Lombard Street: A Description of the Money Market
by
Walter Bagehot
Part 4 out of 4
cent brokerage upon the bill discounted, but we make no charge to the
lender of the money.
'Do you consider that brokerage as a compensation for the skill
which you exercise in selecting the bills which you thus get
discounted?--Yes, for selecting of the bills, writing letters, and
other trouble.
'Does the party who furnishes the money give you any kind of
compensation?--None at all.
'Does he not consider you as his agent, and in some degree
responsible for the safety of the bills which you give him?--Not at
all.
'Does he not prefer you on the score of his judging that you will
give him good intelligence upon that subject?--Yes, he relies upon
us.
'Do you then exercise a discretion as to the probable safety of the
bills?--Yes; if a bill comes to us which we conceive not to be safe,
we return it.
'Do you not then conceive yourselves to depend in a great measure
for the quantity of business which you can perform on the favour of
the party lending the money?--Yes, very much so. If we manage our
business well, we retain our friends; if we do not, we lose them.'
It was natural enough that the owners of the money should not pay,
though the owner of the bill did, for in almost all ages the
borrower has been a seeker more or less anxious; he has always been
ready to pay for those who will find him the money he is in search
of. But the possessor of money has rarely been willing to pay
anything; he has usually and rightly believed that the borrower
would discover him soon.
Notwithstanding other changes, the distribution of the customers of
the bill-brokers in different parts of the country still remains
much as Mr. Richardson described it sixty years ago. For the most
part, agricultural counties do not employ as much money as they
save; manufacturing counties, on the other hand, can employ much
more than they save; and therefore the money of Norfolk or of
Somersetshire is deposited with the London bill-brokers, who use it
to discount the bills of Lancashire and Yorkshire.
The old practice of bill-broking, which Mr. Richardson describes,
also still exists. There are many brokers to be seen about Lombard
Street with bills which they wish to discount but which they do not
guarantee. They have sometimes discounted these bills with their own
capital, and if they can re-discount them at a slightly lower rate
they gain a difference which at first seems but trifling, but with
which they are quite content, because this system of lending first
and borrowing again immediately enables them to turn their capital
very frequently, and on a few thousand pounds of capital to discount
hundreds of thousands of bills; as the transactions are so many,
they can be content with a smaller profit on each. In other cases,
these nonguaranteeing brokers are only agents who are seeking money
for bills which they have undertaken to get discounted. But in
either case, as far as the banker or other ultimate capitalist is
concerned, the transaction is essentially that which Mr. Richardson
describes. The loan by such banker is a rediscount of the bill; that
banker cannot obtain repayment of that loan, except by the payment
of the bill at maturity. He has no claim upon the agent who brought
him the bill. Billbroking, in this which we may call its archaic
form, is simply one of the modes in which bankers obtain bills which
are acceptable to them and which they rediscount. No reference is
made in it to the credit of the bill-broker; the bills being
discounted 'without recourse' to him are as good if taken from a
pauper as if taken from a millionaire. The lender exercises his own
judgment on the goodness of the bill.
But in modern bill-broking the credit of the bill-broker is a vital
element. The lender considers that the bill-brokerno matter whether
an individual, a company, or a firmhas considerable wealth, and he
takes the 'bills,' relying that the broker would not venture that
wealth by guaranteeing them unless he thought them good. The lender
thinks, too, that the bill-broker being daily conversant with bills
and bills only, knows probably all about bills: he lends partly in
reliance on the wealth of the broker and partly in reliance on his
skill. He does not exercise much judgment of his own on the bills
deposited with him: he often does not watch them very closely.
Probably not one-thousandth part of the creditors on security of
Overend, Gurney and Co., had ever expected to have to rely on that
security, or had ever given much real attention to it. Sometimes,
indeed, the confidence in the bill-brokers goes farther. A
considerable number of persons lend to them, not only without much
looking at the security but even without taking any security. This
is the exact reverse of the practice which Mr. Richardson described
in 1810; then the lender relied wholly on the goodness of the bill,
now, in these particular cases, he relies solely on the bill-broker,
and does not take a bill in any shape. Nothing can be more natural
or more inevitable than this change. It was certain that the
bill-broker, being supposed to understand bills well, would be asked
by the lenders to evince his reliance on the bills he offered by
giving a guarantee for them. It was also most natural that the
bill-brokers, having by the constant practice of this lucrative
trade obtained high standing and acquired great wealth, should
become, more or less, bankers too, and should receive money on
deposit without giving any security for it.
But the effects of the change have been very remarkable. In the
practice as Mr. Richardson described it, there is no peculiarity
very likely to affect the money market. The bill-broker brought
bills to the banker, just as others brought them; nothing at all
could be said as to it except that the Bank must not discount bad
bills, must not discount too many bills, and must keep a good
reserve. But the modern practice introduces more complex
considerations. In the trade of bill-broking, as it now exists,
there is one great difficulty; the bill-broker has to pay interest
for all the money which he receives. How this arose we have just
seen. The present lender to the bill-broker at first always used to
discount a bill, which is as much as saying that he was always a
lender at interest. When he came to take the guarantee of the
broker, and only to look at the bills as a collateral security,
naturally he did not forego his interest: still less did he forego
it when he ceased to take security at all. The bill-broker has, in
one shape or other, to pay interest on every sixpence left with him,
and that constant habit of giving interest has this grave
consequence: the bill-broker cannot afford to keep much money
unemployed. He has become a banker owing large sums which he may be
called on to repay, but he cannot hold as much as an ordinary
banker, or nearly as much, of such sums in cash, because the loss of
interest would ruin him. Competition reduces the rate which the
bill-broker can charge, and raises the rate which the bill-broker
must give, so that he has to live on a difference exceedingly
narrow. And if he constantly kept a large hoard of barren money he
would soon be found in the 'Gazette.'
The difficulty is aggravated by the terms upon which a great part of
the money at the bill-brokers is deposited with them. Very much of
it is repayable at demand, or at very short notice. The demands on a
broker in periods of alarm may consequently be very great, and in
practice they often, are so. In times of panic there is always a
very heavy call, if not a run upon them; and in consequence of the
essential nature of their business, they cannot constantly keep a
large unemployed reserve of their own in actual cash, they are
obliged to ask help of some one who possesses that cash. By the
conditions of his trade, the bill-broker is forced to belong to a
class of 'dependent money-dealers,' as we may term them, that is, of
dealers who do not keep their own reserve, and must, therefore, at
every crisis of great difficulty revert to others.
