Lombard Street: A Description of the Money Market
Walter Bagehot

Part 3 out of 4

need to discharge those liabilities. And bankers are in even greater
terror. In a panic they will not discount a host of new bills; they
are engrossed with their own liabilities and those of their own
customers, and do not care for those of others. The notion that the
Bank of England can stop discounting in a panic, and so obtain fresh
money, is a delusion. It can stop discounting, of course, at
pleasure. But if it does, it will get in no new money; its bill case
will daily be more and more packed with bills 'returned unpaid.'

The sale of stock, too, by the Bank of England in the middle of a
panic is impossible. The bank at such a time is the only lender on
stock, and it is only by loans from a bank that large purchases, at
such a moment, can be made. Unless the Bank of England lend, no
stock will be bought. There is not in the country any large sum of
unused ready money ready to buy it. The only unused sum is the
reserve in the Banking Department of the Bank of England: if,
therefore, in a panic that Department itself attempt to sell stock,
the failure would be ridiculous. It would hardly be able to sell any
at all. Probably it would not sell fifty pounds' worth. The idea
that the Bank can, during a panic, replenish its reserve in this or
in any other manner when that reserve has once been allowed to
become empty, or nearly empty, is too absurd to be steadily
maintained, though I fear that it is not yet wholly abandoned.

The second and more reasonable conception of the independence of the
Bank of England is, however, this: It may be said, and it is said,
that if the Bank of England stop at the beginning of a panic, if it
refuse to advance a shilling more than usual, if it begin the battle
with a good banking reserve, and do not diminish it by extra loans,
the Bank of England is sure to be safe. But this form of the
opinion, though more reasonable and moderate, is not, therefore,
more true. The panic of 1866 is the best instance to test it. As
everyone knows, that panic began quite suddenly, on the fall of
'Overends.' Just before, the Bank had 5,812,000 L. in its reserve;
in fact, it advanced 13,000,000 L. of new money in the next few
days, and its reserve went down to nothing, and the Government had
to help. But if the Bank had not made these advances, could it have
kept its reserve?

Certainly it could not. It could not have retained its own deposits.
A large part of these are the deposits of bankers, and they would
not consent to help the Bank of England in a policy of isolation.
They would not agree to suspend payments themselves, and permit the
Bank of England to survive, and get all their business. They would
withdraw their deposits from the Bank; they would not assist it to
stand erect amid their ruin. But even if this were not so, even if
the banks were willing to keep their deposits at the Bank while it
was not lending, they would soon find that they could not do it.
They are only able to keep those deposits at the Bank by the aid of
the Clearing-house system, and if a panic were to pass a certain
height, that system, which rests on confidence, would be destroyed
by terror.

The common course of business is this. A B having to receive 50,000
l. from C D takes C D's cheque on a banker crossed, as it is called,
and, therefore, only payable to another banker. He pays that cheque
to his own credit with his own banker, who presents it to the banker
on whom it is drawn, and if good it is an item between them in the
general clearing or settlement of the afternoon. But this is
evidently a very refined machinery, which a panic will be apt to
destroy. At the first stage A B may say to his debtor C D, 'I cannot
take your cheque, I must have bank-notes.' If it is a debt on
securities, he will be very apt to say this. The usual
practicecredit being goodis for the creditor to take the debtor's
cheque, and to give up the securities. But if the 'securities'
really secure him in a time of difficulty, he will not like to give
them up, and take a bit of paper a mere cheque, which may be paid or
not paid. He will say to his debtor, 'I can only give you your
securities if you will give me banknotes.' And if he does say so,
the debtor must go to his bank, and draw out the 50,000 L. if he has
it. But if this were done on a large scale, the bank's 'cash in
house' would soon be gone; as the Clearing-house was gradually
superseded it would have to trench on its deposit at the Bank of
England; and then the bankers would have to pay so much over the
counter that they would be unable to keep much money at the Bank,
even if they wished. They would soon be obliged to draw out every

The diminished use of the Clearing-house, in consequence of the
panic, would intensify that panic. By far the greater part of the
bargains of the country in moneyed securities is settled on the
Stock Exchange twice a month, and the number of securities then
given up for mere cheques, and the number of cheques then passing at
the Clearing-house are enormous. If that system collapse, the number
of failures would be incalculable, and each failure would add to the
discredit that caused the collapse.

The non-banking customers of the Bank of England would be
discredited as well as other people; their cheques would not be
taken any more than those of others; they would have to draw out
banknotes, and the Bank reserve would not be enough for a tithe of
such payments.

The matter would come shortly to this: a great number of brokers and
dealers are under obligations to pay immense sums, and in common
times they obtain these sums by the transfer of certain securities.
If, as we said just now, No. 1 has borrowed 50,000 L. of No. 2 on
Exchequer bills, he, for the most part, cannot pay No. 2 till he has
sold or pledged those bills to some one else. But till he has the
bills he cannot pledge or sell them; and if No. 2 will not give them
up till he gets his money, No. 1 will be ruined, because he caunot
pay it. And if No. 2 has No. 3 to pay, as is very likely, he may be
ruined because of No. 1's default, and No. 4 only on account of No.
3's default; and so on without end. On settling day, without the
Clearing-house, there would be a mass of failures, and a bundle of
securities. The effect of these failures would be a general run on
all bankers, and on the Bank of England particularly.

It may indeed be said that the money thus taken from the Banking
Department of the Bank of England would return there immediately;
that the public who borrowed it would not know where else to deposit
it; that it would be taken out in the morning, and put back in the
evening. But, in the first place, this argument assumes that the
Banking Department would have enough money to pay the demands on it;
and this is a mistake: the Banking Department would not have a
hundredth part of the necessary funds. And in the second, a great
panic which deranged the Clearing-house would soon be diffused all
through the country. The money therefore taken from the Bank of
England could not be soon returned to the Bank; it would not come
back on the evening of the day on which it was taken out, or for
many days; it would be distributed through the length and breadth of
the country, wherever there were bankers, wherever there was trade,
wherever there were liabilities, wherever there was terror.

And even in London, so immense a panic would soon impair the credit
of the Banking Department of the Bank of England. That department
has no great prestige. It was only created in 1844, and it has
failed three times since. The world would imagine that what has
happened before will happen again; and when they have got money,
they will not deposit it at an establishment which may not be able
to repay it. This did not happen in former panics, because the case
we are considering never arose. The Bank was helping the public,
and, more or less confidently, it was believed that the Government
would help the Bank. But if the policy be relinquished which
formerly assuaged alarm, that alarm will be protracted and enhanced,
till it touch the Banking Department of the Bank itself.

I do not imagine that it would touch the Issue Department. I think
that the public would be quite satisfied if they obtained banknotes.
Generally nothing is gained by holding the notes of a bank instead
of depositing them at a bank. But in the Bank of England there is a
great difference: their notes are legal tender. Whoever holds them
can always pay his debts, and, except for foreign payments, he could
want no more. The rush would be for bank-notes; those that could be
obtained would be carried north, south, east, and west, and, as
there would not be enough for all the country, the Banking
Department would soon pay away all it had.

Nothing, therefore, can be more certain than that the Bank of
England has in this respect no peculiar privilege; that it is simply
in the position of a Bank keeping the Banking reserve of the
country; that it must in time of panic do what all other similar
banks must do; that in time of panic it must advance freely and
vigorously to the public out of the reserve.

And with the Bank of England, as with other Banks in the same case,
these advances, if they are to be made at all, should be made so as
if possible to obtain the object for which they are made. The end is
to stay the panic; and the advances should, if possible, stay the
panic. And for this purpose there are two rules: First. That these
loans should only be made at a very high rate of interest This will
operate as a heavy fine on unreasonable timidity, and will prevent
the greatest number of applications by persons who do not require
it. The rate should be raised early in the panic, so that the fine
may be paid early; that no one may borrow out of idle precaution
without paying well for it; that the Banking reserve may be
protected as far as possible.

Secondly. That at this rate these advances should be made on all
good banking securities, and as largely as the public ask for them.
The reason is plain. The object is to stay alarm, and nothing
therefore should be done to cause alarm. But the way to cause alarm
is to refuse some one who has good security to offer. The news of
this will spread in an instant through all the money market at a
moment of terror; no one can say exactly who carries it, but in half
an hour it will be carried on all sides, and will intensify the
terror everywhere. No advances indeed need be made by which the Bank
will ultimately lose. The amount of bad business in commercial
countries is an infinitesimally small fraction of the whole
business. That in a panic the bank, or banks, holding the ultimate
reserve should refuse bad bills or bad securities will not make the
panic really worse; the 'unsound' people are a feeble minority, and
they are afraid even to look frightened for fear their unsoundness
may be detected. The great majority, the majority to be protected,
are the 'sound' people, the people who have good security to offer.
If it is known that the Bank of England is freely advancing on what
in ordinary times is reckoned a good securityon what is then
commonly pledged and easily convertible--the alarm of the solvent
merchants and bankers will be stayed. But if securities, really good
and usually convertible, are refused by the Bank, the alarm will not
abate, the other loans made will fail in obtaining their end, and
the panic will become worse and worse.

It may be said that the reserve in the Banking Department will not
be enough for all such loans. If that be so, the Banking Department
must fail. But lending is, nevertheless, its best expedient. This is
the method of making its money go the farthest, and of enabling it
to get through the panic if anything will so enable it. Making no
loans as we have seen will ruin it; making large loans and stopping,
as we have also seen, will ruin it. The only safe plan for the Bank
is the brave plan, to lend in a panic on every kind of current
security, or every sort on which money is ordinarily and usually
lent. This policy may not save the Bank; but if it do not, nothing
will save it.

If we examine the manner in which the Bank of England has fulfilled
these duties, we shall find, as we found before, that the true
principle has never been grasped; that the policy has been
inconsistent; that, though the policy has much improved, there still
remain important particulars in which it might be better than it is.
The first panic of which it is necessary here to speak, is that of
1825: I hardly think we should derive much instruction from those of
1793 and 1797; the world has changed too much since; and during the
long period of inconvertible currency from 1797 to 1819, the
problems to be solved were altogether different from our present
ones. In the panic of 1825, the Bank of England at first acted as
unwisely as it was possible to act. By every means it tried to
restrict its advances. The reserve being very small, it endeavoured
to protect that reserve by lending as little as possible. The result
was a period of frantic and almost inconceivable violence; scarcely
any one knew whom to trust; credit was almost suspended; the country
was, as Mr. Huskisson expressed it, within twenty-four hours of a
state of barter. Applications for assistance were made to the
Government, but though it was well known that the Government refused
to act, there was not, as far as I know, until lately any authentic
narrative of the real facts. In the 'Correspondence' of the Duke of
Wellington, of all places in the world, there is a full account of
them. The Duke was then on a mission at St. Petersburg, and Sir R.
Peel wrote to him a letter of which the following is a part: 'We
have been placed in a very unpleasant predicament on the other
question--the issue of Exchequer Bills by Government. The feeling of
the City, of many of our friends, of some of the Opposition, was
decidedly in favour of the issue of Exchequer Bills to relieve the
merchants and manufacturers.

