The “Reserve” is the reserve of the Banking Department only, and has no connection with the Issue Department as regards the convertibility of its notes. The great importance that is attached to the Reserve being maintained at a large figure is due to the fact that not only can this Reserve be drawn upon for home requirements, but that it is open to attack, and serious attack, from abroad.
As regards home requirements, the needs of the public in usual times follow a regular course, and one that is known and can be provided for beforehand; but this is not the case as regards foreign demands, and it is in connection with these demands that most of the changes in the Bank Rate owe their origin. If the directors of the Bank of England had to deal with home demands only, the question of fixing the Bank Rate would be an easy one—that is, of fixing the rate at which they are nominally prepared to discount for the public and for bill-brokers, and the rate which, by custom, governs the interest allowed on deposits and in many cases the rate charged for loans by other banks. But London is the most open market for gold in the whole world, and any country which requires gold for any purpose can draw it from London with more ease than from any other quarter. Hence our stock of gold is peculiarly open to attack, and in fixing the Bank Rate from time to time, the directors have to consider the question of whether gold is coming to us or leaving us. If gold is coming here in large quantities, the Reserve will improve, money will be plentiful with ordinary banks, who will consequently be prepared to lend at cheaper rates—considerably below the advertised rate of the Bank of England—and that institution will gradually lower its rate so as to keep in line with the prevailing conditions. On the other hand, if gold is leaving us in considerable quantities, the Reserve will of course fall, and this will be followed by a gradual tightening of rates in the Money Market, and the Bank Rate will be raised, not only in order to check the export of the metal, but to attract imports. Why a high Bank Rate is likely to attract foreign gold to our shores, and a low rate to have the contrary effect, will be explained in a later chapter dealing with the Foreign Exchanges.
CHAPTER VIII
THE GROWTH OF JOINT-STOCK BANKS
We have already seen in dealing with the Bank of England that the formation of a bank with more than six partners was _supposed_ to have been expressly prohibited by the Bank’s Charter. The direct result of this presumed prohibition was the establishment throughout the country of a large number of small private banks. Many of these were institutions of credit, ably managed and backed with a fair capital; but the majority of them were weak, and in times of trouble proved a source of danger and loss to the community. The various financial crises of the later part of the seventeenth and the early part of the eighteenth century gradually brought home to the people and the Government the unwisdom of the system whereby the growth of small banks was fostered, and the establishment of large and wealthy institutions was forbidden. At length—in 1826—the Bank of England was by Act of Parliament compelled to part with a portion of its presumed monopoly, and joint-stock banks were allowed to be established outside a sixty-five-mile radius from London.
It is somewhat remarkable that after the formation of joint-stock banks was at last permitted, very small advantage was at first taken of the permission thus afforded; one joint-stock bank was founded at Lancaster, another at Bradford, and a third at Norwich. But it was not until a period of commercial prosperity set in that any considerable number of such banks were founded. In the year 1833, however, and for a few following years, a large number of provincial joint-stock banks sprang into existence.
The presumed monopoly of the Bank of England within the sixty-five-mile radius was next called in question in London, and it was asserted that the monopoly consisted only of a prohibition of the formation of banks of issue, and steps were taken to found a joint-stock bank in London. This was strongly opposed by the Bank, which tried to have its Charter so amended that its monopoly might be complete. This proposal of the Bank of England was, in its turn, strongly opposed by the Government, which not only refused to alter the Charter, but, at the next renewal thereof, in 1833, actually inserted a clause expressly permitting joint-stock banks to be established within the sixty-five-mile limit, provided that such banks did not borrow or take up in England any sum or sums of money on their bills or notes payable on demand or at less than six months from the borrowing thereof.
No sooner had this clause become law than advantage was taken of it, and the formation of the first joint-stock bank in London was commenced. This bank was the London and Westminster, which was established in 1834, and it was quickly followed by the London Joint Stock Bank in 1836, and the Union Bank of London and the London and County Bank, both in 1839.
