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.