'It was said in favour of the issue, that the same measure had been
tried and succeeded in 1793 and 1811. Our friends whispered about
that we were acting quite in a different manner from that in which
Mr. Pitt did act, and would have acted had he been alive.

'We felt satisfied that, however plausible were the reasons urged in
favour of the issue of Exchequer Bills, yet that the measure was a
dangerous one, and ought to be resisted by the Government.

'There are thirty millions of Exchequer Bills outstanding. The
purchases lately made by the Bank can hardly maintain them at par.
If there were a new issue to such an amount as that contemplated
viz., five millions--there would be a great danger that the whole mass
of Exchequer Bills would be at a discount, and would be paid into
the revenue. If the new Exchequer Bills were to be issued at a
different rate of interest from the outstanding onessay bearing an
interest of five per cent--the old ones would be immediately at a
great discount unless the interest were raised. If the interest were
raised, the charge on the revenue would be of course proportionate
to the increase of rate of interest. We found that the Bank had the
power to lend money on deposit of goods. As our issue of Exchequer
Bills would have been useless unless the Bank cashed them, as
therefore the intervention of the Bank was in any event absolutely
necessary, and as its intervention would be chiefly useful by the
effect which it would have in increasing the circulating medium, we
advised the Bank to take the whole affair into their own hands at
once, to issue their notes on the security of goods, instead of
issuing them on Exchequer Bills, such bills being themselves issued
on that security.

'They reluctantly consented, and rescued us from a very embarrassing

The success of the Bank of England on this occasion was owing to its
complete adoption of right principles. The Bank adopted these
principles very late; but when it adopted them it adopted them
completely. According to the official statement which I quoted
before, 'we,' that is, the Bank directors, 'lent money by every
possible means, and in modes which we had never adopted before; we
took in stock on security, we purchased Exchequer Bills, we made
advances on Exchequer Bills, we not only discounted outright, but we
made advances on deposits of bills of Exchange to an immense
amountin short, by every possible means consistent with the safety
of the Bank.' And for the complete and courageous adoption of this
policy at the last moment the directors of the Bank of England at
that time deserve great praise, for the subject was then less
understood even than it is now; but the directors of the Bank
deserve also severe censure, for previously choosing a contrary
policy; for being reluctant to adopt the new one; and for at last
adopting it only at the request of, and upon a joint responsibility
with, the Executive Government.

After 1825, there was not again a real panic in the money market
till 1847. Both of the crises of 1837 and 1839 were severe, but
neither terminated in a panic: both were arrested before the alarm
reached its final intensity; in neither, therefore, could the policy
of the Bank at the last stage of fear be tested.

In the three panics since 1844--in 1847, 1857, and 1866--the policy of
the Bank has been more or less affected by the Act of 1844, and I
cannot therefore discuss it fully within the limits which I have pre
scribed for myself. I can only state two things: First, that the
directors of the Bank above all things maintain, that they have not
been in the earlier stage of pamc prevented by the Act of 1844
from making any advances which they would otherwise have then made.
Secondly, that in the last stage of panic, the Act of 1844 has been
already suspended, rightly or wrongly, on these occasions; that no
similar occasion has ever yet occurred in which it has not been
suspended; and that, rightly or wrongly, the world confidently
expects and relies that in all similar cases it will be suspended
again. Whatever theory may prescribe, the logic of facts seems
peremptory so far. And these principles taken together amount to
saying that, by the doctrine of the directors, the Bank of England
ought, as far as they can, to manage a panic with the Act of 1844,
pretty much as they would manage one without it--in the early stage of
the panic because then they are not fettered, and in the latter
because then the fetter has been removed.

We can therefore estimate the policy of the Bank of England in the
three panics which have happened since the Act of 1844, without
inquiring into the effect of the Act itself. It is certain that in
all of these panics the Bank has made very large advances indeed. It
is certain, too, that in all of them the Bank has been quicker than
it was in 1825; that in all of them it has less hesitated to use its
banking reserve in making the advances which it is one principal
object of maintaining that reserve to make, and to make at once. But
there is still a considerable evil. No one knows on what kind of
securities the Bank of England will at such periods make the
advances which it is necessary to make.

As we have seen, principle requires that such advances, if made at
all for the purpose of curing panic, should be made in the manner
most likely to cure that panic. And for this purpose, they should be
made on everything which in common times is good 'banking security.'
The evil is, that owing to terror, what is commonly good security
has ceased to be so; and the true policy is so to use the Banking
reserve, that if possible the temporary evil may be stayed, and the
common course of business be restored. And this can only be effected
by advancing on all good Banking securities.

Unfortunately, the Bank of England do not take this course. The
Discount office is open for the discount of good bills, and makes
immense advances accordingly. The Bank also advances on consols and
India securities, though there was, in the crisis of 1866, believed
to be for a moment a hesitation in so doing. But these are only a
small part of the securities on which money in ordinary times can be
readily obtained, and by which its repayment is fully secured.
Railway debenture stock is as good a security as a commercial bill,
and many people, of whom I own I am one, think it safer than India
stock; on the whole, a great railway is, we think, less liable to
unforeseen accidents than the strange Empire of India. But I doubt
if the Bank of England in a panic would advance on railway debenture
stock, at any rate no one has any authorised reason for saying that
it would. And there are many other such securities.

The amount of the advance is the main consideration for the Bank of
England, and not the nature of the security on which the advance is
made, always assuming the security to be good. An idea prevails (as
I believe) at the Bank of England that they ought not to advance
during a panic on any kind of security on which they do not commonly
advance. But if bankers for the most part do advance on such
security in common times, and if that security is indisputably good,
the ordinary practice of the Bank of England is immaterial. In
ordinary times the Bank is only one of many lenders, whereas in a
panic it is the sole lender, and we want, as far as we can, to bring
back the unusual state of a time of panic to the common state of
ordinary times.

In common opinion there is always great uncertainty as to the
conduct of the Bank: the Bank has never laid down any clear and
sound policy on the subject. As we have seen, some of its directors
(like Mr. Hankey) advocate an erroneous policy. The public is never
sure what policy will be adopted at the most important moment: it is
not sure what amount of advance will be made, or on what security it
will be made. The best palliative to a panic is a confidence in the
adequate amount of the Bank reserve, and in the efficient use of
that reserve. And until we have on this point a clear understanding
with the Bank of England, both our liability to crises and our
terror at crises will always be greater than they would otherwise


The Government of the Bank of England.

The Bank of England is governed by a board of directors, a Governor,
and a Deputy-Governor; and the mode in which these are chosen, and
the time for which they hold office, affect the whole of its
business. The board of directors is in fact self-electing. In theory
a certain portion go out annually, remain out for a year, and are
subject to re-election by the proprietors. But in fact they are
nearly always, and always if the other directors wish it, re-elected
after a year. Such has been the unbroken practice of many years, and
it would be hardly possible now to break it. When a vacancy occurs
by death or resignation, the whole board chooses the new member, and
they do it, as I am told, with great care. For a peculiar reason, it
is important that the directors should be young when they begin; and
accordingly the board run over the names of the most attentive and
promising young men in the old-established firms of London, and
select the one who, they think, will be most suitable for a bank
director. There is a considerable ambition to fill the office. The
status which is given by it, both to the individual who fills it and
to the firm of merchants to which he belongs, is considerable. There
is surprisingly little favour shown in the selection; there is a
great wish on the part of the Bank directors for the time being to
provide, to the best of their ability, for the future good
government of the Bank. Very few selections in the world are made
with nearly equal purity. There is a sincere desire to do the best
for the Bank, and to appoint a well-conducted young man who has
begun to attend to business, and who seems likely to be fairly
sensible and fairly efficient twenty years later.

The age is a primary matter. The offices of Governor and
Deputy-Governor are given in rotation. The Deputy-Governor always
succeeds the Governor, and usually the oldest director who has not
been m office becomes Deputy-Governor. Sometimes, from personal
reasons, such as ill-health or special temporary occupation, the
time at which a director becomes Deputy-Governor may be a little
deferred, and, in some few cases, merchants in the greatest business
have been permitted to decline entirely. But for all general
purposes, the rule may be taken as absolute. Save in rare cases, a
director must serve his time as Governor and Deputy-Governor nearly
when his turn comes, and he will not be asked to serve much before
his turn. It is usually about twenty years from the time of a man's
first election that he arrives, as it is called, at the chair. And
as the offices of Governor and Deputy-Governor are very important, a
man who fills them should be still in the vigour of life.
Accordingly, Bank directors, when first chosen by the board, are
always young men.

At first this has rather a singular effect; a stranger hardly knows
what to make of it. Many years since, I remember seeing a very fresh
and nice-looking young gentleman, and being struck with astonishment
at being told that he was a director of the Bank of England. I had
always imagined such directors to be men of tried sagacity and long
experience, and I was amazed that a cheerful young man should be one
of them. I believe I thought it was a little dangerous. I thought
such young men could not manage the Bank well. I feared they had the
power to do mischief.

Further inquiry, however, soon convinced me that they had not the
power. Naturally, young men have not much influence at a board where
there, are many older members. And in the Bank of England there is a
special provision for depriving them of it if they get it. Some of
the directors, as I have said, retire annually, but by courtesy it
is always the young ones. Those who have passed the chair--that is,
who have served the office of Governor--always remain. The young part
of the board is the fluctuating part, and the old part is the
permanent part; and therefore it is not surprising that the young
part has little influence. The Bank directors may be blamed for many
things, but they cannot be blamed for the changeableness and
excitability of a neocracy.

Indeed, still better to prevent it, the elder members of the board
that is, those who have passed the chairform a standing committee of
indefinite powers, which is called the Committee of Treasury. I say
'indefinite powers,' for I am not aware that any precise description
has ever been given of them, and I doubt if they can be precisely
described. They are sometimes said to exercise a particular control
over the relations and negotiations between the Bank and the
Government. But I confess that I believe that this varies very much
with the character of the Governor for the time being. A strong
Governor does much mainly upon his own responsibility, and a weak
Governor does little. Still the influence of the Committee of
Treasury is always considerable, though not always the same. They
form a a cabinet of mature, declining, and old men, just close to
the executive; and for good or evil such a cabinet must have much

By old usage, the directors of the Bank of England cannot be
themselves by trade bankers. This is a relic of old times. Every
bank was supposed to be necessarily, more or less, in opposition to
every other bankbanks in the same place to be especially in
opposition. In consequence, in London, no banker has a chance of
being a Bank director, or would ever think of attempting to be one.
I am here speaking of bankers in the English sense, and in the sense
that would surprise a foreigner. One of the Rothschilds is on the
Bank direction, and a foreigner would be apt to think that they were
bankers if any one was. But this only illustrates the essential
difference between our English notions of banking and the
continental. Ours have attained a much fuller development than
theirs. Messrs. Rothschild are immense capitalists, having,
doubtless, much borrowed money in their hands. But they do not take
100 L. payable on demand, and pay it back in cheques of 5 L. each,
and that is our English banking. The borrowed money which they have
is in large sums, borrowed for terms more or less long. English
bankers deal with an aggregate of small sums, all of which are
repayable on short notice, or on demand. And the way the two employ
their money is different also. A foreigner thinks 'an Exchange
business'that is, the buying and selling bills on foreign countriesa
main part of banking. As I have explained, remittance is one of the
subsidiary conveniences which early banks subserve before deposit
banking begins. But the mass of English country bankers only give
bills on places in England or on London, and in London the principal
remittance business has escaped out of the hands of the bankers.
Most of them would not know how to carry through a great 'Exchange
operation,' or to 'bring home the returns.' They would as soon think
of turning silk merchants. The Exchange trade is carried on by a
small and special body of foreign bill-brokers, of whom Messrs.
Rothschild are the greatest. One of that firm may, therefore, well
be on the Bank direction, notwithstanding the rule forbidding
bankers to be there, for he and his family are not English bankers,
either by the terms on which they borrow money, or the mode in which
they employ it. But as to bankers in the English sense of the word,
the rule is rigid and absolute. Not only no private banker is a
director of the Bank of England, but no director of any joint stock
bank would be allowed to become such. The two situations would be
taken to be incompatible.