In a natural state of banking, that in which all the principal banks
kept their own reserve, this demand of the bill-brokers and other
dependent dealers would be one of the principal calls on that
reserve. At every period of incipient panic the holders of it would
perceive that it was of great importance to themselves to support
these dependent dealers. If the panic destroyed those dealers it
would grow by what it fed upon (as is its nature), and might
probably destroy also the bankers, the holders of the reserve. The
public terror at such times is indiscriminate. When one house of
good credit has perished, other houses of equal credit though of
different nature are m danger of perishing. The many holders of the
banking reserve would under the natural system of banking be obliged
to advance out of that reserve to uphold bill-brokers and similar
dealers. It would be essential to their own preservation not to let
such dealers fail, and the protection of such dealers would
therefore be reckoned among the necessary purposes for which they
retained that reserve.
Nor probably would the demands on the bill-brokers in such a system
of banking be exceedingly formidable. Considerable sums would no
doubt be drawn from them, but there would be no special reason why
money should be demanded from them more than from any other money
dealers. They would share the panic with the bankers who kept the
reserve, but they would not feel it more than the bankers. In each
crisis the set of the storm would be determined by the cause which
had excited it, but there would not be anything in the nature of
bill-broking to attract the advance of the alarm peculiarly to them.
They would not be more likely to suffer than other persons; the only
difference would be that when they did suffer, having no adequate
reserve of their own, they would be obliged to ask the aid of
others.
But under a one-reserve system of banking, the position of the
bill-brokers is much more singular and much more precarious. In
fact, in Lombard Street, the principal depositors of the
bill-brokers are the bankers, whether of London, or of provincial
England, or of Scotland, or Ireland. Such deposits are, in fact, a
portion of the reserve of these bankers; they make an essential part
of the sums which they have provided and laid by against a panic.
Accordingly, in every panic these sums are sure to be called in from
the bill-brokers; they were wanted to be used by their owners in
time of panic, and in time of panic they ask for them. 'Perhaps it
may be interesting,' said Alderman Salomons, speaking on behalf of
the London and Westminster Bank, after the panic of 1857, to the
committee, 'to know that, on November 11, we held discounted bills
for brokers to the amount of 5,623,000 L. Out of these bills
2,800,000 L. matured between November 1 and December 4; 2,000,000 L.
more between December 1 and December 31; consequently we were
prepared merely by the maturing of our bills of exchange for any
demand that might come upon us.' This is not indeed a direct
withdrawal of money on deposit, but its principal effect is
identical. At the beginning of the time the London and Westminster
Bank had lent 5,000,000 L. more to the bill-brokers than they had at
the end of it; and that 5,000,000 L. the bank had added to its
reserve against a time of difficulty.
The intensity of the demand on the bill-broker is aggravated
therefore by our peculiar system of banking. Just at the moment
when, by the nature of their business, they have to resort to the
reserves of bankers for necessary support, the bankers remove from
them large sums in order to strengthen those reserves. A great
additional strain is thrown upon them just at the moment when they
are least able to bear it; and it is thrown by those who under a
natural system of banking would not aggravate the pressure on the
bill-brokers, but relieve it.
And the profits of bill-broking are proportionably raised. The
reserves of the bankers so deposited with the bill-broker form a
most profitable part of his business; they are on the whole of very
large amount, and at all times, except those of panic, may well be
depended upon. The bankers are pretty sure to keep them there, just
because they must keep a reserve, and they consider it one of the
best places in which to keep it. Under a more natural system, no
part of the banking reserve would ever be lodged at the brokers.
Bankers would deposit with the brokers only their extra money, the
money which they considered they could safely lend, and which they
would not require during a panic. In the eye of the banker, money at
the brokers would then be one of the investments of cash, it would
not be a part of such cash. The deposits of bill-brokers and the
profits of bill-broking are increased by our present system, just in
proportion as the dangers of bill-brokers during a panic are
increased by it.
The strain, too, on our banking reserve which is caused by the
demands of the bill-brokers, is also more dangerous than it would be
under a natural system, because that reserve is in itself less. The
system of keeping the entire ultimate reserve at a single bank,
undoubtedly diminishes the amount of reserve which is kept. And
exactly on that very account the danger of any particular demand on
that reserve is augmented, because the magnitude of the fund upon
which that demand falls is diminished. So that our one-reserve
system of banking combines two evils: first, it makes the demand of
the brokers upon the final reserve greater, because under it so many
bankers remove so much money from the brokers; and under it also the
final reserve is reduced to its minimum point, and the entire system
of credit is made more delicate, and more sensitive.
The peculiarity, indeed, of the effects of the one reserve is indeed
even greater in this respect. Under the natural system, the
billbrokers would be in no respect the rivals of the bankers which
kept the ultimate reserve. They would be rather the agents for these
bankers in lending upon certain securities which they did not
themselves like, or on which they did not feel competent to lend
safely. The bankers who in time of panic had to help them would in
ordinary times derive much advantage from them. But under our
present system all this is reversed. The Bank of England never
deposits any money with the bill-brokers; in ordinary times it never
derives any advantage from them. On the other hand, as the Bank
carries on itself a large discount business, as it considers that it
is itself competent to lend on all kinds of bills, the bill-brokers
are its most formidable rivals. As they constantly give high rates
for money it is necessary that they should undersell the Bank, and
in ordinary times they do undersell it. But as the Bank of England
alone keeps the final banking reserve, the bill-brokers of necessity
have to resort to that final reserve; so that at every panic, and by
the essential constitution of the money market, the Bank of England
has to help, has to maintain in existence, the dealers, who never in
return help the Bank at any time, but who are in ordinary times its
closest competitors and its keenest rivals.
It might be expected that such a state of things would cause much
discontent at the Bank of England, and in matter of fact there has
been much discussion about it, and much objection taken to it. After
the panic of 1857, this was so especially. During that panic, the
Bank of England advanced to the bill-brokers more than 9,000,000 L.,
though their advances to bankers, whether London or country, were
only 8,000,000 L.; and, not unnaturally, the Bank thought it
unreasonable that so large an inroad upon their resources should be
made by their rivals. In consequence, in 1858 they made a rule that
they would only advance to the bill-brokers at certain seasons of
the year, when the public money is particularly large at the bank,
and that at other times any application for an advance should be
considered excep tonal, and dealt with accordingly. And the object
of that regulation was officially stated to be 'to make them keep
their own reserve, and not to be dependent on the Bank of England.'