The London and Westminster Bank commenced business in the city of London and at Westminster in March, 1834; at that date the paid-up capital was £50,000 only; but that the bank quickly commanded confidence, and began to gather together a lucrative connection, can be gathered from the fact that by the close of that year its balance sheet showed that it held balances belonging to the public of over £180,000. The paid-up capital had by then been increased to about £180,000.
The earlier joint-stock banks which were established in London had to contend with many disadvantages. They were not allowed by the Bank of England to open current accounts with that institution, and the private bankers would not allow them the facility of being represented in the Clearing House—an institution to which we shall refer later.
They were likewise troubled with legal difficulties, as the position of the shareholders of such banks was merely that of a common law partnership; and consequently, in any action, the exact names of all the shareholders had to be given, and all were parties to the action. This inconvenience was remedied by an Act passed in 1838, which allowed a banking company to sue or be sued in the name of any of its members; but the position of its shareholders still remained the same as to their unlimited liability, and it was not until the year 1858 that an Act was passed allowing joint-stock banks to take advantage of the system of limited liability; a system which was first allowed to ordinary joint-stock companies by an Act passed in 1855.
Another inconvenience with which these banks had to contend was occasioned by the enactment providing that no such partnership could accept bills having a less date than six months. Various expedients were tried to circumvent this difficulty, but none were successful, and it was not until the year 1844 that joint-stock banks were released from this incubus.
In spite of so many embarrassing and hindering circumstances the joint-stock banks more than held their own, and gradually increased their wealth and importance. From small beginnings they gathered strength as the years rolled on, and little as the originators of the movement may have imagined to what colossal proportions the business would attain to-day, the joint-stock banks of England and Wales together hold deposits from the public exceeding the enormous sum of £600,000,000; a sum nearly equal to our National Debt.
The number of our banks, both private and joint-stock, has been decreasing for many years. This is owing partly to the failure of the weaker banks of both classes, but chiefly to the numerous amalgamations of recent years. At the close of the year 1849 there were ninety-nine joint-stock banks established in England and Wales, at the close of 1892 there were one hundred and two, and at the close of 1902 only sixty-eight, not including the Bank of England. These banks then held deposits amounting to no less a sum than £600,333,000. The decrease in joint-stock banks in the last ten years, from one hundred and two to sixty-eight, is remarkable; but this does not necessarily imply any lessening of banking accommodation to the public; on the contrary, the reverse is the case, owing to the great increase in the number of branches which have been established.
According to the _Economist_, there were 2,336 banking offices belonging to joint-stock banks open to the public in England and Wales on the 31st of December, 1891, whereas on the 31st of December, 1901, the number had nearly doubled and stood at 4,146. The network of banks thus spread over the length and breadth of the land has resulted in tapping new sources of business. An enormous number of people now keep banking accounts who previously did not do so, but who used to pay cash for all their purchases and keep their money in the proverbial stocking. Though the average balances maintained by this new class of customer may be small, it is a case of “many a mickle makes a muckle,” and the aggregate of new balances so obtained has largely helped to swell the total balances in the hands of the banks. In 1892, one hundred and two joint-stock banks of England and Wales held balances amounting to nearly £400,000,000, whereas now, as already mentioned, a sum exceeding £600,000,000 is in the hands of the banks. It must be remembered, however, that a considerable portion of this increase is due to the fact that a large number of private banks have been absorbed by joint-stock banks during the ten years in question, and that the balances held by the private banks so absorbed were not included in the figures of ten years ago.
Some of the joint-stock banks of London established branches in certain mercantile districts of the town early in their career, but they were slow to see the advantage to be gained by opening branches in the suburbs, and by catering for the wants of private individuals, tradesmen, and the smaller classes of merchants and manufacturers. But the conspicuous success which attended the efforts of one or two institutions in this direction, drew the attention of other banks to the advantages to be gained by keeping level with the growth of Greater London, and providing what is required by its inhabitants. The result is that the suburbs of London are now as well, or better, provided with banking accommodation than any other part of the kingdom; and so great is the competition among various banks in this direction, that the limits of discretion appear to be overstepped in certain districts, as to the number of branches which can possibly obtain a profitable business from those localities.