The mass of the Bank directors are merchants of experience,
employing a considerable capital in trades in which they have been
brought up, and with which they are well acquainted. Many of them
have information as to the present course of trade, and as to the
character and wealth of merchants, which is most valuable, or rather
is all but invaluable, to the Bank. Many of them, too, are quiet,
serious men, who, by habit and nature, watch with some kind of care
every kind of business in which they are engaged, and give an
anxious opinion on it. Most of them have a good deal of leisure, for
the life of a man of business who employs only his own capital, and
employs it nearly always in the same way, is by no means fully
employed. Hardly any capital is enough to employ the principal
partner's time, and if such a man is very busy, it is a sign of
something wrong. Either he is working at detail, which subordinates
would do better, and which he had better leave alone, or he is
engaged in too many speculations, is incurring more liabilities than
his capital will bear, and so may be ruined. In consequence, every
commercial city abounds in men who have great business ability and
experience, who are not fully occupied, who wish to be occupied, and
who are very glad to become directors of public companies in order
to be occupied. The direction of the Bank of England has, for many
generations, been composed of such men.

Such a government for a joint stock company is very good if its
essential nature be attended to, and very bad if that nature be not
attended to. That government is composed of men with a high average
of general good sense, with an excellent knowledge of business in
general, but without any special knowledge of the particular
business in which they are engaged. Ordinarily, in joint stock banks
and companies this deficiency is cured by the selection of a manager
of the company, who has been specially trained to that particular
trade, and who engages to devote all his experience and all his
ability to the affairs of the company. The directors, and often a
select committee of them more especially, consult with the manager,
and after hearing what he has to say, decide on the affairs of the
company. There is in all ordinary joint stock companies a fixed
executive specially skilled, and a somewhat varying council not
specially skilled. The fixed manager ensures continuity and
experience in the management, and a good board of directors ensures
general wisdom.

But in the Bank of England there is no fixed executive. The Governor
and Deputy-Governor, who form that executive, change every two
years. I believe, indeed, that such was not the original intention
of the founders. In the old days of few and great privileged
companies, the chairman, though periodically elected, was
practically permanent so long as his policy was popular. He was the
head of the ministry, and ordinarily did not change unless the
opposition came in. But this idea has no present relation to the
constitution of the Bank of England. At present, the Governor and
Deputy-Governor almost always change at the end of two years; the
case of any longer occupation of the chair is so very rare, that it
need not be taken account of. And the Governor and Deputy-Governor
of the Bank cannot well be shadows. They are expected to be
constantly present; to see all applicants for advances out of the
ordinary routine; to carry on the almost continuous correspondence
between the Bank and its largest customer--the Government; to bring
all necessary matters before the board of directors or the Committee
of Treasury, in a word, to do very much of what falls to the lot of
the manager in most companies. Under this shifting chief executive,
there are indeed very valuable heads of departments. The head of the
Discount Department is especially required to be a man of ability
and experience. But these officers are essentially subordinate; no
one of them is like the general manager of an ordinary bankthe head
of all action. The perpetually present executive--the Governor and
Deputy-Governor--make it impossible that any subordinate should have
that position. A really able and active-minded Governor, being
required to sit all day in the bank, in fact does, and can hardly
help doing, its principal business.

In theory, nothing can be worse than this government for a bank a
shifting executive; a board of directors chosen too young for it to
be known whether they are able; a committee of management, in which
seniority is the necessary qualification, and old age the common
result; and no trained bankers anywhere.

Even if the Bank of England were an ordinary bank, such a
constitution would be insufficient; but its inadequacy is greater,
and the consequences of that inadequacy far worse, because of its
greater functions. The Bank of England has to keep the sole banking
reserve of the country; has to keep it through all changes of the
money market, and all turns of the Exchanges; has to decide on the
instant in a panic what sort of advances should be made, to what
amounts, and for what dates; and yet it has a constitution plainly
defective. So far the government of the Bank of England being better
than that of any other bankas it ought to be, considering that its
functions are much harder and graver--any one would be laughed at who
proposed it as a model for the government of a new bank; and that
government, if it were so proposed, would on all hands be called
old-fashioned, and curious.

As was natural, the effects--good and evil--of its constitution are
to be seen in every part of the Bank's history. On one vital point
the Bank's management has been excellent. It has done perhaps less
'bad business,' certainly less very bad business, than any bank of
the same size and the same age. In all its history I do not know
that its name has ever been connected with a single large and
discreditable bad debt. There has never been a suspicion that it was
'worked' for the benefit of any one man, or any combination of men.
The great respectability of the directors, and the steady attention
many of them have always given the business of the Bank, have kept
it entirely free from anything dishonorable and discreditable.
Steady merchants collected in council are an admirable judge of
bills and securities. They always know the questionable standing of
dangerous persons; they are quick to note the smallest signs of
corrupt transactions; and no sophistry will persuade the best of
them out of their good instincts. You could not have made the
directors of the Bank of England do the sort of business which
'Overends' at last did, except by a moral miracle--except by
changing their nature. And the fatal career of the Bank of the
United States would, under their management, have been equally
impossible. Of the ultimate solvency of the Bank of England, or of
the eventual safety of its vast capital, even at the worst periods
of its history, there has not been the least doubt.

But nevertheless, as we have seen, the policy of the Bank has
frequently been deplorable, and at such times the defects of its
government have aggravated if not caused its calamities.

In truth the executive of the Bank of England is now much such as
the executive of a public department of the Foreign Office or the
Home Office would be in which there was no responsible permanent
head. In these departments of Government, the actual chief changes
nearly, though not quite, as often as the Governor of the Bank of
England. The Parliamentary Under-Secretary--the Deputy-Governor, so to
speak, of that office--changes nearly as often. And if the
administration solely, or in its details, depended on these two, it
would stop. New men could not carry it on with vigour and
efficiency; indeed they could not carry it on at all. But, in fact,
they are assisted by a permanent Under-Secretary, who manages all
the routine business, who is the depository of the secrets of the
office, who embodies its traditions, who is the hyphen between
changing administrations. In consequence of this assistance, the
continuous business of the department is, for the most part, managed
sufficiently well, notwithstanding frequent changes in the heads of
administration. And it is only by such assistance that such business
could be so managed. The present administration of the Bank is an
attempt to manage a great, a growing, and a permanently continuous
business without an adequate permanent element, and a competent
connecting link.

In answer, it may be said that the duties which press on the
Governor and Deputy-Governor of the Bank are not so great or so
urgent as those which press upon the heads of official departments.
And perhaps, in point of mere labour, the Governor of the Bank has
the advantage. Banking never ought to be an exceedingly laborious
trade. There must be a great want of system and a great deficiency
in skilled assistance if extreme labour is thrown upon the chief.
But in importance, the functions of the head of the Bank rank as
high as those of any department. The cash reserve of the country is
as precious a deposit as any set of men can have the care of. And
the difficulty of dealing with a panic (as the administration of the
Bank is forced to deal with it) is perhaps a more formidable instant
difficulty than presses upon any single minister. At any rate, it
comes more suddenly, and must be dealt with more immediately, than
most comparable difficulties; and the judgment, the nerve, and the
vigour needful to deal with it are plainly rare and great.

The natural remedy would be to appoint a permanent Governor of the
Bank. Nor, as I have said, can there be much doubt that such was the
intention of its founders. All the old companies which have their
beginning in the seventeenth century had the same constitution, and
those of them which have lingered down to our time retain it. The
Hudson's Bay Company, the South Sea Company, the East India Company,
were all founded with a sort of sovereign executive, intended to be
permanent, and intended to be efficient. This is, indeed, the most
natural mode of forming a company in the minds of those to whom
companies are new. Such persons will have always seen business
transacted a good deal despotically; they will have learnt the value
of prompt decision and of consistent policy; they will have often
seen that business is best managed when those who are conducting it
could scarcely justify the course they are pursuing by distinct
argument which others could understand. All 'city' people make their
money by investments, for which there are often good argumentative
reasons; but they would hardly ever be able, if required before a
Parliamentary committee, to state those reasons. They have become
used to act on them without distinctly analysing them, and, in a
monarchical way, with continued success only as a test of their
goodness. Naturally such persons, when proceeding to form a company,
make it upon the model of that which they have been used to see
successful. They provide for the executive first and above all
things. How much this was in the minds of the founders of the Bank
of England may be judged of by the name which they gave it. Its
corporate name is the 'Governor and Company of the Bank of England.'
So important did the founders think the executive that they
mentioned it distinctly, and mentioned it first.

And not only is this constitution of a company the most natural in
the early days when companies were new, it is also that which
experience has shown to be the most efficient now that companies
have long been tried. Great railway companies are managed upon no
other. Scarcely any instance of great success in a railway can be
mentioned in which the chairman has not been an active and judicious
man of business, constantly attending to the affairs of the company.
A thousand instances of railway disaster can be easily found in
which the chairman was only a nominal heada nobleman, or something
of that sort-chosen for show. 'Railway chairmanship' has become a
profession, so much is efficiency valued in it, and so indispensable
has ability been found to be. The plan of appointing a permanent
'chairman' at the Bank of England is strongly supported by much
modern experience.

Nevertheless, I hesitate as to its expediency; at any rate, there
are other plans which, for several reasons, should, I think, first
be tried in preference.

First. This plan would be exceedingly unpopular. A permanent
Governor of the Bank of England would be one of the greatest men in
England. He would be a little 'monarch' in the City; he would be far
greater than the 'Lord Mayor.' He would be the personal embodiment
of the Bank of England; he would be constantly clothed with an
almost indefinite prestige. Everybody in business would bow down
before him and try to stand well with him, for he might in a panic
be able to save almost anyone he liked, and to ruin almost anyone he
liked. A day might come when his favour might mean prosperity, and
his distrust might mean ruin. A position with so much real power and
so much apparent dignity would be intensely coveted. Practical men
would be apt to say that it was better than the Prime Ministership,
for it would last much longer, and would have a greater jurisdiction
over that which practical men would most value, over money. At all
events, such a Governor, if he understood his business, might make
the fortunes of fifty men where the Prime Minister can make that of
one. Scarcely anything could be more unpopular in the City than the
appointment of a little king to reign over them.