As might be supposed, this rule was exceedingly unpopular with the
brokers, and the greatest of them, Overend, Gurney and Co., resolved
on a strange policy in the hope of abolishing it. They thought they
could frighten the Bank of England, and could show that if they were
dependent on it, it was also dependent on them. They accordingly
accumulated a large deposit at the Bank to the amount of
3,000,000 L., and then withdrew it all at once. But this policy had
no effect, except that of exciting a distrust of 'Overends': the
credit of the Bank of England was not diminished; Overends had to
return the money in a few days, and had the dissatisfaction of
feeling that they had in vain attempted to assail the solid basis of
everyone's credit, and that everyone disliked them for doing so. But
though this un-conceived attempt failed as it deserved, the rule
itself could not be maintained. The Bank does, in fact, at every
period of pressure, advance to the bin-brokers; the case may be
considered 'exceptional,' but the advance is always made if the
security offered is really good. However much the Bank may dislike
to aid their rivals, yet they must aid them; at a crisis they feel
that they would only be aggravating incipient demand, and be
augmenting the probable pressure on themselves if they refused to do
so.
I shall be asked if this anomaly is inevitable, and I am afraid that
for practical purposes we must consider it to be so. It may be
lessened; the bill-brokers may, and should, discourage as much as
they can the deposit of money with them on demand, and encourage the
deposit of it at distant fixed dates or long notice. This will
diminish the anomaly, but it will not cure it. Practically,
bin-brokers cannot refuse to receive money at call. In every market
a dealer must conduct his business according to the custom of the
market, or he will not be able to conduct it at all. All the
bin-brokers can do is to offer better rates for more permanent
money, and this (though possibly not so much as might be wished)
they do at present. In its essence, this anomaly is, I believe, an
inevitable part of the system of banking which history has given us,
and which we have only to make the best of, since we cannot alter
it.
CHAPTER XII.
The Principles Which Should Regulate the Amount of the Banking
Reserve to Be Kept by the Bank of England.
There is a very common notion that the amount of the reserve which
the Bank of England ought to keep can be determined at once from the
face of their weekly balance sheet. It is imagined that you have
only to take the liabilities of the Banking department, and that a
third or some other fixed proportion will in all cases be the amount
of reserve which the Bank should keep against those liabilities. But
to this there are several objections, some arising from the general
nature of the banking trade, and others from the special position of
the Bank of England.
That the amount of the liabilities of a bank is a principal element
in determining the proper amount of its reserve is plainly true; but
that it is the only element by which that amount is determined is
plainly false. The intrinsic nature of these liabilities must be
considered, as well as their numerical quantity. For example, no one
would say that the same amount of reserve ought to be kept against
acceptances which cannot be paid except at a certain day, and
against deposits at call, which may be demanded at any moment. If a
bank groups these liabilities together in the balance-sheet, you
cannot tell the amount of reserve it ought to keep. The necessary
information is not given you.
Nor can you certainly determine the amount of reserve necessary to
be kept against deposits unless you know something as to the nature
of these deposits. If out of 3,000,000 L. of money, one depositor
has 1,000,000 L. to his credit, and may draw it out when he pleases,
a much larger reserve will be necessary against that liability of
1,000,000 L. than against the remaining 2,000,000 L. The intensity of
the liability, so to say, is much greater; and therefore the
provision in store must be much greater also. On the other hand,
supposing that this single depositor is one of calculable
habitssuppose that it is a public body, the time of whose demands is
known, and the time of whose receipts is known alsothis single
liability requires a less reserve than that of an equal amount of
ordinary liabilities. The danger that it win be called for is much
less; and therefore the security taken against it may be much less
too. Unless the quality of the liabilities is considered as well as
their quantity, the due provision for their payment cannot be
determined.
These are general truths as to all banks, and they have a very
particular application to the Bank of England. The first application
is favourable to the Bank; for it shows the danger of one of the
principal liabilities to be much smaller than it seems. The largest
account at the Bank of England is that of the English Government;
and probably there has never been any account of which it was so
easy in time of peace to calculate the course. All the material
facts relative to the English revenue, and the English expenditure,
are exceedingly well known; and the amount of the coming payments to
and from this account are always, except in war times, to be
calculated with wonderful accuracy. In war, no doubt, this is all
reversed; the account of a government at war is probably the most
uncertain of all accounts, especially of a government of a scattered
empire, like the English, whose places of outlay in time of war are
so many and so distant, and the amount of whose payments is
therefore so incalculable. Ordinarily, however, there is no account
of which the course can be so easily predicted; and therefore no
account which needs in ordinary times so little reserve. The
principal payments, when they are made, are also of the most
satisfactory kind to a banker; they are, to a great extent, made to
another account at his bank. These largest ordinary payments of the
Government are the dividends on the debt, and these are mostly made
to bankers who act as agents for the creditors of the nation. The
payment of the dividends for the Government is, therefore, in great
part a transfer from the account of the Government to the accounts
of the various bankers. A certain amount no doubt goes almost at
once to the non-banking classes; to those who keep coin and notes in
house, and have no account at any bank. But even this amount is
calculable, for it is always nearly the same. And the entire
operation is, to those who can watch it, singularly invariable time
after time.
But it is important to observe, that the published accounts of the
Bank give no such information to the public as win enable them to
make their own calculations. The account of which we have been
speaking is the yearly account of the English Governmentwhat we may
call the Budget account, that of revenue and expenditure. And the
laws of this are, as we have shown, already known. But under the
head 'Public Deposits' in the accounts of the Bank, are contained
also other accounts, and particularly that of the Secretary for
India in Council, the laws of which must be different and are quite
unknown. The Secretary for India is a large lender on its account.
If any one proposed to give such power to the Chancellor of the
Exchequer, there would be great fear and outcry. But so much depends
on habit and tradition, that the India Office on one side of Downing
Street can do without remark, and with universal assent, what it
would be thought 'unsound' and extravagant to propose that the other
side should do. The present India Office inherits this independence
from the old Board of the Company, which, being mercantile and
business-like, used to lend its own money on the Stock Exchange as
it pleased; the Council of India, its successor, retains the power.
Nothing can be better than that it should be allowed to do as it
likes; but the mixing up the account of a body which has such a
power, and which draws money from India, with that of the Home
government clearly prevents the general public from being able to
draw inferences as to the course of the combined account from its
knowledge of home finance only. The account of 'public deposits' in
the Bank return includes other accounts too, as the Savings' Bank
balance, the Chancery Funds account, and others; and in consequence,
till lately the public had but little knowledge of the real changes
of the account of our Government, properly so called. But Mr. Lowe
has lately given us a weekly account, and from this, and not from
the Bank account, we are able to form a judgment. This account and
the return of the Bank of England, it is true, unhappily appear on
different days; but except for that accident our knowledge would be
perfect; and as it is, for almost all purposes what we know is
reasonably sufficient. We can now calculate the course of the
Government account nearly as well as it is possible to calculate it.
