manner that a large customer is -interested in his banker; and, though, in every probability, so long -as the Government banks with the Old Lady, it will assist her whenever -cause may arise, it is not pledged so to do. Again, the twentieth -century may be productive of great change; and, though it seems -improbable that a Government would remove its accounts from the Bank, -such an event is by no means impossible, for the only tie between the -Government and the Bank of England is that the former is the Bank's -oldest client. - -On the other hand, so long as Government does keep its balances at -the Bank of England, it cannot afford to allow the Bank to fail, even -were there the risk of it doing so. But holders of Bank stock, like -the holders of shares in any other bank, would be paid last should the -Bank be wound up, however remote a possibility that may be; and seeing -that their capital is not a prior charge upon the assets of the Bank, -and that, therefore, £100 of stock is worth £326 only so long as the -Bank of England is a going concern, it is difficult to see why Bank -stock should be considered a desirable holding for trustees. It seems -to me that, valuable though the security undoubtedly is, it does not -possess a single one of those characteristics which should distinguish -a "trustee" stock, for dividends are fluctuating, and capital is a -_last_ charge on the assets of the Bank. In fact, the stock is a kind -of guarantee to the customers--and a splendid guarantee too, for it is -the Bank's large capital which makes it the safest bank for depositors -in the land. But that the holders of a "trustee" stock should, in the -event of a company being wound up, get the _last_ look in is surely -somewhat odd. However, this is only another illustration of the -confidence the public has in the Bank of England, which, people are -convinced, will exist as long as the nation. - -The Bank, because the public imagines that it is connected more closely -with the Government than in reality is the case, naturally suffers -in credit when its patron does. Consequently during 1899, when the -British reverses in South Africa increased the difficulties of the -Government and depressed Consols, Bank stock, although dividends -were maintained at ten per cent. per annum, fell in sympathy with -Government securities, despite the fact that the shares of the large -English banking companies were not appreciably affected. Of course -this depreciation, which has proved lasting, was not the result of -sound reasoning, for so long as the war continued money was sure to -be dear, and dear money plainly indicated that the Bank would support -its dividend of ten per cent. Further, the large Government borrowings -constantly compelled the outside market to borrow from the Bank, which, -had it so decided, could have charged exceptionally high rates, and -thereby have added considerably to its profit; but, with its usual -moderation, it wisely refrained from exacting excessive rates from -those who, when Lombard Street was temporarily denuded of surplus -capital, were compelled to apply to it for loans. The Bank, during the -trying period in question, certainly did not attempt to make extra -profit out of the nation's misfortune, as it assuredly might have done -had its directors been actuated by a grasping spirit. Is there another -bank in the land that would not have profited by the occasion? There -may be; but I am disposed to doubt it, and I certainly should not care -to attempt to name the institution. - -Here, then, we find two influences at work at the same time, and the -result is distinctly curious. The Bank of England, from the nature of -its business, pays increased dividends when trade is good, therefore -its stock should advance in value during the prosperous portion of -a cycle; but, because of its business relation with the Government, -its stock is looked upon by the public as a kind of Government -security, and, consequently, when any political event causes Consols -to fall, Bank stock recedes in sympathy with them. There is no reason -for this movement, and if it proves anything it proves how little -Finance is understood by the investing public. Here is a stock which -pays fluctuating dividends classed with the so-called "gilt-edged" -variety of securities; therefore its movements often seem erratic, -because at one time it responds to the law that regulates the price of -gilt-edged stocks, and at another to the law which decides the price of -industrials. - -It can be seen from our list that for the decade ended 1901 the Bank -of England paid an average dividend of nine-and-a-half per cent. per -annum. Based on the said average, a purchaser, if he require a return -of three per cent. for his money, will have to buy Bank stock at -316⅔; but 319¼ in 1901 is the lowest price it has touched since -1888, and it seems highly probable that our would-be purchaser at -316⅔ would wait in vain for his stock at those figures. Indeed, the -present price, 326, looks cheap for Bank stock. Bought at 325, and -based on an average dividend of nine-and-a-half per cent., the stock -would return about £2 18s. 6d. per cent. So small a return upon one's -money is not calculated to make one anxious to buy, and Consols at 93 -are perhaps a greater temptation, though neither investment appeals -very strongly, so far as interest is concerned, to the imagination. - -If purchased during the depressed portion of a cycle, the shares of the -large banking companies can be bought at a price which will yield an -average dividend of over four-and-a-half per cent. to the investor; but -it must be borne in mind that, as a rule, he incurs a certain liability -on such shares, whereas Bank stock is free from possible calls, and, -consequently, not exposed to the objection which is constantly urged -against the majority of bank shares as an investment. - -Some of my readers, I dare say, will not agree with all my conclusions; -and, perhaps, it may be urged that the information herein contained -were better withheld from the general public. But the truth is -always worth the telling, and if our banking system will not bear -investigation then it must be a bad one. Despite obvious defects in -construction, it is apparent, however, that our great credit machine, -when skilfully managed, can successfully endure considerable strain; -and, if gold be dangerously economised, our present system at least -gives us that inestimable blessing--Cheap Money. - -[Illustration] - - - - - _Sixth Edition._ _Price 1s. net._ - -BANKS AND THEIR CUSTOMERS. - -By HENRY WARREN, - -Author of "The Story of the Bank of England." and "Your Bankers' -Position at a Glance." - - -"The book is amusing as well as instructive, and at the price we may -reasonably say that no one who has a banking account should omit to -read and store it in his library. More especially he who is in the -habit of keeping a large balance, as also he who is in the habit of -negotiating for an overdraft, should study what is revealed in this -book."--_Field._ - -"Contains a vast mass of useful information intelligently discussed. To -educate the public on a technical subject calls for more than ordinary -knowledge. It needs what Mr. Warren undoubtedly possesses, and -that is a sound practical understanding, and a thorough common-sense -way of setting forth his knowledge in simple form. This our Author -succeeds admirably in doing."--_Financial News._ - -"Masterly."--_Drapers' Record._ - -"Invaluable."--_Birmingham Daily Gazette._ - -"Cannot be too strongly recommended."--_Scotsman._ - -"His revelations are startling."--_Morning Post._ - -"Especially we commend the chapter 'How to check your bankers' -charges.'"--_Investors' Review._ - - * * * * * - -_The Author's two most flattering testimonials are_-- - -"Bank Manager" in _Investors' Review_ says: "The book is not worth the -paper upon which it is written." - -Strangely enough, a Bank Customer writes: "Your little book has saved -me £40 a year." - - -EFFINGHAM WILSON, Publisher, Royal Exchange, London. - - - - - -End of Project Gutenberg's The Story of the Bank of England, by Henry Warren - -*** END OF THIS PROJECT GUTENBERG EBOOK THE STORY OF THE BANK OF ENGLAND *** - -***** This file should be named 63449-0.txt or 63449-0.zip ***** -This and all associated files of various formats will be found in: - http://www.gutenberg.org/6/3/4/4/63449/ - -Produced by Graeme Mackreth and The Online Distributed -Proofreading Team at https://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - -Updated editions will replace the previous one--the old editions will -be renamed. - -Creating the works from print editions not protected by U.S. copyright -law means that no one owns a United States copyright in these works, -so the Foundation (and you!) can copy and distribute it in the United -States without permission and without paying copyright -royalties. 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You may copy it, give it away or re-use it under the terms of -the Project Gutenberg License included with this eBook or online at -www.gutenberg.org. If you are not located in the United States, you'll have -to check the laws of the country where you are located before using this ebook. - -Title: The Story of the Bank of England - A History of English Banking, and a Sketch of the Money Market - -Author: Henry Warren - -Release Date: October 13, 2020 [EBook #63449] - -Language: English - -Character set encoding: UTF-8 - -*** START OF THIS PROJECT GUTENBERG EBOOK THE STORY OF THE BANK OF ENGLAND *** - - - - -Produced by Graeme Mackreth and The Online Distributed -Proofreading Team at https://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - - - - - - -</pre> - - - -<p class="center"> -<img src="images/illus1.jpg" alt="pic" /> -</p> - - -<p class="center"> THE BANK OF ENGLAND.</p> - - - - - -<p class="ph3">THE STORY</p> - -<p class="ph5">OF THE</p> - -<p class="ph1">Bank of England</p> - -<p class="ph4">(<span class="smcap">A History of English Banking, and -a Sketch of the Money Market</span>)</p> - -<p class="ph6">BY</p> - -<p class="ph3">HENRY WARREN</p> - -<p class="ph5">AUTHOR OF</p> - -<p class="ph4">"YOUR BANKERS' POSITION AT A GLANCE"<br /> - -ETC.</p> - - -<p class="ph4" style="margin-top: 5em;">JORDAN & SONS, LIMITED</p> -<p class="ph5">116 <span class="allsmcap">AND</span> 120 CHANCERY LANE, LONDON, W.C.</p> - -<p class="ph6">1903</p> - -<div class="hidehand"> -<p class="center"> -<img src="images/cover.jpg" alt="pic" /> -</p></div> - - - -<p class="ph6" style="margin-top: 10em;">LONDON:<br /> -PRINTED BY JORDAN AND SONS, LIMITED,<br /> -120 CHANCERY LANE, W.C.</p> - - - -<hr class="chap" /> - -<div class="chapter"> -<h2 class="nobreak" >CONTENTS</h2> -</div> - - - - - -<table summary="toc" width="85%"> -<tr><td></td><td>CHAPTER</td> <td align="right">PAGE</td></tr> - -<tr><td align="right">I.</td> <td><a href="#CHAPTER_I"><span class="smcap">The Period of Monopoly, 1708 to 1826</span></a></td> <td align="right"><a href="#Page_1">1</a></td></tr> - -<tr><td align="right">II.</td> <td><a href="#CHAPTER_II"><span class="smcap">Before and After the Act of 1844</span></a></td> <td align="right"><a href="#Page_24">24</a></td></tr> - -<tr><td align="right">III.</td> <td><a href="#CHAPTER_III"><span class="smcap">The Bank's Weekly Return</span></a></td> <td align="right"><a href="#Page_48">48</a></td></tr> - -<tr><td align="right">IV.</td> <td><a href="#CHAPTER_IV"><span class="smcap">The Issue and Banking Departments</span></a></td> <td align="right"><a href="#Page_63">63</a></td></tr> - -<tr><td align="right">V.</td> <td><a href="#CHAPTER_V"><span class="smcap">The Store in the Issue Department</span></a></td> <td align="right"><a href="#Page_74">74</a></td></tr> - -<tr><td align="right">VI.</td> <td><a href="#CHAPTER_VI"><span class="smcap">Weekly Differences in the Return</span></a></td> <td align="right"><a href="#Page_85">85</a></td></tr> - -<tr><td align="right">VII.</td> <td><a href="#CHAPTER_VII"><span class="smcap">The Bank as Agent of the Mint</span></a></td> <td align="right"><a href="#Page_94">94</a></td></tr> - -<tr><td align="right">VIII.</td> <td><a href="#CHAPTER_VIII"><span class="smcap">The Principal Currency Drains</span></a></td> <td align="right"><a href="#Page_101">101</a></td></tr> - -<tr><td align="right">IX.</td> <td><a href="#CHAPTER_IX"><span class="smcap">Banks and the Creation of Credit</span></a></td> <td align="right"><a href="#Page_113">113</a></td></tr> - -<tr><td align="right">X.</td> <td><a href="#CHAPTER_X"><span class="smcap">The Battle of the Banks</span></a></td> <td align="right"><a href="#Page_126">126</a></td></tr> - -<tr><td align="right">XI.</td> <td><a href="#CHAPTER_XI"><span class="smcap">The London Money Market</span></a></td> <td align="right"><a href="#Page_139">139</a></td></tr> - -<tr><td align="right">XII.</td><td><a href="#CHAPTER_XII"> <span class="smcap">The Bank Rate and Stock Exchange -Securities</span></a></td><td align="right"> <a href="#Page_154">154</a></td></tr> - -<tr><td align="right">XIII.</td> <td><a href="#CHAPTER_XIII"><span class="smcap">The Banks as Stockbrokers</span></a></td> <td align="right"><a href="#Page_161">161</a></td></tr> - -<tr><td align="right">XIV.</td> <td><a href="#CHAPTER_XIV"><span class="smcap">The Short Loan Fund and the Price -of Securities</span></a></td> <td align="right" ><a href="#Page_169">169</a></td></tr> - -<tr><td align="right">XV.</td> <td><a href="#CHAPTER_XV"><span class="smcap">Panic Years</span></a></td> <td align="right"><a href="#Page_177">177</a></td></tr> - -<tr><td align="right">XVI.</td> <td><a href="#CHAPTER_XVI"><span class="smcap">The Banks and the Public</span></a></td> <td align="right"><a href="#Page_224">224</a></td></tr> - -<tr><td align="right">XVII.</td> <td><a href="#CHAPTER_XVII"><span class="smcap">Bank Stock</span></a></td> <td align="right"><a href="#Page_240">240</a></td></tr> -</table> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_1"></a>[Pg 1]</span></p> - -<h2 class="nobreak" id="CHAPTER_I">CHAPTER I.</h2> -</div> - -<p class="center">The Period of Monopoly, 1708 to 1826.</p> - - -<p class="drop">T<span class="uppercase">he</span> Bank of England, which is managed by a Governor, Sub-Governor, and -twenty-four Directors, was incorporated in 1694 at the suggestion of a -Scotsman, William Paterson, a man of roving disposition, whose Darien -expedition proved a miserable fiasco, cost Scotland some £400,000, and -shattered the health of Paterson, who died in London at the beginning -of 1719, if not in poverty at least stripped of nearly all his fortune.</p> - -<p>Schemes relating to the Isthmus of Darien (or Panama), that narrow -little strip of land which unites the two Americas, have proved -fruitful in disaster. France's great canal venture, we all remember, -resulted in huge loss and grave scandal; and Paterson lived to bitterly -regret his colonisation scheme, devoutly wishing that he had pinned -his faith to his<span class="pagenum"><a id="Page_2"></a>[Pg 2]</span> finance company, the Bank of England, for a finance -company it then was in every sense of the word.</p> - -<p>Little is known of William Paterson's early career, the various -accounts relating thereto being meagre and conflicting, his enemies -describing him as a mere adventurer, and his friends declaring that -he was actuated by the worthiest of motives. However, when it is -remembered that his second great venture (the Darien scheme) involved -thousands in ruin, it is evident that had the man been a saint he would -not have lacked detractors, and though his public utterances sound -quaintly pious to the modern ear, it seems probable that he was only an -enterprising merchant, whose morality was neither better nor worse than -that of the times in which he lived.</p> - -<p>The son of a Scotch farmer, Paterson left home at an early age, and, -after settling for a short time in the West of England, set sail for -the West Indies, returning to Europe about 1686 with the Darien scheme -in his brain. Receiving but scant encouragement in England, despite the -fact that his bank had been successfully floated, he concentrated his -energies upon Scotland, where his scheme fired the public imagination, -almost every Scotsman with a<span class="pagenum"><a id="Page_3"></a>[Pg 3]</span> few pounds to invest eagerly taking the -money to the company, convinced that Panama was the natural commercial -centre of the world, and that gold would be rained therefrom upon -fortunate Scotland. The whole nation went almost frantic with the -fever, for Panama, with its gold mines and its world-wide trade, -was going to make Scotland rich beyond the dreams of avarice. It is -estimated that nearly half the capital of the country was sunk in the -Darien scheme.</p> - -<p>Chartered by the Scottish Parliament in 1695, three vessels sailed -from Leith in July, 1698, with some twelve hundred settlers on board, -Paterson and his wife among the number. All Edinburgh flocked down to -Leith to wish the members God-speed, and then returned to their homes -to dream of the streams of gold with which Scotland was to be flooded. -In a few years everybody would be rich, and Edinburgh would be the -greatest and proudest city in the world. Trade, however, was destined -to flow to a city a little farther south.</p> - -<p>The scheme proved a dismal failure. England and Holland opposed the -new colony; the East India Company treated it as a rival, and Spain -was actively hostile. The climate did the rest. Before the close of -1699<span class="pagenum"><a id="Page_4"></a>[Pg 4]</span> "New Edinburgh" was deserted, and the colonists, decimated by -want of provisions and disease, set sail for New York. To make matters -worse, a second company meanwhile had sailed from Scotland, where the -utmost enthusiasm still prevailed; but the new arrivals found the town -deserted, and themselves at the mercy of the Spanish warships. Mad with -rage at the lack of success of their national adventure, the Scotch -openly accused the English Government of treachery, declaring that its -conduct in withholding food supplies was as discreditable to it as was -the butchery of Mac Ian and his clan at Glencoe in 1692, when neither -old man nor child was spared, and fugitives were allowed to perish of -hunger and exposure in the mountains.</p> - -<p>Paterson's faith in Panama must have been profound. His wife died -in the new colony, and he himself suffered severely in health; yet, -after his return towards the end of 1699, directly his health began -to improve, we read of his approaching William with a fresh Darien -venture. The King naturally refused to risk a second disaster, and -Paterson, like all great speculators who have risked everything and -lost, could not again persuade the public to share his enthusiasm, for -that mysterious entity<span class="pagenum"><a id="Page_5"></a>[Pg 5]</span> seldom trusts a man after a cloud has obscured -his "star." Once his spell of so-called good luck is broken, the public -desert him in a body, when the adventurer, if he be wise, retires into -obscurity with his spoil.</p> - -<p>Paterson lived to discover that it is only a rising star, radiating -success, that can obtain a sufficiently large following to finance -a great scheme, and though he strove manfully to promote the new -venture, his sanguine predictions were received sceptically. Nor did -his subsequent schemes meet with a better reception. But he must still -have retained some influence, for, after the Act of Union in 1707, -he was returned to Parliament by a Scotch burgh. His chief claim to -distinction, however, undoubtedly rests upon the fact that he founded -the Bank of England, of which he was appointed one of the first -directors.</p> - -<p>The Bank of England, from its inception down to the present day, has -never been a Government institution. It was originally simply a company -that advanced money to and transacted business for the Government, -which, in return, granted it certain privileges and concessions; but -the connection between the Government and the Bank was so close, and -their interests so identical, that public opinion<span class="pagenum"><a id="Page_6"></a>[Pg 6]</span> connected the one -indissolubly with the other. From this conception sprang the erroneous -impression that the Bank is a Government establishment, when, in -reality, it is no more so than is the National Provincial Bank of -England or the London and County Bank.</p> - -<p>In 1694, the Government of William III., which was generally in a state -of monetary tightness, found that the war with France was draining -its resources, and, having failed to raise sufficient funds by the -imposition of taxes, it resolved, apparently as a kind of <i>dernier -ressort</i>, to accept Paterson's financial scheme, which had been shelved -some three years earlier; and on 27th July, 1694, a charter was granted -to the "Corporation of the Governor and Company of the Bank of England."</p> - -<p>The capital of the company, £1,200,000, was subscribed by some forty -London merchants, and lent to the Government. It is only reasonable to -assume that the subscribers were supporters of the Government, and that -they were Whigs, whose aim, in supplying William with the sinews of -war, was the crushing of James, whose pusillanimity had disgusted even -his own followers at the battle of the Boyne in 1690.</p> - -<p><span class="pagenum"><a id="Page_7"></a>[Pg 7]</span></p> - -<p>Then, again, the commercial morality of the Stuarts was notoriously bad -in the City. Charles I., when the City of London refused him a loan, -took forcible possession of £200,000 deposited by the Goldsmiths in -the Exchequer; and Charles II., in 1672, robbed them of considerably -over £1,000,000. The Goldsmiths, in those days, were the private -bankers with whom the London merchants left their cash, receiving an -acknowledgment or receipt in return, promising payment on demand, and -the Goldsmiths deposited their surplus cash in the Exchequer, just as -the banks of to-day do with the Bank of England. Through this act of -spoliation the Goldsmiths were unable to meet their liabilities, and -many of them, together with their customers, were involved in common -ruin in consequence. James II. added to the financial sins of his house -by debasing the currency: so small wonder that the merchants of London -had had enough of the Stuarts, whose theory of the "Divine right" of -kings did not even stop short at the pockets of their subjects—always -their most vulnerable point.</p> - -<p>The Bank of England, which to-day is quite outside party politics, was -at its inception a Whig finance company, incorporated solely<span class="pagenum"><a id="Page_8"></a>[Pg 8]</span> for the -purpose of lending its capital to the Government at the rate of eight -per cent. per annum; and out of this creation has evolved the present -"Old Lady of Threadneedle Street," whose career, if chequered, has been -one of unquestionable integrity.</p> - -<p>It is difficult even in imagination to picture to oneself the England -of 1694; but it is easy to understand that in those days great -storehouses of capital were non-existent—non-existent, that is to -say, in the modern sense. Our huge credit institutions, which are -indispensable in the twentieth century for the proper carrying on of -trade, and which dive by means of branches into almost every corner of -the land, thereby collecting millions of pounds of loanable capital, -would have spread their tentacles in vain during the seventeenth -century, when neither the money nor the facilities for its profitable -employment existed in the country.</p> - -<p>Capital was scarce—consequently the rate of interest was high—and -eight per cent. was a rate at which even the Government could not -borrow in the City in 1694, from ten to thirteen per cent. per annum -being about the value of loanable capital, while the commission paid -was oftentimes exorbitant. The Bank,<span class="pagenum"><a id="Page_9"></a>[Pg 9]</span> which was established by the -Whigs, was naturally bitterly opposed by the Tories, who saw in its -success the destruction of the cause they had at heart. The capitalist -class disliked it for selfish reasons; and the Goldsmiths, recognising -a formidable opponent, joined issue with its enemies.</p> - -<p>Holders of stock and everybody connected with the Bank were looked upon -as enemies of the House of Stuart, which, were it restored to power, -would naturally wreak its vengeance upon a company that had helped to -finance William—for forgiveness is one of those abstract attributes -with which only brave and wise men are blest, and James II. had not -given proof of possessing either courage or wisdom. Small wonder then -that the City should support the Dutchman.</p> - -<p>The National Debt, too, was founded during the reign of William, the -first loan of £1,000,000 being raised in 1693, and those persons who -held it were bound by the strongest of ties—commercial ties—to -William. The fund-holders were Liberal; the Bank was Liberal; and as -its very life was dependent upon the existence of the Government, it -seems only natural that, in the popular mind, it should have been -looked upon as a Government institution,<span class="pagenum"><a id="Page_10"></a>[Pg 10]</span> though there is but little -excuse for so classing it now. The fact that so many people still share -this illusion, however, clearly proves that a large proportion of the -public is unacquainted with the Bank's history.</p> - -<p>The Bank of England's charter was renewed in 1697, and again in 1708, -when, in order to prevent the establishment of similar institutions, -it was granted the monopoly of Joint Stock Banking in England. This it -retained until 1826, when an Act was passed permitting the formation -of Joint Stock Banks of Unlimited Liability beyond sixty-five miles of -London, provided they had no branches in the Metropolis.</p> - -<p>It is a long jump from 1708 to 1826, and, of course, the charter was -renewed many times between the two dates, the Government generally -taking advantage of each extension to force some concession from the -Bank, which, as its credit and business expanded, had increased its -original capital by many millions; but 1826 was the year of reform, and -the intervening period possesses little interest except to the student.</p> - -<p>Between 1826 and 1829 the Bank opened eleven provincial branches, but -those which were established at Gloucester, Swansea, Exeter,<span class="pagenum"><a id="Page_11"></a>[Pg 11]</span> and -Norwich have since been closed. Joint Stock Banks were then started in -the provinces, though not with very happy results, for in 1832 their -reckless trading was severely stigmatised by Lord Overstone; but it -was not until 1834 that the first joint stock bank, the London and -Westminster, was started in London, a clause having been inserted in -the Act when the charter of the Bank of England was renewed in 1833, to -the effect that, provided a joint stock bank did not issue notes, it -was at liberty to carry on business in the City.</p> - -<p>Both the Bank of England and the London private bankers opposed the -new bank with acerbity, the former refusing to open an account for it -in its books, and the latter declining to admit it into the Clearing -House. Not satisfied with this, the Bank brought an action against the -Westminster. But it was quite natural that the newcomer should have -been received in this fashion, for innovations, however necessary and -useful, are seldom accepted rapturously in this country, which appears -to have almost a Chinese dislike of the unusual. Besides, it is not the -custom of the country, even for the sake of appearances, to receive a -trade rival with open arms, and it would have been a little surprising -had the<span class="pagenum"><a id="Page_12"></a>[Pg 12]</span> Bank surrendered its monopoly of joint stock banking in -England without a struggle, whilst its desire, after being stripped of -some of its privileges, to annoy its despoilers, was, if not laudable, -eminently human.</p> - -<p>In 1836 the London Joint Stock Bank followed the example of the -Westminster, and in 1839 the Union Bank of London, which has recently -amalgamated with Messrs. Smiths, opened its doors, while such -well-known banks as the National Provincial Bank of England and the -London and County Bank were formed in 1833 and 1836 respectively. The -trade of the country had by that time far outgrown the resources of the -Bank of England, which was quite unable to minister to the increasing -demands of a prosperous and progressive England; and to-day the only -monopoly which the Bank enjoys is that left to it by the Act of 1844.</p> - -<p>From William and Mary to Victoria, in whose reign the Act of 1844—that -Magna Charta of the banking community—was introduced, covers a most -interesting period in the history of the nation, whose development had -been retarded by the "Divine right" of the Stuarts, which cost Charles -I. his head and James II. his throne. The theory is much in<span class="pagenum"><a id="Page_13"></a>[Pg 13]</span> evidence -to-day, though it now takes the form of a great abstract idea, not -compatible with practical politics, and which has found a resting place -in the heart, rather than in the head, of the people—for the practical -twentieth century has a strange trick of banishing disproved theories -from the head to the heart; and perhaps it is this national trait which -saves the country from violent revolutions.</p> - -<p>It would be a mistake to assert that commerce had declined under -the Stuarts. It increased rapidly in spite of them; but, after the -"Glorious Revolution," the "Divine right" of kings became a mere theory -in this country, and the power of the Crown was made subservient to the -will of the people. In short, the rule of Parliament began. The trade -of the country gradually expanded, and with it the influence of the -Bank.</p> - -<p>In order that we may thoroughly grasp the position previously occupied -by the Bank of England, and the influence given to it by its connection -with the Government, it will be better, before briefly discussing the -Act of 1844, to revert to the days when the sway of the Bank of England -was absolute.</p> - -<p>In 1708, we know, the Bank was granted the monopoly of joint stock -banking in<span class="pagenum"><a id="Page_14"></a>[Pg 14]</span> England, and, further, it was made illegal for any private -firm, whose partners were more than six in number, to conduct the -business of a banker. This restriction was not removed until 1857, when -the partners in a private bank might consist of ten, and it will be -seen from the following facts that this limitation was harmful to the -best interests of the country.</p> - -<p>One result of this hard-and-fast enactment was the encouragement of -small private banks in every county of England; but the fact that the -number of their partners was limited to six effectually checked their -expansion, and finally brought hundreds of them to the ground; for -they could not strengthen themselves, and add to their resources, by -amalgamation as is now possible.</p> - -<p>As the population of the country increased, the position of the private -bankers, as a class, became precarious, especially in rapidly growing -commercial centres, because their supply of loanable capital was -insufficient to meet the increasing demands of their clients. In their -attempt to finance their customers they neglected to maintain adequate -reserves, and consequently failures were numerous directly any very -considerable demand was made upon them.</p> - -<p><span class="pagenum"><a id="Page_15"></a>[Pg 15]</span></p> - -<p>Instead of a few large and powerful banking companies, there existed -numerous weak private firms, which, in many instances, had advanced out -of all proportion to their total working resources, thereby sacrificing -security to large profits. So long as times were good all went merrily; -but, unfortunately, the great impetus given to trade by the conclusion -of peace with France and the United States in 1783 did not last more -than five or six years.</p> - -<p>The year 1789 brings us to the French Revolution, and in 1793 we were -at war with France again. Then came the reaction. Country bankers -failed in every direction; but in 1797 Mr. Pitt came to the rescue in -order to relieve the Bank of England, and the directors of the Bank -were allowed to issue notes at their discretion, cash payments being -suspended. Between 1792 and 1820 over one thousand private bankers put -up their shutters; and during the 1825 crisis sixty-five banks closed -their doors, hundreds of their customers being ruined in consequence. -The panic of 1825, which almost emptied the Bank's tills, thoroughly -convinced the Government that the country had outgrown the monopoly of -the Bank of England.</p> - -<p><span class="pagenum"><a id="Page_16"></a>[Pg 16]</span></p> - -<p>By limiting the partners in private banking companies to six in number, -and prohibiting the establishment of joint stock banks in opposition -to the Bank of England, the Government sanctioned a policy which could -not but result in disaster. Like most monopolies, that of the Bank -of England was framed to exclude powerful rivals, and to keep those -in opposition small and weak; and the result was disaster and ruin -in every direction. The greater the trade of the country, the more -apparent became the evil, until even the Government was compelled to -decide that the monopoly of the Bank of England must forthwith be -curtailed.</p> - -<p>Small tradesmen were quick to realise the possibilities attached to an -unlimited issue of notes, and hundreds of them combined the business of -banking with their retail trades, for, although the law placed every -obstacle in the way of sound banking, it encouraged small men, who -possessed little or no capital, to engage in a business which should be -conducted with much capital and great caution. The country was flooded -with the notes of these so-called bankers, who, directly their notes -were presented for payment in large numbers, failed by the dozen.</p> - -<p><span class="pagenum"><a id="Page_17"></a>[Pg 17]</span></p> - -<p>A system which encouraged all that was bad, and excluded everything -that was sound and secure, was naturally doomed to extinction; and -small wonder that in 1826 the era of country joint stock banking began. -Like most fresh ventures which cannot be guided by precedent, it began -disastrously, for the simple reason that those who were responsible for -the guidance of the new companies had to learn from experience—a very -bitter school. But the new banks laboured under fewer disadvantages -than the old private bankers, and the Bank Act of 1844, we shall see, -clearly defined their position.</p> - -<p>We can now understand why the private banker was never a great success -in this country. He was of course sacrificed to the monopoly of the -Bank of England; for although six very rich capitalists could conduct -a large banking business, the resources at their command would not -be sufficient to enable them to extend their branches throughout the -country. Consequently, before the advent of the joint stock banks we -find the private banker, broadly speaking, confining his connections to -a particular district or county.</p> - -<p>It is true that he enjoyed free trade in banking down to 1844; but the -regulation<span class="pagenum"><a id="Page_18"></a>[Pg 18]</span> as to the number of partners in his business necessarily -confined his offices or branches to a limited area, and effectually -prevented his expansion on a large scale; so we get influential houses -in the various counties, such as the Gurneys in Norfolk and Suffolk, -the Smiths in Nottingham, and so on. It is noticeable, however, that -both these well-known private firms, recognising the applicability -of the joint stock system to the times, have surrendered their note -issues, and taken a place in the modern movement, evidently foreseeing -that, in order to progress, they must adopt the methods of their more -successful rivals.</p> - -<p>Undoubtedly, the country was not ripe for such a movement until the -beginning of the nineteenth century; and though the number of partners -in private banking firms was extended to ten in 1857, this concession -by no means placed the private banker on an equal footing with the -joint stock companies, which could increase their members or partners -by the issue of additional capital whenever it became apparent that -their business was rapidly progressing. The private banker, had he -desired to farm some dozen counties, would have been compelled to find -a few large<span class="pagenum"><a id="Page_19"></a>[Pg 19]</span> capitalists to join hands with him, whereas the joint -stock banks had only to obtain hundreds of very small ones, and it is -quite evident that the companies possessed infinitely the easier task. -In fact, down to 1844 the monopoly of the Bank of England prevented -their rapid growth. Then came the period of, so to speak, free banking; -but not for the private firms.</p> - -<p>People are constantly asking: Why did not the private bankers establish -themselves firmly in the country and progress? They were first in the -field, and, had they been well managed, surely they would have been as -progressive as their joint stock rivals.</p> - -<p>But we know that the law never gave them the remotest chance. How could -they progress on a really gigantic scale when their partners were -limited to six? The law literally forced them to stand aside; and in -1826 and 1833 only the joint stock system profited by the concessions -wrung from the Bank of England, because by that system alone could -sufficient capital be obtained to enable a bank to farm the country -from south of the Tweed to Land's End.</p> - -<p>Of course the private banker was at liberty to adopt the joint stock -system at an earlier<span class="pagenum"><a id="Page_20"></a>[Pg 20]</span> date, but he did not at first believe in the new -movement, and, consequently, clung to his own system until he was far -outdistanced by his competitors, for directly the country was relieved -from the incubus in the shape of the Bank of England's monopoly, and -the joint stock system was given a free hand, that system, as might -have been expected, instantly began to forge ahead, and in a very short -space of time the private banker, who to this day cannot admit more -than ten persons into partnership, was left hopelessly behind by a -system which was unfettered by legal restrictions and allowed fair play.</p> - -<p>The Bank of England's monopoly reduced the private banker to impotency. -It fostered in every county of England dangerously small firms, which -disappeared in hundreds as soon as credit became bad and a state of -panic caused their notes to be presented for payment in unusually large -numbers, and it made really great private banking companies impossible -in England; while but for the fact that public opinion wrenched this -power from the hands of the directors, the Bank and its monopoly, which -encouraged a dangerous form of banking, might both have been swept away -in a bad financial crisis.</p> - -<p><span class="pagenum"><a id="Page_21"></a>[Pg 21]</span></p> - -<p>Fortunately, public opinion won the day; and though the private banker -could not compete successfully against the joint stock system on -account of the smallness of his capital compelling him to concentrate -his energies in a particular district, that system, being unrestricted, -soon covered the land with its branches. The private bankers were at -first held in check by the Bank of England's monopoly. Now they are -simply being smothered out of existence by the extension of a system -of which, in a manner, though, of course, not in the modern sense, the -Bank was the first exponent; for a banker, at the beginning of the -nineteenth century, was largely dependent upon his note circulation for -his profit, our present system of deposit banking being then in its -infancy. In fact, the one evolved out of the other.</p> - -<p>If a person held one hundred pounds in bank notes, it could not but -occur to him that he was in reality lending the issuer one hundred -pounds entirely free of interest; and as he possessed sufficient -confidence in the banker to lock up the notes in his cash box, it was -only going one step farther to deposit his money at his bank and draw -out the cash as he required it. Obviously, too, if he<span class="pagenum"><a id="Page_22"></a>[Pg 22]</span> exchanged the -notes for a deposit receipt, he would receive some interest upon his -money; and as the receipt could be held equally as safely as the notes, -he naturally adopted the plan that was the more profitable to himself. -So, although in 1826 the joint stock banks in the country attached -great importance to their circulation, their notes rather took the form -of an advertising medium for attracting deposits, or, at least, became -a means to that end, for the progressive banks did not hesitate to -sacrifice their note issues in order that they might open branches in -London.</p> - -<p>We find, then, that the joint stock banks at first attempted to place -as many of their notes as possible among the public, and that, by the -process already explained, the holders of their notes gradually began -to deposit with them, until, by degrees, our present system of deposit -banking obtained a firm hold upon the habits of the people. As the -trade of the country expanded, the cheque rapidly drove out a large -proportion of the bank notes in circulation; and though the issue of -notes certainly introduced deposit banking in this country, modern -requirements have made cheques and bills of exchange the media for -the transference of credit. Such being the<span class="pagenum"><a id="Page_23"></a>[Pg 23]</span> case, the note issues of -the larger joint stock banks became of secondary importance to them; -and, rather than remain outside the Metropolis, we have seen that they -sacrificed their notes to the monopoly of the Bank of England.</p> - -<p>From 1708 to 1826 the Bank of England owed its predominant position -entirely to monopoly, and enough has been written to show that its sway -was not an unmixed blessing to the country. The private banker, without -a shadow of doubt, can trace his lack of progress to the restrictions -placed upon his business by the Bank charter; and the joint stock -companies may certainly be said to have succeeded in spite of the -Bank; yet no greater compliment can be paid to any institution than to -assert that it has earned the respect, if not the love, of its enemies; -and such undoubtedly may be truthfully affirmed of the "Old Lady of -Threadneedle Street," even when her rule was autocratic and her rivals' -dislike of her intense.