Secondly. I do not believe that we should always get the best man
for the post; often I fear that we should not even get a tolerable
man. There are many cases in which the offer of too high a pay would
prevent our obtaining the man we wish for, and this is one of them.
A very high pay of prestige is almost always very dangerous. It
causes the post to be desired by vain men, by lazy men, by men of
rank; and when that post is one of real and technical business, and
when, therefore, it requires much previous training, much continuous
labour, and much patient and quick judgment, all such men are
dangerous. But they are sure to covet all posts of splendid dignity,
and can only be kept out of them with the greatest difficulty.
Probably, in every Cabinet there are still some members (in the days
of the old close boroughs there were many) whose posts have come to
them not from personal ability or inherent merit, but from their
rank, their wealth, or even their imposing exterior. The highest
political offices are, indeed, kept clear of such people, for in
them serious and important duties must constantly be performed in
the face of the world. A Prime Minister, or a Chancellor of the
Exchequer, or a Secretary of State must explain his policy and
defend his actions in Parliament, and the discriminating tact of a
critical assemblyabounding in experience, and guided by
traditionwill soon discover what he is. But the Governor of the Bank
would only perform quiet functions, which look like routine, though
they are not, m which there is no immediate risk of success or
failure; which years hence may indeed issue in a crop of bad debts,
but which any grave persons may make at the time to look fair and
plausible. A large Bank is exactly the place where a vain and
shallow person in authority, if he be a man of gravity and method,
as such men often are, may do infinite evil in no long time, and
before he is detected. If he is lucky enough to begin at a time of
expansion in trade, he is nearly sure not to be found out till the
time of contraction has arrived, and then very large figures will be
required to reckon the evil he has done.

And thirdly, I fear that the possession of such patronage would ruin
any set of persons in whose gift it was. The election of the
Chairman must be placed either in the court of proprietors or that
of the directors. If the proprietors choose, there will be something
like the evils of an American presidential election. Bank stock will
be bought in order to confer the qualification of voting at the
election of the 'chief of the City.' The Chairman, when elected, may
well find that his most active supporters are large borrowers of the
Bank, and he may well be puzzled to decide between his duty to the
Bank and his gratitude to those who chose him. Probably, if he be a
cautious man of average ability, he will combine both evils; he will
not lend so much money as he is asked for, and so will offend his
own supporters; but will lend some which will be lost, and so the
profits of the Bank will be reduced. A large body of Bank
proprietors would make but a bad elective body for an office of
great prestige; they would not commonly choose a good person, and
the person they did choose would be bound by promises that would
make him less good.

The court of directors would choose better; a small body of men of
business would not easily be persuaded to choose an extremely unfit
man. But they would not often choose an extremely good man. The
really best man would probably not be so rich as the majority of the
directors, nor of so much standing, and not unnaturally they would
much dislike to elevate to the headship of the City, one who was
much less in the estimation of the City than themselves. And they
would be canvassed in every way and on every side to appoint a man
of mercantile dignity or mercantile influence. Many people of the
greatest prestige and rank in the City would covet so great a
dignity; if not for themselves, at least for some friend, or some
relative, and so the directors would be set upon from every side.

An election so liable to be disturbed by powerful vitiating causes
would rarely end in a good choice. The best candidate would almost
never be chosen; often, I fear, one would be chosen altogether unfit
for a post so important. And the excitement of so keen an election
would altogether disturb the quiet of the Bank. The good and
efficient working of a board of Bank directors depends on its
internal harmony, and that harmony would be broken for ever by the
excitement, the sayings, and the acts of a great election. The board
of directors would almost certainly be demoralised by having to
choose a sovereign, and there is no certainty, nor any great
likelihood, indeed, that they would choose a good one. In France the
difficulty of finding a good body to choose the Governor of the Bank
has been met characteristically. The Bank of France keeps the money
of the State, and the State appoints its governor. The French have
generally a logical reason to give for all they do, though perhaps
the results of their actions are not always so good as the reasons
for them. The Governor of the Bank of France has not always, I am
told, been a very competent person; the Sub-Governor, whom the State
also appoints, is, as we might expect, usually better. But for our
English purposes it would be useless to inquire minutely into this.
No English statesman would consent to be responsible for the choice
of the Governor of the Bank of England. After every panic, the
Opposition would say in Parliament that the calamity had been
'grievously aggravated,' if not wholly caused, by the 'gross
misconduct' of the Governor appointed by the ministry. Or, possibly,
offices may have changed occupants and the ministry in power at the
panic would be the opponents of the ministry which at a former time
appointed the Governor. In that case they would be apt to feel, and
to intimate, a 'grave regret' at the course which the nominee of
their adversaries had 'thought it desirable to pursue.' They would
not much mind hurting his feelings, and if he resigned they would
have themselves a valuable piece of patronage to confer on one of
their own friends. No result could be worse than that the conduct of
the Bank and the management should be made a matter of party
politics, and men of all parties would agree in this, even if they
agreed in almost nothing else.

I am therefore afraid that we must abandon the plan of improving the
government of the Bank of England by the appointment of a permanent
Governor, because we should not be sure of choosing a good governor,
and should indeed run a great risk, for the most part, of choosing a
bad one.

I think, however, that much of the advantage, with little of the
risk, might be secured by a humbler scheme. In English political
offices, as was observed before, the evil of a changing head is made
possible by the permanence of a dignified subordinate. Though the
Parliamentary Secretary of State and the Parliamentary
Under-Secretary go in and out with each administration, another
Under-Secretary remains through all such changes, and is on that
account called 'permanent.' Now this system seems to me in its
principle perfectly applicable to the administration of the Bank of
England. For the reasons which have just been given, a permanent
ruler of the Bank of England cannot be appointed; for other reasons,
which were just before given, some most influential permanent
functionary is essential in the proper conduct of the business of
the Bank; and, mutatis mutandis, these are the very difficulties,
and the very advantages which have led us to frame our principal
offices of state in the present fashion.

Such a Deputy-Governor would not be at all a 'king' in the City.
There would be no mischievous prestige about the office; there would
be no attraction in it for a vain man; and there would be nothing to
make it an object of a violent canvass or of unscrupulous
electioneering. The office would be essentially subordinate in its
character, just like the permanent secretary in a political office.
The pay should be high, for good ability is wanted--but no pay would
attract the most dangerous class of people. The very influential,
but not very wise, City dignitary who would be so very dangerous is
usually very opulent; he would hardly have such influence he were
not opulent: what he wants is not money, but 'position.' A
Governorship of the Bank of England he would take almost without
salary; perhaps he would even pay to get it: but a minor office of
essential subordination would not attract him at all. We may augment
the pay enough to get a good man, without fearing that by such pay
we may temptas by social privilege we should temptexactly the sort
of man we do not want.

Undoubtedly such a permanent official should be a trained banker.
There is a cardinal difference between banking and other kinds of
commerce; you can afford to run much less risk in banking than in
commerce, and you must take much greater precautions. In common
business, the trader can add to the cost price of the goods he sells
a large mercantile profit, say 10 to 15 per cent; but the banker has
to be content with the interest of money, which in England is not so
much as per cent upon the average. The business of a banker
therefore cannot bear so many bad debts as that of a merchant, and
he must be much more cautious to whom he gives credit. Real money is
a commodity much more coveted than common goods: for one deceit
which is attempted on a manufacturer or a merchant, twenty or more
are attempted on a banker. And besides, a banker, dealing with the
money of others, and money payable on demand, must be always, as it
were, looking behind him and seeing that he has reserve enough in
store if payment should be asked for, which a merchant dealing
mostly with his own capital need not think of. Adventure is the life
of commerce, but caution, I had almost said timidity, is the life of
banking; and I cannot imagine that the long series of great errors
made by the Bank of England in the management of its reserve till
after 1857, would have been possible if the merchants in the Bank
court had not erroneously taken the same view of the Bank's business
that they must properly take of their own mercantile business. The
Bank directors have almost always been too cheerful as to the Bank's
business, and too little disposed to take alarm. What we want to
introduce into the Bank court is a wise apprehensiveness, and this
every trained banker is taught by the habits of his trade, and the
atmosphere of his life.

The permanent Governor ought to give his whole time to the business
of the Bank. He ought to be forbidden to engage in any other
concern. All the present directors, including the Governor and
Deputy-Governor, are engaged in their own business, and it is very
possible, indeed it must perpetually have happened, that their own
business as merchants most occupied the minds of most of them just
when it was most important that the business of the Bank should
occupy them. It is at a panic and just before a panic that the
business of the Bank is most exacting and most engrossing. But just
at that time the business of most merchants must be unusually
occupying and may be exceedingly critical. By the present
constitution of the Bank, the attention of its sole rulers is most
apt to be diverted from the Bank's affairs just when those affairs
require that attention the most. And the only remedy is the
appointment of a permanent and influential man, who will have no
business save that of the Bank, and who therefore presumably will
attend most to it at the critical instant when attention is most
required. His mind, at any rate, will in a panic be free from
pecuniary anxiety, whereas many, if not all, of the present
directors must be incessantly thinking of their own affairs and
unable to banish them from their minds.

The permanent Deputy-Governor must be a director and a man of fair
position. He must not have to say 'Sir' to the Governor. There is no
fair argument between an inferior who has to exhibit respect and a
superior who has to receive respect. The superior can always, and
does mostly, refute the bad arguments of his inferior; but the
inferior rarely ventures to try to refute the bad arguments of his
superior. And he still more rarely states his case effectually; he
pauses, hesitates, does not use the best word or the most apt
illustration, perhaps he uses a faulty illustration or a wrong word,
and so fails because the superior immediately exposes him. Important
business can only be sufficiently discussed by persons who can say
very much what they like very much as they like to one another. The
thought of the speaker should come out as it was in his mind, and
not be hidden in respectful expressions or enfeebled by affected
doubt. What is wanted at the Bank is not a new clerk to the
directors, they have excellent clerks of great experience nowbut a
permanent equal to the directors, who shall be able to discuss on
equal terms with them the business of the Bank, and have this
advantage over them in discussion, that he has no other business
than that of the Bank to think of.