So far, as we have said, an analysis of the return of the Bank of
England is very favourable to the Bank. So great a reserve need not
usually be kept against the Government account as if it were a
common account. We know the laws of its changes peculiarly well: we
can tell when its principal changes will happen with great accuracy;
and we know that at such changes most of what is paid away by the
Government is only paid to other depositors at the Bank, and that it
win really stay at the Bank, though under another name. If we look
to the private deposits of the Bank of England, at first sight we
may think that the result is the same. By far the most important of
these are the 'Bankers' deposits'; and, for the most part, these
deposits as a whole are likely to vary very little. Each banker, we
will suppose, keeps as little as he can, but in all domestic
transactions payment from one is really payment to the other. All
the most important transactions in the country are settled by
cheques; these cheques are paid in to the 'clearing-house,' and the
balances resulting from them are settled by transfers from the
account of one banker to another at the Bank of England. Payments
out of the bankers' balances, therefore, correspond with payments
in. As a whole, the deposit of the bankers' balances at the Bank of
England would at first sight seem to be a deposit singularly stable.
Indeed, they would seem, so to say, to be better than stable. They
augment when everything else tends to diminish. At a panic, when all
other deposits are likely to be taken away, the bankers' deposits,
augment; in fact they did so in 1866, though we do not know the
particulars; and it is natural that they should so increase. At such
moments all bankers are extremely anxious, and they try to
strengthen themselves by every means in their power; they try to
have as much money as it is possible at command; they augment their
reserve as much as they can, and they place that reserve at the Bank
of England. A deposit which is not likely to vary in ordinary times,
and which is likely to augment in times of danger, seems, in some
sort, the model of a deposit. It might seem not only that a large
proportion of it might be lent, but that the whole of it might be
so. But a further analysis will, as I believe, show that this
conclusion is entirely false; that the bankers' deposits are a
singularly treacherous form of liability; that the utmost caution
ought to be used in dealing with them; that, as a rule, a less
proportion of them ought to be lent than of ordinary deposits.
The easiest mode of explaining anything is, usually, to exemplify it
by a single actual case. And in this subject, fortunately, there is
a most conspicuous case near at hand. The German Government has
lately taken large sums in bullion from this country, in part from
the Bank of England, and in part not, according as it chose. It was
in the main well advised, and considerate in its action; and did not
take nearly as much from the Bank as it might, or as would have been
dangerous. Still it took large sums from the Bank; and it might
easily have taken more. How then did the German Government obtain
this vast power over the Bank? The answer is, that it obtained it by
means of the bankers' balances, and that it did so in two ways.
First, the German Government had a large balance of its own lying at
a particular Joint Stock Bank. That bank lent this balance at its
own discretion, to bill-brokers or others, and it formed a single
item in the general funds of the London market. There was nothing
special about it, except that it belonged to a foreign government,
and that its owner was always likely to call it in, and sometimes
did so. As long as it stayed unlent in the London Joint Stock Bank,
it increased the balances of that bank at the Bank of England; but
so soon as it was lent, say, to a bill-broker, it increased the
bill-broker's balance; and as soon as it was employed by the
bill-broker in the discount of bills, the owners of those bills paid
it to their credit at their separate banks, and it augmented the
balances of those bankers at the Bank of England. Of course if it
were employed in the discount of bills belonging to foreigners, the
money might be taken abroad, and by similar operations it might also
be transferred to the English provinces or to Scotland. But, as a
rule, such money when deposited in London, for a considerable time
remains in London; and so long as it does so, it swells the
aggregate balances of the body of bankers at the Bank of England. It
is now in the balance of one bank, now of another, but it is always
dispersed about those balances somewhere. The evident consequence is
that this part of the bankers' balances is at the mercy of the
German Government when it chooses to apply for it. Supposing, then,
the sum to be three or four millions and I believe that on more than
one occasion in the last year or two it has been quite as much, if
not more--that sum might at once be withdrawn from the Bank of
England. In this case the Bank of England is in the position of a
banker who is liable for a large amount to a single customer, but
with this addition, that it is liable for an unknown amount. The
German Government, as is well known, keeps its account (and a very
valuable one it must be) at the London Joint Stock Bank; but the
Bank of England has no access to the account of the German
Government at that bank; they cannot tell how much German money is
lying to the credit there. Nor can the Bank of England infer much
from the balance of the London Joint Stock Bank in their Bank, for
the German money was probably paid in various sums to that bank, and
lent out again in other various sums. It might to some extent
augment that bank's balance at the Bank of England, or it might not,
but it certainly would not be so much added to that balance; and
inspection of that bank's balance would not enable the Bank of
England to determine even in the vaguest manner what the entire sum
was for which it might be asked at any moment. Nor would the
inspection of the bankers' balances as a whole lead to any certain
and sure conclusions. Something might be inferred from them, but not
anything certain. Those balances are no doubt in a state of constant
fluctuation; and very possibly during the time that the German money
was coming in some other might be going out. Any sudden increase in
the bankers' balances would be a probable indication of new foreign
money, but new foreign money might come in without causing an
increase, since some other and contemporaneous cause might effect a
counteracting decrease.