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_24"></a>[Pg 24]</span></p> - -<h2 class="nobreak" id="CHAPTER_II">CHAPTER II.</h2> -</div> - -<p class="center">Before and After the Act of 1844.</p> - - -<p class="drop">W<span class="uppercase">e</span> have seen that part of the Bank of England's monopoly was annulled -in 1826, and that in 1833 a clause was inserted in the charter to the -effect that joint stock banks of unlimited liability could open in -London, provided they did not issue notes; and though the state of the -law still allowed the Bank to harass and annoy the new companies, its -power was thoroughly broken, and its monopoly of joint stock banking -gone—fortunately for ever.</p> - -<p>The country enjoyed a period of prosperity from 1833 to 1836, but the -speculative fever soon began to develop, and by the end of 1835 it was -burning fiercely, for men and women possessed an extraordinary faith -in those much advertised short cuts to wealth in the early thirties. -No path, if it were sufficiently short,<span class="pagenum"><a id="Page_25"></a>[Pg 25]</span> was too precipitous. Hope was -boundless, credit was unlimited, and companies in profusion were formed -by the philanthropists and dreamers of those times.</p> - -<p>Then came the crisis of 1837, when the Bank's policy rose almost to the -verge of madness. Just at a critical moment, when it was imperative -that no untoward incident should occur to disturb the already depressed -state of credit, the Bank of England refused, and persisted in its -refusal, to discount bills bearing the endorsement of the joint stock -banks.</p> - -<p>The action of the Bank added to the confusion, and, as speculation in -America had been rampant, it dealt a final blow to the houses engaged -in the American trade by issuing instructions that their bills also -should not be discounted. Then, as might have been expected, the fury -of the storm beat against the Bank itself; and by the end of February, -1837, its bullion was reduced to £4,077,000. In 1839 another crisis -occurred, and the bullion declined to £2,522,000. Upon this occasion -£2,500,000 was borrowed from the Bank of France, and the discount rate -of the Bank of England was gradually advanced to six per cent.</p> - -<p><span class="pagenum"><a id="Page_26"></a>[Pg 26]</span></p> - -<p>These constantly recurring panics thoroughly alarmed the Government, -which, having stripped the Bank of England of its monopoly of joint -stock banking, now turned its attention to the currency, and by the -Bank Act of 1844 secured the convertibility of the note. In fact, the -chief aim of the Act was to reduce the issues of the country bankers, -who, by forcing large numbers of their one pound notes into circulation -and neglecting to maintain a sufficient proportion of cash in hand to -meet them on presentation, helped to finance the gamble of 1824. Some -of the banks paid the penalty in the year following, and disappeared -from the scene.</p> - -<p>In 1821 the Bank of England, after a period of restriction, began to -pay off its notes under the value of £5, but the Government allowed the -country bankers to continue issuing their small notes until the expiry -of the Bank Charter in 1833. In 1826 an Act was passed prohibiting the -stamping of notes under £5, and forbidding the circulation after April, -1829, of those then current.</p> - -<p>The Bank Act of 1844 confirmed the alterations of 1826 and 1833, and, -in addition, made great alterations in connection with the currency. -The Issue Department of the Bank of England was to be kept entirely -distinct from<span class="pagenum"><a id="Page_27"></a>[Pg 27]</span> the Banking Department. Notes, to the extent of -£14,000,000, might be issued against the debt owing by the Government -to the Bank and against other securities, but coin and bullion must be -deposited in the Issue Department against every note issued in excess -of that sum.</p> - -<p>Notes issued by the Bank of England are, therefore, secured principally -by specie, and by the Government debt, which amounts (1902) to -£11,015,100; and as every note is a warrant entitling the holder to -gold on demand, a Bank of England note is really and truly equivalent -to gold. However, under certain possible, if improbable, conditions, -the Bank could not fulfil its obligations or promises to pay cash -on presentation, for if all its notes in circulation were presented -simultaneously there would not be sufficient coin in the Issue -Department to meet them; but that is a most unlikely contingency.</p> - -<p>Further, these notes are "legal tender" in England. In other words, -a debtor can compel his creditor to accept them in discharge of his -debt; but nobody is obliged to give out change should the value of the -notes tendered exceed the amount of the sum owing. In Scotland and -Ireland Bank of England notes are "current"<span class="pagenum"><a id="Page_28"></a>[Pg 28]</span> but not "legal" tender. -Neither are they by the Bank itself, nor by any of its branches, and -sovereigns, though not half-sovereigns or silver, may be demanded in -exchange. All notes are convertible at the London Office of the Bank, -whose branches, however, are only responsible for those notes issued -therefrom.</p> - -<p>The Bank still retains the monopoly of issuing notes in London and at a -distance not greater than sixty-five miles from the Metropolis. No new -bank of issue may be formed; and as the private bankers in London had -ceased circulating their notes prior to 1844, the Act practically gave -the Bank the monopoly of note issue within the prescribed area. This -monopoly alone is of great value; but when we remember that its notes -are legal tender in England as well, it is evident that the Bank of -England still enjoys a most important concession.</p> - -<p>The private bankers of London, and the joint stock banks in London and -within sixty-five miles of it, were debarred by the Act of 1844 from -issuing notes. Of course the private bankers who still issued notes -within the prescribed space retained their privilege, but they were no -longer able to circulate as many as they could persuade the public to -accept.</p> - -<p><span class="pagenum"><a id="Page_29"></a>[Pg 29]</span></p> - -<p>Bankers, both joint stock and private, who claimed the privilege of -issuing notes were compelled to make a return of their issues for a -period of twelve weeks to a given date, when the average amount was -ascertained, and the extent of the future issue of each bank settled -in accordance therewith. The issues, in other words, were fixed, and -they could not exceed the sum authorised without breaking the law, -and exposing themselves to a fine equivalent to the average excess -during any one month. The Government, anxious to avoid a repetition of -the scandals of 1825 and 1836, was evidently determined to limit the -note circulations of the country banks, and there seems little doubt -that, when the Act was framed, one of its aims was the slow but sure -extermination of the country bank note.</p> - -<p>Banks which intend giving up their note circulations may compound with -the Bank of England, which is then allowed to increase its own issue by -two-thirds of the disappearing issues. The Government, however, takes -all the profit accruing from such arrangements.</p> - -<p>The result of these regulations can be seen in the accretions made -from time to time to the Bank's authorised issue of £14,000,000, which -has now increased to £18,175,000. The<span class="pagenum"><a id="Page_30"></a>[Pg 30]</span> majority of the issues of the -private bankers fixed by the Act of 1844 have since lapsed; and the -same may be said of the more progressive of the country joint stock -banks, which, as their deposits grew, opened branches in London, -thereby sacrificing their note circulations to the monopoly of the Bank -of England, whose notes are fast driving those of the small country -bankers out of circulation. Broadly speaking, it may be said that Bank -of England notes are the only notes accepted readily by the English -public; but the mere fact of their being legal tender ensures that.</p> - -<p>Readers who are not acquainted with the history of Banking must not -assume that the Act of 1844 affects either Scotland or Ireland. The -note circulation of both those countries is regulated by the Act of -1845, but in neither country are the provisions identically the same as -those affecting England.</p> - -<p>Any person may demand of the Issue Department notes in exchange for -gold bullion of standard fineness at the rate of £3 17s. 9d. per ounce.</p> - -<p>The Bank Act of 1844, according to its framers, would make panics and -crises evils of the past; but, as a matter of fact, it was a new broom, -and its sweeping powers were<span class="pagenum"><a id="Page_31"></a>[Pg 31]</span> greatly overestimated. Its provisions, we -can see, related entirely to currency reform; and though the country -bankers could no longer borrow on their notes to an unlimited extent, -it must be remembered that Sir Robert Peel's famous Act, if it fixed -the maximum amount of their issues, did not take the precaution to -also fix the minimum reserve of cash in hand to be held against them. -Obviously, no Act could strengthen the position of the banks against -panics unless it laid down the minimum or legal reserve of cash to be -maintained against deposits, and we shall see that, in this respect, -the Act of 1844 did not realise expectations.</p> - -<p>Controversy raged furiously around Peel's Act, and, needless to say, it -became the bone of party contention. Whenever a subject reaches that -stage in this country, its merits are forced into the background. Sides -are taken, critics and politicians range themselves upon either the -one or the other, and the subject, consequently, speedily gets all the -truth lashed out of it. The number of people who really understand the -question thoroughly is infinitesimal; and they, as a rule, by a strange -irony of fate, do not dabble in politics. The important subject is -therefore handed over to the tender mercies of the multitude,<span class="pagenum"><a id="Page_32"></a>[Pg 32]</span> which, -quite ignorant of its underlying principles, splits itself into two -hostile camps, beats out the dust with sticks, and then returns a man -to Parliament to vote on this side or on that.</p> - -<p>When in 1847, three years after the passing of the Act, another crisis -occurred, public opinion attached all the blame to Peel's Act; but -public opinion was wrong. Public opinion is usually based upon instinct -rather than upon reason, and, consequently, carried away by a sense of -indignation or wrong, it rushes madly at what it considers the cause of -the mischief. In this case its bugbear was Peel's Act. The real reason -was to be found in the simple fact that neither the Bank of England nor -any of the large banks held a sufficient proportion of cash in hand -to meet those sudden demands for gold which may be made upon a banker -at any moment, and to which his business is peculiarly exposed during -periods of bad credit.</p> - -<p>It was the old, old story, which in these days seems hardly to require -an explanation. After a period of exceptional prosperity, there almost -invariably follows a lean year or two, when loanable capital is -cheap and the prices of commodities depressed. Then is the<span class="pagenum"><a id="Page_33"></a>[Pg 33]</span> company -promoter's opportunity, and schemes, wise and otherwise, are brought -to the notice of the public. Presently there comes a gradual expansion -of enterprise, and rising prices beget confidence, when a whisper goes -round to the effect that good times are coming.</p> - -<p>At first business improves slowly and surely. Then, as prices mount -higher and higher, every producer increases his output, anxious to -share in the general prosperity. Suddenly, just before the end, there -is a boom. Prices rush madly upwards, until every prudent man sees -that business has degenerated into a mere gamble, and that he must act -quickly if he does not wish to be caught by the receding tide. Unless -the banks are strong at that moment, disaster is inevitable; and as -they had not taken the necessary precaution in 1847, the result was a -crisis.</p> - -<p>Capital was cheap during the last quarter of 1844, the Bank rate -remaining stationary at two-and-a-half per cent. from September of that -year to October, 1845. Cheap money gives the promoter his opportunity; -and in 1845 the railway mania was at its zenith. England was in the -hands of the surveyor, and the "boom" began in real earnest. As usual,<span class="pagenum"><a id="Page_34"></a>[Pg 34]</span> -everybody was to become immensely rich, and, as usual, most people -were again bitterly disappointed. By a strange process of reasoning, -experience does not count in finance. Hope, after a very little while, -drives out of the memory of human beings the nightmare of disaster; -so, in an astonishingly short space of time, they are gambling again. -The crisis of 1837 had lost all its significance by 1845; and then, of -course, the Bank Act was to prevent commercial panics in the future!</p> - -<p>At the end of 1846 the Bank rate was raised to four per cent., and in -October, 1847, it touched eight per cent. The speculation in railways -naturally resulted in a gamble in iron; and, after the terrible famine -in Ireland of 1846, when thousands died of fever and want in their -wretched hovels and even on the roadsides, the suspension of the Corn -Laws led to large importations of foreign grain. A sudden fall in -prices immediately followed the increased supply, and the merchants in -Mark Lane began to fail. Then people looked gravely at one another, and -inquired what would happen next.</p> - -<p>Credit is the disposition of one person to trust another; therefore -as business gradually<span class="pagenum"><a id="Page_35"></a>[Pg 35]</span> expands, credit or confidence increases at -precisely the same ratio; and when prices are high and profits large, -the impression prevails that everybody is making money—consequently, -confidence begins to drive out caution; so, towards the end of a -period of prosperity the acquisitive fever burns fiercely. Everybody -is in mad haste to get rich; caution is flung to the winds; and we -get a <i>débâcle</i>. Then follows a time of bad credit. That is to say, -immediately after the reaction, everyone is disposed to be sceptical -of his neighbour's position, to wonder whether he were hit by the -recent upheaval, and to be extremely cautious in granting credit to his -customers. This took place after the crisis of 1847. For a little while -everybody was afraid to trust his neighbour; but by 1857 speculation -was in full swing again, and the inevitable collapse followed. These -periods of good and bad times, or good and bad credit, run their course -with the regularity of a fever.</p> - -<p>So it was in 1847. Directly a few failures were announced, the public -became alarmed, and speculation received a check. The failures -continued, and every holder of bills, anxious to have money at his -credit at the banks, tried to discount them. But the banks were -totally<span class="pagenum"><a id="Page_36"></a>[Pg 36]</span> unprepared for this sudden demand, and in Liverpool and -Newcastle some of them closed their doors. The London bankers refused -their customers ordinary accommodation, and the Bank of England at -first declined to advance against securities. Bills, consequently, -could not be met at maturity, and the result was panic and a run on the -banks.</p> - -<p>The situation was saved by the suspension of the recently passed Bank -Act, and on 25th October, 1847, the Government authorised the Bank -of England to issue notes at its discretion, until the feeling of -apprehension had subsided. The Bank thereupon advanced on bills and -stock, and, although the rate of discount was eight per cent., the fact -that money could be obtained on good bills and first-class securities -speedily allayed the panic, and by 23rd November following the Act was -again in force. Further, the amount issued by the Bank beyond the limit -imposed thereby did not exceed £400,000, although its reserve, by 23rd -October, was reduced to £1,547,000.</p> - -<p>Perhaps we shall now be better able to understand the Act of 1844, and -to see that, though it effected a most useful reform in the currency, -and prevented a host of weak country bankers inundating the provinces -with<span class="pagenum"><a id="Page_37"></a>[Pg 37]</span> their doubtful paper, it does not contain a single clause which -would either prevent or alleviate a panic. Indeed the paradox is that -during a crisis relief can only be obtained by breaking the Act, and -allowing the Bank of England to advance notes freely against the -better-class securities. The power to issue notes was taken out of the -hands of numerous weak banks, and confided to one strong one. Perhaps, -however, it would be more correct to say that the power for evil of the -small country bankers was "fixed" by the Act; and, as we have seen, -the Bank of England's notes are gradually driving those of the English -provincial banks out of circulation. Then, again, the extinction of the -country issues gave a marked impetus to our modern system of deposit -banking. The cheque soon became the principal credit document in -circulation, and the country joint stock banks relied absolutely for -their advancement upon their ability to attract deposits to their books.</p> - -<p>So long as the Bank of England's notes can be exchanged for gold -on demand, it is impossible for them to depreciate in value, and -they cannot drive more gold out of the country than is equal to the -Bank's fixed or authorised maximum, because, against every<span class="pagenum"><a id="Page_38"></a>[Pg 38]</span> note -issued in excess, specie for a like amount must be deposited in the -Issue Department. Certain writers urge that this limitation is an -interference with the freedom of the banker; but, seeing that our -modern system of banking rests upon so small a cash basis, surely it -is absolutely essential that our currency at least should be above -suspicion in times of falling credit. The public does not require notes -then. It wants credit; and this it obtains in the books of the banks.</p> - -<p>The currency, certainly, should be left absolutely to the laws of -supply and demand; and though it is true that the Bank of England -sometimes has to protect the convertibility of its notes by raising its -rate of discount, still, our present system approaches very near to -perfection in so far as the exchange of the note for gold is concerned, -and it certainly does not seem desirable to have the country again -flooded with paper money which may, or may not, be paid on presentation.</p> - -<p>Any person who possesses gold can have it turned into coin immediately; -so, under our present system, every addition to the currency must come -either direct from the mines or else be received in settlement of the -balance of indebtedness owing by foreign<span class="pagenum"><a id="Page_39"></a>[Pg 39]</span> nations to this country. We -are, therefore, spared those evils which result from an over-issue -of paper, and which were sometimes so greatly in evidence before the -passing of the Act of 1844.</p> - -<p>The absurdity of the attack on the Act must now be apparent, inasmuch -as the only reform it could possibly effect was a currency reform, -which was certainly badly needed. Viewed in that light it must surely -be acknowledged that the Bank Act of 1844 is one of the soundest -financial Bills that has ever become an Act of Parliament. The fact -that, in spite of the great change in our banking system—which may be -said to have been revolutionised since 1844—the Act has successfully -stood the test of time, is also proof positive (if proof were required) -that it was framed with great skill and judgment.</p> - -<p>Had the Act further decreed that every bank should maintain a ratio -of, say, at least eighteen per cent. of legal tender against its -public liabilities, even panics might have been avoided. At any rate, -the banks would have been better prepared to meet drains upon their -resources, though even then—as has been pointed out is the case with -the Act itself—the law would have to be<span class="pagenum"><a id="Page_40"></a>[Pg 40]</span> broken directly a run was -made on the banks by their customers. For all that, such a regulation -would keep the banks in a fair state of preparedness during normal -times, and consequently every bank in the land would be ready to face a -panic.</p> - -<p>Our system of credit is based on a small cash reserve; and it would be -impossible to devise any workable scheme which would afford bankers -absolute security, because it would prove too costly both to the banks -themselves and to their customers, who would have to pay much higher -rates in proportion as the depositors' money was secured. The most -prudent banker can only insure his business up to a certain point, as, -if he kept more than a certain proportion of cash in hand, he would -conduct his business at a loss; so if a panic take possession of his -customers and they rush for gold, he is lost if the demand should drain -his reserve and encroach on his till-money. No system in the world -could possibly save him then. The most our banks can do, therefore, -is to be prepared to a certain extent, and, viewed in the light of -past history, it is criminal of directors not to take the ordinary -precautions. A clause in the Act, as already suggested, would<span class="pagenum"><a id="Page_41"></a>[Pg 41]</span> at least -ensure a fair state of preparedness in all our banking companies, and -beyond that it is impossible to go.</p> - -<p>It has been shown that the Act works most effectively in a time of -panic when it is broken. It is, perhaps, interesting to recall that -the Bank of Germany, in order to remedy this defect, is allowed to -issue notes beyond the authorised amount at its own discretion; but -the German Government, in order to check abuses, makes over-issue an -unprofitable transaction for the Bank by imposing a fine of five per -cent. on any amount issued in excess of the authorised limit. Were our -own Government to adopt the same expedient, the Bank of England, during -a time of stress and excitement, could meet all demands automatically, -and the Act would be almost perfect of itself. On the other hand, the -Government might not like to see so much power pass into the hands of -the directors of the Bank, though there can be little doubt that they -would use it with the greatest moderation and to the public advantage.</p> - -<p>The object of this chapter is to show that panics were not lessened -in any degree by the Act, and perhaps it may be said that the fact -has been dinned into one's ears<span class="pagenum"><a id="Page_42"></a>[Pg 42]</span> to the verge of irritation. But an -ardent reformer's feelings are strong, and it is difficult to make -this subject clear to those who are not conversant with the history of -Banking, and who, perhaps, are disposed to think the subject both dry -and uninteresting.</p> - -<p>The panic of 1847 was followed by another in 1857, and in 1866 the -Overend and Gurney crisis occurred. From 1866 down to the present day, -unless we include the Baring scare in 1890, the country has been free -from these scourges, and the reason is not very far to seek.</p> - -<p>The Act of 1844 placed the currency of the country on a sound basis, -and experience, by teaching the banks caution, did the rest. The -large banking companies, after the terrible panic of 1866, plainly -recognised that advances must be made with great discretion, and that, -if they valued their own safety, speculation must be either kept -well within bounds or discouraged entirely. Merchants and traders -who require capital for speculative purposes can only obtain it by -making application to the banks, which, in the very great majority of -instances, now refuse to make advances unless tangible securities be -deposited to cover their loans.</p> - -<p><span class="pagenum"><a id="Page_43"></a>[Pg 43]</span></p> - -<p>Merchants, therefore, unless their credit be exceptionally good, or -unless they possess first-rate stocks and shares, cannot speculate -to the same extent as was possible forty years ago and, of course, -those persons who possess marketable securities, which bring them in -incomes, are the last people in the world to risk an assured position -for possible great future gain. They are accustomed to the good things -of this earth, and though they may earnestly desire a large accretion -to their wealth, the thought that, in the event of failure, they may -lose what they already possess, checks the impulse to finance a scheme, -which, while holding out promises of great success, is also not without -possibilities of grave disaster. As a rule, only small men will take -such risks, and the banks will not finance them at any price.</p> - -<p>By refusing to accommodate weak speculators, the banks have kept -business in a healthy channel, and have largely confined speculation -to those people who can afford to pay their losses—always a cautious -class. The rank speculator, therefore, has been driven to outside -houses, and such houses, we know, are constantly failing; but Lombard -Street, having weeded this dangerous element out of its system, is now -more stable.</p> - -<p><span class="pagenum"><a id="Page_44"></a>[Pg 44]</span></p> - -<p>Recognising that their system of credit is always exposed to possible -disaster, and having had the fact brought forcibly home to them upon -so many occasions, the banks, since 1866, have gradually accumulated -larger and larger cash reserves in order to be better prepared to deal -immediately and effectively with those cataclysms which from time to -time are certain to assail them; and though it is an open question -whether their reserves are even now sufficient, the most casual -observer must acknowledge that, with a few exceptions, our banking -companies are in a better state of preparedness at the moment than -perhaps during any other period of their history.</p> - -<p>By compelling the schemers to deposit securities against their loans -and advances the banks secure themselves against large bad debts; and -by accumulating fair cash reserves they insure their business against -suspension during panics. Having taken these precautions, it is not -surprising that their path has been rendered comparatively smooth -during recent years; and, further, the more prudent manner in which the -business of a banker is now conducted makes the shares of the large -banking companies less speculative holdings,<span class="pagenum"><a id="Page_45"></a>[Pg 45]</span> and greatly reduces the -risks of shareholders in connection with their liabilities on the -uncalled portion of their shares, though that liability should by no -means be forgotten or accepted in any other light than that of serious -responsibility.</p> - -<p>This brings us to another point in their history. It was not until 1858 -that banks could be registered as limited liability companies, and, -needless to say, no unlimited bank has been formed since that date; -whilst every joint stock bank now in existence (although, in the great -majority of instances, the members are liable for certain known sums on -each share held by them) has limited the liability of its shareholders, -those companies formed prior to 1858 having since taken the necessary -steps.</p> - -<p>Naturally, persons of wealth would not risk their fortunes by holding -shares in an unlimited bank, but now that the exact liability is known -the responsibility is accepted with a lighter heart, and, consequently, -this class of security is considered a desirable investment by those -who can afford to take a little risk in return for higher interest than -that yielded by the so-called "gilt-edged" variety of securities.</p> - -<p><span class="pagenum"><a id="Page_46"></a>[Pg 46]</span></p> - -<p>The reader cannot but be struck by the gradual evolution of our banking -system; and it must be evident to him that the present more secure -position is the outcome of a bitter struggle with adversity. It is -usual, when discussing the Bank of England's position in the money -market, to degenerate into abuse, and to show that the Old Lady of -Threadneedle Street has committed every conceivable folly in dealing -with questions of finance. No doubt the accusations are true in the -light of past experience. But they were the follies of her times, and, -if we are to believe the critics, we are not greatly in advance of our -own. Then is it not a little unreasonable to expect the Bank directors -of 1825 to be in advance of the financial opinion then current in the -City? They had the very best advice of the day at their disposal, and -had the present-day critics lived in 1825 they would have urged the -Bank directors to take the very course that was then adopted.</p> - -<p>English history, at a certain period, seems an account of one long -struggle between the will of the people and the power of the Crown; and -Banking history, prior to 1844, reads like one long struggle between -the banks and the Bank of England. But there is this distinction,<span class="pagenum"><a id="Page_47"></a>[Pg 47]</span> to -wit, the sterling honesty of the Bank. Surely, in the whole world's -history there is not another such instance of unbroken faith on the -part of a financial institution which has enjoyed a life of more than -two hundred years. While anxious to give an accurate account of the -Bank's history, and to explain all its faults and all its failings, it -is impossible, the closer one examines its actions, not to be the more -impressed by its honesty of purpose.</p> - -<p>Every new movement gropes its way out of the darkness into the light. -The process is, however, a slow one; and if, in the future, there are -new problems to be solved, then future generations will have to learn -the laws affecting them in the school of experience. Despite their -increased knowledge, they will probably make the same mistakes as those -recorded in these chapters, for it is astonishing, as our environment -changes, how short a distance we can see in front of our noses. Banking -in 1950 will in all probability be very different to banking in -1902—especially if population increases at its present rate all the -world over.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_48"></a>[Pg 48]</span></p> - -<h2 class="nobreak" id="CHAPTER_III">CHAPTER III.</h2> -</div> - -<p class="center">The Bank's Weekly Return.</p> - - -<p class="drop">F<span class="uppercase">or</span> the nonce we have finished with history, and will turn our -attention to the Bank of England as it now stands in the centre of the -Money Market. The joint stock banks publish their balance sheets either -annually or half-yearly; but the Bank of England, in compliance with -the Act, compiles a weekly statement to the close of business each -Wednesday. This Return or Balance Sheet is submitted to the directors -on the following day, and, when passed by them, is exhibited on the -wall of the Bank to an expectant crowd of messengers and officials, -whose business it is either to criticise or copy it. But by far the -greater number of the persons there assembled merely wish to know -whether any alteration has been made by the directors in the Bank's -discount rate, and, that ascertained, the crowd rapidly thins.</p> - -<p><span class="pagenum"><a id="Page_49"></a>[Pg 49]</span></p> - -<p>The following is a copy of the Return or Balance Sheet for the week -ended Wednesday, 1st October, 1902:—</p> - -<p class="center">ISSUE DEPARTMENT.</p> - -<table summary="sheet" width="65%"> -<tr> -<td> -</td> -<td align="center">£ -</td> -<td> -</td> -<td align="center">£ -</td> -</tr> -<tr> -<td>Notes Issued -</td> -<td align="right">51,792,330 -</td> -<td class="td1"> Government Debt -</td> -<td align="right">11,015,100 -</td> -</tr> -<tr> -<td> -</td> -<td> -</td> -<td class="td1"> Other Securities -</td> -<td align="right">7,159,900 -</td> -</tr> -<tr> -<td> -</td> -<td> -</td> -<td class="td1"> Gold Coin and Bullion -</td> -<td align="right">33,617,330 -</td> -</tr> -<tr> -<td> -</td> -<td align="right" >—————— -</td> -<td class="td1"> -</td> -<td align="right" >—————— -</td> -</tr> -<tr> -<td > -</td> -<td align="right">£51,792,330 -</td> -<td class="td1"> -</td> -<td align="right">£51,792,330 -</td> -</tr> -<tr> -<td> -</td> -<td align="right">=========== -</td> -<td> -</td> -<td align="right">=========== -</td> -</tr> -</table> - - -<p class="center">BANKING DEPARTMENT.</p> - -<table summary="sheet" width="80%"> -<tr> -<td align="center"><span class="smcap">Liabilities.</span> -</td> -<td> -</td> -<td align="center"><span class="smcap">Assets.</span> -</td> -<td> -</td> -</tr> -<tr> -<td> -</td> -<td align="center">£ -</td> -<td> -</td> -<td align="center" >£ -</td> -</tr> -<tr> -<td>Proprietors' Capital -</td> -<td align="right" >14,553,000 -</td> -<td class="td1"> Government Securities -</td> -<td align="right" >15,826,080 -</td> -</tr> -<tr> -<td>Rest -</td> -<td align="right">3,816,736 -</td> -<td class="td1"> Other Securities -</td> -<td align="right" >31,837,516 -</td> -</tr> -<tr> -<td>Public Deposits<br /> <small>(Including Exchequer, Savings' Bank,<br /> Commissioners -of National Debt,<br /> and Dividend accounts)</small> -</td> -<td align="right" class="td2">10,025,973 -</td> -<td class="td3"> Notes -</td> -<td align="right" class="td2">21,391,145 -</td> -</tr> - -<tr> -<td>Other Deposits -</td> -<td align="right">42,695,526 -</td> -<td class="td1"> Gold and Silver Coin -</td> -<td align="right" >2,225,084 -</td> -</tr> -<tr> -<td >Seven-day and other Bills -</td> -<td align="right" >188,590 -</td> -<td class="td1" > -</td> -<td > -</td> -</tr> -<tr> -<td> -</td> -<td align="right">—————— -</td> -<td class="td1"> -</td> -<td align="right" >—————— -</td> -</tr> -<tr> -<td> -</td> -<td align="right">£71,279,825 -</td> -<td class="td1"> -</td> -<td align="right" >£71,279,825 -</td> -</tr> -<tr> -<td> -</td> -<td align="right">=========== -</td> -<td> -</td > -<td align="right" >=========== -</td> -</tr> -</table> - - - - - - -<p>A glance at the right hand side of the statement relating to the Issue -Department tells us that every note, either in the hands of<span class="pagenum"><a id="Page_50"></a>[Pg 50]</span> the public -or held in reserve in the Banking Department, is covered by securities -and specie deposited in the Issue Department. The amount of the notes -in circulation is, of course, obtained by deducting the notes in hand -in the Banking Department from the total amount of Notes Issued on the -left-hand side of the Issue Department. The difference, £30,401,185, -is called the "circulation," and represents the sum which the Bank of -England had borrowed from the public on its notes on the 1st October -last.</p> - -<p>Each department is distinct, and has, in fact, a separate existence; -so if the Banking Department requires gold, it must, like an ordinary -individual, exchange some of its notes in hand at the Issue Department, -obtaining therefrom the additional coin to satisfy the demands of its -customers in the Banking Department.</p> - -<p>The Bank has transferred the Government debt and other securities, -which together amount to £18,175,000, to the Issue Department, and this -sum is called the "authorised issue," for the simple reason that the -Government allows the Bank to issue notes for a like amount against -these securities, which are mortgaged to the holders of its notes.<span class="pagenum"><a id="Page_51"></a>[Pg 51]</span> -Gold coin and bullion, we know, must be deposited against every note -issued in excess of this sum; and as both sides of the statement agree, -it is evident that this has been done. These £51,000,000 of gold and -securities, then, are hypothecated to the holders of the Bank's notes, -and, in the event of the Bank of England being wound up, the creditors -in the Banking Department could not touch either the securities or the -gold. But we see that the Bank holds £21,391,145 of its own notes in -the Banking Department, and, of course, these notes are secured in the -same manner as those held by the public; consequently, this department -enjoys similar rights and privileges in respect of them. Add the notes -in hand in the Banking Department to the "circulation," and it will be -found that the total equals the amount issued.</p> - -<p>It follows that the Bank only makes a profit on the authorised portion -of its note issue, for, as gold is deposited against the remainder, -it must lose thereupon to the extent of the cost of production of the -notes issued in excess. Obviously, then, the Act does not limit the -note issue of the Bank, but it does limit that portion which is not -covered by gold, and, consequently, it removes the probability of our<span class="pagenum"><a id="Page_52"></a>[Pg 52]</span> -seeing Bank of England notes at a discount, as was the case during the -early part of the nineteenth century, for the fact that the Bank of -England is compelled to redeem its notes in gold on demand prevents -depreciation of its paper.</p> - -<p>Of course, the amount of notes in circulation varies from day to day, -and so, too, does the amount of notes issued, which rises and falls -as the stock of bullion in the Issue Department is either increased -or diminished. Every note paid is immediately cancelled, and no note, -after it has been changed at the Bank, ever goes into circulation -again. Hence the reason why Bank of England notes present such a marked -contrast to the notes of the country bankers, who issue their paper -over and over again, until it becomes quite unpleasant to handle, and -distinctly malodorous.</p> - -<p>The Bank of England may be said to perform four separate functions. -Its Issue Department, as we have seen, is responsible for the -notes. Secondly, the Bank manages the National Debt on behalf of -the Government. Thirdly, in consequence of its holding the bankers' -reserves, it acts as agent for the Mint. And, fourthly, it conducts an -ordinary banking business, but it includes among its customers<span class="pagenum"><a id="Page_53"></a>[Pg 53]</span> the -largest and most influential depositor and borrower in the Kingdom, to -wit, the British Government.</p> - -<p>The Banking Department, which we will next discuss, stands quite by -itself. The first entry on the left-hand side of the balance sheet, -we can see, consists of the Bank's capital. Then follows the "rest" -or reserve fund, which is never allowed to fall below £3,000,000, the -accretions made thereto from time to time representing the profits of -the Bank, which are distributed among the stockholders in the shape of -dividend after the close of each half-year on the 5th April and the 5th -October.</p> - -<p>The third entry on the statement, Public Deposits, is made up of the -various Government balances; and Other Deposits, which form by far -the largest debit in the balance sheet, comprise current account and -bankers' balances, the latter largely predominating. Since 1877 the -Bank has not published the sum standing to the credit of the London -bankers in its books; and as this deposit represents the reserve upon -which the bankers might have to draw in the event of a panic, it seems -an error of judgment not to give publicity to the figures, even if they -do show<span class="pagenum"><a id="Page_54"></a>[Pg 54]</span> how largely the Bank of England is dependent upon the other -banks for its own working resources.</p> - -<p>Public or Government Deposits and Other Deposits stand in a very -peculiar relation to each other, and, before discussing the October -return, it is perhaps desirable to illustrate this relation. The fiscal -year ends on the 5th April; consequently, the Government is busily -engaged in collecting the revenue during January, February, and March. -"Other Deposits" are often referred to as the market fund of cash, and -as those persons who pay their taxes draw cheques upon their bankers, -it follows that during these months huge sums are transferred from the -bankers' balances (Other Deposits) to the credit of Public Deposits, -which are consequently swollen appreciably.</p> - -<p>Bankers' balances being reduced, the banks have therefore less to -lend; and if the demand for loanable capital is brisk at the time, -borrowers are driven to the Bank of England, which sometimes has to -raise its rate of discount in order to protect its reserve. Payment of -instalments upon Government loans and large issues of Treasury bills -produce a like effect.</p> - -<p><span class="pagenum"><a id="Page_55"></a>[Pg 55]</span></p> - -<p>On the 5th October (four days after the date of the return under -discussion) a quarterly instalment on the National Debt is due. Then -credit flows from Government Deposits back to Other Deposits. The banks -can lend freely again, and the Bank of England, in order to attract -borrowers, may even have to lower its rates. Undoubtedly, this is a -somewhat artificial state of affairs, because money at times is made -either cheap or dear, not solely as the result of demand and supply, -but partly according to the personality of the holders of the loanable -capital when the demand arises.</p> - -<p>A glance at the return shows us that there is a balance of over -£10,000,000 against Government Deposits. This implies that the Bank -has control of the money market, that many of the bill brokers, -finding Lombard Street empty, have been compelled to borrow from the -Bank, which puts on the screw as demands upon its resources increase. -Further, rates are not likely to be easier until money is released by -the Government. Were the banks to keep their own reserves, and did the -Government deposit with three or four of the strongest of them, then -this constantly recurring tightness would not occur; but under our one -reserve system it is unavoidable. However, it<span class="pagenum"><a id="Page_56"></a>[Pg 56]</span> by no means follows -that the average rate of discount would be lower under such a system. -Indeed, the probability is that it would be much higher, because the -banks would be compelled to keep larger reserves, and, consequently, -would have less to lend.</p> - -<p>The last amount on the liability side of the statement is £188,590, -which is owing by the Bank on bills in circulation. Shortly after the -passing of the Act, and before the joint stock banks had accumulated -their vast deposits, the Bank of England issued a much larger volume -of these post bills; but since the country banks have been able to -draw upon their London agents and head offices in London, the Bank's -bills in circulation have gradually dropped from well over £1,000,000 -to their present figures. The last three entries, when added together, -give us the amount of the Bank's indebtedness to the Government and -to the public; and the aggregate, £71,279,825, represents the total -liabilities of the Banking Department. But a company, if it be solvent, -must possess assets for a like sum, and these we find on the right hand -or credit side of the statement.