The formal duties of such a permanent officer could only be defined
by some one conversant with the business of the Bank, and could
scarcely be intelligibly discussed before the public. Nor are the
precise duties of the least importance. Such an officer, if sound,
able, and industrious, would soon rule the affairs of the Bank. He
would be acquainted better than anyone else, both with the
traditions of the past and with the facts of the present; he would
have a great experience; he would have seen many anxious times; he
would always be on the watch for their recurrence. And he would have
a peculiar power of guidance at such moments from the nature of the
men with whom he has most to deal. Most Governors of the Bank of
England are cautious merchants, not profoundly skilled in banking,
but most anxious that their period of office should be prosperous
and that they should themselves escape censure. If a 'safe' course
is pressed upon them they are likely to take that course. Now it
would almost always be 'safe' to follow the advice of the great
standing 'authority'; it would always be most 'unsafe' not to follow
it. If the changing Governor act on the advice of the permanent
Deputy-Governor, most of the blame in case of mischance would fall
on the latter; it would be said that a shifting officer like the
Governor might very likely not know what should be done, but that
the permanent official was put there to know it and paid to know it.
But if, on the other hand, the changing Governor should disregard
the advice of his permanent colleague, and the consequence should be
bad, he would be blamed exceedingly. It would be said that, 'being
without experience, he had taken upon him to overrule men who had
much experience; that when the constitution of the Bank had provided
them with skilled counsel, he had taken on himself to act of his own
head, and to disregard that counsel;' and so on ad infinitum. And
there could be no sort of conversation more injurious to a man in
the City; the world there would say, rightly or wrongly, 'We must
never be too severe on errors of judgment; we are all making them
every day; if responsible persons do their best we can expect no
more. But this case is different: the Governor acted on a wrong
system; he took upon himself an unnecessary responsibility:' and so
a Governor who incurred disaster by disregarding his skilled
counsellor would be thought a fool in the City for ever. In
consequence, the one skilled counsellor would in fact rule the Bank.
I believe that the appointment of the new permanent and skilled
authority at the Bank is the greatest reform which can be made
there, and that which is most wanted. I believe that such a person
would give to the decision of the Bank that foresight, that
quickness, and that consistency m which those decisions are
undeniably now deficient. As far as I can judge, this change in the
constitution of the Bank is by far the most necessary, and is
perhaps more important even than all other changes. But,
nevertheless, we should reform the other points which we have seen
to be defective.

First, the London bankers should not be altogether excluded from the
court of directors. The old idea, as I have explained, was that the
London bankers were the competitors of the Bank of England, and
would hurt it if they could. But now the London bankers have another
relation to the Bank which did not then exist, and was not then
imagined. Among private people they are the principal depositors in
the Bank; they are therefore particularly interested in its
stability; they are especially interested in the maintenance of a
good banking reserve, for their own credit and the safety of their
large deposits depend on it. And they can bring to the court of
directors an experience of banking itself, got outside the Bank of
England, which none of the present directors possess, for they have
learned all they know of banking at the Bank itself. There was also
an old notion that the secrets of the Bank would be divulged if they
were imparted to bankers. But probably bankers are better trained to
silence and secrecy than most people. And there is only a thin
partition now between the bankers and the secrets of the Bank. Only
lately a firm failed of which one partner was a director of the
London and Westminster Bank, and another a director of the Bank of
England. Who can define or class the confidential communications of
such persons under such circumstances?

As I observed before, the line drawn at present against bankers is
very technical and exclusively English. According to continental
ideas, Messrs. Rothschild are bankers, if any one is a banker. But
the house of Rothschild is represented on the Bank direction. And it
is most desirable that it should be represented, for members of that
firm can give if they choose confidential information of great value
to the Bank. But, nevertheless, the objection which is urged against
English bankers is at least equally applicable to these foreign
bankers. They have, or may have, at certain periods an interest
opposite to the policy of the Bank. As the greatest Exchange
dealers, they may wish to export gold just when the Bank of England
is raising its rate of interest to prevent anyone from exporting
gold. The vote of a great Exchange dealer might be objected to for
plausible reasons of contrary interest, if any such reasons were
worth regarding. But in fact the particular interest of single
directors is not to be regarded; almost all directors who bring
special information labour under a suspicion of interest; they can
only have acquired that information in present business, and such
business may very possibly be affected for good or evil by the
policy of the Bank. But you must not on this account seal up the
Bank hermetically against living information; you must make a fair
body of directors upon the whole, and trust that the bias of some
individual interests will disappear and be lost in the whole. And if
this is to be the guiding principle, it is not consistent to exclude
English bankers from the court.

Objection is often also taken to the constitution of the Committee
of Treasury. That body is composed of the Governor and
Deputy-Governor and all the directors who have held those offices;
but as those offices in the main pass in rotation, this mode of
election very much comes to an election by seniority, and there are
obvious objections to giving, not only a preponderance to age, but a
monopoly to age. In some cases, indeed, this monopoly I believe has
already been infringed. When directors have on account of the
magnitude of their transactions, and the consequent engrossing
nature of their business, declined to fill the chair, in some cases
they have been asked to be members of the Committee of Treasury
notwithstanding. And it would certainly upon principle seem wiser to
choose a committee which for some purposes approximates to a
committee of management by competence rather than by seniority.

An objection is also taken to the large number of Bank directors.
There are twenty-four directors, a Governor and a Deputy-Governor,
making a total court of twenty-six persons, which is obviously too
large for the real discussion of any difficult business. And the
case is worse because the court only meets once a week, and only
sits a very short time. It has been said, with exaggeration, but not
without a basis of truth, that if the Bank directors were to sit for
four hours, there would be 'a panic solely from that.' 'The court,'
says Mr. Tooke, 'meets at half-past eleven or twelve; and, if the
sitting be prolonged beyond half-past one, the Stock Exchange and
the money market become excited, under the idea that a change of
importance is under discussion; and persons congregate about the
doors of the Bank parlour to obtain the earliest intimation of the
decision.' And he proceeds to conjecture that the knowledge of the
impatience without must cause haste, if not impatience, within. That
the decisions of such a court should be of incalculable importance
is plainly very strange.

There should be no delicacy as to altering the constitution of the
Bank of England. The existing constitution was framed in times that
have passed away, and was intended to be used for purposes very
different from the present. The founders may have considered that it
would lend money to the Government, that it would keep the money of
the Government, that it would issue notes payable to bearer, but
that it would keep the 'Banking reserve' of a great nation no one in
the seventeenth century imagined. And when the use to which we are
putting an old thing is a new use, in common sense we should think
whether the old thing is quite fit for the use to which we are
setting it. 'Putting new wine into old bottles' is safe only when
you watch the condition of the bottle, and adapt its structure most


The Joint Stock Banks.

The Joint Stock Banks of this country are a most remarkable success.
Generally speaking the career of Joint Stock Companies in this
country has been chequered. Adam Smith, many years since, threw out
many pregnant hints on the difficulty of such undertakings--hints
which even after so many years will well repay perusal. But joint
stock banking has been an exception to this rule. Four years ago I
threw together the facts on the subject and the reasons for them;
and I venture to quote the article, because subsequent experience
suggests, I think, little to be added to it.

'The main classes of joint stock companies which have answered are
three:--1st. Those in which the capital is used not to work the
business but to guarantee the business. Thus a banker's business--his
proper business--does not begin while he is using his own money: it
commences when he begins to use the capital of others. An insurance
office in the long run needs no capital; the premiums which are
received ought to exceed the claims which accrue. In both cases, the
capital is wanted to assure the public and to induce it to trust the
concern. 2ndly. Those companies have answered which have an
exclusive privilege which they have used with judgment, or which
possibly was so very profitable as to enable them to thrive with
little judgment. 3rdly. Those which have undertaken a business both
large and simple--employing more money than most individuals or
private firms have at command, and yet such that, in Adam Smith's
words, 'the operations are capable of being reduced to a routine or
such an uniformity of method as admits of no variation."

'As a rule, the most profitable of these companies are banks.
Indeed, all the favouring conditions just mentioned concur in many
banks. An old-established bank has a "prestige," which amounts to a
"privileged opportunity"; though no exclusive right is given to it
by law, a peculiar power is given to it by opinion. The business of
banking ought to be simple; if it is hard it is wrong. The only
securities which a banker, using money that he may be asked at short
notice to repay, ought to touch, are those which are easily saleable
and easily intelligible. If there is a difficulty or a doubt, the
security should be declined. No business can of course be quite
reduced to fixed rules. There must be occasional cases which no
pre-conceived theory can define. But banking comes as near to fixed
rules certainly as any existing business, perhaps as any possible
business. The business of an old-established bank has the full
advantage of being a simple business, and in part the advantage of
being a monopoly business. Competition with it is only open in the
sense in which competition with "the London Tavern" is open; anyone
that has to do with either will pay dear for it.

'But the main source of the profitableness of established banking is
the smallness of the requisite capital. Being only wanted as a
"moral influence," it need not be more than is necessary to secure
that influence. Although, therefore, a banker deals only with the
most sure securities, and with those which yield the least interest,
he can nevertheless gain and divide a very large profit upon his own
capital, because the money in his hands is so much larger than that

'Experience, as shown by plain figures, confirms these conclusions.
We print at the end of this article the respective profits of 110
banks in England, and Scotland, and Ireland, being all in those
countries of which we have sufficient information--the Bank of England
excepted. There are no doubt others, but they are not quoted even on
local Stock Exchange lists, and in most cases publish no reports.
The result of these banks, as regards the dividends they pay, is--

No. of Companies Capital L
Above 20 per cent 15 5,302,767
Between 15 and 20 per cent 20 5,439,439
10 and 15 per cent 36 14,056,950
5 and 10 per cent 36 14,182,379
Under 5 per cent 3 1,350,000
110 40,331,535

that is to say, above 25 per cent of the capital employed in these
banks pays over 15 per cent, and 62 1/2 per cent of the capital pays
more than 10 per cent. So striking a result is not to be shown in
any other joint stock trade.

'The period to which these accounts refer was certainly not a
particularly profitable oneon the contrary, it has been specially
unprofitable. The rate of interest has been very low, and the amount
of good security in the market small. Many banks--to some extent most
banks--probably had in their books painful reminiscences of 1866. The
fever of excitement which passed over the nation was strongest in
the classes to whom banks lent most, and consequently the losses of
even the most careful banks (save of those in rural and sheltered
situations) were probably greater than usual. But even tried by this
very unfavourable test banking is a trade profitable far beyond the
average of trades.

'There is no attempt in these banks on the whole and as a rule to
divide too muchon the contrary, they have accumulated about
13,000,000 L., or nearly 1/3 rd of their capital, principally out of
undivided profits. The directors of some of them have been anxious
to put away as much as possible and to divide as little as possible.

'The reason is plain; out of the banks which pay more than 20 per
cent, all but one were old-established banks, and all those paying
between 15 and 20 per cent were old banks too. The "privileged
opportunity" of which we spoke is singularly conspicuous in such
figures; it enables banks to pay much, which without it would not
have paid much. The amount of the profit is clearly proportional to
the value of the "privileged opportunity." All the banks which pay
above 20 per cent, save one, are banks more than 25 years old; all
those which pay between 15 and 20 are so too. A new bank could not
make these profits, or even by its competition much reduce these
profits; in attempting to do so, it would simply ruin itself. Not
possessing the accumulated credit of years, it would have to wind up
before it attained that credit.

'The value of the opportunity too is proportioned to what has to be
paid for it. Some old banks have to pay interest for all their
money; some have much for which they pay nothing. Those who give
much to their customers have of course less left for their
shareholders. Thus Scotland, where there is always a daily interest,
has no bank in the lists paying over 15 per cent. The profits of
Scotch banks run thus:

Capital L Dividend
Bank of Scotland 1,500,000 12
British Linen Company 1,000,000 3
Caledonian 125,000 10
Clydesdale 900,000 10
Commercial Bank of Scotland 1,000,000 13
National Bank of Scotland 1,000,000 112
North of Scotland 280,000 10
Union Bank of Scotland 1,000,000 10
City of Glasgow 870,000 8
Royal Bank 2,000,000 8

Good profits enough, but not at all like the profits of the London
and Westminster, or the other most lucrative banks of the South.

