The City Editor of a paper has a vast amount of information to supply to the public, and a limited amount of space in which to present that information, and the result is that these articles are usually decidedly “terse”—not to say abrupt—in style: a fact is briefly stated, and the probable effect of such fact is added, though no information is given as to why such an effect should result from such a cause, which is left to the reader to fathom out as best he can.
Money Articles may be roughly divided into two sections: the first deals with the Money Market proper, the foreign exchanges, gold movements, etc., and the second with Stock Exchange matters. These two sections may appeal to somewhat different classes of the community; but the connection between them is so intimate, and they act and react on each other so frequently, that they cannot be dissociated. The first section of the article more nearly affects the subject-matter of this book than the latter portion, which is amply dealt with in another book of this series.
Money Articles almost invariably commence with a paragraph which is really a general summary of the events which have transpired in the Money Market on the day of writing. The first paragraph, though consisting of only a few lines, often teems with information to those that can read it aright. Nearly all the subjects with which it deals have been dealt with in the course of this book, and therefore it will only be necessary to enumerate them here.
The condition of the Money Market is first noted in reference to the supply and demand of “call” and “short money,” as between the bill-brokers, the banks, and the Bank of England; the rates are quoted at which money was lent at “call,” “overnight,” or for “short periods,” and mention is made of any transactions in this market entered into by the India Council. Passing on from this, any facts are mentioned which, on the day in question, _have_ had, or on the following day _will_ have, any important bearing on the position of the short loan fund. These items comprise reminders of the falling due of any instalment on large new public issues, the payment for or repayment of Treasury, India, or Corporation bills, etc.
The question of discount rates is then dealt with, and a note is usually made as to whether or no the banks are “working”; that is, whether the banks are buying bills from the brokers, or refraining from so doing. The paragraph then usually concludes with a reference to exchange rates.
The article then proceeds to note any import or export of gold which has taken place on the day in question, and any variation which may have occurred in the price of gold. Importers of the metal know that they can always sell their gold to the Bank of England at the minimum price of £3 17_s._ 9_d._ per standard ounce, and therefore the price never falls below this figure. If there is any foreign demand for gold, the exporters will bid above this price, and secure what is offering, unless the Bank of England raises its buying price, as it sometimes does in times of stringency. It is of interest to note the origin of imports and the destination of exports of gold; and, at the same time, to follow the movements in the exchange rates of London with these places of origin or destination. The action of the Bank of France and of the Reichsbank in retarding exports will frequently become visible in these figures, as will also the action of the latter institution in facilitating imports of the metal into Germany. A note will at times appear that so much gold has been sold for Germany at such a price, and if the foreign exchange table in the same article be referred to, it will often be found that this gold has left us for Berlin in spite of the exchange being well above the nominal export specie point.
The expression that “the Bank bought so much gold to-day” appears to cause difficulty in some minds, in that some people cannot understand how the Bank benefits by buying gold. “What can be the use of the Bank buying gold?” they say. “It must give gold for gold, which won’t alter its position in the slightest!” This matter is a very simple one really, and explains itself with a little thought. The usual procedure of dealing with an import of gold is for the importer, or his agent, to hand the gold to the Banking Department of the Bank of England, which _credits_ him for the value of the gold. Of course, if the importer were then to draw out this amount in gold the Bank would not be benefited, but this does not happen under any ordinary circumstances. The Banking Department passes the gold on to the Issue Department in exchange for notes, and the extent to which the Bank benefits is shown in the ensuing Return, when “Other Deposits” will be increased, owing to some account having been credited for the gold received, and on the other side of the account “Notes” will be so much higher; that is, the Reserve and Ratio will both be increased. The figures of the Issue Department will be increased on each side by the amount of gold received and notes issued.
The question of silver is then dealt with in the article. This question is not now of such importance as was the case a few years ago, when the bi-metallic theory was so much to the fore. The position of silver is very different now from what it was up to quite recent years. For many centuries previous to about thirty years ago, the price of silver as compared with that of gold was about as 15 is to 1; in other words, an ounce of silver was worth about 5_s._, and an ounce of gold about 75_s._ to 80_s._ This state of things has now entirely disappeared, however, and we find silver fluctuating rapidly and extensively in price—having in the course of the year 1902 been as low as 21⁹/₁₆_d._ per ounce.