As regards capital invested in banking companies, we find an increase, but not anything like the same proportionate increase that the balances exhibit. The paid-up capital of the joint-stock banks of England and Wales at the end of 1892 (not including the Bank of England) was about forty-four million pounds, and by the end of 1902, or in ten years, it had only increased to about forty-seven and a half million pounds; and this in spite of the capital represented by absorbed private banks not appearing in the former total.
The “Reserve Funds” of the banks, however, show a fairly satisfactory increase of six millions, from twenty-eight millions to thirty-four millions in the ten years.
Adding together the two items of Capital and Reserve, so as to arrive at the total working capital, we find that this has increased from seventy-two millions in 1892, to eighty-one and a half millions in 1902, or an increase of little more than 13 per cent., while the balances increased about 50 per cent. in the same time. The uncalled and reserved (_i.e._ capital which can only be called up in the event of failure) capital of the banks increased from one hundred and fifty millions to one hundred and sixty-three millions, or an increase of slightly under 10 per cent.
Turning from the consideration of the amount of funds which the joint-stock banks have at the present time within their disposition and control, to the question of how they employ those funds, it is interesting to note the changes which have taken place during the last ten years. The main portion of a banker’s assets is divided between—
1. Cash, and the balance maintained at the Bank of England or with a London agent, and money at call or short notice. 2. Investments. 3. Discount and Advances.
As regards these three items, we find the following changes have taken place during the last ten years. At the end of 1892 the joint-stock banks held nearly ninety-four millions in cash, etc.; they now have nearly one hundred and sixty-five millions. This represents an increase of about 75 per cent., and is a very satisfactory feature in present-day banking, indicating that the question of keeping a stronger cash reserve is receiving attention, the liabilities in the time having increased only 50 per cent. As regards investments, ninety-five millions was held in this form in 1892, against one hundred and thirty-one millions ten years later, an increase of 38 per cent.; while Discount and Advances have increased from two hundred and eighty-three millions to three hundred and eighty-seven millions—which represents an increase of about 37 per cent. These proportionate increases of Cash, Investments, and Advances and Discounts have taken place while the balances have proportionately increased 50 per cent. In the next chapter we shall proceed to examine in more detail the composition of the balance sheets of banking companies, and the relative proportions which the items appearing therein bear to each other, or should bear to each other, to be in accordance with the system of business maintained by our leading banks.
For ready reference we append on the next page a short table relating to the figures which we have been considering in the present chapter. These figures amply show the advance made by joint-stock banks during the last ten years.
AGGREGATE FIGURES OF THE JOINT-STOCK BANKS OF ENGLAND AND WALES (EXCLUDING THE BANK OF ENGLAND)
,000,000 omitted (except in the last two columns) ----------+--------+--------+-------+--------+--------+----------- | | | | | Cash | | | | |Uncalled| Bank | |Balances|Paid-up |Reserve| and |Balances|Percentage Date. | Held. |Capital.| Funds.|Reserved|and Call| of | | | |Capital.| Money.|(5) to (1). | (1) | (2) | (3) | (4) | (5) | (6) ----------+--------+--------+-------+--------+--------+----------- Dec. 1892 | 397 | 44 | 28 | 150 | 94 | 23·7% ” 1902 | 600 | 48 | 34 | 163 | 165 | 27·5% ----------+--------+--------+-------+--------+--------+-----------
---------+-------+-------+---------+-------+-------+------+-------- | | Per- | | Per- | Per- | | |Invest-|centage|Discounts|centage|centage|Number|Number | ments.| of | and | of | of (5)| of | of Date. | | (7) |Advances.| (9) |+ (7) +|Joint-|Banking | | to | | to |(9) to |Stock |Offices. | | (1). | | (1). | (1). |Banks.| | (7) | (8) | (9) | (10) | (11) | (12) | (13) ---------+-------+-------+---------+-------+-------+------+-------- Dec. 1892| 95 | 23·9% | 283 | 71·3% |118·9% | 102 | 2,326 ” 1902| 131 | 21·8% | 387 | 64·5% |113·8% | 68 | 4,146 ---------+-------+-------+---------+-------+-------+------+--------
CHAPTER IX
JOINT-STOCK BANK BALANCE SHEETS
The object of a joint-stock bank is to pay a dividend on its share capital at a rate as high as can be earned consistently with the performance of the main obligations of such a bank, that is, the safeguarding of moneys deposited with it by customers, and of capital subscribed by shareholders.