This is the first, and the plainest way in which the German
Government could take, and did take, money from this country; and in
which it might have broken the Bank of England if it had liked. The
German Government had money here and took it away, which is very
easy to understand. But the Government also possessed a far greater
power, of a somewhat more complex kind. It was the owner of many
debts from England. A large part of the 'indemnity' was paid by
France to Germany in bills on England, and the German Government, as
those bills became due, acquired an unprecedented command over the
market. As each bill arrived at maturity, the German Government
could, if it chose, take the proceeds abroad; and it could do so in
bullion, as for coinage purposes it wanted bullion. This would at
first naturally cause a reduction in the bankers' balances; at least
that would be its tendency. Supposing the German Government to hold
bill A, a good bill, the banker at whose bank bill A was payable
would have to pay it; and that would reduce his balance; and as the
sum so paid would go to Germany, it would not appear to the credit
of any other banker: the aggregate of the bankers' balances would
thus be reduced. But this reduction would not be permanent. A banker
who has to pay 100,000 L. cannot afford to reduce his balance at the
Bank of England 100,000 L.; suppose that his liabilities are
2,000,000 L., and that as a rule he finds it necessary to keep at
the Bank one-tenth of these liabilities, or 200,000 L., the payment
of 100,000 L. would reduce his reserve to 100,000 L.; but his
liabilities would be still 1,900,000 L. and therefore to keep up his
tenth he would have 90,000 L. to find. His process for finding it is
this: he calls in, say, a loan to the bill-brokers; and if no equal
additional money is contemporaneously carried to these brokers
(which in the case of a large withdrawal of foreign money is not
probable), they must reduce their business and discount less. But
the effect of this is to throw additional business on the Bank of
England. They hold the ultimate reserve of the country, and they
must discount out of it if no one else will: if they declined to do
so there would be panic and collapse. As soon, therefore, as the
withdrawal of the German money reduces the bankers' balances, there
is a new demand on the Bank for fresh discounts to make up those
balances. The drain on the Bank is twofold: first, the banking
reserve is reduced by exportation of the German money, which reduces
the means of the Bank of England; and then out of those reduced
means the Bank of England has to make greater advances.
The same result may be arrived at more easily. Supposing any foreign
Government or person to have any sort of securities which he can
pledge in the market, that operation gives it, or him, a credit on
some banker, and enables it, or him, to take money from the banking
reserve at the Bank of England, and from the bankers' balances; and
to replace the bankers' balances at their inevitable minimum, the
Bank of England must lend. Every sudden demand on the country
causes, in proportion to its magnitude, this peculiar effect. And
this is the reason why the Bank of England ought, I think, to deal
most cautiously and delicately with their banking deposits. They are
the symbol of an indefinite liability: by means of them, as we see,
an amount of money so great that it is impossible to assign a limit
to it might be abstracted from the Bank of England. As the Bank of
England lends money to keep up the bankers' balances, at their usual
amount, and as by means of that usual amount whatever sum foreigners
can get credit for may be taken from us, it is not possible to
assign a superior limit (to use the scientific word) to the demands
which by means of the bankers' balances may be made upon the Bank of
England.
The result comes round to the simple point, on which this book is a
commentary: the Bank of England, by the effect of a long history,
holds the ultimate cash reserve of the country; whatever cash the
country has to pay comes out of that reserve, and therefore the Bank
of England has to pay it. And it is as the Bankers' Bank that the
Bank of England has to pay it, for it is by being so that it becomes
the keeper of the final cash reserve.
Some persons have been so much impressed with such considerations as
these, that they have contended that the Bank of England ought never
to lend the 'bankers' balances' at all, that they ought to keep them
intact, and as an unused deposit. I am not sure, indeed, that I have
seen that extreme form of the opinion in print, but I have often
heard it in Lombard Street, from persons very influential and very
qualified to judge; even in print I have seen close approximations
to it. But I am satisfied that the laying down such a 'hard and
fast' rule would be very dangerous; in very important and very
changeable business rigid rules are apt to be often dangerous. In a
panic, as has been said, the bankers' balances greatly augment. It
is true the Bank of England has to lend the money by which they are
filled. The banker calls in his money from the bill-broker, ceases
to re-discount for that broker, or borrows on securities, or sells
securities; and in one or other of these ways he causes a new demand
for money which can only at such times be met from the Bank of
England. Every one else is in want too. But without inquiring into
the origin of the increase at panics, the amount of the bankers'
deposits in fact increases very rapidly; an immense amount of unused
money is at such moments often poured by them into the Bank of
England. And nothing can more surely aggravate the panic than to
forbid the Bank of England to lend that money. Just when money is
most scarce you happen to have an unusually large fund of this
particular species of money, and you should lend it as fast as you
can at such moments, for it is ready lending which cures panics, and
non-lending or niggardly lending which aggravates them.
At other times, particularly at the quarterly payment of the
dividends, an absolute rule which laid down that the bankers'
balances were never to be lent, would be productive of great
inconvenience. A large sum is just then paid from the Government
balance to the bankers' balances, and if you permitted the Bank to
lend it while it was still in the hands of the Government, but
forbad them to lend it when it came into the hands of the bankers, a
great tilt upwards in the value of money would be the consequence,
for a most important amount of it would suddenly have become
ineffective.
But the idea that the bankers' balances ought never to be lent is
only a natural aggravation of the truth that these balances ought to
be used with extreme caution; that as they entail a liability
peculiarly great and singularly difficult to foresee, they ought
never to be used like a common deposit.
It follows from what has been said that there are always possible
and very heavy demands on the Bank of England which are not shown in
the account of the Banking department at all: these demands may be
greatest when the liabilities shown by that account are smallest,
and lowest when those liabilities are largest. If, for example, the
German Government brings bills or other good securities to this
market, obtains money with them, and removes that money from the
market in bullion, that money may, if the German Government choose,
be taken wholly from the Bank of England. If the wants of the German
Government be urgent, and if the amount of gold 'arrivals,' that is,
the gold coming here from the mining countries, be but small, that
gold will be taken from the Bank of England, for there is no other
large store in the country. The German Government is only a
conspicuous example of a foreign power which happens lately to have
had an unusual command of good securities, and an unusually
continuous wish to use them in England. Any foreign state hereafter
which wants cash will be likely to come here for it; so long as the
Bank of France should continue not to pay in specie, a foreign state
which wants it must of necessity come to London for it.
And no indication of the likelihood or unlikelihood of that want can
be found in the books of the Bank of England.
What is almost a revolution in the policy of the Bank of England
necessarily follows: no certain or fixed proportion of its
liabilities can in the present times be laid down as that which the
Bank ought to keep in reserve. The old notion that one-third, or any
other such fraction, is in all cases enough, must be abandoned. The
probable demands upon the Bank are so various in amount, and so
little disclosed by the figures of the account, that no simple and
easy calculation is a sufficient guide. A definite proportion of the
liabilities might often be too small for the reserve, and sometimes
too great. The forces of the enemy being variable, those of the
defence cannot always be the same.
I admit that this conclusion is very inconvenient. In past times it
has been a great aid to the Bank and to the public to be able to
decide on the proper policy of the Bank from a mere inspection of
its account. In that way the Bank knew easily what to do and the
public knew easily what to foresee. But, unhappily, the rule which
is most simple is not always the rule which is most to be relied
upon. The practical difficulties of life often cannot be met by very
simple rules; those dangers being complex and many, the rules for
encountering them cannot well be single or simple. A uniform remedy
for many diseases often ends by killing the patient.