The reason for this fall in the price of silver is not far to seek; supply has largely exceeded demand. Several countries which had been large consumers of silver for currency purposes have, during the last thirty years, thrown over their silver system and adopted gold in its place, as a standard of value. This, of course, largely decreased the demand for the metal, and in addition it threw a large amount of silver out of circulation and on to the market. The supply of the metal has also been largely increased, owing to extensive discoveries of new mines, and to improvements in the method of mining, which have made it possible for mines of a low grade of ore to be worked at a commercial profit.
The paragraph in the article relating to silver is of chief interest to those who have commercial transactions with silver using countries, and also to those who are interested in companies whose business is conducted in such countries. These companies earn their revenue in silver, but pay their dividends in gold, in addition to often paying for much of their material in gold. Therefore the rate of exchange between such countries and London, which rate is of course subject to the price of silver, is of material interest to the holders of such stocks.
The price of the Mexican dollar is frequently noted in the “silver” paragraph of Money Articles. Mexican dollars circulate freely on the coast of China, in spite of many efforts which have been made to supplant them. When the dollars arrive in China the merchants who receive them put their “mark” on each coin, which thereafter circulates freely; the merchants’ “marks” being looked on by the populace as a proof of genuineness. In London, Mexican dollars are dealt in by weight, and as they are coined in silver nine-tenths fine, their price should consequently be a little less per ounce than the price of bar silver; but demand sometimes exceeds supply, when the price of the coins rises somewhat considerably above their intrinsic worth.
The Indian price of silver is also noted in the article: this price refers to the number of rupees which have to be given for one hundred tolas of silver; the tola being an Indian weight equal to ·375 ounce, and the silver being about nine-tenths fine.
Up to this point the information given in Money Articles is of daily occurrence, and attention is then turned to various items of intelligence according to the day of the week or month. For instance, the day after ’Change is held in London, a paragraph is inserted dealing with the various alterations which have been established in exchange rates since the previous post day, and the “Course of Exchange” is usually printed, more or less in full. On Friday mornings the Bank Return is published, and the City Editor adds his own notes on the same, calling attention to, and explaining as best he can, any alterations which have occurred since the previous return. On Friday also, the return of the Bankers’ Clearing House makes its appearance.
On Wednesdays and Thursdays the traffic returns of various railways are published. These returns are of interest as exhibiting the state of trade throughout the country as a whole, as well as the position of individual lines. In considering railway traffics, and comparing them with previous results, care must be taken to bear in mind any alteration which may have taken place in the price of labour, coal, or material; as an increase in gross profit may be quite offset by an increase in any one of these items, and _vice versâ_. It is also of interest to note that an increase or decrease in the _gross_ earnings of a railway, the chief business of which consists of passenger traffic, has far greater effect on the _net_ earnings than does a similar increase or decrease have on a line the chief business of which consists of goods traffic. Passenger trains run whether they are full or empty, and therefore an increase in the takings from passengers means, very largely, so much more net earnings; whereas goods trains usually run only when traffic offers, and therefore extra traffic means considerable extra expense. In considering the probable results of railways doing business in silver using countries, the influence of the price of silver must not be overlooked.
On the seventh day of each month the Board of Trade publishes a return showing the exports, imports, and re-exports of goods for the previous month. This return is summarised in the following day’s Money Article, and when this is read in conjunction with the Clearing House Return and the Traffic Returns, the three together form a very good barometer of the state of our trade. In studying the figures of the Board of Trade, and comparing them with previous returns, it is important to remember that _values_ only should not be considered, but _quantities_ as well as _values_; we may have imported considerably more of a certain commodity, but paid less for it, or imported less and paid more.
In many articles two tables relating to the foreign exchanges appear daily; one of these is a table of the rates of interest for money ruling in the principal financial centres of the Continent, and the other is a table of the exchange rates prevailing in foreign centres for drafts _on_ London. The first of these tables is of use as providing one of the factors necessary to calculate the “long” rate from the “short” rate; it is also of use as being a guide to the comparative value of money in various centres, and thereby indicating the likelihood of foreign bankers investing their funds in London bills, or of withdrawing such investments. The second table indicates the movements in rates which are taking place on the Continent between our “’Change” days, and it is of use to those persons who have considerable sums to pay to, or receive from, foreign centres. As was noted in the chapter dealing with the foreign exchanges, the rates between any two given centres always keep nearly on a level, but there is at times a slight variation. Advantage can be taken of this variation by persons having transactions with such centres, and this table affords necessary information in the matter.
The foregoing items of news comprise the Money Market portion of the article, and attention is then given to the Stock Exchange portion. This portion is divided into several paragraphs, each one of which deals with a special and well-recognised class of stock, or “market,” as it is called.