With regard to moneys deposited, it must be borne in mind that the relation of banker and customer is that of debtor and creditor; and as the bulk of a banker’s liabilities is repayable in cash on demand, without notice of any kind, it behoves him so to conduct his business that he may be in a position to meet any demand, and that without delay or hesitation—or ruin stares him in the face.
We have already seen that before banking—as we understand it—was practised in England, moneys were deposited with the goldsmiths for safe keeping only and that in course of time the goldsmiths realised that they were never called upon, at any one time, to repay the whole amount deposited with them; that an undemanded portion always remained in their hands which they could safely use for their own profit. This principle, indeed, constitutes the foundation of modern banking. But the question of what demand _may_ be made on any particular day, or during any given period, has to be considered and provided for by each banker for himself. Experience teaches that on an average over any lengthened period the payments are met in the aggregate, and more than met, by new deposits. This is evidenced by the steady growth of balances held by the banks.
The receipts for any one particular day, or during any short period, however, may, and frequently do, fall short of the payments. At the end of each week, for example, bankers lose a large amount of cash, which is drawn for wage-paying purposes, and it is not for several days that this cash gradually dribbles back through tradesmen paying in the money they have received from the wage earners. A similar depletion of cash takes place at the end of each month for the payment of salaries. Again, about the middle of each month suburban and provincial banks have their balances depleted owing to retail customers paying the monthly accounts of their wholesale houses. (This latter demand is not for cash, however, but is satisfied from the Bank of England balances, which, of course, has the same ultimate effect as if actual cash were drawn.) At the end of each quarter there is also a disturbance of balances for rents then falling due; and finally, in the summer and autumn months much actual cash is taken temporarily from the banks for harvest and holiday requirements. Thus the banks lose a portion of their cash or bank balance on certain days and at certain seasons of the year. These demands are all _known demands_, and the banker is prepared accordingly.
It is not sufficient, however, that a banker should be in a position to meet _known_ demands; unforeseen demands may be sprung upon him at any moment, and he must be prepared to meet them immediately they arise. Mr. Bagehot, in his _Lombard Street_, writes as follows of these unexpected demands:—
“Any sudden event which creates a great demand for actual cash may cause, and will tend to cause, a panic in a country where cash is much economised, and where debts payable on demand are large. In such a country an immense credit rests on a small cash reserve, and an unexpected and large diminution of that reserve may easily break up and shatter very much, if not the whole, of that credit. Such accidental events are of the most various nature: a bad harvest, an apprehension of foreign invasion, the sudden failure of a great firm which everybody trusted, and many other similar events have all caused a sudden demand for cash.”
A banker therefore fortifies himself against any sudden or unexpected call by keeping much more cash in his till than he is ever likely to require in normal times; by maintaining a large balance with the Bank of England—which to all intents and purposes is equivalent to “cash” in the till; and by lending out large amounts to bill-brokers, which advances are fully secured, and are repayable either on demand or at short notice. He is able to arrange the amount advanced in this way from day to day—by lending further sums or calling in loans—according to the circumstances of the moment, so that he can maintain that amount in “cash” or “bank balance” which he considers necessary for his safety.
So we see that “cash” and “balance” at the Bank of England together constitute a banker’s first line of defence—they are, so to speak, his “firing line”—and the money which he lends to the bill-brokers constitutes the “supports” to the “firing line.”