'The Bank of England, it is true, does not seem to pay so much as
other English banks in this way of reckoning. It makes an immense
profit, but then its capital is immense too. In fact, the Bank of
England suffers under two difficulties. Being much older than the
other joint stock banks, it belongs to a less profitable era. When
it was founded, banks looked rather to the profit on their own
capital, and to the gains of note issue than to the use of deposits.
The first relations with the State were more like those of a finance
company than of a bank, as we now think of banking. If the Bank had
not made loans to the Government, which we should now think dubious,
the Bank would not have existed, for the Government would never have
permitted it. Not only is the capital of the Bank of England
relatively greater, but the means of making profit in the Bank of
England are relatively less also. By custom and understanding the
Bank of England keep a much greater reserve in unprofitable cash
than other banks; if they do not keep it, either our whole system
must be changed or we should break up in utter bankruptcy. The
earning faculty of the Bank of England is in proportion less than
that of other banks, and also the sum on which it has to pay
dividend is altogether greater than theirs.

'It is interesting to compare the facts of joint stock banking with
the fears of it which were felt. In 1832, Lord Overstone observed: "I
think that joint stock banks are deficient in everything requisite
for the conduct of the banking business except extended
responsibility; the banking business requires peculiarly persons
attentive to all its details, constantly, daily, and hourly watchful
of every transaction, much more than mercantile or trading business.
It also requires immediate prompt decisions upon circumstances when
they arise, in many cases a decision that does not admit of delay
for consultation; it also requires a discretion to be exercised with
reference to the special circumstances of each case. Joint stock
banks being of course obliged to act through agents and not by a
principal, and therefore under the restraint of general rules,
cannot be guided by so nice a reference to degrees of difference in
the character of responsibility of parties; nor can they undertake
to regulate the assistance to be granted to concerns under temporary
embarrassment by so accurate a reference to the circumstances,
favourable or unfavourable, of each case."

'But in this very respect, joint stock banks have probably improved
the business of banking. The old private banks in former times used
to lend much to private individuals; the banker, as Lord Overstone
on another occasion explained, could have no security, but he formed
his judgment of the discretion, the sense, and the solvency of those
to whom he lent. And when London was by comparison a small city, and
when by comparison everyone stuck to his proper business, this
practice might have been safe. But now that London is enormous and
that no one can watch anyone, such a trade would be disastrous; at
present, it would hardly be safe in a country town. The joint stock
banks were quite unfit for the business Lord Overstone meant, but
then that business is quite unfit for the present time.

This success of Joint Stock Banking is very contrary to the general
expectation at its origin. Not only private bankers, such as Lord
Overstone then was, but a great number of thinking persons feared
that the joint stock banks would fast ruin themselves, and then
cause a collapse and panic in the country. The whole of English
commercial literature between 1830 and 1840 is filled with that
idea. Nor did it cease in 1840. So late as 1845, Sir R. Peel thought
the foundation of joint stock banks so dangerous that he subjected
it to grave and exceptional difficulty. Under the Act of 1845, which
he proposed, no such companies could be founded except with shares
of 100 L. with 50 L.; paid up on each; which effectually checked the
progress of such banks, for few new ones were established for many
years, or till that act had been repealed. But in this, as in many
other cases, perhaps Sir R. Peel will be found to have been
clear-sighted rather than far-sighted. He was afraid of certain
joint stock banks which he saw rising around him; but the effect of
his legislation was to give to these very banks, if not a monopoly,
at any rate an exemption from new rivals. No one now founds or can
found a new private bank, and Sir R. Peel by law prevented new joint
stock banks from being established. Though he was exceedingly
distrustful of the joint stock banks founded between 1826 and 1845,
yet in fact he was their especial patron, and he more than any other
man encouraged and protected them.

But in this wonderful success there are two dubious points, two
considerations of different kinds, which forbid us to say that in
other countries, even in countries with the capacity of
co-operation, joint stock banks would succeed as well as we have
seen that they succeed in England. 1st. These great Banks have not
had to keep so large a reserve against their liabilities as it was
natural that they should, being of first-rate magnitude, keep. They
were at first, of course, very small in comparison with what they
are now. They found a number of private bankers grouped round the
Bank of England, and they added themselves to the group. Not only
did they keep their reserve from the beginning at the Bank of
England, but they did not keep so much reserve as they would have
kept if there had been no Bank of England. For a long time this was
hardly noticed. For many years questions of the 'currency,'
particularly questions as to the Act of 1844, engrossed the
attention of all who were occupied with these subjects. Even those
who were most anxious to speak evil of joint stock banks, did not
mention this particular evil. The first time, as far as I know, that
it was commented on in any important document, was in an official
letter written in 1857 by Mr. Weguelin, who was then Governor of the
Bank, to Sir George Lewis, who was then Chancellor of the Exchequer.
The Governor and the Directors of the Bank of England had been asked
by Sir George Lewis severally to give their opinions on the Act of
1844, and all their replies were published. In his, Mr. Weguelin

'If the amount of the reserve kept by the Bank of England be
contrasted with the reserve kept by the joint stock banks, a new and
hitherto little considered source of danger to the credit of the
country will present itself. The joint stock banks of London,
judging by their published accounts, have deposits to the amount of
30,000,000 L. Their capital is not more than 3,000,000 L., and they
have on an average 31,000,000 L., invested in one way or another,
leaving only 2,000,000 L. as a reserve against all this mass of

But these remarkable words were little observed in the discussions
of that time. The air was obscured by other matters. But in this
work I have said so much on the subject that I need say little now.
The joint stock banks now keep a main part of their reserve on
deposit with the bill-brokers, or in good and convertible
interest-bearing securities. From these they obtain a large income,
and that income swells their profits. If they had to keep a much
larger part than now of that reserve in barren cash, their dividends
would be reduced, and their present success would become less

The second misgiving, which many calm observers more and more feel
as to our largest joint stock banks, fastens itself on their
government. Is that government sufficient to lend well and keep safe
so many millions? They are governed, as every one knows, by a board
of directors, assisted by a general manager, and there are in London
unrivalled materials for composing good boards of directors. There
are very many men of good means, of great sagacity and great
experi-ence in business, who are obliged to be in the City every
day, and to remain there during the day, but who have very much time
on their hands. A merchant employing solely or principally his own
capital has often a great deal of leisure. He is obliged to be on
the market, and to hear what is doing. Every day he has some
business to transact, but his transactions can be but few. His
capital can bear only a limited number of purchases; if he bought as
much as would fill his time from day to day he would soon be ruined,
for he could not pay for it. Accordingly, many excellent men of
business are quite ready to become members of boards of directors,
and to attend to the business of companies, a good deal for the
employment's sake. To have an interesting occupation which brings
dignity and power with it pleases them very much. As the aggregation
of commerce in great cities grows, the number of such men augments.
A council of grave, careful, and experienced men can, without
difficulty, be collected for a great bank in London, such as never
could have been collected before, and such as cannot now be
collected elsewhere.

There are facilities, too, for engaging a good banker to be a
manager such as there never were before in the world. The number of
such persons is much on the increase. Any careful person who is
experienced in figures, and has real sound sense, may easily make
himself a good banker. The modes in which money can be safely lent
by a banker are not many, and a clear-headed, quiet, industrious
person may soon learn all that is necessary about them. Our
intricate law of real property is an impediment in country banking,
for it requires some special study even to comprehend the elements
of a law which is full of technical words, and which can only be
explained by narrating its history. But the banking of great cities
is little concerned with loans on landed property. And all the rest
of the knowledge requisite for a banker can easily be obtained by
anyone who has the sort of mind which takes to it. No doubt there is
a vast routine of work to be learned, and the manager of a large
bank must have a great facility in transacting business rapidly. But
a great number of persons are now bred from their earliest manhood
in the very midst of that routine; they learn it as they would learn
a language, and come to be no more able to unlearn it than they
could unlearn a language. And the able ones among them acquire an
almost magical rapidity in effecting the business connected with
that routine. A very good manager and very good board of directors
can, without unreasonable difficulty, be provided for a bank at
present in London.

It will be asked, what more can be required? I reply, a great deal.
All which the best board of directors can really accomplish, is to
form a good decision on the points which the manager presents to
them, and perhaps on a few others which one or two zealous members
of their body may select for discussion. A meeting of fifteen or
eighteen persons is wholly unequal to the transaction of more
business than this; it will be fortunate, and it must be well
guided, if it should be found to be equal to so much. The discussion
even of simple practical points by such a number of persons is a
somewhat tedious affair. Many of them will wish to speak on every
decision of moment, and some of themsome of the best of them
perhapswill only speak with difficulty and slowly. Very generally,
several points will be started at once, unless the discussion is
strictly watched by a rigid chairman; and even on a single point the
arguments will often raise grave questions which cannot be answered,
and suggest many more issues than can be advantageously decided by
the meeting. The time required by many persons for discussing many
questions, would alone prevent an assembly of many persons from
overlooking a large and complicated business.

Nor is this the only difficulty. Not only would a real supervision
of a large business by a board of directors require much more time
than the board would consent to occupy in meeting, it would also
require much more time and much more thought than the individual
directors would consent to give. These directors are only employing
on the business of the Bank the vacant moments of their time, and
the spare energies of their minds. They cannot give the Bank more;
the rest is required for the safe conduct of their own affairs, and
if they diverted it from these affairs they would be ruined. A few
of them may have little other business, or they may have other
partners in the business, on whose industry they can rely, and whose
judgment they can trust; one or two may have retired from business.
But for the most part, directors of a company cannot attend
principally and anxiously to the affairs of a company without so far
neglecting their own business as to run great risk of ruin; and if
they are ruined, their trustworthiness ceases, and they are no
longer permitted by custom to be directors.

Nor, even if it were possible really to supervise a business by the
effectual and constant inspection of fifteen or sixteen rich and
capable persons, would even the largest business easily bear the
expense of such a supervision. I say rich, because the members of a
board governing a large bank must be men of standing and note
besides, or they would discredit the bank; they need not be rich in
the sense of being worth millions, but they must be known to possess
a fair amount of capital and be seen to be transacting a fair
quantity of business. But the labour of such persons, I do not say
their spare powers, but their principal energies, fetches a high
price. Business is really a profession often requiring for its
practice quite as much knowledge, and quite as much skill, as law
and medicine; and requiring also the possession of money. A thorough
man of business, employing a fair capital in a trade, which he
thoroughly comprehends, not only earns a profit on that capital, but
really makes of his professional skill a large income. He has a
revenue from talent as well as from money; and to induce sixteen or
eighteen persons to abandon such a position and such an income in
order to devote their entire attention to the affairs of a joint
stock company, a salary must be given too large for the bank to pay
or for anyone to wish to propose.