First we have the paragraph dealing with the “gilt-edged market.” This market comprises securities of, or guaranteed by, the British Government (Consols, local loans, etc.), Bank stock, and colonial and municipal issues. The whole of this market is largely under the influence of the price of money, and, at present, of excess of supply over demand. The supply of Government stocks has, of course, been increased owing to the requirements of the late war, which led to a further issue of Consols, in addition to the creation of the War Loan and Transvaal Loan. In addition, a very large amount of colonial and municipal loans has been offered to the public during the course of the last few years. These issues have been far in excess of the demand, with a consequence that the market has been glutted with securities of this class, resulting in an all-round depression of prices. This depression has been deepened by the knowledge of the many new issues which are only awaiting a favourable opportunity to be launched on the public.
The next paragraph in most Money Articles deals with the “Foreign Market”—Spanish, Turks, Russians, Tintos, etc. In this section securities are dealt with which have a more or less international character, and in which dealings on foreign stock exchanges have often considerably more importance than the dealings on our own Exchange. Hence this section is not so much under the influence of the price of money as it is under the influence of the attitude and condition of foreign centres, especially those of Paris and Berlin.
Home railways are then dealt with, and then American rails, which latter are, of course, largely under the influence of New York and its magnates. Then comes a paragraph dealing with colonial and foreign rails, which are largely under harvest influences, and the internal condition of the country in which they do their business. Then follow paragraphs on the miscellaneous and industrial sections, and lastly a paragraph on the mining market.
The miscellaneous and industrial section is chiefly notable for the large number and different character of the securities there dealt in, comprising the shares of banks, breweries, insurance and finance companies, iron, coal, and steel concerns, waterworks, etc., besides the shares of numerous manufacturing and catering companies. Much speculation exists in certain classes of these shares, but it is a noticeable fact that the issues of many of the sound industrial concerns have withstood the recent severe wave of depression far better than have many securities which are supposed to be of a considerably higher status.
Following this there usually appear dividend announcements, reports of company meetings, and a number of miscellaneous notices. Although these notices mostly explain themselves, and are of interest only to persons connected with them, yet one or two items which appear from time to time are of somewhat more general interest. It is of frequent occurrence to find in this portion of the article a notice that “tenders for Treasury Bills will be received at the Bank of England on such a date.”
Treasury Bills constitute a Money Market and not a Stock Exchange security, and they belong to the unfunded debt of this country. They were first issued in 1877, and were promptly recognised, both in our own and foreign markets, as being bills of the highest possible class. These bills are issued from time to time to suit the necessities of the Government; they have a currency of three, six, nine, or twelve months, and are of great assistance to the Chancellor of the Exchequer in enabling him to regulate the finances of his department.
Treasury Bills are always issued by the tender system, and those persons who wish to acquire some of these bills must make their application through a London banker. The tender must state how much per cent. will be given for such an amount of bills, and those who tender at higher figures will, of course, obtain an allotment in preference to those tendering at lower ones.
Besides Treasury Bills, several other classes of security are, from time to time, issued by tender; for example: India bills, London County Council bills, Corporation and Colonial stock. This system of issue is not a popular method so far as the general public are concerned, as it is not properly understood; and when the public do endeavour to obtain investments in this manner, they often make ludicrous and expensive mistakes by tendering at a figure far above what would easily obtain an allotment.
Another item of interest which appears among these “notices” is the notice of issue of stock at _fixed prices_. Such notices appear plain on the face of them; but, on comparing the price of issue with the market price of similar stocks, care must be taken not to overlook the fact that very frequently certain allowances have to be taken off the nominal price of issue. These allowances are in respect of the stock being only paid up by instalments, while interest is often paid on the full nominal amount; and often, in addition, a full six months’ interest is paid only three or four months after the issue; besides which the stock can frequently be paid up in full at any time, under rebate. Such considerations as these should always be borne in mind, as they have a material bearing on the _real_ price of issue.
The article concludes with a list of “closing prices,” and of “business done” on the Stock Exchange on the day in question. The closing prices are estimates only, supplied by certain members of the House, and though affording a very good guide to the course of prices, they cannot be relied upon for any out-of-the-way securities—actual dealings in which may be impossible at the prices quoted.
From this brief examination of the usual contents of a Money Article, the large amount of information embodied in such becomes apparent, and also the necessity for a certain amount of technical knowledge to enable a reader to grasp, and make full use of the information there placed at his service.