The next defence which a banker maintains against possible pressure is represented by the amount invested in securities. Investments yield on an average a higher return than sums lent at short notice or call; but it must be remembered that securities are not so easily realised, if the necessity should arise.
Of these investments a large portion is represented by Consols, as, in case of need, these can always be sold for cash at very short notice, or in case of great pressure doubtless the Bank of England would be willing to make advances on the security of this stock. Of securities guaranteed by the British Government, other than Consols, there will probably be a large holding, although these securities might not in time of panic be so readily realisable as Consols. Yet it is probable that the Bank of England would, in order to avert disaster, accept such stocks as security against advances. Other high-class securities which yield a somewhat higher return will also probably be held to a large amount. A banker, however, should not rely too much on these securities for purposes of realisation in time of monetary pressure, it being quite possible that at such times there would be no buyers of any class of securities with the probable exception of Consols.
After making due allowance for “cash,” “bank balances,” “call money,” and “investments,” a banker employs the balance of his funds in discounting bills, buying bills from the market, and making advances to customers.
As the dates when bills fall due for payment are fixed, if for any reason a banker deems it prudent to increase his “cash” and “bank balance,” he can readily do so by letting his bills in hand mature, and not taking up new bills in their place. It is open to the banker to sell the bills he holds, that is, to rediscount them, if he choose to do so; but this course is not practised at the present day, except by a few country banks. Moreover, in the event of a panic, probably no one can be found to buy bills, so that they are not in practice realisable before the maturity dates. As an illustration of this, it may be mentioned that on one occasion during the crisis of 1847, it was found to be impossible in the city of London to discount even an Exchequer Bill of the English Government.
Of the various investments of a banker, “advances to customers” are the most difficult to realise in time of pressure, as the wherewithal for the customers to repay their advances is then wanting, and in their efforts to obtain necessary funds the danger would only be aggravated. In such times, indeed, the commercial world requires extra assistance to avert an actual crash.
“Premises” is an item appearing among the assets in balance sheets of joint-stock banks. It is probable that in many cases the value of the premises largely exceeds the figure at which they are put in the accounts, and hence they constitute a hidden reserve; but the investment, by its nature, is one that cannot readily be made available to meet sudden demands.
We see, therefore, that a banker’s assets usually consist of the following six classes of investments:—
I. Cash in the till and balance with Bank of England (or London agent). II. Money lent at call or short notice. III. Investments— (_a_) Consols; (_b_) securities guaranteed by the British Government; (_c_) other securities. IV. Bills under discount. V. Advances to customers. VI. Premises and sundries.
The first three of these classes constitute what is known as a banker’s “liquid assets.”
TABLE SHOWING, IN THE CASE OF NINE REPRESENTATIVE JOINT-STOCK BANKS, THE PERCENTAGES OF THE VARIOUS CLASSES OF ASSETS RESPECTIVELY TO THE AMOUNT OF LIABILITIES TO THE PUBLIC.
-----+--------+-------+------------+-----------+-----------+------- | | | | | Bills, | | Cash | Call | | | Advances, | | and | and | | Total of | Premises, | Total Bank.| Bank | Short |Investments.| “Liquid | and |Assets. |Balance.| Money.| | Assets.” | Sundries. | -----+--------+-------+------------+-----------+-----------+------- A | 14·9 | 13·4 | 20·4 | 48·7 | 60 | 109 B | 16·4 | 8·7 | 16·8 | 41·9 | 66 | 108 C | 18·3 | 6·5 | 22·0 | 46·8 | 59 | 106 D | 13·8 | 5·4 | 30·3 | 49·5 | 68 | 117 E | 14·6 | 5·6 | 26·6 | 46·8 | 66 | 113 F | 17·0 | 23·0 | 16·0 | 56·0 | 60 | 116 G | 12·4 | 25·0 | 17·1 | 54·5 | 60 | 114 H | 14·4 | 8·7 | 31·5 | 54·6 | 50 | 105 I | 16·5 | 16·1 | 11·0 | 43·6 | 66 | 110 -----+--------+-------+------------+-----------+-----------+-------
The averages of these percentages[2] respectively are as follows:—15·3, 12·6, 21·3, 49·2, 61·6, and 111.