Another simple rule often laid down for the management of the Bank
of England must now be abandoned also. It has been said that the
Bank of England should look to the market rate, and make its own
rate conform to that. This rule was, indeed, always erroneous. The
first duty of the Bank of England was to protect the ultimate cash
of the country, and to raise the rate of interest so as to protect
it. But this rule was never so erroneous as now, because the number
of sudden demands upon that reserve was never formerly so great. The
market rate of Lombard Street is not influenced by those demands.
That rate is determined by the amount of deposits in the hands of
bill-brokers and bankers, and the amount of good bills and
acceptable securities offered at the moment. The probable efflux of
bullion from the Bank scarcely affects it at all; even the real
efflux affects it but little; if the open market did not believe
that the Bank rate would be altered in consequence of such effluxes
the market rate would not rise. If the Bank choose to let its
bullion go unheeded, and is seen to be going so to choose, the value
of money in Lombard Street will remain unaltered. The more numerous
the demands on the Bank for bullion, and the more variable their
magnitude, the more dangerous is the rule that the Bank rate of
discount should conform to the market rate. In former quiet times
the influence, or the partial influence, of that rule has often
produced grave disasters. In the present difficult times an
adherence to it is a recipe for making a large number of panics.
A more distinct view of abstract principle must be taken before we
can fix on the amount of the reserve which the Bank of England ought
to keep. Why should a bank keep any reserve? Because it may be
called on to pay certain liabilities at once and in a moment. Why
does any bank publish an account? In order to satisfy the public
that it possesses cashor available securitiesenough to meet its
liabilities. The object of publishing the account of the banking
department of the Bank of England is to let the nation see how the
national reserve of cash stands, to assure the public that there is
enough and more than enough to meet not only all probable calls, but
all calls of which there can be a chance of reasonable apprehension.
And there is no doubt that the publication of the Bank account gives
more stability to the money market than any other kind of precaution
would give. Some persons, indeed, feared that the opposite result
would happen; they feared that the constant publication of the
incessant changes in the reserve would terrify and harass the public
mind. An old banker once told me: 'Sir, I was on Lord Althorp's
committee which decided on the publication of the Bank account, and
I voted against it. I thought it would frighten people. But I am
bound to own that the committee was right and I was wrong, for that
publication has given the money market a greater sense of security
than anything else which has happened in my time.' The diffusion of
confidence through Lombard Street and the world is the object of the
publication of the Bank accounts and of the Bank reserve.
But that object is not attained if the amount of that reserve when
so published is not enough to tranquillise people. A panic is sure
to be caused if that reserve is, from whatever cause, exceedingly
low. At every moment there is a certain minimum which I will call
the apprehension minimum,' below which the reserve cannot fall
without great risk of diffused fear; and by this I do not mean
absolute panic, but only a vague fright and timorousness which
spreads itself instantly, and as if by magic, over the public mind.
Such seasons of incipient alarm are exceedingly dangerous, because
they beget the calamities they dread. What is most feared at such
moments of susceptibility is the destruction of credit; and if any
grave failure or bad event happens at such moments, the public fancy
seizes on it, there is a general run, and credit is suspended. The
Bank reserve then never ought to be diminished below the
'apprehension point.' And this is as much as to say, that it never
ought very closely to approach that point; since, if it gets very
near, some accident may easily bring it down to that point and cause
the evil that is feared.
There is no 'royal road' to the amount of the 'apprehension
minimum': no abstract argument, and no mathematical computation will
teach it to us. And we cannot expect that they should. Credit is an
opinion generated by circumstances and varying with those
circumstances. The state of credit at any particular time is a
matter of fact only to be ascertained like other matters of fact; it
can only be known by trial and inquiry. And in the same way, nothing
but experience can tell us what amount of 'reserve' will create a
diffused confidence; on such a subject there is no way of arriving
at a just conclusion except by incessantly watching the public mind,
and seeing at each juncture how it is affected.
Of course in such a matter the cardinal rule to be observed is, that
errors of excess are innocuous but errors of defect are destructive.
Too much reserve only means a small loss of profit, but too small a
reserve may mean 'ruin.' Credit may be at once shaken, and if some
terrifying accident happen to supervene, there may be a run on the
Banking department that may be too much for it, as in 1857 and 1866,
and may make it unable to pay its way without assistanceas it was m
those years.
And the observance of this maxim is the more necessary because the
'apprehension minimum' is not always the same. On the contrary, in
times when the public has recently seen the Bank of England exposed
to remarkable demands, it is likely to expect that such demands may
come again. Conspicuous and recent events educate it, so to speak;
it expects that much will be demanded when much has of late often
been demanded, and that little will be so, when in general but
little has been so. A bank like the Bank of England must always,
therefore, be on the watch for a rise, if I may so express it, in
the apprehension minimum; it must provide an adequate fund not only
to allay the misgivings of to-day, but also to allay what may be the
still greater misgivings of to-morrow. And the only practical mode
of obtaining this object is--to keep the actual reserve always in
advance of the minimum 'apprehension' reserve.
And this involves something much more. As the actual reserve is
never to be less, and is always, if possible, to exceed by a
reasonable amount the 'minimum' apprehension reserve, it must when
the Bank is quiet and taking no precautions very considerably exceed
that minimum. All the precautions of the Bank take time to operate.
The principal precaution is a rise in the rate of discount, and such
a rise certainly does attract money from the Continent and from all
the world much faster than could have been anticipated. But it does
not act instantaneously; even the right rate, the ultimately
attractive rate, requires an interval for its action, and before the
money can come here. And the right rate is often not discovered for
some time. It requires several 'moves,' as the phrase goes, several
augmentations of the rate of discount by the Bank, before the really
effectual rate is reached, and in the mean time bullion is ebbing
away and the 'reserve' is diminishing. Unless, therefore, in times
without precaution the actual reserve exceed the 'apprehension
minimum' by at least the amount which may be taken away in the
inevitable interval, and before the available precautions begin to
operate, the rule prescribed will be infringed, and the actual
reserve will be less than the 'apprehension' minimum. In time the
precautions taken may attract gold and raise the reserve to the
needful amount, but in the interim the evils may happen against
which the rule was devised, diffused apprehension may arise, and
then any unlucky accident may cause many calamities.
I may be asked, 'What does all this reasoning in practice come to?
At the present moment how much reserve do you say the Bank of
England should keep? state your recommendation clearly (I know it
will be said) if you wish to have it attended to.' And I will answer
the question plainly, though in so doing there is a great risk that
the principles I advocate may be in some degree injured through some
mistake I may make in applying them.