</p> - -<p>Nearly £16,000,000 are invested in Government securities; and though -any advances<span class="pagenum"><a id="Page_57"></a>[Pg 57]</span> made to the Government by the Bank on deficiency bills -are included therewith, the description is correct, as a loan to the -British Government is as safe as Consols. Just before the dividends on -the funds fall due the balance in the Exchequer is often insufficient -to meet requirements, and it is then that money is borrowed from the -Bank of England on deficiency bills. Of course the Bank also advances -to the Government for other purposes, and the extent of these loans may -be seen in the statement issued by the Chancellor of the Exchequer each -week.</p> - -<p>The next entry on the Assets side, "Other Securities," is extremely -misleading, or, at least, it embraces such a wide variety of assets as -to make the entry practically useless to all who wish to ascertain the -real position of the Bank. Included therein are (1) All the investments -of the Bank other than Government securities; (2) Loans to customers -and to the Stock Exchange, and bills of exchange discounted for -customers and for the bill brokers; (3) The book value of its various -premises, unless, of course, its head office and branches have been -paid for out of the profits of previous years, on which subject the -return does not enlighten us.</p> - -<p><span class="pagenum"><a id="Page_58"></a>[Pg 58]</span></p> - -<p>The balance sheets of some of the minor joint stock banks are -disgracefully compiled, but, with respect to this one entry, the Bank -of England return runs them very close, and it seems a pity that so -powerful a corporation does not set a better example. The Bank, because -it holds the bankers' reserves and keeps the Government accounts, is -often able to corner the outside market; therefore the least it can do -is to issue a plain statement, which will enable the public to see the -exact situation created by the unique position it occupies.</p> - -<p>The return is badly worded, and essential information is certainly -withheld, while distinctness is not by any means one of its good -points, for nobody, unless he studied the statement with the greatest -care, could possibly divine the meaning of some of its quaint, -old-world phraseology. But, as we all know, "great men and great things -are never in a 'urry"; and the Bank of England, which is great in the -best sense of the word, like the Government whose account it keeps, -has never been known to anticipate a new development. A pedigree -person always swears by the old. But the time has surely arrived when -public opinion should compel the directors to issue a fuller and less -ambiguous weekly statement.<span class="pagenum"><a id="Page_59"></a>[Pg 59]</span> The present form was no doubt a model of -lucidity in 1844; but it is woefully behind the times in 1902.</p> - -<p>The last two entries on the Assets side form the Bank's reserve -of legal tender. Strictly speaking, a bank's cash reserve is that -sum which it has set aside to meet possible demands of an abnormal -character, and as the Bank of England's till-money is included in the -two entries in question, the total, £23,616,229, cannot be considered a -true reserve, as a certain deduction has first to be made therefrom to -provide for the ordinary demands made upon its resources in the usual -course of business. Further, the Bank, because it is the bankers' bank, -is peculiarly exposed to large drains of specie and notes. It follows, -therefore, that to ascertain its true reserve, a very large amount -would have to be deducted from the sum in question. A true reserve -is a sum set apart for a particular purpose, of which no portion is -used in the business it is intended to guarantee. It is a fund apart. -Consequently, a banker's real reserve is obtained by deducting from -his legal tender in hand the sum he requires for the conduct of his -business. The Bank of England, however, needs more till-money than an -ordinary banking institution.</p> - -<p><span class="pagenum"><a id="Page_60"></a>[Pg 60]</span></p> - -<p>Glancing at the liability side of the statement, we see that the first -two entries represent working capital. In other words, £18,369,736 is -a fixed sum, against which it is not necessary to hold one penny in -reserve, because no withdrawals can be made therefrom during a time of -bad credit. Such an immense amount of working capital makes the Bank -of England more independent of its depositors than is the ordinary -joint stock bank, and, therefore, its strength as a banking company is -increased appreciably thereby, for the weakness of our banking system -is due entirely to a fear of possible sudden demands on the part of -depositors.</p> - -<p>Still keeping on the same side, the last three entries give us the -Bank's liabilities to the Government and to the public; and as large -demands upon this sum of £52,910,089 may be made at any moment, a sum -of notes and coin is held in the Banking Department to meet them. This -sum, the Bank's so-called reserve, amounts, we know, to £23,616,229, -and we next have to ascertain the ratio per cent. it bears to the -liabilities in question. The following sum will supply the answer:</p> - -<p>(£23,616,229 × 100) / (£52,910,089) = £44·6%</p> - -<p><span class="pagenum"><a id="Page_61"></a>[Pg 61]</span></p> - -<p>The Bank, then, on 1st October last, held £44·6 in notes and specie in -the Banking Department to meet each £100 it owed to its customers. Yet -we say "as safe as the Bank of England," when, as a matter of fact, -the Bank could not pay its debts on demand; and, paradoxical as it may -seem, so the Bank <i>is</i> safe, because its credit is so good that no man -in England would ever dream of questioning its stability, for, if he -did, he would only be laughed at for his pains. Again, comparatively -speaking, the Bank of England is certainly safer than its rivals, and -when we consider, in so far as its customers are concerned, the huge -amount of its capital and reserve, it is evident that it is by far the -safest bank in the land for depositors, as the larger the capital of a -bank the greater is the guarantee of the customer against loss.</p> - -<p>We have seen that the notes and coin in the Banking Department work out -at a ratio per cent. of 44·6 to deposits; but as notes are not legal -tender by the Bank of England, its creditors can refuse to accept them -in discharge of a debt. This £21,391,145 of notes might, however, have -been exchanged for gold with the Issue Department at any moment, so<span class="pagenum"><a id="Page_62"></a>[Pg 62]</span> -that the Bank could have paid off 44·6 per cent. of its liabilities on -the day in question—a huge proportion.</p> - -<p>It may be objected that, as a certain portion of its gold is held in -bars, which would have to be sent to the Mint for coinage, the Bank -could not discharge its debts quite so rapidly, and the contention -would be perfectly true. But, assuming this exchange were made, -£12,226,185 in gold would remain in the Issue Department to meet -£30,401,185 of notes in circulation. The Bank, of course, could not -then pay one half of its notes were they presented; but such a demand -is almost outside the bounds of probability. Still, it is one of those -extremely remote possibilities which no prudent Board of Directors can -afford to forget; and we may be quite sure that this fact has not been -overlooked by the Bank, which can always protect its gold by raising -its discount rate.</p> - -<p>In the next chapter another view will be taken of the Bank of England's -weekly balance sheet.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_63"></a>[Pg 63]</span></p> - -<h2 class="nobreak" id="CHAPTER_IV">CHAPTER IV.</h2> -</div> - -<p class="center">The Issue and Banking Departments Combined.</p> - - -<p class="drop">I<span class="uppercase">n</span> the preceding chapter the Issue and Banking Departments of the Bank -of England have been discussed separately. Strictly speaking they can, -of course, only be so treated, as each division stands alone; yet the -notes in the Banking Department undoubtedly form a connecting link -between the two divisions, seeing that they make the one department -by far the largest single creditor of the other. Therefore it is -intended in this chapter to discuss the return as a whole, to place -the totals in the Issue Department back in the Banking Department, and -to ascertain the Bank's exact state of preparedness<span class="pagenum"><a id="Page_64"></a>[Pg 64]</span> to meet all its -liabilities. The following table will enable us to do this:</p> - -<p class="center">ISSUE AND BANKING DEPARTMENTS.</p> - -<table summary="capital" width="80%"> -<tr> -<td> -</td> -<td align="center">£ -</td> -<td> -</td> -<td align="center">£ -</td> -</tr> -<tr> -<td>Capital -</td> -<td align="right">14,553,000 -</td> -<td> Specie and Bullion -</td> -<td align="right">35,842,414 -</td> -</tr> -<tr> -<td>Rest or Reserve Fund -</td> -<td align="right">3,816,736 -</td> -<td> Government Debt -</td> -<td align="right">11,015,100 -</td> -</tr> -<tr> -<td>Notes in Circulation -</td> -<td align="right">30,401,185 -</td> -<td> Other Securities -</td> -<td align="right">7,159,900 -</td> -</tr> -<tr> -<td>Public Deposits -</td> -<td align="right">10,025,973 -</td> -<td> Government Securities -</td> -<td align="right">15,826,080 -</td> -</tr> -<tr> -<td>Other Deposits -</td> -<td align="right">42,695,526 -</td> -<td> Loans, Bills Discounted, Securities, etc. -</td> -<td align="right">31,837,516 -</td> -</tr> -<tr> -<td>Seven-Day Bills -</td> -<td align="right">188,590 -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td> -</td> -<td align="right">————— -</td> -<td> -</td> -<td align="right">————— -</td> -</tr> -<tr> -<td> -</td> -<td align="right">£101,681,010 -</td> -<td> -</td> -<td align="right">£101,681,010 -</td> -</tr> -<tr> -<td> -</td> -<td align="right">=========== -</td> -<td> -</td> -<td align="right">=========== -</td> -</tr> -</table> - - - - -<p><i>1st October, 1902.</i></p> - -<table summary="ratios" width="90%"> -<tr> -<td colspan="7">=========================================================================== -</td> -</tr> -<tr> -<td>Ratio % of<br /> Specie and<br /> Bullion to<br /> Liabilities. -</td> -<td class="td3">Ratio % of<br /> Investments and <br />Government Debt<br /> to Liabilities. -</td> -<td class="td3">Total<br /> Liquid<br /> Assets. -</td> -<td class="td3">Ratio % of<br /> Capital to<br /> Liabilities. -</td> -<td class="td3">Ratio % of<br /> Rest to <br />Liabilities. -</td> -<td class="td3">Total<br /> Working <br />Capital. -</td> -<td class="td3">Ratio % of<br /> Loans, Bills, etc.,<br /> to Liabilities. -</td> -</tr> -<tr> -<td colspan="7">———————————————————————————————————————————— -</td> - -</tr> -<tr> -<td >43·02 -</td> -<td class="td1">40·81 -</td> -<td class="td1">83·83 -</td> -<td class="td1">17·46 -</td> -<td class="td1">4·58 -</td> -<td class="td1">22·04 -</td> -<td class="td1">38·21 -</td> -</tr> -<tr> -<td colspan="7">============================================================================== -</td> -</tr> -</table> - - -<p>It may be urged that as the gold and securities in the Issue Department -are mortgaged to the holders of Bank of England notes, they cannot -be treated as ordinary assets, and that is true enough; but when -we remember that upon the day in question the Banking<span class="pagenum"><a id="Page_65"></a>[Pg 65]</span> Department -could have exchanged notes to the value of £21,000,000 for gold, the -objection loses much of its force.</p> - -<p>However, assuming the Banking Department made the exchange, then specie -to the extent of over £12,000,000 and the second and third items on -the right-hand side of the balance sheet would be mortgaged to the -holders of the notes in circulation, and the Bank, were it in need, -could legally neither sell the securities nor apply the £12,000,000 in -question to the liquidation of any other debt.</p> - -<p>But, practically, there is small likelihood of the Bank of England -being drained of specie by its notes, which have always been accepted -without demur, even during the most troublous years of its history; -and, while remembering that the notes in circulation are secured in -the manner aforesaid, we may safely consider the Bank's state of -preparedness to meet its total public indebtedness from the point of -view that its liquid assets would be more than sufficient to discharge -all probable demands made by both holders of notes and depositors.</p> - -<p>On the 1st October last the Bank owed on its Notes in Circulation, -Public and Other Deposits, and Bills, the huge sum of £83,311,274, -which we will call its "Liabilities to the<span class="pagenum"><a id="Page_66"></a>[Pg 66]</span> Public." Against this it -held £35,842,414 in specie and bullion, which, a glance at the table -shows, works out at a ratio per cent. of 43·02. The Bank had, then, -£43·02 of the precious metals in hand to meet each £100 it owed to its -customers. There is not another bank in the kingdom able to publish a -balance sheet showing such a splendid proportion of cash in hand to -liabilities—but we must also remember that there is not another bank -in the country whose responsibilities are so great and so multifarious.</p> - -<p>In the previous chapter it was shown that the Banking Department -possessed £44·6 in notes and coin to meet each £100 of the public -liabilities included therein, and, moreover, this would be the ratio -given by the critics; but we now see that, when the two departments -are united, the ratio only works out at £43·02. Strictly speaking, -the larger ratio is correct; yet the smaller gives a much truer idea -of the Bank's ability to pay off its creditors in cash on demand. -Further, as the Bank cannot compel its customers to accept its own -notes in discharge of a debt, the ratio £43·02 certainly gives one a -more accurate impression of the Bank's position in relation to all its -creditors.</p> - -<p><span class="pagenum"><a id="Page_67"></a>[Pg 67]</span></p> - -<p>The Government Debt, Other Securities, and Government Securities amount -to £34,001,080, which works out at a ratio per cent. to liabilities of -£40·81, making the ratio of total liquid assets £83·83. A debt owing -by the British Government is rightly included with the liquid assets -of the Bank, for when the credit of the Government ebbs our banking -companies, which hold huge amounts of Consols, will no longer be -solvent institutions; but no reasonable man imagines that an edifice -which has been centuries in building, and which is still far from being -either complete or perfect, will "go under" in a day, though all know -that it cannot last for ever in its present form. We, however, only -live sixty years or so, and therefore each generation of business men -considers what will last out its time, and troubles itself but little -about what the state of commerce will be fifty years later, as though -dimly conscious that, in the end, man will have to go back to the land.</p> - -<p>The Bank, we see, possesses £83·83 in cash and the very best securities -to meet each £100 it owes to the public. Such figures cannot fail to -impress one, for they prove indisputably that, on its merits, the -Bank of<span class="pagenum"><a id="Page_68"></a>[Pg 68]</span> England is by far the strongest banking company in the three -kingdoms. They should not, however, blind our eyes to the fact that the -Bank is a credit institution, and that were its creditors to go for -gold in a body it would inevitably "smash," for, as we can see from the -figures in the first column of the table on page 49, it never keeps a -supply of the precious metals equal to its liabilities on demand. But, -for all that, the Bank is splendidly prepared to meet every probable -demand; and one cannot ask more of its directors.</p> - -<p>It would be easy enough to write an indictment against the Bank, -proving that its policy is all wrong, that it could not discharge its -obligations under certain given conditions, and that, therefore, it is -a menace to the solvency of the country. But such deductions, which -have already been made by more than one critic, are crass nonsense, -and only testify to the critics' ignorance of the subject. We know -that the Bank's system is not by any means a perfect one, but, surely, -the person who advertises an infallible financial system is either a -great rogue or a great simpleton; for why is he not himself rich beyond -desire?</p> - -<p><span class="pagenum"><a id="Page_69"></a>[Pg 69]</span></p> - -<p>The Bank of England, it is admitted, cannot meet its liabilities on -demand, and most people would think that its directors had gone mad if -they prepared to, while the stockholders would certainly threaten to -turn out those directors who proposed a policy which would reduce the -value of their stock considerably below parity.</p> - -<p>The question seems to be: Is the Bank of England sufficiently prepared -to meet all likely withdrawals of gold by its customers and by the -holders of its notes?</p> - -<p>The two columns, which give us the amount of the Bank's liquid assets, -tell us plainly enough that the Bank of England was well prepared on -the 1st October. We can see that it held a good supply of coin and -bullion, and, secondly, a valuable list of convertible securities; but -as the securities are only convertible so long as the Bank, which holds -the reserves of cash of all the banks in the United Kingdom, is in a -position to meet all probable demands upon its store of gold, it is -evident that the first ratio is of paramount importance.</p> - -<p>The Bank of England, which possesses the only large store of the -precious metals in this country, has to meet both the home and<span class="pagenum"><a id="Page_70"></a>[Pg 70]</span> foreign -demands for gold. It follows, therefore, that its ratio per cent. -of Reserve to Liabilities is eagerly scrutinised each week on the -publication of the return, because it indicates whether or not loanable -capital is likely to be dear or cheap. The means at its disposal for -maintaining an adequate supply in reserve will be discussed later on.</p> - -<p>Should the said ratio fall below, say, forty per cent., then it -is prudent to inquire the reason; and should it recede to, say, -thirty-three or thirty-four per cent., then there may be cause even for -apprehension; but so long as the Bank of England keeps a fair ratio -of reserve to its public indebtedness, there is no cause for alarm: -though a bank which holds the national reserve must always be extremely -cautious, even when credit is good and there is not a breath of -suspicion in the air, for the proverbial little cloud gathers strength -with incredible speed when once it does appear.</p> - -<p>Undoubtedly our banking system is exposed to the gravest dangers, but -as it brings us cheap money we accept the risks; and unless a critic -can produce a workable scheme which will eliminate the hazard and -retain the blessing of cheap loanable capital, he had<span class="pagenum"><a id="Page_71"></a>[Pg 71]</span> better by far -confine his attention to those safeguards that reduce the risks of our -present system, which <i>is</i> workable, to a minimum. Provided the Bank of -England keeps an adequate reserve in the Banking Department, we have at -least the satisfaction of knowing that all that can reasonably be done -to ensure safety has been done, and that those risks, which a credit -bank cannot avoid under any system, have at least been insured against -under our own.</p> - -<p>No doubt the Bank's large working capital of over £17,500,000 has -contributed very considerably to its ascendancy, and helped it, -especially since 1844, to more than hold its own against all comers; -for despite the fact that we occasionally hear sneers—no doubt -prompted by jealousy—at its so-styled omnipotence, an examination of -its return soon convinces the sceptical that it is still the largest -and safest bank in England. Further, it has occupied this enviable -position for over two hundred years.</p> - -<p>The ratio per cent. of Advances (loans, bills discounted, securities, -&c.) to Liabilities is only 38·21—a proportion, especially when it -is remembered that an unknown amount of<span class="pagenum"><a id="Page_72"></a>[Pg 72]</span> investments is included -therewith, which clearly informs us that the Bank is fully alive to the -responsibilities of its unique position, and that its directors, while -they are no doubt anxious to make as much net profit as possible for -the proprietors, have not lost sight of the fact that they also have -duties to perform towards the public.</p> - -<p>But it must not be thought that the directors discharge their duties -towards the public so well from philanthropic motives. Even from a -selfish standpoint it pays them to keep the Bank thoroughly prepared, -as, should they allow the reserve to sink too low, an anxious period -would be certain to follow, when additional profits, made by trading -with too large a proportion of the deposits, would speedily be swept -away by the expense incurred by borrowing back at high rates in order -to strengthen the cash in hand. For a little while the interest upon -the increased loans would swell the profits, but directly the foreign -exchanges moved against this country, and gold began to flow abroad, -even an inexperienced director would realise the folly of risking a -panic for the sake of seeing the dividends rise, and he would not make -such a doubtful experiment a second time.</p> - -<p><span class="pagenum"><a id="Page_73"></a>[Pg 73]</span></p> - -<p>Perhaps, before bringing this chapter to a close, it may be interesting -to compare the total indebtedness of the Bank of England to the public -and its stockholders with that of Lloyds and the National Provincial -Bank of England to their customers and shareholders. The following -table will supply the figures:—</p> - -<table summary="morecrap" width="35%"> -<tr> -<td colspan="2">======================================================== -</td> - -</tr> -<tr> -<td><span class="smcap">Name of Bank.</span> -</td> -<td><span class="smcap">Total Liabilities.</span> -</td> -</tr> -<tr> -<td colspan="2">———————————————————————————————— -</td> - -</tr> -<tr> -<td> -</td> -<td align="center">£ -</td> -</tr> -<tr> -<td>Bank of England -</td> -<td align="right">101,681,010 -</td> -</tr> -<tr> -<td>Lloyds -</td> -<td align="right">58,411,041<sup>[*]</sup> -</td> -</tr> -<tr> -<td>National Provincial Bank of England -</td> -<td align="right">56,444,126<sup>[*]</sup> -</td> -</tr> -<tr> -<td colspan="2">———————————————————————————————— -</td> - -</tr> -<tr> -<td align="center" colspan="2"><sup>[*]</sup>Balance Sheet dated 31st December, 1901. -</td> - -</tr> -<tr> -<td colspan="2">======================================================== -</td> - -</tr> -</table> - - - -<p>We can now see how much larger are the working resources of the Bank -of England than those of either of the other above-mentioned banking -institutions, though, as the joint stock banks keep their reserves of -cash with the Bank of England, the comparison loses a little of its -force. Still, the preponderance of the Bank of England is most marked, -a fact one is not, perhaps, so apt to realise when the Issue and -Banking Departments are considered apart.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_74"></a>[Pg 74]</span></p> - -<h2 class="nobreak" id="CHAPTER_V">CHAPTER V.</h2> -</div> - -<p class="center">The Store in the Issue Department.</p> - - -<p class="drop">W<span class="uppercase">e</span> next have to consider the amount of gold coin and bullion in the -Issue Department—to wit, £33,617,330, and we must remember that this -accumulation is the national store, that the cash reserves of all the -banks in England, Scotland, and Ireland are dependent thereupon, and -that, consequently, the solvency of the nation is decided thereby.</p> - -<p>The indebtedness of the English, Scotch, and Irish Banks to the public -at December, 1901, as shown by their balance sheets, upon current -accounts, deposit receipts, and notes in circulation, amounted to -nearly £910,000,000. The liabilities of the Bank of England and of -those private bankers who publish balance sheets are included in this -huge total.</p> - -<p>This £910,000,000 may be called the "floating capital" of the -country. It is deposited or left with the banks, who invest a certain -proportion<span class="pagenum"><a id="Page_75"></a>[Pg 75]</span> of it in securities, in short loans to the bill brokers -and stockbrokers, in making advances and loans to their customers, -and in discounting bills for them; and, as the said millions are left -at either call or short notice, the banks also have to maintain a -sufficient supply of legal tender to meet all probable demands upon -this immense debt. It is with this "floating capital" that the present -chapter is principally concerned.</p> - -<p>Stored in their strong rooms the banks keep sufficient legal tender -(Bank of England notes and specie) with which to conduct their -business. The sum thus held may be called their "till money"; and -it probably would not exceed five per cent. of the £910,000,000 in -question—viz.: £45,500,000. A large part of this till money is, -however, held in Bank of England notes, which are warrants for gold -upon the store in the Issue Department, but as creditors cannot refuse -the notes they are quite as valuable to a banker as gold. All a banker -has to consider is whether he has a sufficient supply of legal tender -to discharge his public indebtedness; and if he have, he need take no -thought for the morrow.</p> - -<p>Deducting £45,500,000 from £910,000,000, we get £864,500,000. Though -this is an<span class="pagenum"><a id="Page_76"></a>[Pg 76]</span> accumulation of credit in the books of the banks rather -than of cash, their customers can demand the equivalent from them in -legal tender; yet we see that, were the banks drained of £45,500,000, -they would then be entirely dependent upon their reserves at the Bank -of England.</p> - -<p>The reserves are included in Other Deposits, £42,695,526; and seeing -the magnitude of the amount it seems a pity that the Bank of England -does not tell us each week what portion of this total belongs to the -other banks. Further, the Bank of England employs these balances in -its own business; and, though it generally maintains a very large -ratio per cent. of reserve to liabilities, the fact remains that a -certain proportion of the cash reserves of our banks is lent out to -the public—a somewhat startling position at first sight. The banks -accumulate a reserve against those dangers from which their business -is never free, and the Bank of England advances some of it to its own -customers! Apparently, what could be more absurd? But in finance things -are so often not what they seem.</p> - -<p>We now come to the store of gold coin and bullion in the Issue -Department—£33,617,330.<span class="pagenum"><a id="Page_77"></a>[Pg 77]</span> A certain proportion of this must be retained -in order to secure the convertibility of the notes of the Bank, and the -remainder may perhaps be called the national store or accumulation. -The banks of the United Kingdom are indebted, roughly speaking, to -the public to the extent of £910,000,000. But we have seen that, say, -£45,500,000 of this sum is secured by legal tender in hand, so the -unsecured portion amounts to £864,500,000. Our position, then, stands -as under:—</p> - -<table summary="another" width="65%"> -<tr> -<td>Indebtedness of the Banks of the United Kingdom to the public -</td> -<td align="right">£910,000,000 -</td> -</tr> -<tr> -<td><i>Less</i> covered by legal tender (say) -</td> -<td align="right">45,500,000 -</td> -</tr> -<tr> -<td> -</td> -<td align="right">—————— -</td> -</tr> -<tr> -<td> -</td> -<td align="right">£864,500,000 -</td> -</tr> -<tr> -<td>Gold and bullion at the Bank of England -</td> -<td align="right">£35,800,000 -</td> -</tr> -</table> - - - - - -<p>As a matter of fact, we are looking on the bright side of the picture, -for seeing that a large amount in Bank notes would be held among the -£45,500,000 deducted, it follows that the store in the Issue Department -might be appreciably reduced were a considerable number of these notes -presented for payment; and then again, the indebtedness of those -private bankers who do not publish balance<span class="pagenum"><a id="Page_78"></a>[Pg 78]</span> sheets has been omitted. -Suppose we say that the banks hold £35,500,000 in specie. This, -added to the store at the Bank, gives us £71,300,000. Then our banks -owe £910,000,000; but there is only £71,000,000 of specie in their -possession with which to pay their huge debt. On the other hand, many -of the banks do not hold nearly five per cent. of their liabilities -to the public in legal tender on their premises; and, were the truth -known, it is more than probable that in some instances three-and-a-half -to four-and-a-half per cent. would be nearer the mark.</p> - -<p>England, after all, is only a gigantic workshop, and so long as her -shops are busy there is no danger. But have those people who live on -incomes invested solely in British securities ever reflected that, were -there no work for her shops, this system of credit would collapse like -a castle of cards, when their incomes would be gone? Our solvency as -a nation depends absolutely upon the skill and ability displayed by -British manufacturers, and upon the muscles and intelligence of their -workmen. Given a high standard of efficiency and adaptability on the -part of our producers, then trade flows to this country, and by trade -alone can we support our credit and pay our debts. Small<span class="pagenum"><a id="Page_79"></a>[Pg 79]</span> wonder, then, -that thoughtful people are becoming alarmed at the apotheosis of Games -in this country, and at the large number of idlers who do not take a -part in production, but are dependent upon the interest received from -investments, which can only be productive so long as our commerce is -flourishing.</p> - -<p>The capital of this country has been computed by a competent authority -at about £10,500,000,000, but doubtless these figures are very wide of -the mark. Still, the amount of fixed capital invested in the country -must be immense. By "fixed" capital, as distinguished from the floating -or loanable capital deposited with the banks and kindred institutions, -those investments of a more permanent character are implied. A -depositor can demand his money back from his banker, but bank shares -he would have to sell on the Stock Exchange—therefore the one is -"floating" and the other "fixed" capital. It is the same with Consols, -railway shares, and with the shares of all companies in which there is -a market. When there is not a market, then the capital is fixed indeed; -and there would not even be a market for Consols were the Bank of -England drained of its gold. Moreover, during normal times the demand -for loanable capital at the banks<span class="pagenum"><a id="Page_80"></a>[Pg 80]</span> will help to determine the price -an investor will receive should he desire to sell any of his fixed -investments.</p> - -<p>It consequently amounts to this: The fixed capital of the country -cannot be converted or sold unless the banks maintain large cash -reserves; so we may truthfully assert that about £10,000,000,000 of -capital is erected on a basis of about £71,000,000 of cash. This cash, -in its turn, can only be kept in the country while our workshops are -busy; therefore it at once becomes apparent that the national aim -should be to increase our trade, for the yield, and consequently the -value, of British securities is bound to either increase or diminish -in proportion as the trade of the country is either flourishing or the -reverse. Even the Government can only meet the interest on Consols -while the people are in a position to pay their taxes.</p> - -<p>Such a statement may come as a shock to those persons who are -accustomed to draw their dividends each half-year or year, and to -imagine that unless the world came to an end these dividends could -not cease; but they would cease were this country to fall hopelessly -behind in the race for trade. This is not the old Socialist maxim that -"Labour supports<span class="pagenum"><a id="Page_81"></a>[Pg 81]</span> the world" put into a new print dress. It is evident -that the fixed capital of this country, as represented by stocks and -shares, would be mere waste paper unless the banks held sufficient -gold to ensure a market for them: and as this gold cannot be kept in -the country unless our workshops are able to compete successfully with -those of other nations, it follows that the position of those persons -who draw incomes from British securities is entirely dependent upon -the brains and abilities of the men who direct our industries. How -important, then, that the very best talent the nation possesses should -be used in trade; and what folly it is on the part of those so-called -"superior" persons to sneer at the trader—at him who, without doubt, -enables them to draw their incomes regularly!</p> - -<p>There was a time when capital, broadly speaking, could only be obtained -in London; but since then population has increased all the world over, -and as capital is only the savings of labour, it naturally follows that -it can now be obtained abroad, and that London is less necessary to the -foreign borrower; and, as the world fills up, it must surely become -less and less necessary. Yet our gilded youth affects to despise trade. -This is somewhat absurd, when<span class="pagenum"><a id="Page_82"></a>[Pg 82]</span> it is trade that enables him to live in -idleness; and British pride, unless it recognises this fact, may have a -bad fall.</p> - -<p>The banks of the United Kingdom, roughly speaking, are indebted to the -public to the extent of £910,000,000. They only keep till-money in -their safes, and are dependent upon the store in the Issue Department -of the Bank of England for their reserves of cash. In other words, this -£33,000,000 of specie is the foundation stone upon which £910,000,000 -of credit rests. It has already been shown in what relation the fixed -capital of the country stands to this fund.</p> - -<p>The smaller of the provincial banking companies keep their cash -reserves with their London agents, who also place their reserves with -the Bank of England. Consequently, as the agents include the reserves -of these banks with their own deposits, they, like the Bank of England -in relation to the bankers' balances, lend out a percentage of the -reserves of the smaller banks. It follows, therefore, that the bankers' -balances in the hands of the Bank are smaller than would be the case -if each bank kept its reserve with it. The London agents are dependent -upon the Bank, and the smaller banks upon the agents.</p> - -<p><span class="pagenum"><a id="Page_83"></a>[Pg 83]</span></p> - -<p>As the store in the Issue Department is the only large collection of -specie and bullion in the three kingdoms, and as the amount therein -is always extremely small when compared with the huge liabilities -which, under certain conditions, it might be asked to liquidate, any -considerable depletion of this store makes the owners of large bank -balances nervous; for if the Bank of England cannot pay the bankers, -then their bankers will not be able to pay them.</p> - -<p>Again, the liabilities of the banks are so immense in comparison -with their reserves that a very small diminution of the fund in the -Issue Department makes owners of capital anxious, whilst a serious -drain would probably create a panic; and unless means were devised to -allay the panic, it might develop into a revolution; for we are very -commercial in these days, and are beginning to realise that mere glory -may be bought too dearly. Commercialism, however, is not exactly a -fascinating virtue.</p> - -<p>We are constantly being told that the money market is an extremely -sensitive organisation. And no wonder! The banks owe hundreds of -millions on demand and short notice. Considerably over eighty per cent. -of<span class="pagenum"><a id="Page_84"></a>[Pg 84]</span> these millions is invested and lent, and as the banks' reserves of -gold are small, every sudden demand for large supplies of the precious -metals is liable to disorganise the market; and the Bank, which holds -the final reserve, is therefore compelled to raise its rate of discount -in order to protect the bullion in its Issue Department.</p> - -<p>But for this very reason capital may generally be borrowed more cheaply -in London than elsewhere; and though cash is perhaps dangerously -economised, credit is proportionately the more easily obtainable, and -the price of a loan is cheaper than would be the case were the banks to -maintain a higher ratio of cash to liabilities. They would then have -less to lend, and in times when trade was brisk demand would drive up -the rate of interest to higher figures than those which prevail under -our present system, and reduce the profits of borrowers. The average -rate, too, would be greater.</p> - -<p>The dangers of our system are very apparent, but so are its advantages; -and though we consider it pays us to take the risks, it is evident that -we cannot afford to neglect the necessary precautions.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_85"></a>[Pg 85]</span></p> - -<h2 class="nobreak" id="CHAPTER_VI">CHAPTER VI.</h2> -</div> - -<p class="center">Weekly Differences in the Return.</p> - - -<p class="drop">I<span class="uppercase">t</span> were better, before proceeding further, to give a copy of the Bank -Return as it appears in the daily papers each Friday, when comparisons -are made with the figures of the preceding week, and the various -differences carried into distinctive columns. That for the week ended -Wednesday, 1st October, 1902, has been selected, in order that the -figures may be the same throughout this volume. The statement is given -below:</p> - -<p class="center"><span class="smcap">Issue Department.</span></p> - -<table summary ="returns" width="65%"> -<tr> -<td colspan="6">====================================================================== -</td> - -</tr> -<tr> -<td class="td4">2 <span class="smcap">Oct.</span>, 1901. -</td> -<td class="td4"> -</td> -<td class="td4">24 <span class="smcap">Sept.</span>, 1902. -</td> -<td class="td4">1 <span class="smcap">Oct.</span>, 1902. -</td> -<td class="td4" ><span class="smcap">Increase.</span> -</td> -<td class="td4"><span class="smcap">Decrease.</span> -</td> -</tr> -<tr> -<td align="center">£ -</td> -<td> -</td> -<td align="center">£ -</td> -<td align="center">£ -</td> -<td align="center">£ -</td> -<td align="center">£ -</td> -</tr> -<tr> -<td>36,080,595 -</td> -<td>Gold and Bullion -</td> -<td>35,109,950 -</td> -<td>33,617,330 -</td> -<td align="center">... -</td> -<td>1,492,620 -</td> -</tr> -<tr> -<td>53,855,595 -</td> -<td>Notes Issued -</td> -<td>53,284,950 -</td> -<td>51,792,330 -</td> -<td align="center">... -</td> -<td>1,492,620 -</td> -</tr> -<tr> -<td>30,546,875 -</td> -<td>Circulation -</td> -<td>29,198,845 -</td> -<td>30,401,185 -</td> -<td>1,202,340 -</td> -<td align="center">... -</td> -</tr> -<tr> -<td colspan="6">====================================================================== -</td> -</tr> -</table> - - - -<p><span class="pagenum"><a id="Page_86"></a>[Pg 86]</span></p> - - -<p class="center"><span class="smcap">Banking Department.</span></p> -<table summary= "returns" width="70%"> -<tr> -<td colspan="6">=========================================================================== -</td> -</tr> -<tr> -<td class="td4">2 <span class="smcap">Oct.</span>, 1901. -</td> -<td class="td5"> -</td> -<td class="td5">24 <span class="smcap">Sept.</span>, 1902. -</td> -<td class="td5">1 <span class="smcap">Oct.</span>, 1902. -</td> -<td class="td5"><span class="smcap">Increase.</span> -</td> -<td class="td5"><span class="smcap">Decrease.</span> -</td> -</tr> -<tr> -<td align="center">£ -</td> -<td class="td1" align="center"><span class="smcap">Liabilities.</span> -</td> -<td align="center" class="td1">£ -</td> -<td align="center" class="td1">£ -</td> -<td align="center" class="td1">£ -</td> -<td align="center" class="td1">£ -</td> -</tr> -<tr> -<td align="right">3,790,617 -</td> -<td class="td1" > Rest -</td> -<td align="right" class="td1">3,804,611 -</td> -<td align="right" class="td1">3,816,736 -</td> -<td align="right" class="td1">12,125 -</td> -<td align="right" class="td1">... -</td> -</tr> -<tr> -<td align="right" >10,874,581 -</td> -<td class="td1" > Public Deposits -</td> -<td align="right" class="td1">8,301,490 -</td> -<td align="right" class="td1">10,025,973 -</td> -<td align="right" class="td1">1,724,483 -</td> -<td align="right" class="td1">... -</td> -</tr> -<tr> -<td align="right">41,204,129 -</td> -<td class="td1" > Other Deposits -</td> -<td align="right" class="td1">40,373,382 -</td> -<td align="right" class="td1">42,695,526 -</td> -<td align="right" class="td1">2,322,144 -</td> -<td align="right" class="td1">... -</td> -</tr> -<tr> -<td align="right" >143,965 -</td> -<td class="td5" > Seven-Day Bills -</td> -<td align="right" class="td5">192,886 -</td> -<td align="right" class="td5">188,590 -</td> -<td align="right" class="td1">... -</td> -<td align="right" class="td1">4,296 -</td> -</tr> -<tr> -<td align="center" >£ -</td> -<td align="center" class="td1"><span class="smcap">Assets.</span> -</td> -<td align="center" class="td1">£ -</td> -<td align="center" class="td1">£ -</td> -<td align="center" class="td1"><span class="smcap">Decrease.</span> -</td> -<td align="center" class="td1"><span class="smcap">Increase.