CHAPTER XIV
CONCLUSION
In the course of this book we have briefly surveyed the rise and development of the banking system of England. We have studied the establishment and growth of the Bank of England, the gradual elimination of the private banker, and the wonderful development of joint-stock banking, and we have noted the causes which led to London becoming the financial centre of the world, and also the various factors which constitute our Money Market.
From a weak beginning we have seen our system of finance develop into a mighty machine; but we have seen that, although it is mighty, it is a machine of very delicate construction, and that it needs the most careful attention on the part of those connected with its working. A breakdown in one of its parts may mean wreck for the whole concern, and bring with it, not only unparalleled individual distress, but actual danger of an acute form to the whole nation.
The weakest spot of our system arises from the custom of the cash reserves of the bankers being kept with the Bank of England, that is, the one-reserve system. The total deposits held by the banks of the kingdom may be roughly estimated at one thousand million pounds, and practically the whole of this vast sum is repayable in cash on demand. But banks conduct their business on the law of averages, assuming that the demands for cash will be met by the deposit of cash—that what is paid out to one set of customers will be paid in by another set; and, while keeping sufficient till money to tide over the variations of demand and supply from day to day, they maintain no other reserve of cash, beyond the balance at the Bank of England,—or with a London agent, through whom such balances are in effect passed on to the Bank of England. Thus the Bank of England is the reservoir from which all banks expect to be able to draw cash in time of need.
When we turn to the Bank Return, what cash do we find is retained to meet such a heavy contingent liability? In the figures of the “Return” given in chapter vii., the “Reserve” stands at about twenty-five million pounds only; and with regard to this Reserve, it must be remembered that the Bank is peculiarly open to foreign demands in addition to home demands. Such a reserve is slender, to say the least of it, and the strengthening of the “Reserve” to a figure more in keeping with our increased liabilities is, or should be, constantly before the authorities who have the control of our banks. This matter will have to be faced some day, and the longer action is delayed the more difficult will it become to grapple with it.
Various schemes for increasing our reserve have been put forward from time to time: one suggestion was that banks should retain a safety reserve of gold in their own keeping; another that a bankers’ bank should be established, to hold the reserves of other banks in place of the Bank of England; a third, that each bank should maintain a larger balance with the Bank of England, on the understanding that that institution should increase its reserve in respect of such increased balances. These schemes have each their advocates and opponents, but with each the result to the banks would be a loss of profit, for each would involve more money lying idle. This loss of profit is at the root of the whole difficulty.
This brings us to consider the question of competition among bankers, which at present is very keen, and which quite conceivably may lead to dangerous results unless kept within reasonable bounds.
The tendency of the time is towards the absorption of the smaller and weaker banks of the country by the large joint-stock banks. In itself, this is not an undesirable feature, in that it places the banking system, as a whole, on a sounder footing. Another feature is the establishment of branch offices throughout the length and breadth of the land. This gives facilities for capital to flow readily from one part of the country where it may be in excess, to another where it is in demand.
The joint-stock banks, however, are keen competitors among themselves, new branches being established wherever the possibility of securing new business exists, or where existing connections are threatened by the incursions of some other bank.
This multiplication of banking offices is of decided convenience to customers; it saves them the trouble of sending long distances to pay in, or to draw wages, etc.
In the race for business, however, rates are cut down to attract custom, and risks are perhaps undertaken which would not be entertained if competition were not so keen. These risks may not be large individually, but collectively they may amount to a large sum. They possibly tend to lock up resources in _one class_ of security, which, as we have seen, is a source of danger. This is especially the case in new and growing districts, where much accommodation is asked for on the security of house property, and for the purpose of developing new estates. There is, in fact, a growing tendency at the present day to transfer to banks business which formerly went to building societies; and if this system is encouraged, it is likely to result in a large portion of a bank’s advances becoming of a fixed nature and unavailable in case of need.
Mr. F. E. Steele, in a lecture recently delivered to the students of the London Chamber of Commerce, called attention to another danger resulting from undue competition. He said:—
“There is another phase of competition which should be touched upon. This phase I do not remember to have seen specifically dealt with in treatises on banking. I refer to the growing tendency on the part of banks to ear-mark, for the benefit of particular depositors, securities which should form a free asset; a security to the general body of its depositors. You will find now in some balance sheets, either in the investment column or as a footnote, that a certain portion of the bank’s investments are held for public bodies, such as county councils, borough councils, corporations, etc. In order to secure the accounts of these bodies the banker hypothecates to them certain securities, such as Consols, which would otherwise be held for the benefit of its depositors in general. This tendency to tie up assets which should be free should be narrowly watched by the public, and carefully controlled by bankers. That it should be resorted to in some cases seems inevitable. It is done by some of the best and soundest banks. But it is a course which should be resorted to as little as possible.”