And an effectual supervision by the whole board being impossible,
there is a great risk that the whole business may fall to the
general manager. Many unhappy cases have proved this to be very
dangerous. Even when the business of joint stock banks was far less,
and when the deposits entrusted to them were very much smaller, a
manager sometimes committed frauds which were dangerous, and still
oftener made mistakes that were ruinous. Actual crime will always be
rare; but, as an uninspected manager of a great bank has the control
of untold millions, sometimes we must expect to see it: the
magnitude of the temptation will occasionally prevail over the
feebleness of human nature. But error is far more formidable than
fraud: the mistakes of a sanguine manager are, far more to be
dreaded than the theft of a dishonest manager. Easy misconception is
far more common than long-sighted deceit. And the losses to which an
adventurous and plausible manager, in complete good faith, would
readily commit a bank, are beyond comparison greater than any which
a fraudulent manager would be able to conceal, even with the utmost
ingenuity. If the losses by mistake in banking and the losses by
fraud were put side by side, those by mistake would be incomparably
the greater. There is no more unsafe government for a bank than that
of an eager and active manager, subject only to the supervision of a
numerous board of directors, even though that board be excellent,
for the manager may easily glide into dangerous and insecure
transactions, nor can the board effectually check him.

The remedy is this: a certain number of the directors, either those
who have more spare time than others, or those who are more ready to
sell a large part of their time to the bank, must be formed into a
real working committee, which must meet constantly, must investigate
every large transaction, must be acquainted with the means and
standing of every large borrower, and must be in such incessant
communication with the manager that it will be impossible for him to
engage in hazardous enterprises of dangerous magnitude without their
knowing it and having an opportunity of forbidding it. In almost all
cases they would forbid it; all committees are cautious, and a
committee of careful men of business, picked from a large city, will
usually err on the side of caution if it err at all. The daily
attention of a small but competent minor council, to whom most of
the powers of the directors are delegated, and who, like a cabinet,
guide the deliberations of the board at its meetings, is the only
adequate security of a large bank from the rash engagements of a
despotic and active general manager. Fraud, in the face of such a
committee, would probably never be attempted, and even now it is a
rare and minor evil.

Some such committees are vaguely known to exist in most, if not all,
our large joint stock banks. But their real constitution is not
known. No customer and no shareholder knows the names of the
managing committee, perhaps, in any of these large banks. And this
is a grave error. A large depositor ought to be able to ascertain
who really are the persons that dispose of his money; and still more
a large shareholder ought not to rest till he knows who it is that
makes engagements on his behalf, and who it is that may ruin him if
they choose. The committee ought to be composed of quiet men of
business, who can be ascertained by inquiry to be of high character
and well-judging mind. And if the public and the shareholder knew
that there was such a committee, they would have sufficient reasons
for the confidence which now is given without such reasons.

A certain number of directors attending daily by rotation is, it
should be said, no substitute for a permanent committee. It has no
sufficient responsibility. A changing body cannot have any
responsibility. The transactions which were agreed to by one set of
directors present on the Monday might be exactly those which would
be much disapproved by directors present on the Wednesday. It is
essential to the decisions of most business, and not least of the
banking business, that they should be made constantly by the same
persons; the chain of transactions must pass through the same minds.
A large business may be managed tolerably by a quiet group of
second-rate men if those men be always the same; but it cannot be
managed at all by a fluctuating body, even of the very cleverest
men. You might as well attempt to guide the affairs of the nation by
means of a cabinet similarly changing.

Our great joint stock bands are imprudent in so carefully concealing
the details of their government, and in secluding those details from
the risk of discussion. The answer, no doubt will be, 'Let well
alone; as you have admitted, there hardly ever before was so great a
success as these banks of ours: what more do you or can you want?' I
can only say that I want further to confirm this great success and
to make it secure for the future. At present there is at least the
possibility of a great reaction. Supposing that, owing to defects in
its government, one even of the greater London joint stock banks
failed, there would be an instant suspicion of the whole system. One
terra incognita being seen to be faulty, every other terra incognita
would be suspected. If the real government of these banks had for
years been known, and if the subsisting banks had been known not to
be ruled by the bad mode of government which had ruined the bank
that had fallen, then the ruin of that bank would not be hurtful.
The other banks would be seen to be exempt from the cause which had
destroyed it. But at present the ruin of one of these great banks
would greatly impair the credit of all. Scarcely any one knows the
precise government of any one; in no case has that government been
described on authority; and the fall of one by grave misgovernment
would be taken to show that the others might as easily be
misgoverned also. And a tardy disclosure even of an admirable
constitution would not much help the surviving banks: as it was
extracted by necessity, it would be received with suspicion. A
sceptical world would say 'of course they say they are all perfect
now; it would not do for them to say anything else.'

And not only the depositors and the shareholders of these large
banks have a grave interest in their good government, but the public
also. We have seen that our banking reserve is, as compared with our
liabilities, singularly small; we have seen that the rise of these
great banks has lessened the proportion of that reserve to those
liabilities; we have seen that the greatest strain on the banking
reserve is a 'panic.' Now, no cause is more capable of producing a
panic, perhaps none is so capable, as the failure of a first-rate
joint stock bank in London. Such an event would have something like
the effect of the failure of Overend, Gurney and Co.; scarcely any
other event would have an equal effect. And therefore, under the
existing constitution of our banking system the government of these
great banks is of primary importance to us all.


The Private Banks.

Perhaps some readers of the last part of the last chapter have been
inclined to say that I must be a latent enemy to Joint Stock
Banking. At any rate, I have pointed out what I think grave defects
in it. But I fear that a reader of this chapter may, on like
grounds, suppose that I am an enemy to Private Banking. And I can
only hope that the two impressions may counteract one another, and
may show that I do not intend to be unfair.

I can imagine nothing better in theory or more successful in
practice than private banks as they were in the beginning. A man of
known wealth, known integrity, and known ability is largely
entrusted with the money of his neighbours. The confidence is
strictly personal. His neighbours know him, and trust him because
they know him. They see daily his manner of life, and judge from it
that their confidence is deserved. In rural districts, and in former
times, it was difficult for a man to ruin himself except at the
place in which he lived; for the most part he spent his money there,
and speculated there if he speculated at all. Those who lived there
also would soon see if he was acting in a manner to shake their
confidence. Even in large cities, as cities then were, it was
possible for most persons to ascertain with fair certainty the real
position of conspicuous persons, and to learn all which was material
in fixing their credit. Accordingly the bankers who for a long
series of years passed successfully this strict and continual
investigation, became very wealthy and very powerful.

The name 'London Banker' had especially a charmed value. He was
supposed to represent, and often did represent, a certain union of
pecuniary sagacity and educated refinement which was scarcely to be
found in any other part of society. In a time when the trading
classes were much ruder than they now are, many private bankers
possessed variety of knowledge and a delicacy of attainment which
would even now be very rare. Such a position is indeed singularly
favourable. The calling is hereditary; the credit of the bank
descends from father to son: this inherited wealth soon begins
inherited refinement. Banking is a watchful, but not a laborious
trade. A banker, even in large business, can feel pretty sure that
all his transactions are sound, and yet have much spare mind. A
certain part of his time, and a considerable part of his thoughts,
he can readily devote to other pursuits. And a London banker can
also have the most intellectual society in the world if he chooses
it. There has probably very rarely ever been so happy a position as
that of a London private banker; and never perhaps a happier.

It is painful to have to doubt of the continuance of such a class,
and yet, I fear, we must doubt of it. The evidence of figures is
against it. In 1810 there were 40 private banks in Lombard Street
admitted to the clearing-house: there now are only 3. Though the
business of banking has increased so much since 1810, this species
of banks is fewer in number than it was then. Nor is this the worst.
The race is not renewed. There are not many recognised
impossibilities in business, but everybody admits 'that you cannot
found a new private bank.' No such has been founded in London, or,
as far as I know, in the country, for many years. The old ones merge
or die, and so the number is lessened; but no new ones begin so as
to increase that number again.

The truth is that the circumstances which originally favoured the
establishment of private banks have now almost passed away. The
world has become so large and complicated that it is not easy to
ascertain who is rich and who is poor. No doubt there are some
enormously wealthy men in England whose means everybody has heard
of, and has no doubt of. But these are not the men to incur the vast
liabilities of private banking. If they were bred in it they might
stay in it; but they would never begin it for themselves. And if
they did, I expect people would begin to doubt even of their wealth.
It would be said, 'What does A B go into banking for? he cannot be
as rich as we thought.' A millionaire commonly shrinks from
liability, and the essence of great banking is great liability. No
doubt there are many 'second-rate' rich men, as we now count riches,
who would be quite ready to add to their income the profit of a
private bank if only they could manage it. But unluckily they cannot
manage it. Their wealth is not sufficiently familiar to the world;
they cannot obtain the necessary confidence. No new private bank is
founded in England because men of first-rate wealth will not found
one, and men not of absolutely first-rate wealth cannot.

In the present day, also, private banking is exposed to a
competition against which in its origin it had not to struggle.
Owing to the changes of which I have before spoken, joint stock
banking has begun to compete with it. In old times this was
impossible; the Bank of England had a monopoly in banking of the
principle of association. But now large joint stock banks of deposit
are among the most conspicuous banks in Lombard Street. They have a
large paid-up capital and intelligible published accounts; they use
these as an incessant advertisement, in a manner in which no
individual can use his own wealth. By their increasing progress they
effectually prevent the foundation of any new private bank.

The amount of the present business of private banks is perfectly
unknown. Their balance sheets are effective secretsrigidly guarded.
But none of them, except a few of the largest, are believed at all
to gain business. The common repute of Lombard Street might be wrong
in a particular case, but upon the general doctrine it is almost
sure to be right. There are a few well-known exceptions, but
according to universal belief the deposits of most private bankers
in London tend rather to diminish than to increase.

As to the smaller banks, this naturally would be so. A large bank
always tends to become larger, and a small one tends to become
smaller. People naturally choose for their banker the banker who has
most present credit, and the one who has most money in hand is the
one who possesses such credit. This is what is meant by saying that
a long established and rich bank has a 'privileged opportunity'; it
is in a better position to do its business than any one else is; it
has a great advantage over old competitors and an overwhelming
superiority over new comers. New people coming into Lombard Street
judge by results; they give to those who have: they take their money
to the biggest bank because it is the biggest. I confess I cannot,
looking far forward into the future, expect that the smaller private
banks will maintain their ground. Their old connections will not
leave them; there will be no fatal ruin, no sudden mortality. But
the tide will gently ebb, and the course of business will be carried

Sooner or later, appearances indicate, and principle suggests, that
the business of Lombard Street will be divided between the joint
stock banks and a few large private banks. And then we have to ask
ourserves the question, can those large private banks be permanent?
I am sure I should be very sorry to say that they certainly cannot,
but at the same time I cannot be blind to the grave difficulties
which they must surmount.

In the first place, an hereditary business of great magnitude is
dangerous. The management of such a business needs more than common
industry and more than common ability. But there is no security at
all that these will be regularly continued in each generation. The
case of Overend, Gurney and Co., the model instance of all evil in
business, is a most alarming example of this evil. No cleverer men
of business probably (cleverer I mean for the purposes of their
particular calling) could well be found than the founders and first
managers of that house. But in a very few years the rule in it
passed to a generation whose folly surpassed the usual limit of
imaginable incapacity. In a short time they substituted ruin for
prosperity and changed opulence into insolvency. Such great folly is
happily rare; and the business of a bank is not nearly as difficult
as the business of a discount company. Still much folly is common,
and the business of a great bank requires a great deal of ability,
and an even rarer degree of trained and sober judgment. That which
happened so marvelously in the green tree may happen also in the
dry. A great private bank might easily become very rotten by a
change from discretion to foolishness in those who conduct it.