</span> -</td> -</tr> -<tr> -<td align="right">18,022,103 -</td> -<td class="td1" > Government Securities -</td> -<td align="right" class="td1">14,594,260 -</td> -<td align="right" class="td1">15,826,080 -</td> -<td class="td1" align="right">... -</td> -<td align="right" class="td1"> 1,231,820 -</td> -</tr> -<tr> -<td align="right">27,158,440 -</td> -<td class="td1" > Other Securities -</td> -<td align="right" class="td1">26,302,606 -</td> -<td align="right" class="td1">31,837,516 -</td> -<td align="right" class="td1">... -</td> -<td align="right" class="td1">5,534,910 -</td> -</tr> -<tr> -<td align="right">23,308,720 -</td> -<td class="td1"> Notes -</td> -<td align="right" class="td1">24,086,105 -</td> -<td align="right" class="td1">21,391,145 -</td> -<td align="right" class="td1">2,694,960 -</td> -<td align="right" class="td1">... -</td> -</tr> -<tr> -<td align="right">2,077,029 -</td> -<td class="td1"> Gold and Silver -</td> -<td align="right" class="td1">2,242,398 -</td> -<td align="right" class="td1">2,225,084 -</td> -<td align="right" class="td5">17,314 -</td> -<td align="right" class="td5">... -</td> -</tr> -<tr> -<td> -</td> -<td class="td1"> -</td> -<td class="td1"> -</td> -<td class="td1"> -</td> -<td class="td1" align="right">£6,771,026 -</td> -<td class="td1" align="right"> £6,771,026 -</td> -</tr> -<tr> -<td align="center">48⅝% -</td> -<td class="td1" align="center">Ratio -</td> -<td class="td1" align="center">53·87% -</td> -<td class="td1" align="center">44·6% -</td> -<td class="td1"> -</td> -<td class="td1"> -</td> -</tr> -<tr> -<td align="center">3% -</td> -<td class="td1" align="center">Bank Rate -</td> -<td class="td1" align="center">3% -</td> -<td class="td1" align="center">4% -</td> -<td class="td1"> -</td> -<td class="td1"> -</td> -</tr> -<tr> -<td colspan="6">=========================================================================== -</td> -</tr> -</table> - - - - - -<p>Why, it may be asked, is so much importance attached to this return, -and why do the critics, each week, endeavour to state precisely -how much the "market" has borrowed from, or repaid to, the Bank, -and to explain the cause of the various accretions and diminutions -in the different assets and liabilities? With regard to the latter -attempt, each critic, it is said, is quite convinced that he alone -understands the true inwardness of the various movements which result -in the increases and<span class="pagenum"><a id="Page_87"></a>[Pg 87]</span> decreases recorded in our table; but it is just -whispered that those persons at the Bank of England who <i>know</i> the -cause laugh at their deductions.</p> - -<p>The return is of the greatest moment to the public, for the simple -reason that it shows the ratio per cent. of the Bank's reserve of notes -and cash in hand to its liabilities, and, also, the amount of coin and -bullion in the Issue Department. The Bank holds the final reserve; and -if demand is brisk and the other bankers have advanced largely to the -outside market, the bill brokers are driven to the Bank. As the banking -companies have advanced all their spare capital, demand can only be -supplied from the reserve at the Bank of England; and the Bank, which -must protect its gold, checks demand by charging high rates to all who -borrow.</p> - -<p>The return, then, tells us whether loanable capital is likely to be -cheap or dear. If the ratio to liabilities be small, and the store of -gold diminishing, we know that demand has reached the Bank, and that -money will be dear. When money is dear, Consols and other so-called -gilt-edged securities are almost certain to fall in value. If it -become really scarce, then the banks, which lend huge sums on the<span class="pagenum"><a id="Page_88"></a>[Pg 88]</span> -Stock Exchange, charge the brokers enhanced rates, and "carrying over" -becomes difficult. Numerous speculative accounts have to be closed, and -securities, consequently, fall in price.</p> - -<p>Now, a glance at the return of 1st October, 1902, shows that the ratio -on that date is 44·6 per cent., and the Bank's discount rate four per -cent. The bullion in the Issue Department decreased £1,492,620, and -the Bank, in order to arrest this drain, raised the rate from three -to four per cent. The political unrest in France, which at first -threatened to disturb the London money market, and the tightness -of money in New York, were, undoubtedly, two factors which largely -influenced the decision of the directors, who, no doubt, also took into -their consideration the fact that the autumn demand for currency might -further reduce their reserve. Noticing that Consols were at 93-1/8, -and believing that the stringency was only temporary, one might feel -disposed to buy, trusting that cheaper money during the earlier part of -the new year would drive them up to 96 or so.</p> - -<p>The weekly return of the Bank of England, then, is the barometer which -tells us whether loanable capital is either scarce or abundant,<span class="pagenum"><a id="Page_89"></a>[Pg 89]</span> -dear or cheap; and, when read with the Board of Trade returns -and the foreign exchanges, it enables us to guess, with more or -less <i>uncertainty</i>, but still intelligently, and with a degree of -probability, whether or not money is likely to be in future demand. The -Railway and Bankers' Clearing House returns, too, indicate the course -of trade, and are of more than academic interest. It is, however, -always wise to remember that finance is not an exact science, for if it -were the theorists would be fabulously rich; and we know that they are -generally so hard up as to be compelled to write books and financial -articles for a living.</p> - -<p>Now we can see why the Bank of England's weekly balance sheet is keenly -interesting to every person who possesses capital either to lend or to -invest, to dealers in bills and securities, and to every speculator -on the Stock Exchange, as a strong or a weak return may make all the -difference to the rates charged on "contango" day. Borrowers and -lenders are equally concerned, for the rate of interest does not depend -upon the caprice of any individual or of any bank, but is solely the -outcome or result of demand and supply; and demand, when the banks -have exhausted<span class="pagenum"><a id="Page_90"></a>[Pg 90]</span> their supplies of spare capital, then centres itself -fiercely upon the Old Lady of Threadneedle Street simply because she -holds the final reserve of cash, and for no other reason whatsoever.</p> - -<p>Reverting to our statement, we find that the increases and decreases of -the various totals balance each other; and if the differences agree, -then the assets and liabilities, on adding the Bank's capital of -£14,553,000 to the latter, must also balance each other, for the simple -reason that the Bank keeps its books by double entry. The best system -of bookkeeping which can possibly be adopted is the simplest system, -because the very fact of accounts being complex and involved is sure -to result in a multiplicity of mistakes, which prove that the system -is faulty. In double entry there must be a debit for every credit; so -every sum debited to one account in the books of the Bank of England is -credited to another or to others; and as the assets and liabilities in -the statement tally, therefore the balances in the last two columns, -which are the result of multitudinous debits and credits made during -the week, must agree also. But how is it possible for an outsider -to follow these internal movements? He simply cannot.<span class="pagenum"><a id="Page_91"></a>[Pg 91]</span> Consequently -his deductions made from the differences shown week by week are -sometimes very wide of the mark, and, for his own reputation's sake, -it would be wiser if he were to confine his remarks principally to the -all-important questions of the ratio in the Banking Department and the -bullion in the Issue Department.</p> - -<p>For instance, simply with the differences in question to go upon, it -may be said that the return shows that the market has borrowed largely -from the Bank, "Other Securities" being up over £5,000,000. Part of -this amount increased "Other Deposits," and a transfer was also made -to "Public Deposits" in order to pay the Government for £2,000,000 of -Treasury bills, while the accretion to "Government Securities" seems to -indicate that the Government borrowed a certain sum from the Bank on -Ways and Means, and that loans were made to the market on this class of -security.</p> - -<p>In London the "loan account" system is greatly in evidence among the -banks. That is to say, when a customer is granted a loan for, say, -£10,000, his current account is credited £10,000, and a loan account, -opened in his name, is debited £10,000. The interest<span class="pagenum"><a id="Page_92"></a>[Pg 92]</span> is calculated -upon the loan account, and the advantage resulting to the banks is too -evident to call for explanation in these pages.</p> - -<p>When loans are made by the Bank of England, accounts which increase -"Other Securities" are debited, and other accounts, which increase -"Other Deposits" are credited—if the loans are made to the public. -Should the loans be made to the Government, "Public Deposits" and -"Government Securities" also increase proportionately from the same -cause. The Bank, because it keeps the bankers' accounts, occupies a -peculiar position in relation to these entries, and that position will -be discussed in a later chapter.</p> - -<p>The notes in the Banking Department have decreased £2,694,960 and the -specie £17,314, so, if we add these two sums together, the total, -£2,712,274, represents the diminution in the reserve. A glance at the -Bank's liabilities shows us that they have increased appreciably, and -as the reserve has shrunk considerably, it follows that the ratio is -very much smaller than that of the previous week. Indeed, the reserve -had not fallen so low since May; and the monetary outlook being -uncertain, the directors, as a precautionary measure, raised the rate -of discount.</p> - -<p><span class="pagenum"><a id="Page_93"></a>[Pg 93]</span></p> - -<p>Next, suppose that we wish to ascertain the amount of cash which has -been withdrawn from the Bank to meet the demand within the country. The -bullion in the Issue Department is £1,492,620 down, and the coin in the -Banking Department £17,314; so the Bank has lost £1,509,934 in coin -and bullion. But £730,000 was exported during the week; therefore, if -we deduct £730,000 from £1,509,934, the difference, £779,934, is the -amount that is gone into home circulation.</p> - -<p>But, it may be asked, how can one ascertain the amounts of the exports -and imports of the precious metals? Late in the afternoon of each day -the Bank exhibits a statement on its walls giving this information, -and it was from these placards that it was ascertained that the sum in -question had been sent abroad. Hence it is possible to learn how much -cash was withdrawn from the Bank for home requirements during the week, -or, better, the amount of the efflux on the day of the publication of -the return.</p> - -<p>But, as has already been explained, these deductions are not always -reliable.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_94"></a>[Pg 94]</span></p> - -<h2 class="nobreak" id="CHAPTER_VII">CHAPTER VII.</h2> -</div> - -<p class="center">The Bank of England as Agent of the Mint.</p> - - -<p class="drop">I<span class="uppercase">n</span> theory any person can take gold bullion to the Mint, which, under -the Coinage Act, is compelled to give him in exchange sovereigns -containing an equal quantity of gold to that left; but nobody ever -does, and practically the Bank of England acts as the Mint's agent. -By the Bank Act he receives £3 17s. 9d. per ounce, instead of £3 17s. -10-1/2d., the full Mint price, the deduction of 1-1/2d. being about -equal to the loss of interest incurred, for the Mint does not bargain -to pay out coin immediately on delivery of bullion.</p> - -<p>All the bankers in the United Kingdom, we know, obtain their supplies -of cash from the Issue Department of the Bank of England, which, as a -natural consequence, supplies the currency requirements of the nation. -Possessing the only large store of bullion, it can, so to speak, feel -the pulse of the whole trading<span class="pagenum"><a id="Page_95"></a>[Pg 95]</span> community; and, directly a demand -sets in for specie, it sends bullion to the Mint for conversion into -coin. This it can do without any loss of interest whatever, for, of -course, the bullion is lying idle in the Issue Department. A bank -which keeps the Government accounts, and stands in this relation to -the other bankers, must of necessity become the agent of the Mint, -which, even in its output of silver and bronze coins, relies absolutely -upon information received from the Bank of England. The Bank, in fact, -supplies both the London and country bankers with these token coins.</p> - -<p>As an illustration of this one of those little social amenities which -take place between bankers and their clients about Christmas time may -be mentioned. Naturally I am not alluding to the higgling occasioned by -the increase of advances and bills discounted to meet a growing demand -at this period of the year. But many persons, just before the festive -season sets in, like to obtain supplies of bright new silver coins -with which to anoint the palms of their humbler fellow-subjects, whose -manners about that time become aggressively pleasant and ingratiating. -These coins they get from their bankers, who<span class="pagenum"><a id="Page_96"></a>[Pg 96]</span> receive them from the -Bank of England and its branches, either directly or through their -agents. As soon as the bankers run short of silver coins, they apply to -the Bank, which, being in close touch with every source of demand, is -able to guide the Mint on a question of supply.</p> - -<p>The Bank of England does not possess a legal monopoly, but occupies -this position solely because it holds the final reserve of cash. If -the Government and all the bankers keep accounts with the Bank of -England, then the Bank must act as the agent of the Mint so long as -this state of affairs continues, because its Issue Department has to -meet all demands for cash made upon it by the Bank's customers and -the holders of its notes; and as these customers, either directly or -indirectly, include every large dealer in gold in the land, it supplies -the currency as a matter of course. Dealers do not send their bullion -to the Mint, because it is more convenient to sell it outright to -the Bank, which settles with them immediately, thereby removing all -uncertainty as to the length of time coinage will occupy.</p> - -<p>It follows, therefore, that the Bank of England has to meet all demands -for gold, whether for home or foreign requirement; but<span class="pagenum"><a id="Page_97"></a>[Pg 97]</span> it is when gold -is leaving the country in large quantities that drastic measures have -to be taken in order to stop the depletion of the Bank's reserve of the -precious metals, for some of the home drains are only of a temporary -nature, and unless capital be greatly in demand at the time they do not -affect the rate of interest, as the money flows back to the Bank after -a short interval.</p> - -<p>The Bank of England on 5th January, 5th April, 5th July, and 5th -October pays the quarterly dividends on the National Debt. The -Government, which at the present time has to provide over £6,000,000 -each quarter, has a huge sum standing to its credit before one of these -payments matures, and the sudden release of so much capital often -causes the rate of discount to fall, especially during those years when -trade is good, and the demand for loanable capital consequently brisk. -If times are dull, then the rate will not ascend when the Government is -taking money off the market, as the demand upon the reduced resources -of the banks will not be sufficiently keen to drive a large number of -borrowers to the Bank of England.</p> - -<p>We have an illustration of this in the fact that from February, 1894, -to September,<span class="pagenum"><a id="Page_98"></a>[Pg 98]</span> 1896, trade was so inactive, and demand therefore so -small, that the Bank rate stood at two per cent. during the whole -period. In other words, we had two and a half years with the Bank rate -at two per cent. With trade bad and money cheap, speculation soon -became rampant. The gilt-edged variety of securities yielded less, -because trade was less productive, and consequently capital, instead -of being kept idle in the banks, was transferred to the better class -securities, which returned less to the investor in proportion as -increased demand forced up prices. With incomes reduced and balances -lying idle at the banks, the public developed a speculative mania, and -one result was the Stock Exchange boom of 1895, for investment business -and speculation always increase when trade is bad. Bad times, in fact, -at first add to the business of the House.</p> - -<p>Traders keep large balances with the banks for the same reason that the -banks themselves have huge sums standing to their credit in the books -of the Bank of England, because they are bound to accumulate credit in -order to meet their engagements, and, also, to maintain a surplus in -case of accidents, such as bad debts and the inability of<span class="pagenum"><a id="Page_99"></a>[Pg 99]</span> customers to -pay their debts immediately on maturity. When trade slackens and prices -fall, producers reduce their output, and the result is an accumulation -of credit in the books of the banks. Moreover, a certain proportion of -these balances is not then required to finance and guarantee commercial -undertakings. Hence the movement to which attention has already been -drawn.</p> - -<p>But the holders of gilt-edged securities require some inducement in -order to persuade them to sell; and this is forthcoming in the shape -of accretions to the capital value of their stocks and shares as a -result of the increased demand. But the floating capital of the country -is not decreased by this exchange. It is left at precisely the same -figures. The buyers draw cheques upon their bankers, and the sellers -pay the same cheques to their own credit; consequently, the floating -capital in the hands of the banks is always about the same, be the -times good or bad, so long as speculation or investment is confined to -British securities. When, however, foreign securities are purchased, -gold sometimes has to be sent out of the country to help pay for -them; and it is then that the situation may cause apprehension—for -capital is leaving the<span class="pagenum"><a id="Page_100"></a>[Pg 100]</span> country. Should the drain prove serious, the -Bank would have to raise its rate; and were it to prove continuous, -notwithstanding an abnormally high Bank rate, we might have a crisis.</p> - -<p>Returning to the dividends on the funds, "Public Deposits" are -increased before the above-mentioned dates, and when this money is -released, the result is a large addition to "Other Deposits," because -most of the money returns to increase the bankers' balances. A small -part, however, is taken by the fund-holders in cash; so we may notice a -decrease in the Bank's reserve of notes, and, consequently, an increase -in the circulation, together, perhaps, with a fall in the bullion, -representing the small proportion withdrawn in actual cash. Should the -banks, in consequence of this increase in their deposits, be taking -bills from the brokers at cheaper rates, then "Other Securities" would -also lessen, because the bill brokers would pay off the Bank and borrow -in the cheaper market. The converse occurs when the Government is -collecting the revenue, issuing a new loan, or borrowing on Treasury -bills.</p> - -<p>The principal currency drains will be discussed in the following -chapter.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_101"></a>[Pg 101]</span></p> - -<h2 class="nobreak" id="CHAPTER_VIII">CHAPTER VIII.</h2> -</div> - -<p class="center">The Principal Currency Drains.</p> - - -<p class="drop">T<span class="uppercase">he</span> principal currency drains occur during the holiday season and at -harvest time, more especially during the latter period, when large -amounts of cash are sent into the country to satisfy the requirements -of labour. Early in November a demand for gold arises in Scotland, -owing to the fact that rents there fall due at Martinmas (11th -November); and as the Scotch banks, by the Act of 1845, are compelled -to hold gold against notes circulated in excess of their authorised -issues, a rather heavy call is made upon the Bank of England, whose -returns then show a noticeable decrease in the reserve and bullion. -During years of active trade, and, consequently, of brisk demand for -loanable capital, these autumnal drains of gold generally force up -the rate of interest, thereby making the last quarter of the year the -dearest for borrowers.</p> - -<p><span class="pagenum"><a id="Page_102"></a>[Pg 102]</span></p> - -<p>But we are discussing internal demands only, and as, so long as -gold does not leave the country, it is merely a question of certain -sums flowing from the London money market and drifting back to it -again, this ebb and flow, which is shown by the various ups and downs -occurring from time to time in the items of the Bank return, does not -create any apprehension. Indeed, these movements occur so regularly -at certain times of the year that large borrowers often anticipate -them in order that they may tide over such periods with the minimum -of inconvenience. It is, however, otherwise when gold is leaving the -country in large quantities in order to settle the balance of our -indebtedness to other nations, for that <i>may</i> not come back. How it is -again enticed to these shores I will endeavour to explain.</p> - -<p>We now come to a foreign drain of gold; and this depletion of the -currency, we know, flows from the store at the Bank of England into -the hands of the foreign creditors of the nation. We export to, and -import from, other nations on a gigantic scale, and as our imports -are invariably in excess of our exports, it follows that the balance -of indebtedness on this score is always very considerably against us; -but there are other debts due to this country<span class="pagenum"><a id="Page_103"></a>[Pg 103]</span> which from time to time -turn the balance in favour of England, and the prices quoted for bills -on the various Exchanges are the indexes which tell us whether gold is -likely to be either received from, or sent to, the great commercial -centres of the world.</p> - -<p>Other debts due to this country have been mentioned—debts which either -tend to reduce or turn in our favour the balance we owe to foreign -countries. England has immense sums invested in foreign securities, and -the interest received therefrom acts in this direction. So, too, does -the huge sum earned by her ships in the shape of freights. Then, again, -London, still earns a large amount in the shape of commissions, even if -her position as the Clearing House of the world is now less powerful -than formerly, owing to large accumulations of capital in other centres.</p> - -<p>On the other hand a considerable amount of foreign capital is invested -in English securities, which, when sold on the Stock Exchange, give the -foreigner a claim on our stock of gold; and though we, by similar sales -of foreign securities, can prevent this temporary drain of specie, the -enormous dealings in stocks and shares on the various Exchanges are -most keenly watched by the directors of the Bank<span class="pagenum"><a id="Page_104"></a>[Pg 104]</span> of England, lest huge -realisations of British securities by foreigners should drain the Bank -of its gold, with which international indebtedness can alone be settled.</p> - -<p>This brings us to the markets for bills of exchange, the prices of -which, like those of every other security, are settled by supply -and demand. If, at a given date, this country owes a foreign nation -considerably more than it has to receive, then bills on England will be -plentiful in that country; and, further, they will be cheap, because, -as debtors to England have less to remit than the aggregate of bills -on England offered for sale, the supply will be in excess of the -demand, and English bills, consequently, can be bought at a discount. -Conversely, the supply of bills in London on the foreign country will -be smaller than the sum English debtors owe therein, and in order -to save the expense of exporting gold, such bills will be eagerly -sought after, and, as the supply is smaller than the demand, buyers -soon drive them to a premium, when the rate of exchange is said to be -"unfavourable" to England.</p> - -<p>As the balance of our international indebtedness must be cancelled by -gold, it follows that the fewer the bills offering the higher will be -the prices paid for them; and<span class="pagenum"><a id="Page_105"></a>[Pg 105]</span> when, just towards the end, it becomes -evident that the supply is limited the bidding is often spirited; but -the premium paid cannot exceed for any considerable length of time the -expense incurred by exporting and insuring the precious metals between -any two countries, as the debtor always has the choice of despatching -gold to his foreign creditor, and, naturally, he chooses the cheaper -expedient.</p> - -<p>The extreme fluctuations are called "gold points," and they mark the -limit to premiums procurable on bills of exchange. The table given -below will show us those points at which gold will probably either -leave or reach this country:</p> - -<table summary="table" width="65%"> -<tr> -<td colspan="4">============================================================ -</td> -</tr> -<tr> -<td class="td4"><span class="smcap">Exchange.</span> -</td> -<td class="td5"><span class="smcap">Mint Par. of Exchange.</span> -</td> -<td class="td5"><span class="smcap">Gold Exports.</span> -</td> -<td class="td5"><span class="smcap">Gold Imports.</span> -</td> -</tr> -<tr> -<td>London on Paris -</td> -<td class="td1">Francs 25·22½ -</td> -<td class="td1">25·12½ -</td> -<td class="td1">25·32½ -</td> -</tr> -<tr> -<td>Berlin -</td> -<td class="td1">Marks 20·43 -</td> -<td class="td1">20·34 -</td> -<td class="td1">20·52 -</td> -</tr> -<tr> -<td>New York -</td> -<td class="td1">Dollars 4·87 -</td> -<td class="td1">4·84 -</td> -<td class="td1">4·90 -</td> -</tr> -<tr> -<td colspan="4">============================================================ -</td> -</tr> -</table> - - - -<p>When the rates are near those given in the second column, the Bank, -if its reserve be low, begins to consider the advisability of raising -its rate of discount, for it is evident that foreign bills are at a -stiff premium, and that a demand for gold may be made upon it at any -moment. Of course the difference<span class="pagenum"><a id="Page_106"></a>[Pg 106]</span> between the "gold points" gives -scope for speculation, and some cambists gamble in bills for the rise -or the fall just as speculators do in securities. Then, again, the -arbitrageurs largely influence prices by buying and selling securities -which are dealt in on the Stock Exchanges of more than one country. -Wars, revolutions, panics, and social upheavals also cause abnormal -fluctuations in the rates.</p> - -<p>Let us assume that a drain is threatened from Paris. The gold in an -English sovereign is, we can see, worth about 25·22½ francs, and if -only 25·12½ is being offered on 'Change, it follows that bullion -will soon be exported to France. This the Bank wants to prevent. The -cost of transmission of bullion between the two countries is about one -half per cent.; therefore, in order to induce French capitalists to -invest in English bills of three months' date, the rate of interest -in London must be more than two per cent. in excess of that in Paris -before it will pay them to ship bullion to this country, if it be the -intention of the purchasers to withdraw their capital when the bills -mature, as the gain of two per cent. per annum for three months only -just balances the loss of 10s. per cent. incurred on specie shipments, -while no margin is left to defray possible loss through<span class="pagenum"><a id="Page_107"></a>[Pg 107]</span> unfavourable -exchanges at the time of withdrawal. Were a purchase of six months' -bills contemplated, the difference in the two rates would only have to -exceed one per cent. before bullion could be exported profitably.</p> - -<p>When, therefore, the Bank of England wishes to influence the foreign -exchanges, it raises its rate by one, instead of by one half as is -usual when the drain is caused by the currency requirements of this -country, or by an increased demand for loanable capital when trade -is active and the foreign exchanges favourable. One constantly hears -the question: Why has the Bank of England raised the rate by one -instead of by one half as it did last time? A glance at the foreign -exchange tables will generally supply the answer. If the expenses -for transporting and insuring bullion between any two countries are -appreciable, then were the Bank rate raised by one half (remembering -that an addition of one half per cent. per annum gives a profit of -only 2s. 6d. per cent. on a transaction in three months' bills) it is -evident that the inducement is not sufficient to attract gold over here -for that consideration alone.</p> - -<p>By raising its rate, and, if necessary, borrowing in the market in -order to bring the market rates in touch with its own, the Bank<span class="pagenum"><a id="Page_108"></a>[Pg 108]</span> makes -an investment in English bills a profitable transaction; and the -greater its excess over foreign rates, the stronger is the inducement -to send money to England. Of course, were this country really living on -its capital, this influx of gold would only postpone the inevitable day -of settlement, for a bankrupt does not increase his wealth by borrowing -from one person in order to pay off another. But our receipts do not -always coincide with our payments; and when, for instance, gold is sent -to the United States in the autumn to help to pay for crops imported -here, the Bank of England, by raising its rate of discount, and making -that rate a representative one, attracts gold from the Continent, in -order to tide over the interval between debts payable by us immediately -and debts due to us at a future date.</p> - -<p>English bills being a profitable investment, the price of paper on -England at once begins to rise, and when the so-called gold point is -reached the precious metals are shipped to these shores, because the -premium on bills on England is in excess of the cost of despatching -bullion. Every rise in the rate of discount here induces foreign -holders of long-dated paper on England to retain their purchases. If -they<span class="pagenum"><a id="Page_109"></a>[Pg 109]</span> bought three months' bills on England when the Bank's discount -rate was three, interest at the rate of three per cent. per annum was -deducted from the face value of the bill to make it equivalent to a -bill due at sight. Should the minimum rate be raised to four per cent., -and were the holders then to remit the bills to this country to be -discounted, they would have to submit to a deduction at the rate of -four per cent. per annum. In other words, they would lose one per cent. -per annum on the transaction. Long-dated bills would therefore be held -until near maturity in order to avoid this loss.</p> - -<p>An accretion to the Bank rate, then, not only attracts gold or capital -here, but it also induces foreign holders of long-dated bills on -England to keep them in their cases. On the other hand, a fall in the -Bank's rate of discount from, say, three to two per cent. might not -only slacken the demand for English bills, but it would also cause a -considerable number of long-dated bills on England to be sent over here -to be discounted, as the foreign holders would naturally be anxious to -secure the profit between the three per cent. per annum paid to them, -and the two per cent. per annum at<span class="pagenum"><a id="Page_110"></a>[Pg 110]</span> which they would then be taken from -them. The result might possibly be a temporary drain of gold from this -side.</p> - -<p>But it is when a home and a foreign efflux of gold occur at the -same time that the situation becomes serious, and unless immediate -action is taken by the directors of the Bank of England to check the -outflow, there is always the danger—so small is our gold reserve when -contrasted with our exports and imports—that a balance against us at -an unlucky moment may create an awkward tension, which, unless speedily -relieved, may possibly produce a crisis.</p> - -<p>We like to flatter ourselves that England is always safe; but so large -is the amount of bills offering from day to day in the London money -market that the very doubt of there not being sufficient capital in -the possession of the banks to discount them creates uneasiness; and -if it were thought that the Bank of England, which holds the few -millions of reserve upon which hundreds of millions of credit rest, -could not retain its gold, excitement would reach fever pitch in this -country, for everybody's income would be in danger, and the Government, -whose supineness allowed such a state of affairs to develop, would -be in danger too. But we<span class="pagenum"><a id="Page_111"></a>[Pg 111]</span> know that, in the rate of discount, the -directors of the Bank possess an effective instrument to prevent such a -catastrophe, and have the experience to use it to advantage.</p> - -<p>Money begins to leave the Bank for internal circulation during the -summer months in order to meet the demands created by the holidays and -the harvest, and then in October there is always the probability of a -large outflow of gold to the States to help pay for the crops imported -therefrom; while the movement of specie to Scotland in November, -occurring as it does just at a critical moment, is likely to cause some -apprehension, should the Bank's reserve have been depleted earlier, -unless the fact that it is merely a temporary transfer to enable the -Scotch banks to comply with the Act of 1845 be thoroughly grasped.</p> - -<p>The October drain of gold from the Bank when the New York exchange is -unfavourable has in it an element of danger, especially if it happen at -a time when the reserve at the Bank of England is unusually low; and -if loanable capital be then abnormally scarce there is always the risk -that the end of the year requirements may produce a tension, which, -should credit be bad at the time, may develop into a panic.</p> - -<p><span class="pagenum"><a id="Page_112"></a>[Pg 112]</span></p> - -<p>If the Bank manage well, however, it fortunately often foresees that -the autumnal demands may possibly impose a severe temporary strain -upon its resources, and by raising its rate in anticipation of a short -period of exceptional demand, it attracts gold to itself in order to -be thoroughly prepared for possible large depletions of currency later -on, for it is easier to accumulate gold before the event than to check -an outflow when the movement is beginning to create uneasiness, and to -attract attention to the lack of preparedness on the part of the Bank -to meet large withdrawals of specie for export.</p> - -<p>It is not my intention to write a treatise on the foreign exchanges, -and I am quite well aware that I have only touched on the fringe of a -great subject; but if these illustrations help, however slightly, to -elucidate certain of those undercurrents which determine prices, then -the sole aim of this chapter has been attained.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_113"></a>[Pg 113]</span></p> - -<h2 class="nobreak" id="CHAPTER_IX">CHAPTER IX.</h2> -</div> - -<p class="center">Banks and the Creation of Credit.</p> - - -<p class="drop">W<span class="uppercase">e</span> have seen how the Bank of England came to occupy so commanding a -position in the money market, and we now have to consider why its rate -of discount is still a fairly reliable index to the value of loanable -capital. Its advent was extremely distasteful to the private bankers, -who then reigned supreme in London, and who were not slow to recognise -in the new corporation a formidable competitor, for a company which -financed the Government was obviously to be feared. Before 1826 the -Bank of England was the only joint stock bank in the country. Its -notes gradually drove those of the London bankers out of circulation, -and until its joint stock rivals firmly established themselves in the -Metropolis, the Bank was in every sense the most powerful institution -of its kind in the land.</p> - -<p><span class="pagenum"><a id="Page_114"></a>[Pg 114]</span></p> - -<p>Being by far the largest lender of capital in the country, it was only -natural that its rate should accurately interpret those forces which -make loanable capital dear or cheap, as the case may be. But the Bank -could not arbitrarily fix the value of money for a very considerable -period, even when it was able to issue notes without let or hindrance, -any more than it can now. Supply and demand must settle that -ultimately; and whenever the Bank inflated prices by the over-issue -of paper, we have seen that the reaction produced thereby invariably -threatened its existence. This is easily explained.</p> - -<p>Persons borrow money in order that they may trade with it; and sudden -loans of large amounts of capital in the shape of notes immediately -stimulate the markets, and the increased demand engendered thereby -causes the prices of commodities to rise. Rising prices, whether -of securities or goods, give a marked impetus to speculation—so -hopeful are traders directly markets begin to improve; and increased -speculation causes further rises in the prices of both commodities -and loanable capital. Everybody wants to borrow, and to share, in the -coming period of great prosperity.</p> - -<p><span class="pagenum"><a id="Page_115"></a>[Pg 115]</span></p> - -<p>With prices rising here, imports naturally increase, as foreigners -are anxious to sell their goods in the best market. On the other -hand, the English markets have become less profitable to buyers, and, -consequently, exports fall off, the result being that the balance of -our indebtedness to other nations is largely increased. The foreign -exchanges soon begin to move against England, and the Bank of England -(we will assume) which had created the speculation by large issues -of notes, suddenly finds that it is threatened with a foreign drain -of gold, and is compelled to raise its rate in order to protect its -reserve.</p> - -<p>Since 1844 this power has, of course, been taken out of the hands of -the Bank; but it is evident that, even before that date, the Bank of -England could not fix the rate of discount, for whenever it made the -attempt it failed signally. The above illustration fully explains the -reason why. Both before and after the Act the Bank of England would -have suspended payment upon more than one occasion, when it neglected -to keep an adequate reserve, but for Government intervention; and -it will be in the same plight again if it trade with too large a -proportion of its resources.</p> - -<p><span class="pagenum"><a id="Page_116"></a>[Pg 116]</span></p> - -<p>The Bank was then by far the largest dealer in credit, and from time -to time it stated the minimum rate at which it would lend or discount. -But the private bankers were at liberty to underbid it; and although -it could, by making sudden advances, cause money to fall in value, -its power was not of a lasting character, and the rise which followed -was quite beyond its control. Its rivals are now much more powerful, -and the Bank is only one large dealer among many—therefore it has to -either raise or lower its rate according to the demands made upon its -resources; but from its position in the centre of the money market it -still possesses a latent power for possible evil, which appears to have -escaped the attention it deserves.</p> - -<p>This brings us to the vexed question of the creation of credit by a -bank, and though it is stoutly maintained that an ordinary banking -company cannot create credit, I venture to think that, given certain -conditions, it does. But perhaps, before proceeding further, it will be -better to briefly discuss the Clearing House system.</p> - -<p>Cheques and bills, we all know, pour up to London in a constant stream -to the numerous banks, and are presented by them either to the<span class="pagenum"><a id="Page_117"></a>[Pg 117]</span> firms -upon whom they are drawn or to their agents at the Lombard Street -Clearing House. As every bank which is a member of the Clearing House -keeps an account with the Bank of England, the debit and credit -balances (the result of this exchange) are adjusted in the books of -the Bank at the end of each day, and so, though the balances standing -to the credit of the various banks are diminished or increased, the -total sum to the credit of all the clearing bankers remains unaltered. -In other words, the balances, which are the outcome of the exchange -of credit documents at the Clearing House, are finally arranged by -transfer entries in the books of the Bank of England.</p> - -<p>Every cheque presented in the House is debited to one bank and credited -by another, therefore the totals of the debit and credit entries must -agree; and if the totals are the same, then the debit and credit -balances must agree also. In the smaller towns the banks exchange the -local cheques between themselves, and settle the balances in cash or -by payments through London. But Birmingham, Bristol, Leeds, Leicester, -Liverpool, Manchester, and Newcastle-on-Tyne have Clearing Houses of -their own at which local cheques and bills are presented.</p> - -<p><span class="pagenum"><a id="Page_118"></a>[Pg 118]</span></p> - -<p>We can now approach the question of the creation of credit by a bank. -Suppose a bank suddenly increases its advances to its customers by -£1,000,000, and that the customers pay away the whole sum by cheques. -The said cheques are, say, paid by the recipients to the credit of -their accounts with other banks, which present them at the London -Clearing House. The balance of the bank which made the advance is -thereby reduced £1,000,000 at the Bank, and the accounts of other -banks are credited to the same extent; so the deposits at the Bank of -England are not reduced one penny by the transfer. But £1,000,000 has -been added to the working resources of the other banks; and as the -liabilities of the bank that made the advance have not been reduced, -surely this is a creation of credit? Of course, the bank which made the -loan has lost £1,000,000 in "cash" at the Bank of England, and that -asset would then be merged in "advances," which are up £1,000,000; -and though the bank has not created credit in its own books, it has -in those of its rivals. Surely, then, every bank which makes a new -advance to a customer, who employs the sum placed to his credit to -cancel certain debts of his own, creates credit<span class="pagenum"><a id="Page_119"></a>[Pg 119]</span> in the books of other -institutions. But the Bank of England can also create credit in its own.