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considerable number of these notes presented for payment; and then again, the indebtedness of those private bankers who do not publish balance sheets has been omitted.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.