We have had as yet in London, happily, no example of this; indeed,
we have hardly as yet had the opportunity. Till now private banks
have been small; small as we now reckon banks. For their exigencies
a moderate degree of ability and an anxious caution will suffice.
But if the size of the banks is augmented and greater ability is
required, the constant difficulty of an hereditary government will
begin to be felt. 'The father had great brains and created the
business: but the son had less brains and lost or lessened it.' This
is the history of all great monarchies, and it may be the history of
great private banks. The peculiarity in the case of Overend, Gurney
and Co. at least, one peculiarity is that the evil was soon
discovered. The richest partners had least concern in the
management; and when they found that incredible losses were ruining
them, they stopped the concern and turned it into a company. But
they had done nothing; if at least they had only prevented farther
losses, the firm might have been in existence and in the highest
credit now. It was the publicity of their losses which ruined them.
But if they had continued to be a private partnership they need not
have disclosed those losses: they might have written them off
quietly out of the immense profits they could have accumulated. They
had some ten millions of other people's money in their hands which
no one thought of disturbing. The perturbation through the country
which their failure caused in the end, shows how diffused and how
unimpaired their popular reputation was. No one in the rural
districts (as I know by experience) would ever believe a word
against them, say what you might. The catastrophe came because at
the change the partners in the old private firmthe Gurney family
especiallyhad guaranteed the new company against the previous
losses: those losses turned out to be much greater than was
expected. To pay what was necessary the 'Gurneys' had to sell their
estates, and their visible ruin destroyed the credit of the concern.
But if there had been no such guarantee, and no sale of estates, if
the great losses had slept a quiet sleep in a hidden ledger, no one
would have been alarmed, and the credit and the business of
'Overends' might have existed till now, and their name still
continued to be one of our first names. The difficulty of
propagating a good management by inheritance for generations is
greatest in private banks and discount firms because of their
essential secrecy.

The danger may indeed be surmounted by the continual infusion of new
and able partners. The deterioration of the old blood may be
compensated by the excellent quality of the fresh blood. But to this
again there is an objection, of little value perhaps in seeming, but
of much real influence in practice. The infusion of new partners
requires from the old partners a considerable sacrifice of income;
the old must give up that which the new receive, and the old will
not like this. The effectual remedy is so painful that I fear it
often may be postponed too long.

I cannot, therefore, expect with certainty the continuance of our
system of private banking. I am sure that the days of small banks
will before many years come to an end, and that the difficulties of
large private banks are very important. In the mean time it is very
important that large private banks should be well managed. And the
present state of banking makes this peculiarly difficult. The detail
of the business is augmenting with an overwhelming rapidity. More
cheques are drawn year by year; not only more absolutely, but more
by each person, and more in proportion to his income. The payments
in, and payments out of a common account are very much more numerous
than they formerly were. And this causes an enormous growth of
detail. And besides, bankers have of late begun almost a new
business. They now not only keep people's money, but also collect
their incomes for them. Many persons live entirely on the income of
shares, or debentures, or foreign bonds, which is paid in coupons,
and these are handed in for the bank to collect. Often enough the
debenture, or the certificate, or the bond is in the custody of the
banker, and he is expected to see when the coupon is due, and to cut
it off and transmit it for payment. And the detail of all this is
incredible, and it needs a special machinery to cope with it.

A large joint stock bank, if well-worked, has that machinery. It has
at the head of the executive a general manager who was tried in the
detail of banking, who is devoted to it, and who is content to live
almost wholly in it. He thinks of little else, and ought to think of
little else. One of his first duties is to form a hierarchy of
inferior officers, whose respective duties are defined, and to see
that they can perform and do perform those duties. But a private
bank of the type usual in London has no such officer. It is managed
by the partners; now these are generally rich men, are seldom able
to grapple with great business of detail, and are not disposed to
spend their whole lives and devote their entire minds to it if they
were able. A person with the accumulated wealth, the education and
the social place of a great London banker would be a 'fool so to
devote himself. He would sacrifice a suitable and a pleasant life
for an unpleasant and an unsuitable life. But still the detail must
be well done; and some one must be specially chosen to watch it and
to preside over it, or it will not be well done. Until now, or until
lately, this difficulty has not been fully felt. The detail of the
business of a small private bank was moderate enough to be
superintended effectually by the partners. But, as has been said,
the detail of bankingthe proportion of detail to the size of the
bankis everywhere increasing. The size of the private banks will
have to augment if private banks are not to cease; and therefore the
necessity of a good organisation for detail is urgent. If the bank
grows, and simultaneously the detail grows in proportion to the
bank, a frightful confusion is near unless care be taken.

The only organisation which I can imagine to be effectual is that
which exists in the antagonistic establishments. The great private
banks will have, I believe, to appoint in some form or other, and
under some name or other, some species of general manager who will
watch, contrive, and arrange the detail for them. The precise shape
of the organisation is immaterial; each bank may have its own shape,
but the man must be there. The true business of the private partners
in such a bank is much that of the directors in a joint stock bank.
They should form a permanent committee to consult with their general
manager, to watch him, and to attend to large loans and points of
principle. They should not themselves be responsible for detail; if
they do there will be two evils at once: the detail will be done
badly, and the minds of those who ought to decide principal things
will be distracted from those principal things. There will be a
continual worry in the bank, and in a worry bad loans are apt to be
made and money is apt to be lost.

A subsidiary advantage of this organisation is that it would render
the transition from private banking to joint stock banking easier,
if that transition should be necessary. The one might merge in the
other as convenience suggested and as events required. There is
nothing intrusive in discussing this subject. The organisation of
the private is just like that of the joint stock banks; all the
public are interested that it should be good. The want of a good
organisation may cause the failure of one or more of these banks;
and such failure of such banks may intensify a panic, even if it
should not cause one.


The Bill-Brokers.

Under every system of banking, whether that in which the reserve is
kept in many banks, or one in which it is kept in a single bank
only, there will always be a class of persons who examine more
carefully than busy bankers can the nature of different securities;
and who, by attending only to one class, come to be particularly
well acquainted with that class. And as these specially qualified
dealers can for the most part lend much more than their own capital,
they will always be ready to borrow largely from bankers and others,
and to deposit the securities which they know to be good as a pledge
for the loan. They act thus as intermediaries between the borrowing
public and the less qualified capitalist; knowing better than the
ordinary capitalist which loans are better and which are worse, they
borrow from him, and gain a profit by charging to the public more
than they pay to him.

Many stock brokers transact such business upon a great scale. They
lend large sums on foreign bonds or railway shares or other such
securities, and borrow those sums from bankers, depositing the
securities with the bankers, and generally, though not always,
giving their guarantee. But by far the greatest of these
intermediate dealers are the bill-brokers. Mercantile bills are an
exceedingly difficult kind of security to understand. The relative
credit of different merchants is a great 'tradition'; it is a large
mass of most valuable knowledge which has never been described in
books and is probably incapable of being so described. The subject
matter of it, too, is shifting and changing daily; an accurate
representation of the trustworthiness of houses at the beginning of
a year might easily be a most fatal representation at the end of it.
In all years there are great changes; some houses rise a good deal
and some fall. And in some particular years the changes are immense;
in years like 1871 many active men make so much money that at the
end of the year they are worthy of altogether greater credit than
anyone would have dreamed of giving to them at the beginning. On the
other hand, in years like 1866 a contagious ruin destroys the
trustworthiness of very many firms and persons, and often,
especially, of many who stood highest immediately before. Such years
alter altogether an important part of the mercantile world: the
final question of bill-brokers, 'which bills will be paid and which
will not? which bills are second-rate and which first-rate?' would
be answered very differently at the beginning of the year and at the
end. No one can be a good bill-broker who has not learnt the great
mercantile tradition of what is called 'the standing of parties' and
who does not watch personally and incessantly the inevitable changes
which from hour to hour impair the truth of that tradition. The
credit' of a personthat is, the reliance which may be placed on his
pecuniary fidelityis a different thing from his property. No doubt,
other things being equal, a rich man is more likely to pay than a
poor man. But on the other hand, there are many men not of much
wealth who are trusted in the market, 'as a matter of business,' for
sums much exceeding the wealth of those who are many times richer. A
firm or a person who have been long known to 'meet their
engagements,' inspire a degree of confidence not dependent on the
quantity of his or their property. Persons who buy to sell again
soon are often liable for amounts altogether much greater than their
own capital; and the power of obtaining those sums depends upon
their 'respectability,' their 'standing,' and their 'credit,' as the
technical terms express it, and more simply upon the opinion which
those who deal with them have formed of them. The principal mode in
which money is raised by traders is by 'bills of exchange;' the
estimated certainty of their paying those bills on the day they fall
due is the measure of their credit; and those who estimate that
liability best, the only persons indeed who can estimate it
exceedingly well, are the bill-brokers. And these dealers, taking
advantage of their peculiar knowledge, borrow immense sums from
bankers and others; they generally deposit the bills as a security;
and they generally give their own guarantee of the goodness of the
bill: but neither of such practices indeed is essential, though both
are the ordinary rule. When Overends failed, as I have said before,
they had borrowed in this way very largely. There are others now in
the trade who have borrowed quite as much.

As is usually the case, this kind of business has grown up only
gradually. In the year 1810 there was no such business precisely
answering to what we now call bill-broking in London. Mr.
Richardson, the principal 'bill-broker' of the time, as the term was
then understood, thus described his business to the 'Bullion

'What is the nature of the agency for country banks'It is twofold:
in the first place to procure money for country bankers on bills
when they have occasion to borrow on discount, which is not often
the case; and in the next place, to lend the money for the country
bankers on bills on discount. The sums of money which I lend for
country bankers on discount are fifty times more than the sums
borrowed for country bankers.

'Do you send London bills into the country for discount?--Yes.

'Do you receive bills from the country upon London in return, at a
date, to be discounted?--Yes, to a very considerable amount, from
particular parts of the country.

'Are not both sets of bills by this means under discount?--No, the
bills received from one part of the country are sent down to another
part for discount.

'And they are not discounted in London?--No. In some parts of the
country there is but little circulation of bills drawn upon London,
as in Norfolk, Suffolk, Essex, Sussex, &c.; but there is there a
considerable circulation in country bank-notes, principally optional
notes. In Lancashire there is little or no circulation of country
bank-notes; but there is a great circulation of bills drawn upon
London at two or three months' date. I receive bills to a
considerable amount from Lancashire in particular, and remit them to
Norfolk, Suffolk, &c., where the bankers have large lodgments, and
much surplus money to advance on bills for discount.'

Mr. Richardson was only a broker who found money for bills and bills
for money. He is further asked:

'Do you guarantee the bills you discount, and what is your charge
per cent?--No, we do not guarantee them; our charge is one-eighth per


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