</p> - -<p>On the other hand, say, Bank A calls in £1,000,000 from the bill -brokers, who obtain credit to the extent of £1,000,000 from, say, -Bank C, and draw cheques thereupon, and hand them to Bank A, which -takes them to the Clearing House. C's balance at the Bank is reduced -by £1,000,000, and A's is increased by a like sum; but in neither -case is the "liabilities" side of the balance sheet affected. It is -a mere transfer of credit from one account on the "assets" side to -another on the same side, while the bankers' balances at the Bank of -England remain the same. However, should Bank A advance £1,000,000 to a -customer, who draws cheques against it, then the creation of credit in -the books of other banks begins, as illustrated by our first example.</p> - -<p>Again, take the case of a bank which sells securities, say Consols, to -the amount of £1,000,000. It receives cheques upon other banks for a -like sum; and these it takes to the Clearing House, where it presents -them to those banks upon which they are drawn. The result is that the -selling bank's balance at the Bank is up £1,000,000, and that the -accounts of the<span class="pagenum"><a id="Page_120"></a>[Pg 120]</span> other banks are down £1,000,000; but their liabilities -also are down £1,000,000, whereas the liabilities of the selling bank -are precisely the same. It has simply transferred £1,000,000 from -Consols to "cash" at the Bank of England on the "assets" side of its -balance sheet. Such a sale has reduced the floating capital of the -banks by £1,000,000. Further, could not a little "window dressing" be -done in this manner were a bank to find itself short of "cash" at the -end of the half-year? By lending the sum so obtained the selling bank -could create an amount of credit in the books of its rivals similar to -that which it had previously destroyed. By buying stock back, too, it -would produce exactly the same effect as if it made a loan.</p> - -<p>Now we come to the creation of credit by the Bank of England in its own -books. Were the Bank to suddenly lend £3,000,000, the "Other Deposits" -would be up to that extent, and "Other Securities" would also be up to -a like amount, because the Bank would credit its customers and debit -the loans. Both sides of its return are increased, but, so far, credit -has not been created by these mere book entries, though the way for -its creation has been prepared. The customers or persons to<span class="pagenum"><a id="Page_121"></a>[Pg 121]</span> whom the -advances have been made begin to draw upon their accounts by cheques, -and as these cheques are returned by the other bankers to the credit -of their accounts (bankers' balances) it follows that "Other Deposits" -are not reduced at the Bank. The Bank, then, has created £3,000,000 -of credit in its books, and though it can no longer make sudden loans -by a huge issue of notes as was possible prior to 1844, yet, because -it holds the bankers' balances, we can see that it is able to produce -precisely the same effect by means of another instrument.</p> - -<p>If the Bank lends £3,000,000 to the Government, "Public Deposits" and -"Government Securities" advance proportionately. When the Government -begins to pay out, then a large part of this sum returns to "Bankers' -Balances," and credit is created at the Bank of England to the extent -of the sum so returned. But the banks (Lombard Street) have more to -lend; therefore money is made artificially cheap.</p> - -<p>On the other hand, the Government sometimes borrows in the open market -on Treasury bills. Credit is then transferred at the Bank through the -medium of the Clearing House from "Bankers' Balances" to "Public<span class="pagenum"><a id="Page_122"></a>[Pg 122]</span> -Deposits." The resources of Lombard Street are reduced, and until -Government disbursements are made, and credit thereby transferred to -Lombard Street, money becomes tight, and borrowers are often driven to -the Bank.</p> - -<p>We have seen that in the end an over-issue of notes is certain to -reduce the Bank's reserve to a dangerously low level, and that, -therefore, directors who know their business would hesitate to make so -risky an experiment. The same argument is equally applicable to the -creation of credit by sudden large loans on the part of the Bank in its -own books. Such loans, we have seen, increase both sides of the return; -but the Bank's reserve of notes and coin in the Banking Department -remains at the same figures, consequently, its ratio per cent. to -liabilities shows an ominous decline, which is, of itself, a warning -that something is wrong.</p> - -<p>Let us assume that the Bank suddenly lends £5,000,000. Money is thereby -made artificially cheap, and the market rate for bills must fall in -consequence. But the bankers' balances have been increased in the books -of the Bank of England, and Lombard Street is not going to quietly -look on while Threadneedle Street does all the business. Consequently, -the bankers lend a portion of their balances at lower rates<span class="pagenum"><a id="Page_123"></a>[Pg 123]</span> still, -in order to attract business to themselves, and the market rate falls -again. Here we have a situation analogous to that described in the -earlier part of this chapter.</p> - -<p>Now suppose this movement took place in October, and that a drain of -gold occurred outwards. The Bank, in order to arrest the said drain, -would have to raise its rate, and to bring the market rate in touch -with its own it would be compelled to sell Consols, thereby reducing -the bankers' balances in its books, and, of course, lessening the power -of the banks to lend. But such a process is an expensive one, for -the Bank is in reality borrowing back at panic prices the capital it -created during a time of temporary ease.</p> - -<p>Although the Bank undoubtedly possesses this power, the directors -are not likely to abuse it, because the risk incurred is out of -all proportion to the possible gain if the deal is carried through -successfully; so we may say that their power to create credit in their -books is limited or regulated by the ratio per cent. of the Bank's -reserve to its liabilities.</p> - -<p>Of course, it may be asked: Is it safe to entrust such power to a board -of directors who have to earn dividends for a body of stockholders?</p> - -<p><span class="pagenum"><a id="Page_124"></a>[Pg 124]</span></p> - -<p>That is a difficult question to answer, and one, moreover, to which -there is no occasion to reply in this work. It may safely be said that -no director who understands his business would take the risk upon any -consideration; but there is the remote chance that an incompetent -Governor might be placed at the helm, and in that event, however -improbable, should he lose sight of everything but the dividends, he -might create a terrible panic throughout the land. On the other hand, -all who see the Bank return from week to week may read the signs, and -should the ratio fall abnormally low the critics would flagellate the -Governor unmercifully, and the business man, who is unaccustomed to the -pleasantries of criticism, unless he be a most hardened member of his -species, squirms under such a lash, fearful that his friends may read -just what the Press thinks of him; so he takes heed.</p> - -<p>Though the Bank's rate is not always the same as the market rate, it -is seldom very much out of touch therewith. When the directors find -that their rate of discount is too high to attract custom, then, if -the reserve be also high, they lower their minimum in order to get a -fair share of the business that<span class="pagenum"><a id="Page_125"></a>[Pg 125]</span> is doing. Their other alternative, of -course, is to borrow on stock, and in that manner to compel the bill -brokers to pay them a reluctant visit.</p> - -<p>The policy of the Bank has never been one of "grab," though the bill -brokers often grumble; but its position, in relation to the market, -is an extremely difficult one, so difficult at times as to be fraught -with great anxiety; and remembering the power that devolves upon it -by reason of its holding the bankers' balances, its policy seems one -of enviable restraint and moderation. But that is only what everybody -expects of the Bank of England.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_126"></a>[Pg 126]</span></p> - -<h2 class="nobreak" id="CHAPTER_X">CHAPTER X.</h2> -</div> - -<p class="center">The Battle of the Banks.</p> - - -<p class="drop">B<span class="uppercase">ut</span> little has hitherto been said concerning the relations of the Bank -of England with its rivals in the money market, and in order to trace -the movement from its beginning we must return to 1826, in which year -joint stock banks could be established in England at a greater distance -than sixty-five miles from London. The Bank stoutly resisted this -innovation, but the Government, in consequence of the constant failures -of the country private bankers, passed the Act of 1826, and the thin -edge of the wedge once inserted, the Bank's monopoly in London soon -disappeared.</p> - -<p>The London and Westminster, despite the determined opposition of the -Bank of England, opened business in London during 1834, and the Bank's -monopoly of banking was gone. All that then remained to it was the -exclusive<span class="pagenum"><a id="Page_127"></a>[Pg 127]</span> privilege of issuing notes in and within sixty-five miles -of London, the only legal monopoly it still enjoys. Unable to keep the -joint stock banks out of London the Bank actively opposed them, as also -did the private bankers, who, while the Bank refused to open accounts -for the new companies in its books, declined to admit them into the -Clearing House, which was founded by the London bankers about 1775. The -irony of Fate! They are now a feeble minority in a house of their own -building. But history—both domestic and economic—can supply parallel -instances.</p> - -<p>Although the new system was destined to drive out the old, the joint -stock banks made a bad start, and failures were at first so frequent -that the public began to share the opinion of the Bank and to look upon -them as anything but safe institutions. They were born in disaster, and -their policy did not provide an antidote to the old evils; but, like -the Bank of England itself, they were taught prudence by a series of -panics and upheavals which threatened to wipe them out of existence. -They were, in short, licked into shape, and that cautious prudent -policy which now distinguishes our great banking companies is the fruit -of a very bitter experience.</p> - -<p><span class="pagenum"><a id="Page_128"></a>[Pg 128]</span></p> - -<p>Towards the middle of the nineteenth century the manufactures of Great -Britain began to increase by leaps and bounds, and population, which -always augments rapidly when food is cheap and abundant, kept pace with -the country's unprecedented commercial activity. In 1801 the population -of London was less than one million. In 1837 it had increased to about -two millions; and at the present time Greater London contains over six -and a half millions.</p> - -<p>It is quite evident that the Bank of England could not alone minister -to the increasing wants of London, and both in the Metropolis and in -the provinces its joint stock rivals rapidly accumulated credit. In -June, 1854, the new banks were admitted into the Clearing House, and -since that date they have carried all before them. They shared in -the almost magical increase in the volume of British trade, but they -neither created nor provided the incentive to that remarkable outburst -of national prosperity which was the result of Free Trade, and which -made this country the workshop of the world. Since then, however, the -world has filled up.</p> - -<p>The population of the United States in 1870 was 38,500,000; in -1900, 75,500,000.<span class="pagenum"><a id="Page_129"></a>[Pg 129]</span> In 1871 the population of the German Empire was -41,000,000. In 1901 it had increased to 56,000,000. During the same -period the population of the United Kingdom increased from 31,500,000 -to 41,500,000. There are more people in the world to be fed, and as the -earth fills up the struggle for existence must surely become fiercer. -Noticing this, people naturally inquire whether, seeing the changed -environment, Free Trade is suitable to the times. Some years ago, when -trade was bad, the bimetallic controversy was raging, but since 1895 -its advocates have been dumb, for the simple reason that people will -not listen to theorists when times are good. They are then too intent -upon making money. They think they may not get the chance again.</p> - -<p>No doubt, when the depressed portion of the cycle came round -bimetallists would have been heard again. But in the place of -Bimetallism we now find Protection, and, in all truth, the question is -serious enough; for, when the present wave of prosperity dies out in -the States, there seems every probability that the huge American trusts -will endeavour to swamp our markets with their goods. Free traders make -quite a profession of faith of their commercial opinion. They declare -that<span class="pagenum"><a id="Page_130"></a>[Pg 130]</span> they are free traders with the same fervour they might infuse -into the avowal that they were Protestants or Roman Catholics. But -modern Christianity is eminently adaptable to every fresh situation. Is -Free Trade?</p> - -<p>The worse the times become, the louder, probably, will grow the -controversy between the free traders and the protectionists; and when -we remember that our workshops support our credit, and upon what an -amazingly small reserve of the precious metals that credit is based, it -is evident that the question ought to be approached with the greatest -caution; for a decision that emptied our workshops would ruin the -nation.</p> - -<p>As the savings of the country increased, the joint stock banks -accumulated credit with astonishing rapidity, and the Bank of England, -slow to recognise the power of the new system, which was so admirably -suited to the changed environment, was compelled to receive its hated -rivals into the fold. The companies possessed no vaults for the storage -of the precious metals on a large scale, and they were therefore glad -to avail themselves of the facilities at the disposal of the Bank, -whose premises were much better protected than their own. And then, -again, as the<span class="pagenum"><a id="Page_131"></a>[Pg 131]</span> Bank's notes were legal tender, the companies could send -them from the head offices to the branches cheaply, while they were a -convenient form in which to keep a certain proportion of their cash in -hand.</p> - -<p>The evolution of the Bank of England, we can see, has not proceeded -smoothly; but it is remarkable that an institution, which owed its -pre-eminence entirely to monopoly, did not gradually begin to sink into -a second-rate banking company directly its exclusive privilege of joint -stock banking was abrogated and free trade in banking established in -England. So conservative was the Bank's policy that it seems little -short of marvellous that its joint stock rivals should have quietly -endured its studied insults. The new movement was then, however, -not only in its infancy, but was under a cloud as well, and through -the companies grouping themselves around the Bank they enabled that -institution to retain its position in the centre of the money market. -The power incident to that position has been fully explained in the -previous chapter.</p> - -<p>The London private bankers, whose lack of enterprise can only be -attributed to the fact that they were imbued with those narrow City<span class="pagenum"><a id="Page_132"></a>[Pg 132]</span> -traditions which make London the home of Conservatism, also quite -failed to grasp the situation, and allowed the new companies to expand -in every direction, confident that so sudden a change must end in -disaster, and, therefore, they were content to look on, to shake their -heads sadly at the unprofessional conduct of those new banks, and to -soothe their feelings by ever and anon declaring, with due solemnity, -that joint stock banking would ruin the country.</p> - -<p>Certainly, the new companies did not manage well at first, and a few -of them were wiped out in consequence; but, in spite of mistakes, they -progressed, because their system was adaptable to the requirements of -a growing England. In these times it is the fashion to apotheosise -man—to picture him as a kind of demi-god; therefore, it is asserted -that man makes his mark on the times. But it is surely more rational -and logical to assume that the times gradually mould the particular -cast of brain that is adaptable to a constantly changing environment, -and that the man who chances to possess that cast of brain goes with -the tide—which takes him a long way. At any rate, such was the case -with the joint stock banks, which owe their success entirely to the<span class="pagenum"><a id="Page_133"></a>[Pg 133]</span> -adaptability of their system to a changing market. Moreover, that -market is still changing.</p> - -<p>The old-fashioned London bankers found, to their great surprise, that -they had not read the signs of the times aright; but the orthodox -seldom play the <i>rôle</i> of a prophet successfully, because they have -lived too long in one groove, and so are apt to forget that England is -not the world, which is steadily increasing in population. Instead of -failing, the joint stock banks merely occupied the ground, and, by so -doing, confined the business of the London private banker to the one -street in which he was established and in which his father lived before -him. They had no respect for age—those new companies!</p> - -<p>The joint stock banks spread their tentacles north, south, east, and -west of his sacred City, thereby effectually preventing his expansion, -and "concentrating" his energies in the one street aforesaid, just -as the nations of Europe have "concentrated" the kingdom of the -unspeakable Turk. Great movements seldom originate within London, which -is strikingly lacking in originality, and that new blood from the -provinces which flows in an ever-increasing stream towards the great -City, and alone<span class="pagenum"><a id="Page_134"></a>[Pg 134]</span> arrests decay, also seems to bring with it the new -ideas.</p> - -<p>The London private bankers waited in vain for the expected -disappearance of their rivals, who, despite severe panics and crises, -continued to add rapidly to their resources, until, surrounded by rival -branches, profitable expansion became difficult for the private banker, -whose business is now so localised as to render effective competition -with the companies impossible. He cannot make rapid progress because he -does not possess the branches through which alone the necessary credit -can flow to the central office, and therefore the extinction of private -banking in its present form seems only a question of time, for the -wealthy are certain to deal with those banks whose vast accumulations -are at least the outward and visible sign of the confidence the public -has in their stability.</p> - -<p>But the joint stock banks did not confine their energies to London. The -London and South Western Bank, which was established in 1862, began a -vigorous crusade in the London suburbs, with the happiest results to -its shareholders; and the London and Provincial Bank, which was formed -two years later—in 1864—established small suburban branches in every<span class="pagenum"><a id="Page_135"></a>[Pg 135]</span> -direction, with equally satisfactory returns for its enterprise; while -the London and County, larger and, perhaps, more cautious than either, -also recognised the advantages of suburban expansion. A branch bank -belonging to one of these three banks is now to be found in almost -every London suburb.</p> - -<p>The London and Westminster Bank (established in 1834) was the first -in the field, but the atmosphere of the City is not favourable to -progress, and the Westminster, though an exceptionally strong and -well-managed bank, undoubtedly failed to move with the times. So, -too, did the London Joint Stock Bank and the Union Bank of London, -which has recently somewhat altered its name. It was not until the -provincial joint stock banks invaded London that these companies began -to realise the opportunity they had missed; Lloyd's and Parr's Banks -however, evidently taking in the situation, adopted the new system, and -by skilful amalgamations rapidly forced themselves to the front. The -country banks, in short, practically took possession of Lombard Street.</p> - -<p>Why the Bank of England did not share the same fate as the private -bankers has already been demonstrated. It certainly was<span class="pagenum"><a id="Page_136"></a>[Pg 136]</span> not one whit -better informed than they; and it sympathised with them in their -distrust of the intruders, whose speedy downfall it quite expected to -witness. That the joint stock banks must come to grief was the opinion -of the majority of City men in 1834, and the then directors of the Bank -were City men imbued with those tenets which found credence within the -sacred square mile.</p> - -<p>The bank which keeps the Government account must always be a great -power in the land. Had that account been removed in 1844, together with -the last vestige of monopoly, the Bank—the directors of which shared -to the full in that tenacity and narrow-mindedness characteristic of -wealthy City merchants, whose businesses, and therefore whose ideas, -flow in the narrowest of grooves—must have ceased to be a progressive -institution. But no Government has ever hinted at deserting the Bank, -whose record, though bristling with mistakes, is one of unbroken -integrity; and the public has always looked upon its management as -above suspicion. Especially was this the case during the first few -decades of the new movement.</p> - -<p>The Bank of England had public opinion behind it; and the joint stock -banks, concerning<span class="pagenum"><a id="Page_137"></a>[Pg 137]</span> whose stability opinion was divided, were not then -strong enough to keep their own reserves and to defy the Bank; but when -their system had stood the test of time, the Bank opened its doors to -them, and the companies meekly bowed to the inevitable—for they were -not the power in Lombard Street in those days that they are now.</p> - -<p>In the first instance, we found the private bankers grouped around -the Bank; and now we see our huge joint stock banking companies in a -similar relation to her. They kept their reserves with her when their -system was in its infancy, when the Bank of England, as a result of -monopoly, was the greatest credit institution in the country. As the -companies spread their tentacles throughout the land, accumulating -credit at an extremely rapid pace, those reserves grew proportionately, -until, to-day, we find the Bank of England in the centre of a system -which owes over £910,000,000 in <i>cash</i> to the public.</p> - -<p>Our modern credit system has developed around the Bank, which, as -the holder of the bankers' reserves, now occupies an almost national -position. That position is, undoubtedly, the indirect result of a -monopoly which, prior to 1826, enabled the Bank of England to build<span class="pagenum"><a id="Page_138"></a>[Pg 138]</span> -up a huge business unopposed by others of its kind. In other words, -it had a start of 132 years. The greater, consequently, attracted the -smaller. But united Lombard Street is now a much greater power than -Threadneedle Street—therefore it is always wise to remember that the -Bank of England can only retain its position in the centre of the money -market so long as Lombard Street is agreed that it shall.</p> - -<p>The banks are not legally obliged to keep their reserves with the Bank -of England. Were they so inclined, they could withdraw them to-morrow -and accumulate stores of the precious metals of their own. It follows, -therefore, that the best of feeling should exist between the "Old Lady" -and Lombard Street. Obviously she is not now in a position to dictate -her own terms, as her greatest power is derived from the "bankers' -balances" on the left-hand side of her balance sheet.</p> - -<p>Perhaps it is now easier to understand that the Bank of England, when -it from time to time states the lowest rate at which it will discount -bills for outsiders, occupies the position of a most important lender, -whose minimum rate, though not always the market rate, is seldom either -greatly above or below those of its rivals.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_139"></a>[Pg 139]</span></p> - -<h2 class="nobreak" id="CHAPTER_XI">CHAPTER XI.</h2> -</div> - -<p class="center">The London Money Market.</p> - - -<p class="drop">I<span class="uppercase">t</span> is usual, when describing the Money Market, to assert that it -consists of the numerous banks in the City of London; but it seems to -me that, in reality, the money market extends throughout the United -Kingdom, for wherever there is a bank or a branch bank there is a -market for money. Moreover, the demand arising for loanable capital -in the provinces largely influences the rates of interest ruling from -time to time in London, because, if demand is brisk in the country, the -banks have less to lend in London, consequently the rate advances there.</p> - -<p>When reference is made to the money market the London short loan -fund is invariably meant, and we now have to consider how this fund -is formed. The banks, which are liable to the public for huge sums -of money at call<span class="pagenum"><a id="Page_140"></a>[Pg 140]</span> and short notice, are obliged to keep a certain -proportion of cash in their tills and strong rooms and with the Bank of -England in order to be prepared for any sudden demand that may be made -upon them.</p> - -<p>Their cash in hand is, of course, required to meet the ordinary demands -of a banking business, and that deposited with the Bank of England is -held as a reserve fund against those risks of withdrawal from which a -credit institution owing immense sums at call is never free. Roughly -speaking, a well-managed bank would keep, say, six per cent. of its -public liabilities in legal tender on the premises, and a further ten -to twelve per cent. at its credit in the books of the Bank of England. -The latter accumulation might be called the bank's <i>real</i> reserve, for -it is upon this that it would have to rely during a run.</p> - -<p>Secondly, from eighteen to thirty per cent. of its liabilities to -the public would be invested in first class securities. Those of and -guaranteed by the British Government are in great request for this -purpose, as the Bank of England would not hesitate to advance against -such investments should a company find itself compelled to meet a -sudden drain upon its resources. Every prudent<span class="pagenum"><a id="Page_141"></a>[Pg 141]</span> banker therefore takes -care that a large proportion of these securities is included in his -list, which would also contain Metropolitan and other Corporation -Stocks, English Railway Debentures, Colonial Government Securities, and -so on. A banker's list, in short, should be a so-called "gilt-edged" -one.</p> - -<p>Thirdly, a banker lends a certain proportion of his deposits in the -London money market. Some banks have eight per cent. there, some -fourteen per cent., and others from fifteen to twenty per cent., though -the larger and better managed companies generally employ from seven -to fourteen per cent. therein. A certain amount of this "call money," -however, represents money which has been lent to jobbers and brokers -on the Stock Exchange for "carrying over" purposes at the various -settlements, but by far the larger part of it is money which has been -lent to the bill brokers and discount houses.</p> - -<p>In no sense can this asset in the balance sheets of the banks be looked -upon as a reserve. It is money invested in the London short loan -market—money lent to the bill brokers, who, in times of bad credit, -might not be able to repay it on demand. Just at the very moment -when bankers are most in<span class="pagenum"><a id="Page_142"></a>[Pg 142]</span> need, this asset is the least available; -therefore, it is about the worst possible form in which the reserve of -a credit institution, owing large sums at call, can be invested.</p> - -<p>As a credit bank's debts are due at call and short notice, a true -reserve can only consist of legal tender, and the till money, which -is required in the ordinary course of business during normal times, -certainly cannot be classed with that reserve. When considering what -is a bank's real cash reserve, we ought to deduct from four to five -per cent. from the ratio of cash in hand and with the Bank of England -to liabilities, for a trader would not include the cash required from -day to day in his business with any reserve he might accumulate against -accidents.</p> - -<p>Reverting to investments, we might take Consols as an illustration of -their liquidity. During normal times Consols can be sold for cash at -any moment, but it is otherwise in a time of panic, when practically -everybody wants either to sell them or to borrow upon them. The market -is then disorganised, and people require either gold or large credits -at their bankers—not securities. Hence, even Consols are unsaleable -when a panic develops into a crisis.</p> - -<p><span class="pagenum"><a id="Page_143"></a>[Pg 143]</span></p> - -<p>As the Bank of England holds the cash reserve of the nation, it alone -can advance against securities in the midst of a crisis, and those -banks which were caught short would then have to apply to the Bank -for help. The Bank certainly would not lend upon any but gilt-edged -securities during a time of stress, and if their customers then made a -call upon them those companies which held second-rate investments would -have to close their doors, as they could not obtain assistance from any -other source. A strong list of securities is, therefore, essential to -every bank that is anxious to protect its customers against disaster.</p> - -<p>These three assets (cash in hand and at the Bank of England, money at -call and notice, and investments) constitute a bank's so-called liquid -assets. The ratio of total liquid assets to liabilities maintained by -the best English banks ranges from 43 to 78 per cent. The last-named -figures, which are quite exceptional in their strength, were published -by Stuckey's Banking Company. The remainder of a bank's resources is -employed in making advances and loans, and in discounting bills for its -clients, whilst a small proportion is locked up in premises.</p> - -<p><span class="pagenum"><a id="Page_144"></a>[Pg 144]</span></p> - -<p>We can now form some idea as to what the short loan fund of the London -money market really is. Immense sums are collected at the head offices -of the banks in London through their metropolitan and provincial -branches; and, as the demands of trade are always uncertain—now brisk, -then slack—it is impossible for them to invest all their surplus -capital in securities; consequently, a certain portion of it finds -remunerative employment in this channel.</p> - -<p>A huge stream of credit is constantly circulating through the three -kingdoms, and London, so to speak, is the heart of the system. In years -of active or good trade this stream increases in volume, and during -years of depression it contracts; yet it is difficult to say whether or -not the resources of the banks (the floating capital of the country) -are appreciably lessened during a period of temporary depression, -although the national turnover unquestionably is, as may be seen by the -Clearing House returns. During years of rising prices and increasing -trade activity profits are augmented, and, consequently, the resources -of the banks are swollen; but when the profits are invested within the -country, a similar amount of credit is returned to the<span class="pagenum"><a id="Page_145"></a>[Pg 145]</span> banks by those -who have sold their securities, and though less capital is created -when trade is dull, it is questionable whether the resources of the -banks then shrink very greatly, unless foreign securities are largely -purchased.</p> - -<p>We have seen that this stream of credit flows to London, and as demand -throughout the country is not sufficiently strong to attract it all -back again, a large fund of loanable capital accumulates in the hands -of the London banks, and flows from them to the bill brokers, who -employ it in discounting bills of exchange. But though by far the -greater part of the London short loan fund is accumulated in this -manner by the banks, other firms and companies also discharge their -surplus capital into it. The pool, of course, is not a stagnant one, -for capital is constantly flowing in and out.</p> - -<p>The India Council, for instance, lends large sums in the London short -loan market. The numerous foreign and colonial banks in London do -the same, and so, too, do many of the large insurance companies and -merchants, while during slack times money finds its way from the -Stock Exchange to the bill broking houses. At first sight it seems -strange that bankers should advance money to the bill<span class="pagenum"><a id="Page_146"></a>[Pg 146]</span> brokers, and so -provide their rivals with capital with which to compete against them, -especially as the banks have discount departments of their own.</p> - -<p>Let us, however, consider the position of the bill broker in relation -to the Bank of England and the money market.</p> - -<p>Towards the beginning of the nineteenth century the broker acted as -agent for the country bankers, but this connection was naturally -severed when the country firms opened accounts with the London bankers, -and the broker, whose knowledge of bills was extensive, then transacted -business for himself. Through holding out for high rates, the London -private bankers drove a large amount of business into the hands of the -bill brokers, who, by confining their attention solely to this class -of credit document, came to be largely trusted by the joint stock -companies, which could not obtain servants with the special training of -their rivals.</p> - -<p>In no other country has the bill broker such influence as in -England. In Paris, for instance, the customer discounts with his -banker, who re-discounts with the Bank of France; but in London, for -reasons already stated, bills find their way to the bill brokers,<span class="pagenum"><a id="Page_147"></a>[Pg 147]</span> -who re-discount either with the banks or with the Bank of England. -Moreover, all the best bills get into the hands of the bill brokers, -who, at one time, only discounted the acceptances of the banks and the -larger houses; but they now take small trade bills, and, should the -banking business grow less profitable, it is questionable whether the -banks might not endeavour to dispense with the middleman whom they now -encourage.</p> - -<p>We next have to consider the London money market as a whole. First we -find a system which comprises Lombard Street and Threadneedle Street. -In other words, the London banks, by keeping accounts with the Bank -of England (Threadneedle Street), have placed that institution in the -centre of the system, and we know the Bank derives great power from -this situation; but its power is not innate—it is derived through and -is dependent upon Lombard Street. This group we will call "the money -market" or "the market."</p> - -<p>Then we have the bill brokers, of whom we will speak as "the outside -market." Every morning the bill broker goes from bank to bank inquiring -at what rates he can borrow; and if Lombard Street (the London banks) -cannot supply him with all the capital he<span class="pagenum"><a id="Page_148"></a>[Pg 148]</span> requires, then he is -compelled to apply to the Bank of England, which, however, he always -endeavours to avoid, because the Bank invariably charges him a higher -rate than do the other banks.</p> - -<p>The Bank of England is a great bank of discount: consequently, the -brokers are its rivals; so it is hardly reasonable to expect the Bank -to charge the same rates to them as to its own clients, seeing that -the brokers, by their competition, reduce the Bank's business. When -trade is brisk loanable capital is in considerable demand, and the -banks, therefore, have less money to lend to the bill brokers, who -consequently are then driven to the Bank, which holds the bankers' -balances.</p> - -<p>But the Bank of England's position is an extremely delicate one; and -when the resources of Lombard Street are temporarily exhausted and -demand centres upon itself, it has to take care that its ratio of -reserve of notes and cash in the Banking Department does not sink -too low in proportion to its liabilities. Should the demand upon its -resources prove considerable, it raises its rate until the pressure -is reduced. As a large part of the trade of this country is conducted -through the medium of bills of exchange, it<span class="pagenum"><a id="Page_149"></a>[Pg 149]</span> is absolutely essential -that there should always be a market for good bills. Otherwise, panic -and failures would be the result; so, were the Bank to refuse to take -bills from the brokers at a price, our credit system would collapse at -once, unless the banks themselves, determined to crush the brokers, -offered to deal direct with the holders. But the experiment would be -a most risky one to make. Moreover, it could not be attempted at a -critical moment.</p> - -<p>When Lombard Street is not lending freely, or cannot lend further with -comparative safety, the Bank, by raising its rate of discount from time -to time, reduces the merchant's profit on each transaction, until at -last money becomes so dear that he finds that he is making little or -no profit on his goods. He therefore produces less, and, consequently, -discounts less, when the pressure upon the Bank relaxes.</p> - -<p>So long as money may be obtained, let the price paid for it be what -it may, a sense of security pervades the community; but were it -whispered during a period of temporary tightness that the Bank refused -to discount good bills at any price, our credit system would be in -imminent danger, for the trade of the country would be at a standstill. -Further, did<span class="pagenum"><a id="Page_150"></a>[Pg 150]</span> such a state of affairs continue for many days, the crash -would come, and the Bank of England would then be swept away with the -rest of the market. Our present system is so delicately poised that the -Bank simply dare not refuse to take good trade bills from the brokers.</p> - -<p>We next come to the other side of the picture. The broker, when he goes -his rounds, sometimes finds that the surplus resources of the banks -are abundant, and that they are ready to let him have even more than -he requires. When he makes this discovery, he begins to higgle, to try -to ascertain the lowest rate certain banks are prepared to accept; for -the difference between the rate at which he discounts bills for his -own customers and the rate at which he re-discounts or borrows, is -his margin of profit, and he is naturally anxious to make it as wide -as possible. (The poor man, be it remembered, does not visit Lombard -Street simply because he finds the air pure and the society of bank -officials congenial.) He therefore does his best to discover those -banks which are in funds, and, having found them, to induce them to -lend as cheaply as possible. This he can do when loanable capital is -cheap and abundant,<span class="pagenum"><a id="Page_151"></a>[Pg 151]</span> and the Bank of England probably doing but little -business. Possibly, though the Bank rate is at two and a half, bills -are being taken by the brokers at one and a half. Then the Bank, in -order to get business, either lowers its rate of discount or else, by -selling stock, endeavours to lessen the resources of Lombard Street.</p> - -<p>If the Bank adopt the latter expedient, it usually sells Consols for -cash, and buys them back for the account, thereby temporarily reducing -"bankers' balances," and attracting business to itself. The banks, -having less to lend, raise their rates, which then approximate more -closely to the Bank rate.</p> - -<p>The brokers often complain bitterly of this interference by the Bank -of England with the market's supply of loanable capital, asserting -that this artificial enhancement of rates by the reduction of bankers' -balances through the sale of stock affects their business injuriously, -and benefits the Bank but little; and it certainly is difficult to see -how the Bank of England can make a profit out of the transaction.</p> - -<p>On the other hand, when the market rate is appreciably below the Bank -rate, it is impossible to attract foreign gold to London; and the Bank, -by borrowing on Consols, and making its<span class="pagenum"><a id="Page_152"></a>[Pg 152]</span> rate representative, is acting -in the public interest, should it be desirable either to attract gold -to this country or to prevent its leaving these shores.</p> - -<p>We can now see that the Bank of England, though it states its minimum -rate, is often powerless to transact business thereat; and, recognising -that its own rate is out of touch with the market rate, the Bank often -discounts bills for its own customers at the rates ruling in the open -market, as, were it to refuse to do so, its clients would naturally -take their bills to the cheapest house. When, however, Lombard Street -is empty, and the bill brokers are compelled to approach the Bank -which holds the final reserve, the Bank of England is frequently in a -position to charge its rivals one per cent. above its declared minimum, -and the bill brokers quite naturally feel a little sore. For this -reason they try every source of supply before making application to the -Bank.</p> - -<p>As security against loans made to them the brokers usually deposit -either bills which they have discounted in the ordinary course of their -business or gilt-edged securities, but sometimes the bill broker's -credit is so good that the banks lend him money at call<span class="pagenum"><a id="Page_153"></a>[Pg 153]</span> practically -without security. When securities are deposited they are of course -returned directly the loan is paid off.</p> - -<p>There is also another little point to which attention may be drawn: to -wit—that, although the market we are discussing is a special market, -yet if a borrower's credit be good it is generally possible to obtain -an advance either at or about Bank rate.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_154"></a>[Pg 154]</span></p> - -<h2 class="nobreak" id="CHAPTER_XII">CHAPTER XII.