[Footnote 2: These averages are not the percentages which would be shown by a _combined_ account of the nine banks.]
On examining this table it will be noted that the proportions of funds invested in “liquid assets” do not vary materially with the different banks. When we examine, however, the separate classes of investments making up the total of “liquid assets,” we see that the case is different, and a wide divergence is shown. This is especially so in “call and short money,” where the proportions vary from 5·4 per cent, to 25 per cent, and in “investments,” where they vary from 11 per cent to 31·5 per cent.
The figures given are those of one particular day, and that a day on which, according to popular belief, some of the banks indulge in what has been called by the Press “window dressing”—that is, adjusting to a greater or less extent the amounts held in the respective classes of securities, with a view to the presentation of more impressive figures in the balance sheet to be published as at that day. Had we the actual daily records of the various banks at our disposal, it is not improbable that a greater variation would be shown in the items of “cash” and “call money”; but these figures are not available. It is true that most of the banks now publish monthly statements as to their position, and it is a noticeable fact that while some banks issue these monthly statements as on the close of business of the last day of each month, others vary the day on which the statements are made up; and it is open to conjecture that this variation of date is with the object of making a better showing.
It must not, however, be inferred that such a course as this (“window dressing”) is the usual one adopted by our banks; but it is a method of business which is possible, and which rumour has it is pursued in certain cases. This explains such remarks in the money articles as, “Money was in request to-day, owing to a large amount being called off the market by the banks for window-dressing purposes.”
As regards “call and short” money, it is possible that in time of actual panic a considerable portion of it would not be repaid when “called,” especially as regards the “short” money. It is generally believed, though not stated in any balance sheet, that a large part of this “short” money is not lent to the bill-brokers, but to the Stock Exchange—that is, to stock-brokers. Loans to the Stock Exchange are fixed from one account to the next (about a fortnight ahead), and are then supposed to be paid off if required. In time of difficulty, however, would—or rather could—this money be repaid by the various brokers to whom it is lent? Supposing a broker had a loan of £100,000 secured on American railroad shares, and a crisis suddenly developed, from where could the broker obtain the money to repay the advance if it were called in? He would not be able to sell the shares without serious loss, if at all; and he would have great difficulty at such a time to induce another banker to make him a fresh loan. In all probability the loan would _not_ be repaid, however much the lending banker was desirous, or in need of regaining possession of his money.
Therefore such loans to the Stock Exchange (excepting, perhaps, amounts secured on Consols or such like) cannot fairly be entered under the heading of “call and short” money in a balance sheet. It is desirable, for these reasons, that balance sheets should give more explicit information than is usually the case; and more particularly they should specify separately the amounts lent to the bill-brokers at “call” and “notice,” and the amount lent to the Stock Exchange from account to account.
Turning to the question of “investments,” it may be noted in our table that those banks which show only a small proportion of “call” money, in most cases show a large proportion of “investments”; while, on the other hand, those which show a large amount at “call” hold only a small amount in “investments.”
The table exhibits a wide divergence in the proportions of “investments” held. These proportions vary from 11 per cent, to 31·5 per cent. The actual proportion of investments held, however, is not of so much concern as the nature of the securities which compose the investments; that is, whether or not they are readily realisable in case of need. The classes of investments are fairly shown in most bank balance sheets, and from a study of these some useful information can be gained. As an illustration of this, bank E in the table on page 94 shows in its balance sheet approximately the same holding in Consols as bank I, but the latter bank has deposits from its customers of twice the amount shown by the former. Now if bank E were to reduce its Consols by one-half (giving the same proportion as I), and put the proceeds in “cash” and “call money,” its position would appear thus (using the actual figures of Consols shown by the balance sheets of the two banks)—