I should say that at the present time the mind of the monetary world
would become feverish and fearful if the reserve in the Banking
department of the Bank of England went below 10,000,000 L. Estimated
by the idea of old times, by the idea even of ten years ago, that
sum, I know, sounds extremely large. My own nerves were educated to
smaller figures, because I was trained in times when the demands on
us were less, when neither was so much reserve wanted nor did the
public expect so much. But I judge from such observations as I can
make of the present state of men's minds, that in fact, and whether
justifiably or not, the important and intelligent part of the public
which watches the Bank reserve becomes anxious and dissatisfied if
that reserve falls below 10,000,000 L. That sum, therefore, I call
the 'apprehension minimum' for the present times. Circumstances may
change and may make it less or more, but according to the most
careful estimate I can make, that is what I should call it now.
It will be said that this estimate is arbitrary and these figures
are conjectures. I reply that I only submit them for the judgment of
others. The main question is one of fact--Does not the public mind
begin to be anxious and timorous just where I have placed the
apprehension point? and the deductions from that are comparatively
simple questions of mixed fact and reasoning. The final appeal in
such cases necessarily is to those who are conversant with and who
closely watch the facts.
I shall perhaps be told also that a body like the Court of the
Directors of the Bank of England cannot act on estimates like these:
that such a body must have a plain rule and keep to it. I say in
reply, that if the correct framing of such estimates is necessary
for the good guidance of the Bank, we must make a governing body
which can correctly frame such estimates. We must not suffer from a
dangerous policy because we have inherited an imperfect form of
administration. I have before explained in what manner the
government of the Bank of England should, I consider, be
strengthened, and that government so strengthened would, I believe,
be altogether competent to a wise policy.
Then I should say, putting the foregoing reasoning into figures,
that the Bank ought never to keep less than 11,000,000 L.. or
11,500,000 L. since experience shows that a million, or a million
and a half, may be taken from us at any time. I should regard this
as the practical minimum at which, roughly of course, the Bank
should aim, and which it should try never to be below. And, in order
not to be below 11,500,000 L., the Bank must begin to take
precautions when the reserve is between 14,000,000 L. and 15,000,000
l.; for experience shows that between 2,000,000 L. and 3,000,000 L.
may, probably enough, be withdrawn from the Bank store before the
right rate of interest is found which will attract money from
abroad, and before that rate has had time to attract it. When the
reserve is between 14,000,000 L. and 15,000,000 L., and when it
begins to be diminished by foreign demand, the Bank of England
should, I think, begin to act, and to raise the rate of interest.
CHAPTER XIII.
Conclusion.
I know it will be said that in this work I have pointed out a deep
malady, and only suggested a superficial remedy. I have tediously
insisted that the natural system of banking is that of many banks
keeping their own cash reserve, with the penalty of failure before
them if they neglect it. I have shown that our system is that of a
single bank keeping the whole reserve under no effectual penalty of
failure. And yet I propose to retain that system, and only attempt
to mend and palliate it.
I can only reply that I propose to retain this system because I am
quite sure that it is of no manner of use proposing to alter it. A
system of credit which has slowly grown up as years went on, which
has suited itself to the course of business, which has forced itself
on the habits of men, will not be altered because theorists
disapprove of it, or because books are written against it. You might
as well, or better, try to alter the English monarchy and substitute
a republic, as to alter the present constitution of the English
money market, founded on the Bank of England, and substitute for it
a system in which each bank shall keep its own reserve. There is no
force to be found adequate to so vast a reconstruction, and so vast
a destructions and therefore it is useless proposing them.
No one who has not long considered the subject can have a notion how
much this dependence on the Bank of England is fixed in our national
habits. I have given so many illustrations in this book that I fear
I must have exhausted my reader's patience, but I will risk giving
another. I suppose almost everyone thinks that our system of
savings' banks is sound and good. Almost everyone would be surprised
to hear that there is any possible objection to it. Yet see what it
amounts to. By the last return the savings' banks--the old and the
Post Office together--contain about 60,000,000 L. of deposits, and
against this they hold in the funds securities of the best kind. But
they hold no cash whatever. They have of course the petty cash about
the various branches necessary for daily work. But of cash in
ultimate reserve cash in reserve against a panicthe savings' banks
have not a sixpence. These banks depend on being able in a panic to
realise their securities. But it has been shown over and over again,
that in a panic such securities can only be realised by the help of
the Bank of Englandthat it is only the Bank with the ultimate cash
reserve which has at such moments any new money, or any power to
lend and act. If in a general panic there were a run on the savings'
banks, those banks could not sell 100,000 L. of Consols without the
help of the Bank of England; not holding themselves a cash reserve
for times of panic, they are entirely dependent on the one Bank
which does hold that reserve.
This is only a single additional instance beyond the innumerable
ones given, which shows how deeply our system of banking is fixed in
our ways of thinking. The Government keeps the money of the poor
upon it, and the nation fully approves of their doing so. No one
hears a syllable of objection. And every practical manevery man who
knows the scene of actionwill agree that our system of banking,
based on a single reserve in the Bank of England, cannot be altered,
or a system of many banks, each keeping its own reserve, be
substituted for it. Nothing but a revolution would effect it, and
there is nothing to cause a revolution.
This being so, there is nothing for it but to make the best of our
banking system, and to work it in the best way that it is capable
of. We can only use palliatives, and the point is to get the best
palliative we can. I have endeavoured to show why it seems to me
that the palliatives which I have suggested are the best that are at
our disposal.
I have explained why the French plan will not suit our English
world. The direct appointment of the Governor and Deputy-Governor of
the Bank of England by the executive Government would not lessen our
evils or help our difficulties. I fear it would rather make both
worse. But possibly it may be suggested that I ought to explain why
the American system, or some modification, would not or might not be
suitable to us. The American law says that each national bank shall
have a fixed proportion of cash to its liabilities (there are two
classes of banks, and two different proportions; but that is not to
the present purpose), and it ascertains by inspectors, who inspect
at their own times, whether the required amount of cash is in the
bank or not. It may be asked, could nothing like this be attempted
in England? could not it, or some modification, help us out of our
difficulties? As far as the American banking system is one of many
reserves, I have said why I think it is of no use considering
whether we should adopt it or not. We cannot adopt it if we would.