</h2> -</div> - -<p class="center">The Bank Rate and Stock Exchange Securities.</p> - - -<p class="drop">A<span class="uppercase">t</span> the present time large advances are made by the banking companies to -members of the Stock Exchange, and it is supposed that at the beginning -of 1894, when the Bank rate fell to two per cent., and an investment -of surplus funds in the London short loan market brought in very poor -returns, the banks, tempted by higher rates, largely increased their -loans to the Stock Exchange. In 1890 rumour had it that a few of the -banks made rather heavy losses in connection with the South American -gamble, which brought down the firm of Barings; and the unanimity -they displayed, under the leadership of the late Mr. Lidderdale, in -supporting the tottering structure, certainly lends force to the -suggestion; for philanthropists are not to be found either in Lombard -Street or in Gorgonzola Hall.</p> - -<p><span class="pagenum"><a id="Page_155"></a>[Pg 155]</span></p> - -<p>The same rumour was circulated after the Kaffir boom in 1895, and -a little later it was whispered that some of the banks intended -curtailing their loans to the Stock Exchange, and that in future mining -shares would be received with the greatest circumspection. So close -is the connection between the banks and the "House" that the utmost -consternation prevailed when it was feared that the banks would not -touch certain stocks and shares of a fluctuating character. The mere -rumour created almost a panic among those dealers whose books were full -of the tabooed securities.</p> - -<p>But 1895 was a bad year for the banking companies, and, from a dividend -point of view, 1896 was little better, for the Bank rate did not touch -two-and-a-half per cent. until September of that year. The short loan -market, therefore, was not a tempting place into which to pour surplus -deposits, so the banks apparently thought better of their decision (if -it were a decision), and continued their loans to the Stock Exchange on -the same liberal scale, because such loans yielded a much better return -than those to the bill brokers.</p> - -<p>The very rumour that the banks intended increasing their margin on, -say, American<span class="pagenum"><a id="Page_156"></a>[Pg 156]</span> Rails, would cause those securities to fall, and were -the threat actually executed, then, unless strong support came either -from the public or from New York, the result would be failures of weak -jobbers in that particular market, and a heavy fall in the prices of -American Railway securities. There is the same link between the other -markets of the Stock Exchange and the banks, and, such being the case, -it naturally follows that the prices of securities are influenced by -the abundance or scarcity of loanable capital, and that, therefore, -continuation rates fluctuate with the Bank rate.</p> - -<p>But a very considerable proportion of the transactions conducted on the -Stock Exchange is of a speculative or gambling nature, in which those -mysterious persons called "bulls" and "bears" figure largely, and whose -object it is, not to invest savings in particular stocks and shares, -but to receive a cheque from their broker representing differences -due to them on the rise or fall of the securities in which they are -temporarily interested.</p> - -<p>The "bull" buys stock because he believes that it will rise, and -that he will be able to sell it at a profit before the fortnightly -settlement comes round, but he does not pay for it; and if his sanguine -anticipation is not realised, so<span class="pagenum"><a id="Page_157"></a>[Pg 157]</span> human and hopeful is he, that he -endeavours to obtain a loan on his stock through his broker in order -to carry it over to the next settlement, trusting that he will be able -to sell at a profit before contango day again comes round. The broker -sometimes obtains an advance on the stock through his banker, and so is -enabled to accommodate his client, whom he charges both interest and -commission. Again, the broker may carry over the stock through a jobber -or with a money broker who is a member of the "House," as the Stock -Exchange is colloquially called.</p> - -<p>It has been suggested that some of these money brokers are in reality -agents of the banks—that, in short, they are the middlemen between the -banks and those who want to borrow on the Stock Exchange, just as the -bill broker is the middleman between the banks and those persons who -possess bills. The bill broker deposits the bills he has discounted for -his customers as security against a loan from the banker, and the money -broker deposits the stocks and shares against which he has advanced to -members of the Stock Exchange as security for a loan from the banker to -himself. His profit, therefore, like that of the bill broker, would be -the difference between<span class="pagenum"><a id="Page_158"></a>[Pg 158]</span> the rate at which he borrows from the banker -and the rate at which he lends in the House. When large sums are -advanced in this manner the prices of stocks and shares are forced up -to fictitious figures in the hope that the public will come in and buy. -Yet the Stock Exchange Committee preaches about the iniquities of the -outside broker! Far be it from me to defend the possibly questionable -methods of the latter; but, to an unbiased observer, it sounds somewhat -like the pot calling the kettle black.</p> - -<p>Huge sums of money are advanced every fortnight by the banks to the -money brokers and jobbers, principally against sold stocks and shares, -which are awaiting the arrival of <i>bonâ fide</i> investors. The banks, of -course, require a good margin in order to cover themselves against loss -through any possible depreciation in the hypothecated securities, and -when the settlement or day of reckoning arrives, fresh loans are made, -or old advances are renewed, and the securities carried over to the -end of the account. A high rate of interest naturally makes "carrying -over" from account to account a very expensive operation, whilst an -abnormally high rate renders the process prohibitive.</p> - -<p><span class="pagenum"><a id="Page_159"></a>[Pg 159]</span></p> - -<p>When, therefore, the Bank rate is high and money is dear, a check is -immediately given to speculation on the Stock Exchange, because those -persons who have bought securities for a rise prefer to sell at a loss -before the settlement rather than pay excessive contango rates. It -follows, then, that dear money greatly reduces the dimensions of the -accounts open for the rise.</p> - -<p>The banks, too, often become alarmed by the magnitude of the account, -and having demands upon them for capital elsewhere, they grow nervous -and lend less freely, at greatly enhanced rates, and then jobbers and -money brokers have to refuse a large number of applicants. The result -may be either a fall in the securities dealt in by a particular market -or a general depression throughout the House. Then the "bears" come in -and buy, take their profits, and are jubilant.</p> - -<p>Conversely, a plethora of money and a low Bank rate encourage -speculation, as was the case before the boom of 1895. Continuation -rates are low, and capital comes out of trade into the better-class -securities, which begin to rise in consequence. Then, for a little -while, the "bulls" have it all their own way. But why does the -Committee pose as the friend of<span class="pagenum"><a id="Page_160"></a>[Pg 160]</span> the <i>bonâ fide</i> investor? It is a -little difficult to see where he comes in, unless it be in at the top -and out at the bottom. As a matter of fact, there is so much gambling -in securities taking place in the House that the genuine investor, if -he do not understand the market, falls an easy prey to the "bulls" -and "bears," who, by studying the habits of his kind, anticipate -their requirements, and, after taking a large bite, pass on their -hypothecated shares. On the other hand, the investor who studies the -markets sometimes waits patiently for exhausted "bulls" or sells to -frightened "bears." So, to those who know the game it is about as broad -as it is long.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_161"></a>[Pg 161]</span></p> - -<h2 class="nobreak" id="CHAPTER_XIII">CHAPTER XIII.</h2> -</div> - -<p class="center">The Banks as Stockbrokers.</p> - - -<p class="drop">W<span class="uppercase">ere</span> business on the Stock Exchange solely of an investment nature, it -has been suggested that that institution could dispense with over fifty -per cent. of its members, for, during recent years, a large amount of -the investment business of the country has drifted to the banks, which -place their orders in the hands of a few brokers, with whom they divide -the usual one-eighth per cent. commission. The large banking companies -are outside brokers, and so eager are some of them to attract this -class of business that they offer their clerks half the commission -received from the broker upon all business introduced by them. Seeing -that the average bank clerk is absolutely without experience of the -markets, touts of this variety are a source of danger to the public.</p> - -<p><span class="pagenum"><a id="Page_162"></a>[Pg 162]</span></p> - -<p>The banker who divides his share of the commission with the clerk who -introduces the business is satisfied with one-thirty-second per cent. -commission; but the broker, who only gets one-sixteenth instead of -one-eighth per cent., is, probably, less eager to make a close bargain -for a customer of the bank than for one of his own. On the other hand, -the volume of investment business which flows through the banks to the -Stock Exchange is so large that those brokers who are favoured with the -banks' custom must earn considerable sums by way of commission. Whether -orders from customers of the banks receive that individual attention -which the brokers give to those from their own clients is, however, -another matter.</p> - -<p>Most of the banks have Stock Departments, to which orders are sent by -their country branches. These orders are steadily increasing, and the -tendency seems to be for a large number of the provincial public to do -their investment business through the banks. This class of business is, -therefore, gradually drifting to the banks, and doubtless, as time goes -on, the banking companies will become the recognised channel for the -<i>bonâ fide</i> country investor.</p> - -<p><span class="pagenum"><a id="Page_163"></a>[Pg 163]</span></p> - -<p>It follows that the non-speculative business is getting into a few -hands, with the result that a large number of brokers on the Stock -Exchange are, so to speak, "starved," and consequently obliged to -turn their attention to the demand created by the more speculatively -disposed members of the public. Yet, strange to say, in spite of -the fact that orders are now diverted to the Stock Departments of -the London banks and that, therefore, fewer brokers are required -to transact the investment business of the country, the members of -the Stock Exchange are increasing numerically. Seeing that the safe -business is drifting through the banks into the hands of a few large -brokers we may well ask how the smaller men obtain a living from their -business?</p> - -<p>The ground, year in year out, is being farmed assiduously by the -banks, whose large capital and established credit inspire widespread -confidence; and in the face of such competition the small broker's -chance of success does not seem encouraging. How can he make a -business? The banks, who place their orders with strong brokers, -guarantee those customers who deal through them against the -insolvency of both the broker and the jobber, and such a guarantee is -unquestionably<span class="pagenum"><a id="Page_164"></a>[Pg 164]</span> worth having. The small broker, as a rule, possesses -very little capital; whereas the person who instructs his banker -either to buy or to sell is conscious that he is dealing through an -institution whose credit is practically unlimited, and whose resources -amount to many millions. He has not, therefore, to ask himself whether -his broker is safe, and this sense of security, inspired by a bank's -millions, undoubtedly causes many people who would rather do business -direct with a member of the Stock Exchange to deal with the banks. -Moreover, a bank official is quite well aware of this advantage, and -when a customer, who is undecided whether or not to employ a broker, -asks what inducement the bank holds out to him, he quietly replies: -"You have the bank's credit upon which to rely." Such an answer makes -a customer reflect. Further, it seldom fails to effect its purpose, -because, in the first place, it instils a doubt in the client's mind -regarding the means of his broker; and, in the second place, because he -cannot fail to recognise the greater security the bank affords him.</p> - -<p>It is evident, then, that the small broker's path is bestrewn with -almost insuperable difficulties, and that it is extremely hard for him -to attract safe business. But the<span class="pagenum"><a id="Page_165"></a>[Pg 165]</span> banking companies do not arrest the -flow of speculative orders to his books.</p> - -<p>The banks, which have a horror of speculation, confine their attention -to the buying and selling of stocks and shares through their brokers. -Were they to encourage gambling in securities they are fully aware -that the result would be disastrous to the business of banking, for -a certain number of their customers would be sure to neglect their -business in the hope of snatching differences on the Stock Exchange, -and such a policy would end in a crisis that would bring the country to -the verge of ruin. For this reason alone the banks firmly and wisely -refuse to foster speculation among their clients.</p> - -<p>Capital, we all know, is the savings of labour; consequently the -greater the profits made in trade during any one year, the larger is -the fund awaiting investment. Now, if the banks were to incite the -gambling fever among their customers, this fund would tend to diminish -each year, and, seeing that the prosperity of the country is entirely -dependent upon its trade, bankers, customers, and stockbrokers would -speedily become involved in common ruin. Small wonder, then, that our -large banking companies, which are responsible<span class="pagenum"><a id="Page_166"></a>[Pg 166]</span> to the public for -millions of money—a large proportion of which they must be prepared to -return at any moment—decline to open speculative accounts for their -clients. It would be madness on the part of such institutions to divert -their customers' attention from trade to speculation in securities; and -for this reason the bank clerk as amateur commission agent seems a step -in the wrong direction.</p> - -<p>Moreover, in this respect the policy of the banks appears -contradictory. Recognising the temptations to which their clerks are -exposed, it is their practice to instantly dismiss those men who -indulge a passion for betting; yet some of them deliberately encourage -their servants to tout for investment orders, apparently unconscious -of the fact that once their attention is drawn to the markets, some -of the clerks are almost certain to end by gambling for differences -on their own account. Helping themselves to the money of the banks is -probably the next step. Were not the question so serious, the fact -that directors cannot make so palpable a deduction would be positively -humorous, for it is evidently quite as undesirable, from their point of -view, that a clerk should bet upon a stock as upon a horse.</p> - -<p><span class="pagenum"><a id="Page_167"></a>[Pg 167]</span></p> - -<p>The modern credit system, it will be seen, places a very large part of -the safe or investment business in the hands of a minority of brokers, -who, like the bankers, much prefer to do a good commission business, -and to leave speculation to the smaller brokers, who have less to lose -than they. These favoured brokers have grown accustomed to sleeping -comfortably o' nights, undisturbed by the vision of settling day on -the morrow; and, quite blind to the cause of their enviable freedom -from care, they are disposed to be loud in their abuse of the risky -manner in which some of the smaller brokers conduct their business. -But, seeing that the non-speculative orders flow from the banks to -themselves, it would be interesting if they would attempt to explain -how the army of small brokers can live unless they cater for the wants -of the speculator. As a rule their capital is small, consequently they -cannot afford to wait years while they slowly build up a connection; -so, as the safe business is cornered, they accept the risky. This -they do, not from choice, but from necessity; and the Stock Exchange -Committee, in order to prevent additions to the ranks of these -undesirables, should take steps to reduce the number of members of -the Stock Exchange very<span class="pagenum"><a id="Page_168"></a>[Pg 168]</span> considerably. Already the investors of this -country have to support a small army of over four thousand of them.</p> - -<p>Of course, after every period of excitement, numerous weak members of -the Stock Exchange are weeded out, and, in a sense, the <i>bonâ fide</i> -investor is the pigeon that is plucked by the speculator. The bulls buy -in the fond hope that the investor will come in and relieve them of -their stock; and the bears sell securities which they do not possess, -trusting that investors will also sell, thereby enabling them to buy -at a low figure and to pass on their securities at a profit to those -to whom they have previously sold. The position is therefore often an -artificial one, created by operators for the rise or fall, and the -investor, unless he thoroughly understands the markets, is like a -pigeon among hawks.</p> - -<p>The larger the number of members of the House, the greater is the -risk run by the investor who deals with a small broker; and as the -investment business of the country flows largely in a particular -channel, it is more than probable that, unless the Committee decides to -admit new members sparingly, a large number of small brokers will one -day be "hammered" after a period of intense excitement.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_169"></a>[Pg 169]</span></p> - -<h2 class="nobreak" id="CHAPTER_XIV">CHAPTER XIV.</h2> -</div> - -<p class="center">The Short Loan Fund and the Price of Securities.</p> - - -<p class="drop">A <span class="uppercase">certain</span> proportion of the capital which flows into the London -short loan fund is invested in securities by the bill brokers and -the discount houses, and, as the said securities are deposited with -the bankers from time to time against temporary advances, it follows -that their choice is largely restricted to those of and guaranteed by -the British Government, because the margin exacted on the so-called -gilt-edged varieties is considerably less than that demanded upon the -more fluctuating stocks and shares.</p> - -<p>The bankers themselves invest largely in the same class, and they also -employ vast sums in the short loan market; so that when the market rate -for bills is higher than the interest<span class="pagenum"><a id="Page_170"></a>[Pg 170]</span> received upon, say, Consols, -the bankers are disposed to sell some of their Consols in order to -obtain the higher rates ruling in the outside market. Obviously, then, -any accretion or diminution in the short loan fund at once affects the -prices of gilt-edged securities. If the Bank rate be high, and also -representative, Consols ought to fall, and, conversely, if the Bank -of England's rate be low, trade dull, and the market rate of discount -smaller than the return on Consols, gilt-edged securities should rise.</p> - -<p>If this be the case, a low Bank rate must give an immediate incentive -to speculation in securities, and, therefore, the condition of the -short loan fund is intimately connected with the prices of stocks and -shares, but more particularly with those securities in which lenders in -the money market largely invest. The banks—let the condition of the -money market be what it may—must, of course, always invest a certain -proportion of their resources in Consols, but the sum so invested is -not constant.</p> - -<p>Again, powerful business firms and companies hold Government stock as -reserves against contingencies. The Government makes large purchases -in the Consol market on account of<span class="pagenum"><a id="Page_171"></a>[Pg 171]</span> the Post Office Savings Bank and -the Sinking Fund, while numerous other "bull" points could be given. -However, the fact remains that cheap money provides a strong inducement -to large speculative purchases of Consols.</p> - -<p>The large capitalists and those persons whose credit is good can borrow -at, and sometimes even slightly below, Bank rate on Consols from -the banks, which are satisfied with a small margin against possible -depreciation on Government securities. If, therefore, we examine the -period between February, 1894, and September, 1896, when the Bank rate -was stationary at two per cent., it will be possible to illustrate -this tendency. Day-to-day money was then sometimes quoted at one per -cent. and under, and this state of affairs occasionally extended over -protracted periods.</p> - -<p>Now, suppose a person invested £20,000 in Consols at 112, and that his -banker agreed to advance £18,000 against them at, say, seven days' -notice at one per cent. per annum. Two-and-three-quarter Consols at -112 return £2 9s. per cent. (about). His annual income, therefore, on -£20,000 would amount to about £490; but he owed his banker one per -cent. on £18,000. Hence £180 must be deducted from £490. Upon a capital -of £2000 he therefore earned<span class="pagenum"><a id="Page_172"></a>[Pg 172]</span> £310; and a return of fifteen-and-a-half -per cent. per annum on Consols is surely an excellent reward for his -skill. Of course, we must not forget possible depreciation; but seeing -that the banker's advance released £18,000, which he can use, he can -afford to take some risk.</p> - -<p>The following example, however, affords a more practical illustration -of the possibilities of speculation in Consols during the depressed -portion of a cycle, when the prices of commodities are low and -loanable capital is cheap. First, we want to ascertain the movements -in this security from, say, 1894 to 1896, and of these the table given -hereunder supplies a good idea:—</p> - -<table summary="another" width="65%"> -<tr> -<td colspan="5">============================================================== -</td> - -</tr> -<tr> -<td> -</td> -<td class="td5">1894. -</td> -<td class="td5">1895. -</td> -<td class="td5">1896. -</td> -<td class="td1"> -</td> -</tr> -<tr> -<td rowspan="4" >Goschen's<br /> Two-and-three-quarters<br /> per cent. -(Two-and-a-half<br /> per cent. 5th April, 1903) -</td> -<td class="td1">Highest. -</td> -<td class="td1">Highest. -</td> -<td>Highest. -</td> -<td rowspan="2" class="td1">Bank rate from 22nd<br /> Feb., 1894, to 9th Sept.,<br /> 1896. -</td> -</tr> -<tr> -<td class="td1">103⅝ -</td> -<td class="td1">108⅛ -</td> -<td class="td1">114 -</td> - -<td> -</td> -</tr> -<tr> -<td class="td1">Lowest. -</td> -<td class="td1">Lowest. -</td> -<td class="td1">Lowest. -</td> -<td rowspan="2" class="td1">Two per cent. -</td> -</tr> -<tr> -<td class="td1">98⅜ -</td> -<td class="td1">103½ -</td> -<td class="td1">105⅛ -</td> -<td> -</td> -<td> -</td> -</tr> -<tr> -<td colspan="5">============================================================== -</td> -</tr> -</table> - - - -<p>Let us assume that a person invested £20,000 in Consols at parity in -1894, and arranged with his banker for a loan against them at Bank -rate, and that the banker's margin was to be ten per cent. on the -purchase price. He received, then, a loan of £18,000 from his banker, -so the amount of his own<span class="pagenum"><a id="Page_173"></a>[Pg 173]</span> capital remaining in the venture was £2000. -Very probably, especially if his credit were beyond doubt, he would -have made a closer bargain with his banker, and thus have reduced the -margin slightly—but this is by the way.</p> - -<p>Upon his £20,000 in Consols he obtained two-and-three-quarters per -cent., so that his annual income therefrom was £550. But as he had -to pay his banker two per cent. per annum on £18,000, £360 must be -deducted from £550. His capital in the speculation being £2000, he made -£190 thereupon. This gain works out at nine-and-a-half per cent. per -annum, and nine-and-a-half per cent. on Consols may surely be classed -among the minor forms of temptation. Moreover, as the Bank rate stood -at two per cent. for slightly over two years and a half, he had a long -run for his money.</p> - -<p>But we see that he bought at parity, and that in 1896 Consols touched -114. Had he sold at 110 during that year, his £20,000 in Consols would -have realised £22,000. He, however, owed his banker £18,000, so there -remained £4000 to his credit. As his own capital in the speculation was -£2000 he would have exactly doubled it, and nine-and-a-half per cent. -per annum upon £2000 in Consols for<span class="pagenum"><a id="Page_174"></a>[Pg 174]</span> close upon two years, with a bonus -of £2000 at the finish, is painfully reminiscent of those financial -dreams which so very seldom materialise; yet huge blocks of Consols -were actually bought during this period of two per cent., and dealt -with in the manner aforesaid.</p> - -<p>Of course, the results were not always so satisfactory as those given -in the above illustrations, and no doubt many such ventures ended in -a loss, for prizes of this description are for the lucky few; though -it is usual to dwell upon them to the mortification of the mutable -many. The snatching of profits in this fashion requires skill and -considerable patience, and those persons who receive specious pamphlets -telling them how money is to be made in a marvellously short space of -time by an infallible system may appreciate the plausibility of my -illustrations, but yet should remember that they may find the results -of similar speculations in Consols very disappointing.</p> - -<p>The demand for Government securities created by these speculative -operations is one of the causes which drive up the price of Consols -during periods of cheap money, but it is not by any means the only -cause.<span class="pagenum"><a id="Page_175"></a>[Pg 175]</span> When the Bank rate advances, and capital can be employed more -advantageously in the London short loan market, this period soon comes -to an end, and consequent sales depress the Consol market.</p> - -<p>Very many of the better class securities such as Colonial Government -stocks, Foreign Government securities, and so on, yield from three to -five per cent., and when the Bank of England rate is at from two to -two and a half, though the margin demanded upon such stocks is wider -than that required upon Consols, the difference between the interest -received in the shape of dividends and that paid as the price of a loan -often makes speculative dealings in them decidedly profitable. As the -Bank rate increases, and the speculator's profit margin consequently -narrows, the tendency is for stocks and shares so "carried" to fall in -value. The holders or gamblers then begin to sell, and as the increased -supply of such securities is certain not to be met by an enhanced -demand on the part of investors, prices must fall. Seeing the better -class securities declining in value, those investors who had previously -held aloof are tempted to come in, and the greater the reaction, the -stronger is the inducement to buy;<span class="pagenum"><a id="Page_176"></a>[Pg 176]</span> consequently, the lower prices -recede the larger becomes the number of purchasers, until demand -overtakes supply and prices again begin to move upwards.</p> - -<p>Broadly speaking, it is evident that, unless the markets are -disorganised by panic or by some disquieting political occurrence, the -prices of the so-called gilt-edged securities are influenced by the -conditions prevailing in the London short loan money market.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_177"></a>[Pg 177]</span></p> - -<h2 class="nobreak" id="CHAPTER_XV">CHAPTER XV.</h2> -</div> - -<p class="center">Panic Years.</p> - - -<p class="drop">W<span class="uppercase">hen</span> in 1667 a Dutch fleet sailed up the Medway, demolished a fort -at Sheerness, and, forcing a way into Chatham Docks, burnt all the -ships assembled therein, to the consternation of the inhabitants of -London, there was a run upon the banks; but a Stuart regarded both -events with equanimity, for "Old Rowley" had a mind above trifles of -this description, possibly because he had learnt many bitter truths -in a world seldom understood by Kings. Cynics are not born—they are -made; and Charles II. had drunk from that cup which sharpens the -understanding.</p> - -<p>France, during 1719 and 1720, was in the throes of the Mississippi -scheme, which was engineered by that notorious Scotsman, John Law; and -England, in 1720, witnessed the<span class="pagenum"><a id="Page_178"></a>[Pg 178]</span> collapse of the South Sea Company, -which Sir Robert Walpole, with rare insight and unerring financial -instinct, had demonstrated was a mere gamble, that, at the best, could -only enjoy a temporary success, which was absolutely dependent upon a -rise in the company's stock; but the Government turned a deaf ear to -his warning.</p> - -<p>Scotland, we have seen, had its Darien venture in 1699; and in 1720 all -England went mad over the South Sea Company, which offered to relieve -the Government of part of the National Debt, and entered into an insane -competition with the Bank of England for that purpose. Then occurred -some spirited bidding between the two companies for this privilege; -but the directors of the Bank proved themselves the less mad, and left -their rival in possession of the incubus and the road to ruin.</p> - -<p>The result of the bidding gave the necessary stimulus to the South Sea -Company's stock, and, seeing it going up, the public at once rushed in, -when the stock rose faster than ever. In a very short space of time -the fever for speculation infused itself into the blood of the whole -nation. The pace became so furious that the more thoughtful among the -gamblers began to see the end and to sell,<span class="pagenum"><a id="Page_179"></a>[Pg 179]</span> with the result that, upon -a memorable morning, everybody wanted to dispose of his stock—and then -the bubble burst.</p> - -<p>In June, 1720, the £100 stock of the South Sea Company was rushed up to -£890, and a little later it touched £1000. Then the tide turned, and, -as is invariably the case, all were as anxious to sell as a few days -before they had been eager to buy. Every hour intensified the panic, -until at length the stock fell to £175, and the difference between the -highest and lowest quotations is eloquent of the loss inflicted upon -the community, for everybody who had money to invest was interested in -this gigantic gamble.</p> - -<p>Widespread misery and ruin followed. Suicide was of daily occurrence, -and, after a momentary lull in the storm, popular indignation lashed -itself into fury against the directors, for whom, it was openly -declared, hanging was too good a fate. The Government, thoroughly -alarmed, turned to the one strong man who had consistently opposed the -scheme, and who, in consequence, was at that moment the most popular -man in England; so Sir Robert Walpole stepped into the breach, and -stemmed the tide of popular indignation and national disaster.</p> - -<p><span class="pagenum"><a id="Page_180"></a>[Pg 180]</span></p> - -<p>At first Walpole was disposed to resort to half-measures, but when it -became apparent that the South Sea Company was rotten to the core and -that it must go at any price, he devised a scheme by which the East -India Company and the Bank of England took over £18,000,000 of South -Sea stock. The Bank directors, throughout this trying period, acted -with a strange lack of caution, and the situation was only saved by -Walpole's better judgment.</p> - -<p>The period was one of mad speculation, and no venture was too absurd -to foist upon a public, which, until the crash came, did not display -a gleam of intelligence or discernment, so blinded was it by greed. -Naturally, those bankers who had advanced against South Sea stock -did not escape loss, and many of the goldsmiths and private bankers -were ruined by the reaction, while the Bank of England itself barely -escaped. It is interesting to notice that, even in 1720, the public -could only be tempted by a rising market; and it has remained true to -this instinct, as, for some unaccountable reason, the "bear" is always -looked upon as an undesirable kind of person.</p> - -<p>The next disturbance of credit occurred in 1745, when the Young -Pretender, "Bonnie<span class="pagenum"><a id="Page_181"></a>[Pg 181]</span> Prince Charlie," after defeating Sir John Cope at -Prestonpans, resolved to march on London, and penetrated as far as -Derby. The news of his arrival there reached London on the 4th December -(Black Friday), and the City was seized with so severe a panic that -business was suspended. Some of the citizens actually left the country, -and even the King made preparations for flight. Everybody then wished -to possess himself of gold, and a run at once began upon the Bank -of England, which was taken completely by surprise, and only saved -the situation by resorting to the expedient of paying its notes in -sixpences—a somewhat lengthy proceeding, but one which enabled it to -gain time. Nobody, however, would trust a Stuart, and the panic very -quickly subsided.</p> - -<p>Learning that the Duke of Cumberland was advancing to meet him, -Charles was compelled by his followers to beat a hasty retreat towards -Scotland, and by the 23rd December the Highlanders had crossed the -border again. In January, 1746, they defeated General Hawley at -Falkirk, but in the following April the Prince lost the battle of -Culloden, which dealt the final blow to the hopes of the House of -Stuart.</p> - -<p><span class="pagenum"><a id="Page_182"></a>[Pg 182]</span></p> - -<p>The panics and crises between 1745 and 1857 have been discussed in -Chapters I. and II. of this book—principally in Chapter II.</p> - -<p>The Crimean War, through which this country muddled, was brought to -a close in 1856, at a cost to the nation of £33,000,000; and it may -perhaps be interesting to compare this sum with the £230,000,000 which -has been expended in the South African struggle. Even for a Balaclava -£33,000,000 seems a dear price to pay. But £230,000,000 for a Colenso! -Glory makes a poor national asset.</p> - -<p>In 1848 Lord Dalhousie carried out a policy of annexation in India -in a ruthless manner, and the native princes, thirsting for revenge, -insidiously propagated a rumour among the native soldiery of the East -India Company to the effect that the British Government was anxious to -Christianise them, knowing that the unsophisticated Hindu preferred his -sacred cow to the God of his conquerors, though he had probably little -faith in either.</p> - -<p>At any rate, the princes appealed to the patriotism of the native -soldiers, who, in May, 1857, replied by refusing to accept the famous -"greased" cartridges, and in a few days the insurrectionary movement -was ablaze in India.<span class="pagenum"><a id="Page_183"></a>[Pg 183]</span> The massacre at Cawnpore sent a thrill of horror -and indignation through the country, and Sir Colin Campbell (afterwards -Lord Clyde) was ordered post haste from England to take command of the -British troops. Naturally, our trade with India was disorganised; and, -speculation having exceeded all bounds in America, the grave news from -that country, combined with the outbreak in India, hastened on the -crisis of 1857.</p> - -<p>Quite an epidemic of crime swept through England about the middle of -the nineteenth century, and many names well known in the City were -smirched, whilst even the firm of Overend and Gurney, whose credit was -then at its zenith, were said to have compounded a felony in order to -avoid a bad debt. Financial morality, which is at all times peculiar, -was at this period at its lowest ebb. So small wonder that when the -American banks failed by the dozen in 1857, a feeling of distrust -should make itself felt in this country, which was then engaged in a -fierce struggle in India.</p> - -<p>Merchants and houses engaged in trade with India and America began -to fail, and in a very little while there was a run upon some of the -banks. Then followed the collapse of the Borough Bank, and Dennistoun's -of<span class="pagenum"><a id="Page_184"></a>[Pg 184]</span> Liverpool. In Scotland the Western Bank and the City of Glasgow -Bank put up their shutters; and the failure in London of Sanderson -& Co., the well-known bill brokers, accentuated the grave condition -of credit, forcibly reminded the public that the rotten state of the -American railroads had ruined thousands of speculators in this country, -and generated in the public mind a feeling of positive alarm. The -result was a panic, which by 12th November culminated in a crisis. The -country then looked to the Government and to the Bank of England.</p> - -<p>Both 1855 and 1856 were years of unusually high Bank rates, and during -1857 the demand for loanable capital became so pronounced that the Bank -of England, in order to protect its dwindling store of bullion, had to -raise its rate still further. The year opened with six per cent. In -July it fell to five-and-a-half per cent., but by 19th October it had -reached eight per cent. On 5th November nine per cent. was recorded; -and upon the 9th of the same month it was hurriedly raised to ten per -cent. Lombard Street had then practically arrived at the end of its -available resources; and demand, of course, centred itself upon the -bank which held the bankers' cash balances.</p> - -<p><span class="pagenum"><a id="Page_185"></a>[Pg 185]</span></p> - -<p>The Bank of England, as usual in those days, was quite unprepared to -meet a crisis, and made application for assistance to the Government. -Had help then been refused, it must inevitably have closed its doors, -for the reserve in its Banking Department on 13th November, 1857, -had fallen to £957,000, while it was rumoured that, at the close of -a particular day, the reduction was appreciably greater. In plain -English, the Bank of England was practically broken.</p> - -<p>On 12th November the Government consented, for the second time since -1844, to the suspension of the Bank Charter Act; and when it became -known that the Bank of England was in a position to increase its -circulation to an unlimited extent, and to advance notes against the -better-class securities, the nervous tension created by the numerous -failures throughout the country instantly relaxed, and in a few days a -comparative calm followed the storm. Indeed, before the close of 1858 -the Bank rate was down to two-and-a-half per cent.</p> - -<p>The suspension of the Act during a crisis creates a market for -securities at the Bank of England. Furthermore, at so critical a moment -the Bank is the only market in existence; consequently those securities -in which it decides<span class="pagenum"><a id="Page_186"></a>[Pg 186]</span> to deal are alone saleable, and we know that it -confines its advances solely to the so-called gilt-edged securities -and to good bills. Of course, if the public only thought, it would -instantly perceive that the more notes the Bank issues in excess of its -authorised amount the less secure is its position, because the smaller -is the proportion of gold in the Issue Department to its liabilities. -But the British public is led; it does not think. If it did we should -speedily be in the throes of a revolution.</p> - -<p>The public thinks the Government lends its credit to the Bank, but in -reality it does nothing of the kind. It simply authorises the Bank -of England to break the law, and to advance notes at its discretion. -However, the credit of the Bank is so good that the public, seeing -that it has the "moral" support of the Government, possesses absolute -confidence in its stability; and though it trusts the Bank blindly and -unreasonably, that institution has earned its gratitude upon more than -one occasion, and its history, if full of mistakes, certainly entitles -it to this confidence.</p> - -<p>Mention has been made of the failure of the Western Bank of Scotland -in 1857. This institution, besides advancing indiscreetly at<span class="pagenum"><a id="Page_187"></a>[Pg 187]</span> home, -helped to finance the gamble in American securities; consequently, -when the crisis occurred in the United States, the bank found itself -saddled with huge blocks of unsaleable stocks and shares. Subsequent -investigation disclosed a most discreditable state of affairs.</p> - -<p>In 1856 the Royal British Bank, after a short life of continual fraud, -came to the ground; and in 1857 the public learned that the notorious -Colonel Waugh had fled to Spain with considerable sums belonging to -the Eastern Banking Company. A little later, when it was discovered -that bank directors and auditors who, for a consideration, would attest -such statements as those issued by the Western Bank, could be found -in Scotland, the public came to the conclusion that a balance sheet -is worth little more than the paper upon which it is printed; and a -run at once began upon the rest of the Scotch banks, which promptly -arrested the panic by guaranteeing the notes of the insolvent Western -Bank of Scotland. The City of Glasgow Bank, though it closed its doors -temporarily during this period of fraud and distrust, succeeded in -weathering the storm, only to fail badly in 1878.</p> - -<p>The relations between England and France were severely strained in -1859. A plot was<span class="pagenum"><a id="Page_188"></a>[Pg 188]</span> hatched in London by an Italian secret society -against the life of Napoleon III., whose publication of a denunciation -of British hospitality sent a thrill of passionate resentment through -this country, which replied to his threat of invasion by the inception -of the volunteer movement. The call met with immediate response, for -nothing kindles enthusiasm so quickly as hate, and England, for the -first time in her history, created an army of citizen soldiers. At the -height of the frenzy there were ominous rumours, and for a little while -a state of panic prevailed; but the alarm soon subsided, and the next -year a commercial treaty was enacted with France.