In conclusion, we will turn from the question of the Money Market itself to the army of individuals who spend their lives in the service of the various institutions forming the Money Market. By far the largest number of these individuals are connected with our various joint-stock and private banks. It is commonly thought that the life of a bank clerk is an easy one. Jerome K. Jerome, in his amusing book _Three Men in a Boat_, in referring to the occupation of his friend George, says, “He sleeps in a bank from nine till four, when they wake him up and put him outside.” Common ideas, however, are frequently not quite correct, and though certain members of the fraternity, who happen to be situated in country and suburban districts, do not suffer from overwork, yet as regards those connected with London and the large centres of industry, their life is an arduous one,—often tedious in its sameness,—the hours of work are not short, and the remuneration, although adequate, is not generally on the scale that some time ago was popularly believed to be the happy lot of the bank clerk. Still, one’s life is what he makes it, and the idea embodied in Napoleon’s saying—that every soldier carried in his knapsack a marshal’s bâton—is equally true of the banking profession.
Every junior on entering the service of a bank has before him the prospect of ultimately rising to occupy a position of importance and respect, even to the position of general manager of his bank, if he so equips and conducts himself as to be fit for and worthy of such promotion.
The facilities and inducements to self-improvement placed before bank clerks of the present day are much greater than in bygone times. Many classes are held and lectures given dealing with banking subjects. Examinations are held, and many banks recognise and reward the success of their clerks at these tests of knowledge. Technical knowledge, however, is not everything; common sense, good judgment, tact, and a cool head are also necessary in order to become a successful banker or financier, but these qualities are of much more value when combined with sound and good technical knowledge.
Greatness is not thrust upon any bank clerk, but it is in the power of all, if they will, to achieve it, to a greater or less degree.
APPENDIX
THE GOLD RESERVE
Since the remarks concerning the Gold Reserve were written (chapter xiv.) much interest has been aroused in the matter by a suggestion made by Mr. J. Herbert Tritton, the President of the Institute of Bankers.
At the opening of the last session of the Institute (November, 1903) the President, in his inaugural address, after referring to many current and important topics, passed on to the subject of the visible gold reserves, and made the following novel suggestion. By Mr. Tritton’s courtesy his remarks on this matter are here reproduced in full.
“VISIBLE GOLD RESERVES
“The ever-pressing question of this country’s visible reserves of gold, quiescent during the war, is again attracting attention. Theoretically, everyone would admit that larger reserves of gold in this country are desirable; many would go further and say necessary; but any, even the smallest, step in the direction of action is at once barred on the ground of expense. At whose cost is the reserve to be held? £15,000,000 at 3 per cent. is £450,000 a year, and this must almost inevitably come out of somebody’s pocket. Bank of England stockholders and ordinary bank shareholders would be mulcted, or would think they were, to the extent, say, of a second income tax of 1_s_. in the pound on their dividends. Of course, the question is, in its essence, of national importance, but the Treasury of this country never allows itself to be influenced by considerations of this character—nor, indeed, have the English people for the last fifty years expected either Government help or Government interference in their financial or commercial affairs. Pardon the interjection, but I, for one, say long may this country be not only self-reliant, but free; free to trade as each member of it shall choose, unshackled and uninfluenced by Government restrictions or Government encouragements! We may, perhaps, cherish a faint hope that the new Chancellor of the Exchequer may realise that he has taken with him from the Post Office, liabilities as a banker, £144,605,088 in respect of Post Office Savings Banks, and finds in his new office a further sum of £52,505,081 in respect of Trustee Savings Banks, making together £197,110,169, liable to be repaid in gold; and realising this as a banker, may be less obdurate than his predecessors. But it would not be wise to expect much from Downing Street: if the thing is to be done we must do it ourselves. That a solution of the question is supremely necessary I am convinced, however great the initial difficulties may be; and that it is not beyond attainment if the best energies and the best brains of the banking community be devoted to it, I am also persuaded. Mr. R. H. Inglis Palgrave gives in his new book, _Bank Rate and the Money Market_—a book which every banker should possess and read—page 104, the following table:—