</p> - -<p>During 1862 loanable capital was cheap, and in July that year the Bank -rate sank to two per cent., whilst at no time did it exceed three per -cent. With money abundant, the promoter was soon in evidence, and the -speculation fever once more took possession of the public, hundreds of -companies being registered under the Companies Act of 1862 within the -space of a few months, until dear money began to lessen the output of -limited liability concerns and the energies of that arch-enemy, the -promoter. In 1861 the United States was convulsed by civil war, which<span class="pagenum"><a id="Page_189"></a>[Pg 189]</span> -caused a cessation of production there on a large scale, and produced a -cotton famine in this country. Lancashire, the centre of the industry, -could not obtain fresh supplies of the raw material when the ports -of the Southern States were blockaded, and early in January, 1863, -hundreds of thousands of operatives were out of employment. Speculation -instantly received a check, and the energies of the country were -concentrated upon raising huge sums for the alleviation of the distress -in Lancashire—for 500,000 unemployed workers might at any moment, -should their attitude become menacing, prove a danger to the State.</p> - -<p>From 1863 to 1865 the Bank of England was undoubtedly face to face -with a serious situation, and, for the first time in its history, its -directors grasped the simple fact that only by maintaining a good -reserve can the country be saved from panics and crises. The year 1863 -was one of high Bank rates, and during the autumn of 1864 pressure -upon the Bank's resources became so severe that a crisis was narrowly -averted. Supplies of cotton from America having practically ceased, -demand centred upon India, and the Bank of England, early in August, -had to support a drain of silver<span class="pagenum"><a id="Page_190"></a>[Pg 190]</span> thither to help pay for the cotton -crop. On 4th August the Bank rate was raised to eight per cent., and -again on 8th September to nine per cent., at which figure it remained -until the 10th November, when it fell to eight again. The strain -upon the Bank was severe, but the crises of 1847 and 1857 had taught -their lesson, and by using the "Bank rate" with effect, the directors -succeeded in keeping a sufficient reserve in the Banking Department.</p> - -<p>By about the middle of 1865 capital was cheap, but, towards the end of -that year, a decided stringency manifested itself, and at the beginning -of 1866 many companies which had been registered under the Act of 1862 -failed. The banks, whose reserves were then much smaller than now, -came in for their share of distrust, and the failure of a Liverpool -firm for a large amount made the public uneasy; but when it was known -on the 11th May that Overend, Gurney & Co. had closed their doors, the -City was seized with panic, and streams of depositors rushed to Lombard -Street to withdraw their money from the banks, which, in a very short -time, were paying out at a rate it was impossible to maintain; and it -soon became evident that unless confidence were speedily restored the -banks must break.</p> - -<p><span class="pagenum"><a id="Page_191"></a>[Pg 191]</span></p> - -<p>The Bank of England had to meet large demands from the provincial -banks, for distrust was general throughout the country; consequently -at such a moment the country bankers required their reserves of cash -in their safes, so that they could immediately meet the demands of -the more nervous of their customers should necessity arise. The Bank -advanced its rate to seven per cent. on the 3rd May; to eight per -cent. on the 8th of the same month; and to nine per cent. on the -11th; and, the pressure becoming more intense, application was made -to the Chancellor of the Exchequer, with the result that the Bank of -England was authorised to break the Act if necessary, the Government's -condition being that the rate of discount should be ten per cent. while -the Act was in abeyance; so, on the 12th May, the Bank rate was raised -to ten per cent., where it remained until the 16th August following.</p> - -<p>By the 16th May the reserve was reduced to £731,000, but directly it -became known that the Bank was in a position to advance notes against -approved securities the tension relaxed, thereby proving that the -public understood the cure as little as it did the disease—for it -was an act of madness to make the run, and equally as stupid not to -perceive<span class="pagenum"><a id="Page_192"></a>[Pg 192]</span> that the issuing of unconvertible notes is at the best only -a quack remedy. However, the remedy proved effective, and the result -enables one to realise that a nation, like an individual, is the slave -of habit.</p> - -<p>The history of the firm of Overend, Gurney & Co. makes sorry reading. -Between this old-established discount house and the Bank of England -there had always existed a spirit of rivalry; and when, after the -crisis of 1857, the Bank stated its intention not to again assist the -bill brokers during a time of panic, and only to make advances to them -at those periods when the Government takes large sums off the market, a -very bitter feeling sprang up between the discount houses and the Bank.</p> - -<p>Overends, determined to show the Bank that it was not omnipotent, -allowed their account at the Bank of England to run largely into -credit, and one day suddenly demanded three millions in cash. Their -ruse failed. Indeed it was as stupid as the resolution which goaded -them into making the effort; for, of course, were the Bank to refuse -to assist the bill brokers during a panic, it would only be adding -fuel to the flames and increasing its own difficulties. Small wonder -then that so absurd a decree created intense irritation, for,<span class="pagenum"><a id="Page_193"></a>[Pg 193]</span> upon -examination, it is evident that the Bank of England is as dependent -upon the bankers' balances in a time of panic as are the bill brokers -upon the institution which holds them. Then what folly to advertise -such a decision!</p> - -<p>Naturally, the Bank is not pleased at the thought that it must help -its rivals over the stile, but the peculiarities of our banking system -compel it to, whether it like the task or not. Therefore, it was an -error of judgment on the part of the directors of the Bank to pose as -the champions of the banking community, and to declare that the bill -brokers must, in future, accumulate reserves of their own, when they -knew quite well that the nature of their business utterly precluded -such an attempt.</p> - -<p>During a panic the Bank of England can only save itself by advancing -freely against certain securities and good bills. The credit so -created, however, swells the bankers' balances in its own books, and -consequently the amount standing to the credit of the bankers increases -appreciably. But, at such a moment, the bankers call in large sums from -the bill brokers, and, unless the brokers can obtain advances from the -Bank of England against good bills and gilt-edged securities, they -will<span class="pagenum"><a id="Page_194"></a>[Pg 194]</span> be unable to satisfy the demands of Lombard Street. By declining -to advance to the bill brokers, the Bank, in reality, would be refusing -credit to Lombard Street (bankers' balances); and, as the Bank itself -could not live were Lombard Street to withdraw its balances at so -critical a time, it follows that it must lend to the bill brokers in -order to enable them to repay the bankers. It simply dare not refuse -to assist them, for, if it did, the banks might decline to support the -Bank which left them in the lurch just at the height of the storm. -The bill brokers (the outside market) come within our present credit -system, and if, when a state of panic prevails, they were left to their -fate, in every probability the system of which they form a part would -collapse with them. The brokers may not be essential to the system, but -it is always dangerous to "swop horses whilst crossing a stream."</p> - -<p>In 1865 Overend, Gurney & Co. converted their business into a joint -stock company for the same reason that some private firms adopt the -procedure—because their profits were decreasing—though this was not -known until after the crash of 1866. During the panic of 1857 the -Bank of England made large advances to Overends; but when, early in -May, 1866, the<span class="pagenum"><a id="Page_195"></a>[Pg 195]</span> firm again applied to the Bank for assistance, the -request was refused. It has been suggested that the Bank's decision -was prompted by malevolence, but at so crucial a moment the directors -of the Bank would have hesitated to make a rod for their own backs, -and, had they believed in the genuineness of Overends' application, -they would have gladly granted the accommodation in order to spare -themselves the panic which they knew must follow their refusal -to assist a firm with liabilities of over £19,000,000. Moreover, -subsequent events confirmed the judgment of the directors of the Bank -of England.</p> - -<p>When the partners of Overend, Gurney & Co. discovered that their books -were full of possible bad debts, they promptly converted the firm -into a company, guaranteed the book debts, and appointed directors. -Shortly afterwards it was noticed that the Gurneys were realising their -property, and suspicion was at once aroused, for it was naturally -assumed that they had incurred heavy losses. When, therefore, the -company appealed to the Bank the next year, the directors were -sceptical, for though Overends still retained the entire confidence -of their country customers, there undoubtedly existed a feeling of -distrust<span class="pagenum"><a id="Page_196"></a>[Pg 196]</span> in the City, and the directors of the Bank of England shared -in the opinion there prevailing.</p> - -<p>When the rash speculations of the partners were disclosed the public -was loud in its abuse, and nothing short of a prosecution would satisfy -it; and when, early in January, 1869, the directors of Overends were -committed for trial on the gravest of charges, the crowd manifested its -delight. But the comedy followed. The trial took place at the end of -the year, by which time public opinion had completely veered round, and -when it became known that the accused were acquitted, this same crowd -cheered lustily. Small wonder that a Government, which must be well -aware of the vagaries of crowds, should hesitate to conduct a public -prosecution.</p> - -<p>The panic of 1866, though the suspension of the Bank Act immediately -brought relief, dealt a fearful blow to credit, and the country -recovered from the shock with painful slowness. Foreigners, alarmed by -the disorganisation of the London money market, began to withdraw their -capital, and the Bank, in order to check this drain of gold outwards, -was compelled to keep its discount rate at ten per cent. for three -weary months.</p> - -<p><span class="pagenum"><a id="Page_197"></a>[Pg 197]</span></p> - -<p>By the middle of 1867 the Bank rate was at two per cent.; but even the -company promoter had not the audacity to show himself, so depressed -was the public spirit by the disasters of the previous year. The great -railway companies, too, began to find themselves in financial straits, -and their credit was so bad that they could only raise money on -debenture stocks at high rates of interest, for the public then looked -upon their ordinary shares as distinctly speculative holdings. As the -railway directors neglected to borrow with the option of redemption at -certain figures at a future date, it followed that, when their credit -greatly improved at a later period, the companies were saddled with a -huge drain in the shape of high interest on their debenture issues, -whereas, had their directors exercised ordinary prudence, they would -now be paying very much less upon their prior stocks, and consequently -the dividends on their ordinary shares would be proportionately -greater. Evidently, then, the interests of the shareholders were -sacrificed to the holders of the debenture and preferred stocks.</p> - -<p>As the prior stocks absorb so large a share of the profits, and, -moreover, as the amount so absorbed is practically always the same,<span class="pagenum"><a id="Page_198"></a>[Pg 198]</span> -whereas the revenue is variable, it follows that the distributions -on the ordinary shares fluctuate considerably. This fact, of course, -has not escaped speculators, who work out the ratio of ordinary share -capital to total capital; and the smaller the ratio the more inconstant -will be the dividends, and the greater the movement in prices. -Investors know that, should the trade of the country be improving -rapidly, a certain railway will earn more; and if its share capital -ratio be small, then the increase in revenue will largely swell the -ordinary dividends thereupon—so they speculate for a rise.</p> - -<p>The Franco-German war, which broke out in 1870 did not at first -exercise any very great effect on the English money market, for though -the Bank raised its rate to six per cent. on the 4th August that year, -it was at two and a half before the end of September. Indeed, after the -panic of 1866 down to the middle of 1870, scarcely a ripple disturbed -the unusual calm of the money market, but the three crises since 1844 -were largely accountable for that. They taught both Lombard Street and -the Bank of England that caution is essential to the successful working -of our banking system, and that fair reserves, however great the -loss of<span class="pagenum"><a id="Page_199"></a>[Pg 199]</span> interest incurred thereupon, are indispensable to a banker. -The result of these bitter lessons may be read in the comparatively -peaceful history of English banking since 1866.</p> - -<p>In 1870 specie payments were temporarily suspended by the Bank of -France, and the European demand for the precious metals had to be -met by the Bank of England. A much larger amount of foreign capital, -consequently, was deposited in London, which then became the Clearing -House of Europe, and the accumulation of so much foreign money -unquestionably made the money market more sensitive, and increased the -responsibilities of the Bank, whose store in the Issue Department was -then peculiarly exposed to the danger of a drain outwards.</p> - -<p>The Franco-German war ended disastrously for France in 1871, and the -vanquished had to pay a huge indemnity to the victor. France paid -considerable sums to Germany by bills on England, and although Germany -employed a certain proportion of the capital so obtained in the London -money market, it withdrew large sums in gold, which were required for -purposes of currency reform. During the latter part of 1872 the Bank -rates were decidedly high, and in November, 1873, nine per cent.<span class="pagenum"><a id="Page_200"></a>[Pg 200]</span> was -recorded for about two weeks, but by December it was down to four and -a half again. The Bank, no doubt, had its anxious moments during this -period, for the larger the drain outwards the more dependent would -be the bill brokers upon it, and the directors could not refuse to -increase their advances to the brokers, because, had they done so, -there would have been a panic at once.</p> - -<p>We can now see distinctly how our system works. First, we get the bill -brokers or middlemen, who, from the nature of their business, cannot -afford to keep reserves, because their margin of profit is so small; -and secondly there are the bankers, who keep their reserves with the -Bank of England, which is thereby placed, so to speak, in the centre of -the money market.</p> - -<p>The Bank, after it was stripped of its monopoly of joint stock -banking, failed for a time to understand its new environment, and it -would have closed its doors three times since 1844 but for Government -intervention, viz., in 1847, 1857, and 1866. However, when we remember -that its directors were merchants, not trained bankers, and that the -Bank had to adapt itself to entirely changed surroundings, this result -is not remarkable.<span class="pagenum"><a id="Page_201"></a>[Pg 201]</span> So little acquainted were the directors with the -laws of banking that they actually believed the Act of 1844 would -prove a panacea for all kinds of financial troubles; but their eyes -were opened very widely indeed in 1847, and they gradually came to the -common-sense conclusion that "the higher the ratio of reserve in the -Banking Department the smaller is the danger of disaster to the Bank -and to the country."</p> - -<p>During 1866 the Bank was fairly well prepared, and, for the first -time in its history, it met a panic in a scientific or common-sense -manner, and advanced without hesitation to all would-be borrowers whose -securities were good. The greatest danger the Bank has to face is the -suspension or stoppage of the credit machine of which it is the heart, -for if the progress of that machine be arrested, then the trade of the -country must also stop, and England will be bankrupt.</p> - -<p>So long as the machine can be kept in motion a catastrophe is -impossible, and experience has taught the Bank that, during a period -of pronounced distrust, this can only be done by advancing liberally -against certain securities, and by a skilful use of the "Bank rate." -The whole credit machine must work<span class="pagenum"><a id="Page_202"></a>[Pg 202]</span> smoothly, and it would be madness, -at such a moment, for the Bank to attempt to leave any part of the -machine (the bill brokers for instance) to its fate. This is now fully -recognised, and consequently a better feeling exists between the -various divisions of the money market.</p> - -<p>The credit machine is kept in motion by the workshops; therefore, -during a panic money has to be advanced to discount good trade bills -in order to support the workshops, for if a rumour got about that the -banks were refusing the acceptances of strong firms, the pressure to -borrow would immediately increase, thereby adding a fresh danger to -the situation, and causing nervous depositors to rush in a body to the -banks for their money.</p> - -<p>It follows, therefore, that in order to arrest a panic, and to prevent -a dangerous run upon their resources, the banks must lend freely to -strong clients. In a time of financial stress the weak go to the wall, -for finance is no exception to the rule that only the strong can live -when a storm bursts and causes a struggle for existence. There is no -room for sentiment at such a moment. The fight is bitter and to the -finish. Sentiment comes in afterwards.<span class="pagenum"><a id="Page_203"></a>[Pg 203]</span> This state of affairs is one of -the curious products of modern civilisation, and, if you want to alter -it, you must first alter human nature, which changes strangely little -as the centuries roll on.</p> - -<p>At first sight these sudden advances seem highly imprudent, because the -banks are parting with their resources, but unless the workshops are -assisted the banks <i>must</i> break: whereas, by advancing liberally on -the best securities at high rates of interest, the dangerous element -is speedily weeded out, and, provided the reserves of the banks are -fairly large in proportion to their liabilities, a healthy reaction -is practically certain to assert itself long before the end of their -lending power is reached. The Bank, when it advances, of course creates -credit in its books, and so adds to the resources of Lombard Street. -The relief thus obtained is artificial, and, were it intended as a -permanent cure of a disease, it must in the end only aggravate the -malady. But it is temporary assistance during a trying time that the -workshops require, and it is just this which our modern credit system, -when skilfully administered, can give admirably. In fact it possesses -the very machinery for the purpose. This sudden demand for additional -credit<span class="pagenum"><a id="Page_204"></a>[Pg 204]</span> (not specie) during a period of pronounced distrust is -fortunately of short duration, and the Bank is, therefore, only called -upon to make large loans for a short time, as, though the depression -following a panic may prove lasting, the acute stage which the Bank has -to face is soon over.</p> - -<p>The dangers of our credit system are apparent to everybody; but when -critics point to the panics which have occurred since the Act was -passed, and make deductions therefrom to the effect that the Bank may -find itself in a similar plight should another such whirlwind develop, -they usually forget that, though the same danger exists, our banking -companies are now much more prudently managed, and that the directors -of the Bank of England, having the misfortunes of the past to guide -them, are thoroughly acquainted with the delicacy of the machine they -manage, and are, consequently, less liable to err.</p> - -<p>We have seen that the joint stock banking movement began in 1826 under -conditions which were far from favourable, and the companies, like the -Bank of England itself, having to learn their business as the movement -progressed, naturally committed many blunders; but when the dangers of -banking were better understood<span class="pagenum"><a id="Page_205"></a>[Pg 205]</span> failures became much less frequent, and -after 1866 they were few and far between. The credit of the joint stock -banks vastly improved in consequence, and confidence in their stability -soon began to take the place of distrust. But in 1878 the failure of -the City of Glasgow Bank and of the West of England Bank, together with -some half-dozen private bankers and banking companies, undoubtedly -revived old prejudices and created a feeling of unrest among depositors -and shareholders.</p> - -<p>The City of Glasgow Bank, it will be remembered, was in trouble -during 1857, but in 1878 both its customers and shareholders had -reason to regret that it ever opened its doors again, for the gravest -irregularities were disclosed when its affairs were examined, false -balance sheets having been certified by auditors and directors during a -period of over four years; and once again the public was startled out -of its sense of security by the discovery that some bank directors and -auditors were not less peccant than the majority of the human race when -hazardous speculations landed them in financial difficulties.</p> - -<p>The directors of the City of Glasgow Bank finding themselves out of -their depth, clutched at the proverbial straw, and, like a weak<span class="pagenum"><a id="Page_206"></a>[Pg 206]</span> -individual who starts with the best of intentions, they were speedily -sucked into the vortex of crime. By the Act of 1845 the directors were -bound to hold gold against any excess in the amount of the bank's -circulation fixed thereby, but they overcame this difficulty by the -simple expedient of making false returns to the Government. Having once -crossed the line which separates the sheep from the goats the rest was -easy.</p> - -<p>With an utter disregard for the interests of the shareholders, the -directors advanced huge sums to firms in which they were pecuniarily -interested, and, as these firms did badly, they were compelled either -to bolster them up with additional loans or to allow them to fail. -They chose the latter alternative, and, as might have been expected, -the bank's assets rapidly dwindled, millions of pounds in the shape of -bad debts being disguised on the right hand side of the balance sheet -as cash in hand, Government securities, and so on. The business of the -bank soon degenerated into a mere gamble, and during the latter part of -its career the institution was only kept in existence by the continuous -perpetration of frauds.</p> - -<p>Of course the longer the game (it can be dignified by no other name) -continued the more<span class="pagenum"><a id="Page_207"></a>[Pg 207]</span> desperate were the efforts it called forth, -and just before the end the directors hit upon the brilliant idea -of conducting a big gamble in Australia, in the vain hope that a -decided success would obliterate the mistakes of the past; but about -this time rumour was active, and when it was noticed that the bank's -acceptances were being hawked all over the City, holders of its paper -became suspicious. The bill brokers naturally do not like putting all -their eggs in one basket, but endeavour to get as many good names as -possible, so that, should a particular firm meet with misfortune, they -may be in a position to bear the loss. When, therefore, the City of -Glasgow Bank's paper was offered freely, they refused to place more of -its bills in their cases, and, inquiries concerning the bank being made -in consequence, the end soon came.</p> - -<p>Though the revelations which followed generated a feeling of intense -nervousness among bank shareholders and depositors both in Scotland -and this country, and undoubtedly caused a slight panic, the country -was spared a crisis. The Scotch banks, in order to prevent the -run extending to themselves, encashed the notes of the delinquent -institution, and advanced liberally to those<span class="pagenum"><a id="Page_208"></a>[Pg 208]</span> persons whose money and -securities were held by the City of Glasgow Bank. In this manner a -serious panic was averted.</p> - -<p>The Bank of England raised its rate immediately danger was threatened, -and on the 14th October, 1878, the rate touched six per cent., but it -fell to five per cent. in November, and money was exceptionally cheap -during the next two years. The West of England Bank had also advanced -its resources in a reckless manner, and it failed badly in consequence; -but the Scotch scandals were not repeated, and the public gradually -regained confidence in the banking companies.</p> - -<p>When it was clearly seen after the failure of the Glasgow Bank, how -easily a large bank, unless it be most cautiously and prudently -managed, can ruin its members and customers, the public hesitated to -hold shares in an unlimited banking company. For a time the prices -of bank shares fell considerably, and fiction became tediously full -of heroines and heroes who lost their fortunes by holding just one -share in the Glasgow Bank. It was the "just one share" that proved so -thrilling, and accentuated the sadness and the danger of possessing -shares in an unlimited bank. The risks of a banking business were -discussed on<span class="pagenum"><a id="Page_209"></a>[Pg 209]</span> every side; and, after this failure, the unlimited -banking companies took steps which enabled them to affix the desirable -word "limited" to their registered names.</p> - -<p>From the time of the failures of the City of Glasgow Bank and the West -of England Bank until 1890, when the Baring crisis suddenly opened -the eyes of the public to the dangerous gamble which was taking place -in South American securities, the money market enjoyed a period of -comparative calm. Speculation since 1885 had increased in volume, and -the prices of securities steadily rose; but early in 1890 it became -apparent that continuous speculation had inflated prices and created -a situation which could not last. The Bank rate during the autumn of -1889 was exceptionally high, and remained at six per cent. from 30th -December, 1889, to 20th February, 1890, when it gradually descended, -but this fall only proved the lull before the storm, which raged -furiously in the November following.</p> - -<p>England has always speculated largely in both North and South America, -and the result has almost invariably been a panic. In 1890 it was the -Argentine Republic which was to prove an Eldorado for the British -investor, and Baring Brothers were so convinced that<span class="pagenum"><a id="Page_210"></a>[Pg 210]</span> this wonderful -land must prove a veritable gold mine that they practically staked the -existence of their firm upon it, but Argentina sadly disappointed its -backers. Having staked their all and lost, there were many who thought -that Barings should have paid the penalty of their mistake, for Fate -certainly was not so kind to some of the smaller losers in the gamble -as was the Bank of England to Baring Brothers.</p> - -<p>In June the Buenos Ayres Western Railway was unable to raise capital in -this country; and when at a later date Baring Brothers failed to place -a new Argentine loan, the worst was feared. Earlier in the year the -United States had increased its circulation of silver currency, thereby -creating a sudden demand for that metal and a proportionate rise in -those securities upon which the interest is payable in silver. A fall -soon followed; and when it was found that the Argentine Government -was in straits, Stock Exchange settlements became difficult. The -banks, which had advanced huge sums to the Stock Exchange on American -securities, increased their margins directly the markets looked -dangerous; consequently high rates of interest, together with the rapid -fall in South<span class="pagenum"><a id="Page_211"></a>[Pg 211]</span> American securities, made "carrying over" in the House -an expensive operation. Speculators became alarmed, and sold out at -panic prices in order to cut their losses, and on 7th November pressure -upon the Bank of England became so great that the rate was raised from -five to six per cent.</p> - -<p>Lord Revelstoke, who was a partner in the firm of Baring Brothers, was -also a director of the Bank of England, and, finding that his firm -was in difficulties, he disclosed his position to the Bank directors, -who, when they heard that Messrs. Barings' liabilities to the public -amounted to over £28,000,000, felt that even the Bank of England could -not afford to guarantee so large a sum; so, after much deliberation, -it was decided to invite the co-operation of Lombard Street in the -bolstering up of Barings, and, for the first time in its history, the -directors of our large banking institutions met the directors of the -Bank in their sacred parlour to discuss what steps should be taken in -order to avoid a disturbance of credit which, should the suspension -of Barings be announced, would probably produce a crisis even more -disastrous than that caused by the Overend and Gurney crash in 1866.</p> - -<p><span class="pagenum"><a id="Page_212"></a>[Pg 212]</span></p> - -<p>The resources of Lombard Street combined are infinitely greater than -those of the Bank, which, we have seen, largely draws its own power -therefrom, and the directors of the Bank of England, in consulting with -the directors of the joint stock banks, proved that they thoroughly -understood the constitution of the money market. Moreover, this new -step created a precedent which bound the whole market more closely -together, for each division clearly recognised how essential it is that -the great machine should work smoothly. This can only be accomplished -by the best of feeling existing between its constituent parts, and -the wise step taken by the directors of the Bank in November, 1890, -undoubtedly generated a feeling of sympathy which had formerly been -noticeably absent between the various sections of the money market, -and which augurs well for the harmonious working of the system in the -future. Such sympathy may be the outcome of enlightened selfishness, -but it is none the less valuable.</p> - -<p>The directors of the joint stock banks, when the position of Baring -Brothers was revealed to them, instantly recognised the danger of -the position, and, as their advances to the Stock Exchange were -considerable, they were<span class="pagenum"><a id="Page_213"></a>[Pg 213]</span> naturally anxious to prevent a catastrophe -which would create a panic in the House, and the end of which it was -impossible to foresee. Barings, who are financiers in the English -sense of the word, not bankers, had at the worst only been guilty of -imprudent speculation, and, as all inquiries were answered in the most -straightforward manner, Lombard Street was as anxious as the Old Lady -herself to assist Baring Brothers over the stile. Undoubtedly Lombard -Street would have liked to make an example of the firm that was caught -short of cash, but it was afraid to leave it to its fate, because it -knew that discrimination is not one of the characteristics of excited -depositors, and that, were Barings to close their doors, the credit of -Lombard Street would next be questioned.</p> - -<p>The outcome of the meeting at the Bank was that the Bank of England -agreed to make advances to Baring Brothers in order to enable them -to meet their liabilities as they matured, and the large banking -companies, on their side, guaranteed the Bank against loss to the -extent of £15,000,000.</p> - -<p>Immense sums had been invested in South America, and when it was -rumoured that the wealthy firm of Barings was tottering, Argentine<span class="pagenum"><a id="Page_214"></a>[Pg 214]</span> -securities were practically unsaleable on the Stock Exchange, where -a state of panic prevailed. For a few days the wildest rumours were -noised abroad, and the tension, just at the height of the panic, became -so acute that even the Consol market was idle. The market then turned -in despair to the Bank, which was compelled to borrow £3,000,000 from -the Bank of France as a precautionary measure, and also to accept help -from the Russian Government.</p> - -<p>The British Government, fully alive to the gravity of the Bank's -position, promised to suspend the Act in case of need; but when it -became known that Barings were to be supported, and that the Bank of -England was lending freely on approved securities at high rates of -interest, confidence was restored, though a few days earlier it had -looked as if a dangerous crisis were imminent. The Bank Act, however, -was not suspended, but it is difficult to say what might have happened -had not the Bank of France come to the rescue, for the gold advanced -by that institution at so awkward a time doubtless tended to greatly -alleviate the feeling of apprehension which existed in this country, -and which, at any moment, might have overcome restraint.</p> - -<p><span class="pagenum"><a id="Page_215"></a>[Pg 215]</span></p> - -<p>The Bank rate remained at six per cent. until 4th December (a period -of twenty-seven days), when it was reduced to five per cent.; for the -high rates ruling in the market attracted gold to this country, and -increased the reserve of the Bank of England beyond the apprehension -minimum, thereby enabling that institution to make the change in -question. By the middle of the following year (1891) the Bank's rate -of discount was down to two-and-a-half per cent.; but confidence was -not restored for some considerable time; and we all remember the deadly -dull years of 1894 and 1895, when it was predicted that Consols would -never again fall below 100. The financial prophets and the weather -prophets are generally wrong, but though we have acquired the habit of -tapping the glass each morning, a prudent man carries his umbrella all -the same.</p> - -<p>The directors of the Bank of England, when they were informed of Baring -Brothers' position, acted with great tact and ability. They did not -hesitate to assist everybody who possessed good securities, and when it -was found that loanable capital was obtainable, the alarming symptoms -which were at first in evidence soon subsided. Whether or not the -Bank were sufficiently prepared at the time<span class="pagenum"><a id="Page_216"></a>[Pg 216]</span> is, however, a matter of -opinion. The directors certainly began the year badly, for the ratio -of the reserve in the Banking Department was under twenty-eight per -cent.—a dangerously low proportion in these times, when huge sums of -foreign capital may be suddenly withdrawn from the market at the least -sign of discredit. Nor are high rates of discount always effective -in immediately attracting gold to the Bank, as the Bank of France, -should it desire to retain its bullion, can always charge a prohibitive -premium on its gold. Certainly, since 1890 the Bank of England has -maintained larger reserves, and the Baring panic unquestionably proved -that such a step was necessary.</p> - -<p>It would seem that the panic of 1890 was the result of a Stock -Exchange gamble, which was only rendered possible by the large loans -on securities made to members of the House by the banks. The Baring -incident brought matters to a climax, and Lombard Street, which was -more involved in the speculation than many persons imagined, had to -save both that firm and the Stock Exchange in order to avoid a crop of -bad debts, which, with numerous failures, and a far greater drop in the -prices of securities, would have inevitably resulted.</p> - -<p><span class="pagenum"><a id="Page_217"></a>[Pg 217]</span></p> - -<p>Mr. Lidderdale, who was Governor of the Bank during this period, acted -with great energy, and after the danger was passed congratulations were -showered upon him from every side.</p> - -<p>The Stock Exchange presented an address to Mr. Lidderdale, and in -making the presentation its spokesman said: "If the Bank had not acted -in the way it did, a great disaster would have befallen the mercantile -community." Yes, and that disaster would have been largely caused by -speculation on the Stock Exchange. Further, had not the directors of -the Bank met this incipient panic in a scientific manner, and used -their power as precedent dictated, members of the House would have -failed by the dozen. One is forced to the conclusion that Lombard -Street and the Stock Exchange had a lucky escape, and that the "members -of the mercantile community" were the unfortunates who, after years of -toil, had to wipe out the deficit.</p> - -<p>Now we come to the bright side of the picture. Later on the business -of Baring Brothers was converted into a company, and in 1895 it was -definitely announced that the assets of the firm had been liquidated -without any loss whatsoever to the guarantors. Baring Brothers & Co., -Limited, now publish a strong<span class="pagenum"><a id="Page_218"></a>[Pg 218]</span> balance sheet, which entitles the -company to a place among our well-managed institutions, and so short is -the memory of the public when things financial are in question, that -the panic of 1890 is, if not quite forgotten, at least regarded as -ancient history. Indeed, the public hardly seems to realise that, in -November, 1890, the monetary situation was so acute that a quickening -of the public pulse would probably have resulted in one of the most -dangerous crises the country has ever been called upon to face.</p> - -<p>After the Baring crisis the market was unperturbed for a little -while, but in 1893 many of the Australian banks found themselves in -difficulties, and as the people in this country, tempted by the high -rates offered at the London offices of the Australian banks, and by -their agents on this side, had deposited largely with them, a very -bitter feeling soon manifested itself. Australia, like South America, -was to prove an Eldorado for the small investor, but the pace was -forced, and the reaction came in 1893, when many of the banks suspended -payment. Even now some of the Australian banks in London are not any -too strong, and discrimination is certainly desirable.</p> - -<p><span class="pagenum"><a id="Page_219"></a>[Pg 219]</span></p> - -<p>On 9th October, 1899, the Boers issued their famous Ultimatum, -to which they immediately received an answer that was brief and -unmistakeable; but, unfortunately, the pen of the Government at first -proved mightier than the sword, and by 3rd November White was shut up -in Ladysmith. Then followed the failures of Methuen and Gatacre, and -on 15th December General Buller was repulsed at Colenso. Thoroughly -roused, the Government sent out Lord Roberts and Lord Kitchener. On -the night of 6th January, 1900, the Boers made a desperate attempt to -take Ladysmith, while Buller again failed to relieve the town on the -22nd, and did not enter it until after Cronje was brought to bay at -Paardeberg at the end of February.</p> - -<p>This period of disaster cast a gloom over the whole nation, which -grew sullen and determined, and, when at last the tide began to turn, -the sudden lifting of the burden immediately metamorphosed a silent -depressed crowd into a cheering multitude, which on Mafeking day turned -London into a veritable pandemonium; but the depression caused by -unpleasant surprises was intense, and, therefore, the joy at finding -the incubus gone was the more irrepressible. Hence the disorderly -scenes<span class="pagenum"><a id="Page_220"></a>[Pg 220]</span> upon the day in question. A reaction after the period of -suspense was inevitable, and the greater the gloom the more violent -would be the excitement that followed when the first ray of sunshine -pierced the mist. Yet how little was this understood at the time.</p> - -<p>That financial barometer—the Bank rate—began to reflect the political -situation early in October. Our state of unpreparedness was a by-word -on the Continent, and when in September, 1899, the Boers displayed -an unyielding attitude, which was at first mistaken for bravado, our -overweening confidence in the British soldier blinded our eyes to the -imperfections of our fighting machine. The Continent, which was better -informed than the British Government, believed that the Boers were -determined. On the 3rd October, when the Free State burghers occupied -Van Reenen's Pass, the Bank advanced its rate to four-and-a-half per -cent.; on the 5th October the rate was five per cent., and on the 30th -November six per cent., where it remained until the 11th January, 1900, -when five per cent. was recorded.</p> - -<p>But if the Government was unprepared the Bank of England was not, and -from start to finish, by a judicious use of its rate of discount,<span class="pagenum"><a id="Page_221"></a>[Pg 221]</span> an -adequate supply of bullion was maintained in the Issue Department. Long -experience had taught its lesson, and our financial machine, which was -in a good state of preparedness, worked without a hitch. Who can doubt -that if our fighting machine had been as ably handled, it would have -done its work well from first to last?</p> - -<p>There is also another point which is well worth attention. If our banks -neglect to keep good reserves, a panic results immediately there is -any unusual demand upon their resources, and the cost of a panic soon -convinces their directors that it is cheaper to be always prepared. -Will the expenditure of some £230,000,000 teach the Government the -same simple truth? If we must have an army, it is madness not to keep -it—as our banks are kept—ready. Mr. Kruger and his advisers did not -consider the latent potentiality of the British fighting machine. They -ascertained its state of preparedness to strike at a moment's notice, -and, seeing that it was unprepared, the Boers wisely struck the first -blow, hoping to drive the English into the sea before the machine could -be adapted to a new environment. On the other hand, they failed to -realise the resources of the Empire. Had<span class="pagenum"><a id="Page_222"></a>[Pg 222]</span> the Boers believed that the -British could land an army of even 150,000 men in South Africa, in all -probability there would have been no war. The Government, which was -caught unprepared, had to pour out money like water, because it had -neglected to take one of the simplest business precautions—to keep the -army ready.</p> - -<p>On 31st May, 1902, peace was declared, and now the country has to face -a domestic problem. In 1899 trade was good, and in 1900 the prices -of commodities were at their zenith; but during 1901 a reaction set -in, and at the present time trade is certainly not active. Reservists -are arriving from South Africa in large numbers; and, as the labour -market is already depressed, a number of them are sure to experience -considerable difficulty in finding employment. War is certainly not a -business that civilises, and if a man has once tasted blood, in however -just a cause, it is difficult to believe that life will seem quite so -sacred to him again. Should the times become really bad, these men who -have returned from the front, and who cannot again find a place in -civil life, will turn instinctively to the weapons upon which they have -learned to depend. Consequently,<span class="pagenum"><a id="Page_223"></a>[Pg 223]</span> should there be a severe depression -in trade, an epidemic of crime is one of those possibilities which may -send a thrill of horror through the country.</p> - -<p>Since September, 1899, the money market has certainly had to contend -with great difficulties, and a system which has proved itself more -than equal to the strain surely cannot be so undesirable as certain -critics would have us believe. Again, the more the public understands -the system, the less is the danger of panic; for it must be apparent to -every man who reads this book that, if he study his own interests, he -will select a strong bank, and, having taken that precaution, he will -carefully refrain from rushing for his deposit during a time of stress.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_224"></a>[Pg 224]</span></p> - -<h2 class="nobreak" id="CHAPTER_XVI">CHAPTER XVI.</h2> -</div> - -<p class="center">The Banks and the Public.</p> - - -<p class="drop">W<span class="uppercase">e</span> have seen that the history of the Bank of England may be divided -into two periods. From 1708 to 1826 the Bank enjoyed the monopoly of -joint stock banking in England. After 1826 it had to adapt itself -to a constantly changing environment. England, in fact, outgrew the -Bank, just as the financial world has outgrown London. The directors -of the Bank of England were City merchants, whose ideas usually run -in a particular groove. It is not, therefore, in the least remarkable -that they stuck to old customs and neglected new opportunities. The -directors of the London and Westminster Bank made the same mistake. So -did those of the Union Bank of London, the London Joint Stock Bank, and -one or two others, simply because their training was of the City: that -is to say, like the streets around the Bank, narrow.</p> - -<p><span class="pagenum"><a id="Page_225"></a>[Pg 225]</span></p> - -<p>To a very great extent the Bank of England is dependent upon the -bankers' balances, for, unless it held them, it would not be able to -finance the Government. If its directors had, however, thoroughly -understood the movement of 1826, the Bank would now be a much more -independent institution, and would be a power in every county in -England and Wales. In 1826 the Government expressly desired the -directors of the Bank to open country branches, and by 1830 it -possessed eleven offices in the large provincial towns. But the -innovation was not encouraged by those in authority, and to-day the -Bank of England possesses only nine country and two Metropolitan -branches. Unquestionably a golden opportunity was neglected, for, had -the directors decided to open in the large provincial towns, Bank stock -would probably be worth over five hundred at this moment.</p> - -<p>At first the joint stock bank movement was neither popular nor -successful, but nobody questioned the credit of the Bank of England; -and if that institution had quickly met the wants of the country by -opening branches in the towns, it could have had the pick of the -provincial business, for everybody, including both commercial firms -and the leisured classes,<span class="pagenum"><a id="Page_226"></a>[Pg 226]</span> would have been anxious to deal with a -bank which was absolutely above suspicion. And who would dream of -making a run upon the "Government" bank? The Bank would gradually have -accumulated vast deposits, which would have made it independent of -the "bankers' balances"; but the ground is now covered with banking -companies, and the Bank of England's opportunity is gone, never to -return. At present it is a great bank of discount. Had it farmed the -provinces in earnest, it would have become a great deposit bank, -deriving its power from its depositors and the Government account, -instead of from the Government and the bankers, as it now does. But -its directors were not trained bankers, and they failed to realise the -important part that branches or feeders were to play in the new system, -consequently, with the huge capital of the Bank, large dividends on its -stock are now out of the question.</p> - -<p>Our present system is, after all, the result of chance as well as of -skill. It grew. Further it committed all the follies of youth and -inexperience. Then, again, at the beginning, it was as a house divided -against itself, and consequently upon more than one occasion it fell, -for a banking system can only be worked<span class="pagenum"><a id="Page_227"></a>[Pg 227]</span> successfully when all the -strong members are pledged either to stand or to fall together. Indeed, -our system would be considerably strengthened if the great banks were -in closer touch with the Bank of England.</p> - -<p>Some few years ago, when there was a somewhat bitter feeling between -Lombard Street and the Bank, it was often suggested that were each bank -to keep its own reserve of cash the rate of discount would be more -stable; but, in the event of such a change, the banks would undoubtedly -have to maintain increased reserves, and a greater proportion of their -resources would consequently be non-productive. As they would then -have less capital to lend, it also follows that, even if rates in the -open market did fluctuate less, the average rate of discount paid by -the public would be higher, because there would be less capital in the -London short loan money market to meet the demands of the bill brokers -and stockbrokers.</p> - -<p>On the other hand, if the banks realised their investments in -proportion as they increased their reserves, and so maintained the same -amount of capital in the London short loan fund, their own profits -would decrease; and the bank proprietors are not<span class="pagenum"><a id="Page_228"></a>[Pg 228]</span> philanthropists. -In the one case the public would suffer, and in the other the banks -themselves would lose, whilst in neither instance is the advantage -to be gained at all proportionate to the risk incurred by a sudden -disturbance of credit.</p> - -<p>Our present system, with all its imperfections, has gradually grown -up around the Bank of England, and if Lombard Street were to decide -to keep its own reserve, the result would be confusion, and confusion -might be followed by panic—so great is the faith of the public in -the Old Lady, whose history entitles her to both consideration and -respect. The change might, or might not, result in a run upon Lombard -Street; but the Bank of England, whether or not the money market were -disorganised, would not lose the confidence of the nation, which is -convinced that the Bank cannot fail.</p> - -<p>Lombard Street, we may rest assured, would not risk so drastic a -change. It may be urged that, were the banks to keep their own -reserves, the Bank could not finance the Government, which would then -have to borrow to a greater extent in the open market; and perhaps -such would be the case. But though the Bank of England is at present -largely<span class="pagenum"><a id="Page_229"></a>[Pg 229]</span> dependent upon the "bankers' balances," and upon the power -derived from its position in the centre of the system, it must not be -assumed, even if the banks could agree among themselves as to the ratio -of cash each should hold, that the Bank would be compelled to bow to -their decision.</p> - -<p>As a matter of fact, such a decision on the part of Lombard Street -would change the Bank of England from a discount bank into a deposit -bank—a metamorphosis which Lombard Street could not face with -equanimity. The Bank, whatever arrangements it may make with its own -customers, does not at present compete against Lombard Street for -deposits at interest; but were the bankers to withdraw their balances, -the Bank would be compelled to appeal to the public for deposits, and -who can doubt that it could not attract as much capital to its vaults -as it required? The Bank would only have to make its rate of interest -sufficiently attractive, and the public would rush to it with deposits. -Where would Lombard Street be then?</p> - -<p>Unless the Bank rate be unusually high, the banks allow one-and-a-half -per cent. below it upon money left at interest in London. The country -deposit rate, which is somewhat<span class="pagenum"><a id="Page_230"></a>[Pg 230]</span> higher, is affected to a certain -extent by competition in the provincial towns and cities. But the -Bank would not confine its efforts to London if its hand were forced. -It would offer high rates at its branches, and might even open fresh -offices. The bankers' deposit rates would then be forced upwards in -order to arrest the drain from themselves to the Bank of England. No; -Lombard Street cannot play fast and loose with the Old Lady; and, -if certain critics will reflect, they will see that the Bank has -less to fear from a change in our present system than have those who -occasionally threaten her. Her position, were the banks foolish enough -to withdraw their balances, is not quite so hopeless as it is sometimes -made to appear upon paper. Indeed, the better the understanding between -the Bank and Lombard Street, the safer is our "one reserve" system, and -consequently the less liable is the country to financial crises—for it -is only by the united action of all the great banks that the situation -can be saved in times of stress. This was clearly proved during the -Baring scare of 1890.</p> - -<p>The "clearing" bankers from time to time fix the deposit rate for -London by the Bank rate, and though their country branches are<span class="pagenum"><a id="Page_231"></a>[Pg 231]</span> not -bound by their decision—which is advertised in the newspapers directly -a change is made—the country deposit rate fluctuates with the Bank -rate, though, as a rule, it neither falls so low as the London rate -when capital is cheap, nor advances so far when it is dear. Further, -the rates charged for loans and advances should be regulated to a -certain extent by the Bank rate. However, that is a question which need -not be entered into here.</p> - -<p>Should the bankers decide to keep their own reserves, it is evident -that the Bank of England's rate of discount would immediately cease -to be a representative rate, and that a powerful rival, with a great -history and a clean record, would at once begin to compete against the -bankers for both deposits and advances. Were the Bank of England, so -to speak, to decide to remain outside the system, Lombard Street could -not even fix a minimum deposit rate for London, because the Bank, if it -required capital, would bid against its rivals, and would soon obtain -all it needed. Instead of being more stable, rates in the open market -would move up and down with startling suddenness. Would-be borrowers, -puzzled by such irritating movements, would soon grow nervous,<span class="pagenum"><a id="Page_232"></a>[Pg 232]</span> for -the prices of commodities would fluctuate too, and everybody would be -afraid to make large purchases. The closer one examines the question, -the more absurd appears the suggestion of a split between the Bank and -our great joint stock banking companies; and the only wonder is that -any person with the slightest sense of proportion can seriously advance -so dangerous a proposition, which that friend of our youth, "Euclid," -would have at once pronounced "absurd."</p> - -<p>Custom has placed its seal upon our banking system; and the person who -is rash enough to break that seal may discover that he has released -new forces, which, though theory plainly demonstrates that they will -act in a certain direction, are pretty sure to make their way through -an unsuspected flaw which offers less resistance. A system which has -been over two hundred years in the building cannot be changed in a -day—especially a system which, even if it be not understood, has -entered into the daily life of the people. It is because the system is -not understood that the change would be so dangerous—so irritating. -It would be asking the British public to think, to change its habits, -to suddenly adopt new ideas; and as that mysterious body has never<span class="pagenum"><a id="Page_233"></a>[Pg 233]</span> -yet been educated up to thinking for itself, it would be found that it -would kick against a new system like the stubborn donkey it is. Here -is the real danger. The change, if the public would adapt itself to -it, might prove beneficial—but the public would not; and as even its -advantages over the present system are doubtful, where is the practical -banker who would suggest the move? His one aim is not to disturb the -money market, and for that reason alone he would hesitate to remove -the Bank of England from its position in the centre of the system; but -when we remember that the Bank, by accepting deposits, could probably -beat Lombard Street at its own game, the change in question need not be -discussed seriously.</p> - -<p>There is one other phase in modern banking which, perhaps, calls for -notice, and that is the fierce competition for safe business taking -place between the banks themselves both in London and the provinces. -Most of our large towns and cities are overbanked. Consequently, the -public has a choice of many markets, as it were; and, quite naturally, -it tries to lend in the dearest and to borrow in the cheapest. It may -be asked: How much longer will this state of affairs exist? And the -answer is:<span class="pagenum"><a id="Page_234"></a>[Pg 234]</span> Just so long as the banks decide that it shall; and not a -day longer!</p> - -<p>The better the risks of banking are understood by the public the more -difficult will it be for a weak bank to attract custom; and as the -smaller banks, especially in the manufacturing centres, are unable to -obtain sufficient deposits to meet the demands for advances, it follows -that, when their loans grow out of all proportion to their resources, -they are compelled to amalgamate with a large institution possessing -numerous branches, and therefore in a position to collect huge sums of -loanable capital, and distribute it just where it is wanted.</p> - -<p>For instance, a large bank collects very much more capital in certain -districts than it lends therein; but at branches situated in busy -manufacturing cities the demand for capital, especially when trade is -brisk, approximates much too closely to the sums collected at those -branches to be compatible with sound banking. However, the bank has -accumulated more than it requires in other towns, and is therefore -in a position to transfer the surplus to those places where demand -is strong, and, at the same time, to maintain a good ratio of liquid -assets to liabilities, whereas<span class="pagenum"><a id="Page_235"></a>[Pg 235]</span> a local bank in a busy centre can often -only meet the requirements of its customers by advancing to a dangerous -extent.</p> - -<p>The directors of such banking companies are beginning to realise this -danger; and fearful that one day they may be caught short of cash, the -smaller joint stock banks are gradually being absorbed by the greater -companies, whose numerous tentacles enable them to distribute their -capital evenly throughout their system, and to maintain fair cash -reserves against their liabilities.</p> - -<p>As the small banks disappear, competitors are removed from the -market; and there is every probability that banking in this country -will by-and-by be in the hands of a few large and powerful banking -companies. The public could not resist the banks were they to unite -against it. Already the "clearing" banks have fixed the deposit rate -for London, and it is only one step farther to declare the minimum rate -at which they will advance—for what resistance can the public offer to -a combination with more than £910,000,000 in deposits alone behind it?</p> - -<p>Were the banks to hold a conference, and to decide that competition -must be kept within bounds, the public would not have a voice in<span class="pagenum"><a id="Page_236"></a>[Pg 236]</span> -the matter. The English banks, like those of Scotland, would, after -having come to some arrangement among themselves, meet from time to -time in order to fix the minimum rates of interest and commission, and -their customers would either have to pay those rates or else obtain -accommodation outside the confederation. Of course, all the banks would -have to close up their ranks before this arrangement would be possible, -and, at the moment of writing, it seems improbable that certain -companies, which make a business of competition, could be persuaded to -come inside. So long as the banks are divided the public will be able -to drive bargains with them, but, directly they fall into line, their -rule will begin, and the quicker the smaller companies disappear the -nearer the reign of the banks approaches.</p> - -<p>Seeing that our banking system can only work smoothly so long as both -Lombard Street and Threadneedle Street work in harmony, it follows -that in time the link which connects the large banking companies will -become stronger, and the relations between them pleasanter, because, in -business as elsewhere, friendship is centred in the head rather than -in the heart. The banks must draw closer together, because, if they -do not,<span class="pagenum"><a id="Page_237"></a>[Pg 237]</span> their system is unworkable; and, as they are now compelled -to adopt certain precautions in order to protect themselves against -panic on the part of their customers (who in that respect are their -enemies), it is only natural that they should take steps to put an end -to excessive competition, which weakens their position and prevents -their acting together at a moment when united action alone can restore -confidence in their ability to meet their liabilities.</p> - -<p>We all know the stale apothegm: "Self-preservation is the first law of -nature." It is the religion of the world. We can see the law at work -among our friends, but, being polite, we refrain from comment—though -if we be wise, we reflect; for here is the great unpreached gospel -which governs the actions of men. Self-preservation clearly dictates -that the banks cannot afford to allow competition among themselves to -weaken the system upon which their safety depends; and, should the -danger become pronounced, they are certain to combine against the -public in order to at least agree to certain minimum rates below which -none will do business.</p> - -<p>It may be said: You yourself were the first to point out that certain -customers are in a<span class="pagenum"><a id="Page_238"></a>[Pg 238]</span> position to make terms with the bankers, and to -advise them to do so. That is true enough; and so long as the banks are -divided amongst themselves this is possible; but it by no means follows -that, because the customers can make certain bargains this year, they -will be able to make similar arrangements next, for the banks have -their remedy, and when the right time comes they will not neglect to -take it.</p> - -<p>We have dissected that complex machine, which is called the Money -Market, and of which the Bank of England is the heart. As each unit is -dependent upon the strength of the whole, no bank should be allowed -to trade upon the credit of the rest, for obviously it cannot exist -outside the system during a time of stress unless it possess an -adequate reserve of cash. Therefore each unit ought to bear its fair -share of the burden when the sun is shining, and, if it refuse, it -should be made to take the consequences when the storm bursts.</p> - -<p>The closer our banking system is examined the stronger becomes the -conviction that the interests of all the banks are identical, and -that, therefore, if banking is to be conducted in this country with -comparative safety, every bank<span class="pagenum"><a id="Page_239"></a>[Pg 239]</span> should be compelled, either by the -law of the land or by public opinion, to keep a fair reserve in legal -tender against its liabilities. Further, the true interests of the -banks are the same as those of the public—for the good business man -is always a cautious man, and if he takes the trouble to study the -risks to which a banking business is exposed, he will hardly care to -place his money with a company unless it be well prepared to face those -storms to which its environment peculiarly exposes it.</p> - -<p>Under our one reserve system the banks must either stand or fall -together during a crisis. The system, therefore, requires the support -of all; consequently, the duties or obligations of each bank should -be clearly defined, and this can only be done by an Act of Parliament -or by an understanding between the banks. The closer the banks draw -together the safer is our system of banking.</p> -<hr class="chap" /> - -<div class="chapter"> -<p><span class="pagenum"><a id="Page_240"></a>[Pg 240]</span></p> - -<h2 class="nobreak" id="CHAPTER_XVII">CHAPTER XVII.</h2> -</div> - -<p class="center">Bank Stock.</p> - - -<p class="drop">W<span class="uppercase">hen</span> the trade of the country is prosperous, we expect to see banking -companies paying high dividends, because rising prices stimulate -borrowing on the part of the public; and, consequently, as the -resources of the banks are limited, the increased demand for loanable -capital sends up rates, with the result that distributions are -enhanced, and that the prices of bank shares advance in sympathy with -improving dividends.</p> - -<p>We all know that there is a link which binds industries together, and -that a depression in one trade, if it prove lasting, must communicate -itself to the rest. Nor is this movement confined to any one nation. -Therefore, when we hear that a depression exists in Germany or in any -other great manufacturing country,<span class="pagenum"><a id="Page_241"></a>[Pg 241]</span> it is a matter for regret rather -than otherwise, because the goods of that country are almost certain to -be exported here in large quantities.</p> - -<p>If there be stagnation in Germany, then money will be cheap in that -country, and commodities will be cheap too. Manufacturers, therefore, -will be able to obtain better prices in foreign markets; consequently, -German exports will increase, and prices will soon begin to fall in -England. Again, depression in the States speedily makes itself felt in -the English markets, which become glutted with American goods, with the -result that production lessens at home, and times gradually become, as -we colloquially say, "bad."</p> - -<p>But there is one factor with which we have not reckoned, and that is -time; for though after a period of prosperity prices generally fall -suddenly—as, for instance, during 1901—it usually takes two or three -years before production is again in full swing. In these days, when -commercial ties bind the whole world so closely together, one nation -cannot afford to rejoice at the misfortune of another; and when this -fact is more clearly seen and is better understood, possibly large -standing armies will become an unnecessary evil,<span class="pagenum"><a id="Page_242"></a>[Pg 242]</span> for the secret of -true progress is the fact that commerce and civilisation always advance -together.</p> - -<p>The Bank of England, which deals in money and credit like every other -bank, is exposed to the same influences as the rest of its kind; -consequently, when trade is brisk and loanable capital dear, it pays -larger dividends than during the depressed portion of a cycle. The -following table will illustrate the fact:—</p> - -<table summary="stock" width="85%"> -<tr> -<td colspan="11">============================================================================ -</td> - -</tr> -<tr> -<td colspan="11" align="center" class="td4">£14,553,000 STOCK. -</td> - -</tr> -<tr> -<td class="td4"> -</td> -<td class="td5">1892. -</td> -<td class="td5">1893. -</td> -<td class="td5">1894. -</td> -<td class="td5">1895. -</td> -<td class="td5">1896. -</td> -<td class="td5">1897. -</td> -<td class="td5">1898. -</td> -<td class="td5">1899. -</td> -<td class="td5">1900. -</td> -<td class="td5">1901. -</td> -</tr> -<tr> -<td>Highest -</td> -<td class="td1">344 -</td> -<td class="td1">343 -</td> -<td class="td1">338 -</td> -<td class="td1">336 -</td> -<td class="td1">345 -</td> -<td class="td1">351½ -</td> -<td class="td1">367 -</td> -<td class="td1">361½ -</td> -<td class="td1">349 -</td> -<td class="td1">342 -</td> -</tr> -<tr> -<td>Lowest -</td> -<td class="td1">325 -</td> -<td class="td1">325 -</td> -<td class="td1">322 -</td> -<td class="td1">322½ -</td> -<td class="td1">322 -</td> -<td class="td1">326 -</td> -<td class="td1">341 -</td> -<td class="td1">325 -</td> -<td class="td1">326 -</td> -<td class="td1">319¼ -</td> -</tr> -<tr> -<td>Dividend % per annum<br /> 5th April -</td> -<td class="td3">10 -</td> -<td class="td3">10 -</td> -<td class="td3">8 -</td> -<td class="td3">8 -</td> -<td class="td3">8½ -</td> -<td class="td3">10 -</td> -<td class="td3">10 -</td> -<td class="td3">10 -</td> -<td class="td3">10 -</td> -<td class="td3">10 -</td> -</tr> -<tr> -<td class="td4">Dividend % per annum<br /> 5th October -</td> -<td class="td6">9½ -</td> -<td class="td6">9 -</td> -<td class="td6">8½ -</td> -<td class="td6">8½ -</td> -<td class="td6">10 -</td> -<td class="td6">10 -</td> -<td class="td6">10 -</td> -<td class="td6">10 -</td> -<td class="td6">10 -</td> -<td class="td6">10 -</td> -</tr> -<tr> -<td colspan="11" align="center" >Average Distribution, 9½ per cent. -</td> -</tr> -<tr> -<td colspan="11">=========================================================================== -</td> -</tr> -</table> - -<p>It is at once evident that when its distributions are compared with -those of the large banking companies, the Bank does not excel as -a dividend-payer, and the reason, of course, is because it has to -distribute its earnings over so large an amount of stock or capital; -but, although it pays fluctuating dividends—<span class="pagenum"><a id="Page_243"></a>[Pg 243]</span>which are regulated -by the average rate capital may earn during any half-year—it is -noticeable that, since 1899, despite the fact of dividends being -maintained at ten per cent. per annum, the price of Bank stock touched -lower figures than any recorded during the decade, when, according -to every financial rule, prices ought to have been well maintained. -Further, the shares of the joint stock banks did not exhibit this -tendency to any marked extent. Why, then, should Bank stock be an -exception to the rule?</p> - -<p>The years 1894 and 1895 were distinguished by cheap money and -indifferent trade, therefore we should expect to see the Bank's -dividends decrease, and its stock fall in sympathy with diminishing -distributions. If we glance at the table we shall see that our -deductions were realised. In 1896 trade began to improve. Rising prices -lessened the purchasing power of money; consequently the industrial -machine required more capital <i>after</i> the rise, because a given sum -would then purchase <i>less</i>. The result was an increased demand for -loanable capital, which at once became dearer; and the Bank of England, -together with the other banks in the country, earned more. Again, as -one would have expected, dividends and stock<span class="pagenum"><a id="Page_244"></a>[Pg 244]</span> moved up together. During -1897 the same movements were witnessed; but in 1899 Bank stock began to -fall, although distributions were maintained. This deviation from rule -evidently calls for explanation. Compare, for instance, the prices of -the shares of the undermentioned banks during the period in question:—</p> - -<table summary="dividends" width="80%"> -<tr> -<td colspan="6">============================================================================ -</td> -</tr> -<tr> -<td class="td4"> -</td> -<td class="td6">1895. -</td> -<td class="td6">1899. -</td> -<td class="td6">1900. -</td> -<td class="td6">1901. -</td> -<td class="td6">Dividend %<br /> per annum<br /> each year<br /> since 1898. -</td> -</tr> -<tr> -<td>London and County—<i>Highest</i> -</td> -<td class="td1">95½ -</td> -<td class="td1">109½ -</td> -<td class="td1">107 -</td> -<td class="td1">107 -</td> -<td class="td1">22 -</td> -</tr> -<tr> -<td><span style="margin-left:2em;">" " " </span> <i>Lowest</i> -</td> -<td class="td1">89½ -</td> -<td class="td1">103 -</td> -<td class="td1">101½ -</td> -<td class="td1">100¼ -</td> -<td class="td1"> -</td> -</tr> -<tr> -<td>London and Provincial—<i>Highest</i> -</td> -<td class="td1">21¾ -</td> -<td class="td1">22½ -</td> -<td class="td1">22¾ -</td> -<td class="td1">23⅜ -</td> -<td class="td1">18 -</td> -</tr> -<tr> -<td><span style="margin-left:2em;">" " " </span> <i>Lowest</i> -</td> -<td class="td1">19¼ -</td> -<td class="td1">21 -</td> -<td class="td1">21½ -</td> -<td class="td1">20½ -</td> -<td class="td1"> -</td> -</tr> -<tr> -<td>London Joint Stock-<i>Highest</i> -</td> -<td class="td1">34¼ -</td> -<td class="td1">39 -</td> -<td class="td1">37⅞ -</td> -<td class="td1">37¾ -</td> -<td class="td1">12 -</td> -</tr> -<tr> -<td><span style="margin-left:2em;">" " " </span><i>Lowest</i> -</td> -<td class="td1">30⅞ -</td> -<td class="td1">33¼ -</td> -<td class="td1">34 -</td> -<td class="td1">34½ -</td> -<td class="td1">1900 & 1901 -</td> -</tr> -<tr> -<td colspan="6">============================================================================== -</td> -</tr> -</table> - - -<p>We can see, in the above instances, that where dividends were -maintained, prices moved between much the same figures, whilst in every -case a marked advance is shown on the quotations of 1895, whereas Bank -stock receded further in 1901, when the dividend was ten per cent. -per annum, than it did during 1895, when the distribution for the -year was only eight-and-a-quarter per cent. It is this anomaly which -we have to discuss. The trade of the country from 1896 to the end of -1900 was progressive,<span class="pagenum"><a id="Page_245"></a>[Pg 245]</span> and though in 1901 a reaction set in, the large -requirements of the Government, and the state of uncertainty created -by the war, kept loanable capital dear. The banks, consequently, were -enabled to support their huge dividends during 1901, though their being -able to declare the same rates for the last half of the present year -seems doubtful.</p> - -<p>But to return to the fall in Bank stock, which, at the moment of -writing, is quoted at 326. The public, so little does it understand the -position of the Bank of England, still looks upon it as a Government -institution; and, as though to give colour to this illusion, we find -its stock quoted in the same division as "British Funds &c." By The -Trustee Act, 1893, trustees, where they are not prohibited by the -trust deed, may invest in Bank of England stock; and, as a result of -this enactment, there is an increased demand for its stock, which -consequently yields less to a buyer; yet, strictly speaking, Bank stock -cannot be classed with the so-called "gilt-edged" securities, because -the interest it returns is variable.</p> - -<p>It is true that the holder does not incur any liability, and in this -sense Bank stock is a much more desirable investment than shares<span class="pagenum"><a id="Page_246"></a>[Pg 246]</span> in -a joint stock bank upon which the member is liable for certain stated -sums in the shape of uncalled capital; but the Government does not -guarantee the dividends of the Bank. Indeed, it is only interested -in the Bank of England in the same manner that a large customer is -interested in his banker; and, though, in every probability, so long -as the Government banks with the Old Lady, it will assist her whenever -cause may arise, it is not pledged so to do. Again, the twentieth -century may be productive of great change; and, though it seems -improbable that a Government would remove its accounts from the Bank, -such an event is by no means impossible, for the only tie between the -Government and the Bank of England is that the former is the Bank's -oldest client.</p> - -<p>On the other hand, so long as Government does keep its balances at -the Bank of England, it cannot afford to allow the Bank to fail, even -were there the risk of it doing so. But holders of Bank stock, like -the holders of shares in any other bank, would be paid last should the -Bank be wound up, however remote a possibility that may be; and seeing -that their capital is not a prior charge upon the assets of the Bank, -and that, therefore, £100 of stock<span class="pagenum"><a id="Page_247"></a>[Pg 247]</span> is worth £326 only so long as the -Bank of England is a going concern, it is difficult to see why Bank -stock should be considered a desirable holding for trustees. It seems -to me that, valuable though the security undoubtedly is, it does not -possess a single one of those characteristics which should distinguish -a "trustee" stock, for dividends are fluctuating, and capital is a -<i>last</i> charge on the assets of the Bank. In fact, the stock is a kind -of guarantee to the customers—and a splendid guarantee too, for it is -the Bank's large capital which makes it the safest bank for depositors -in the land. But that the holders of a "trustee" stock should, in the -event of a company being wound up, get the <i>last</i> look in is surely -somewhat odd. However, this is only another illustration of the -confidence the public has in the Bank of England, which, people are -convinced, will exist as long as the nation.</p> - -<p>The Bank, because the public imagines that it is connected more closely -with the Government than in reality is the case, naturally suffers -in credit when its patron does. Consequently during 1899, when the -British reverses in South Africa increased the difficulties of the -Government and depressed Consols, Bank stock, although dividends -were maintained at ten per<span class="pagenum"><a id="Page_248"></a>[Pg 248]</span> cent. per annum, fell in sympathy with -Government securities, despite the fact that the shares of the large -English banking companies were not appreciably affected. Of course -this depreciation, which has proved lasting, was not the result of -sound reasoning, for so long as the war continued money was sure to -be dear, and dear money plainly indicated that the Bank would support -its dividend of ten per cent. Further, the large Government borrowings -constantly compelled the outside market to borrow from the Bank, which, -had it so decided, could have charged exceptionally high rates, and -thereby have added considerably to its profit; but, with its usual -moderation, it wisely refrained from exacting excessive rates from -those who, when Lombard Street was temporarily denuded of surplus -capital, were compelled to apply to it for loans. The Bank, during the -trying period in question, certainly did not attempt to make extra -profit out of the nation's misfortune, as it assuredly might have done -had its directors been actuated by a grasping spirit. Is there another -bank in the land that would not have profited by the occasion? There -may be; but I am disposed to doubt it, and I certainly should not care -to attempt to name the institution.</p> - -<p><span class="pagenum"><a id="Page_249"></a>[Pg 249]</span></p> - -<p>Here, then, we find two influences at work at the same time, and the -result is distinctly curious. The Bank of England, from the nature of -its business, pays increased dividends when trade is good, therefore -its stock should advance in value during the prosperous portion of -a cycle; but, because of its business relation with the Government, -its stock is looked upon by the public as a kind of Government -security, and, consequently, when any political event causes Consols -to fall, Bank stock recedes in sympathy with them. There is no reason -for this movement, and if it proves anything it proves how little -Finance is understood by the investing public. Here is a stock which -pays fluctuating dividends classed with the so-called "gilt-edged" -variety of securities; therefore its movements often seem erratic, -because at one time it responds to the law that regulates the price of -gilt-edged stocks, and at another to the law which decides the price of -industrials.</p> - -<p>It can be seen from our list that for the decade ended 1901 the Bank -of England paid an average dividend of nine-and-a-half per cent. per -annum. Based on the said average, a purchaser, if he require a return -of three per cent. for his money, will have to buy Bank<span class="pagenum"><a id="Page_250"></a>[Pg 250]</span> stock at -316-2/3; but 319¼ in 1901 is the lowest price it has touched since -1888, and it seems highly probable that our would-be purchaser at -316-2/3 would wait in vain for his stock at those figures. Indeed, the -present price, 326, looks cheap for Bank stock. Bought at 325, and -based on an average dividend of nine-and-a-half per cent., the stock -would return about £2 18s. 6d. per cent. So small a return upon one's -money is not calculated to make one anxious to buy, and Consols at 93 -are perhaps a greater temptation, though neither investment appeals -very strongly, so far as interest is concerned, to the imagination.</p> - -<p>If purchased during the depressed portion of a cycle, the shares of the -large banking companies can be bought at a price which will yield an -average dividend of over four-and-a-half per cent. to the investor; but -it must be borne in mind that, as a rule, he incurs a certain liability -on such shares, whereas Bank stock is free from possible calls, and, -consequently, not exposed to the objection which is constantly urged -against the majority of bank shares as an investment.</p> - -<p>Some of my readers, I dare say, will not agree with all my conclusions; -and, perhaps, it may be urged that the information<span class="pagenum"><a id="Page_251"></a>[Pg 251]</span> herein contained -were better withheld from the general public. But the truth is -always worth the telling, and if our banking system will not bear -investigation then it must be a bad one. Despite obvious defects in -construction, it is apparent, however, that our great credit machine, -when skilfully managed, can successfully endure considerable strain; -and, if gold be dangerously economised, our present system at least -gives us that inestimable blessing—Cheap Money.</p> - -<p class="center"> -<img src="images/illus2.jpg" alt="pic" /> -</p> - - -<p><span class="pagenum"><a id="Page_252"></a>[Pg 252]</span></p> - - - - -<p style="margin-top: 10em;" class="center"> -<span style="margin-left: 1em;"><i>Sixth Edition.</i> <i>Price 1s. net.</i></span><br /> -</p> - -<p class="center">BANKS AND THEIR CUSTOMERS.</p> - -<p class="center">By HENRY WARREN,</p> - -<p class="center">Author of "The Story of the Bank of England." and "Your Bankers' -Position at a Glance."</p> - - -<p>"The book is amusing as well as instructive, and at the price we may -reasonably say that no one who has a banking account should omit to -read and store it in his library. More especially he who is in the -habit of keeping a large balance, as also he who is in the habit of -negotiating for an overdraft, should study what is revealed in this -book."—<i>Field.</i></p> - -<p>"Contains a vast mass of useful information intelligently discussed. To -educate the public on a technical subject calls for more than ordinary -knowledge. It needs what Mr. <span class="smcap">Warren</span> undoubtedly possesses, and -that is a sound practical understanding, and a thorough common-sense -way of setting forth his knowledge in simple form. This our Author -succeeds admirably in doing."—<i>Financial News.</i></p> - -<p>"Masterly."—<i>Drapers' Record.</i></p> - -<p>"Invaluable."—<i>Birmingham Daily Gazette.</i></p> - -<p>"Cannot be too strongly recommended."—<i>Scotsman.</i></p> - -<p>"His revelations are startling."—<i>Morning Post.</i></p> - -<p>"Especially we commend the chapter 'How to check your bankers' -charges.'"—<i>Investors' Review.</i></p> - -<hr class="tb" /> - -<p><i>The Author's two most flattering testimonials are</i>—</p> - -<p>"Bank Manager" in <i>Investors' Review</i> says: "The book is not worth the -paper upon which it is written."</p> - -<p>Strangely enough, a Bank Customer writes: "Your little book has saved -me £40 a year."</p> - - -<p>EFFINGHAM WILSON, Publisher, Royal Exchange, London.</p> - - - - - - - - -<pre> - - - - - -End of Project Gutenberg's The Story of the Bank of England, by Henry Warren - -*** END OF THIS PROJECT GUTENBERG EBOOK THE STORY OF THE BANK OF ENGLAND *** - -***** This file should be named 63449-h.htm or 63449-h.zip ***** -This and all associated files of various formats will be found in: - http://www.gutenberg.org/6/3/4/4/63449/ - -Produced by Graeme Mackreth and The Online Distributed -Proofreading Team at https://www.pgdp.net (This file was -produced from images generously made available by The -Internet Archive) - -Updated editions will replace the previous one--the old editions will -be renamed. - -Creating the works from print editions not protected by U.S. copyright -law means that no one owns a United States copyright in these works, -so the Foundation (and you!) can copy and distribute it in the United -States without permission and without paying copyright -royalties. 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