The one-reserve system is fixed upon us. The only practical
imitation of the American system would be to enact that the Banking
department of the Bank of England should always keep a fixed
proportionsay one-third of its liabilitiesin reserve. But, as we
have seen before, a fixed proportion of the liabilities, even when
that proportion is voluntarily chosen by the directors, and not
imposed by law, is not the proper standard for a bank reserve.
Liabilities may be imminent or distant, and a fixed rule which
imposes the same reserve for both will sometimes err by excess, and
sometimes by defect. It will waste profits by over-provision against
ordinary danger, and yet it may not always save the bank; for this
provision is often likely enough to be insufficient against rare and
unusual dangers. But bad as is this system when voluntarily chosen,
it becomes far worse when legally and compulsorily imposed. In a
sensitive state of the English money market the near approach to the
legal limit of reserve would be a sure incentive to panic; if
one-third were fixed by law, the moment the banks were close to
one-third, alarm would begin, and would run like magic. And the fear
would be worse because it would not be unfoundedat least, not
wholly. If you say that the Bank shall always hold one-third of its
liabilities as a reserve, you say in fact that this one-third shall
always be useless, for out of it the Bank cannot make advances,
cannot give extra help, cannot do what we have seen the holders of
the ultimate reserve ought to do and must do. There is no help for
us in the American system; its very essence and principle are
faulty.
We must therefore, I think, have recourse to feeble and humble
palliatives such as I have suggested. With good sense, good
judgment, and good care, I have no doubt that they may be enough.
But I have written in vain if I require to say now that the problem
is delicate, that the solution is varying and difficult, and that
the result is inestimable to us all.
APPENDIX.
Note A.
Liabilities and Cash Reserve of the Chief Banking Systems.
The following is a comparison of the liabilities to the public, and
of the cash reserve, of the banking systems of the United Kingdom,
France, Germany, and the United States. For the United Kingdom the
figures are the most defective, as they only include the deposits of
the Bank of England, and of the London joint stock banks, and the
banking reserve of the Bank of England, which is the only cash
available against these liabilities is also the only cash reserve
against the similar liabilities of the London private banks, the
provincial English banks, and the Scotch and Irish banks. In the
case of England, therefore, the method of comparison exhibits a
larger proportion of cash to liabilities than what really exists.
(1) ENGLISH BANKING.
Liabilities.
Deposits of Bank of England, less
estimated Joint Stock Bank balances, at December 31, 1872 L 29,000,000
Deposits of London Joint Stock Banks
at December 31 1872 (see 'Economist,' February 8, 1873) L 91,000,000
Total liabilities L 120,000,000
Reserve of Cash
Banking Reserve in Bank of England. L 13,500,000
Making proportion of cash reserve to liabilities to the public about
11'2 per cent.
(2) BANK of FRANCE (FEBRUARY, 1873).
Liabilities
Circulation L 110,000,000
Deposits L 15,000,000
Total liabilities L 125,000,000
Reserve of Cash.
Coin and bullion in hand L 32,000,000
Making proportion of cash reserve to liabilities to the public about
25 per cent.
(3) BANKS OF GERMANY (JANUARY, 1873).
Liabilities
Circulation L 63,000,000
Deposits L 8,000,000
Acceptances and Indorsements L 17,000,000
Total liabilities L 88,000,000
Reserves of Cash
Cash in Hand L 41,000,000
Making proportion of cash reserve to liabilities to the public about
per cent.
(4) NATIONAL BANKS OF UNITED STATES (OCTOBER 3, 1872).
Liabilities
Circulation L 67,000,000
Deposits L 145,000,000
Total liabilities L 212,000,000
Reserve of Cash
Coin and legal tenders in hand L 26,000,000
Making proportion of cash reserve to liabilities to the public about
12.3 per cent.
SUMMARY
Liabilities Cash held Proportion of cash
to the public to liabilities per
cent
Bank of England and London
Joint Stock Banks 20,000,000 13,500,000 11.2
Bank of France 125,000,000 32,000,000 25.0
Banks of Germany 88,000,000 41,000,000 47.0
National Banks of
United States 212,000,000 26,000,000 12.3
Note B.
Extract from Evidence Given by Mr. Alderman Salomons before House of
Commons Select Committee in 1858
1146. [Chairman.] The effect upon yourselves of the pressure in
November was, I presume, to induce you to increase your reserve in
your own hands, and also to increase your deposits with the Bank of
England?--Yes, that was so; but I wish to tell the Committee that that
was done almost entirely by allowing the bills of exchange which we
held to mature, and not by raising any money, or curtailing our
accommodation to our customers. Perhaps it may be interesting to the
Committee to know that on the 11th of November we held discounted
bills for brokers to the amount of 5,623,000 L. Out of those bills,
2,800,000 L. matured between the 11th of November and the 4th of
December, and 2,000,000 L. more between the 4th of December and the
31st. So that about 5,000,000 L. of bills matured between the 11th
of November and the 31st of December; consequently we were prepared,
merely by the maturing of our bills of exchange, for any demands
that might possibly come upon us.
1147. I understand you to say that you did not withdraw your usual
accommodation from your own customers, but that you ceased to have
in deposit with the bill-brokers so large a sum of money as you had
before?--Not exactly that; the bills which we had discounted were
allowed to mature, and we discounted less; we kept a large reserve
of cash.
1148. That is to say, you withdrew from the commercial world a part
of that accommodation which you had previously given, and at the
same time you increased your deposits with the Bank of England?--Yes,
our deposits with the Bank of England were increased. We did not
otherwise withdraw accommodation.
1149. [Mr. Weguelin.] Had you any money at call with the
billbrokers?--A small amount; perhaps about 500,000 L. or less, which
we did not call in.
1150. [Chairman.] What I understand you to say is, that the effect of
the commercial pressure upon you was to induce you upon the whole to
withdraw from commerce an amount of accommodation which in other
times you had given, and at the same time to increase your deposits
with the Bank of England?--So far only as ceasing to discount with
strangers, persons not having current accounts with us.
1151. Or to give the same amount to the bill-broker?--For a while,
instead of discounting for brokers and strangers, we allowed our
bills to mature, and remained quiescent with a view to enable us to
meet any demand that might be made on ourselves.
1152. Except what you felt bound to your own customers to continue
to give, you ceased to make advances?--Quite so; perhaps I might say
at the same time, that besides a large balance which we kept at the
Bank of England, which of course was as available as in our own
tills, we increased our notes in our tills at the head office and at
all the branches.
1153. I suppose at that time large sales of public securities were
made by the London joint stock banks, which securities were
purchased by the public?--It is understood that some joint stock and
other banks sold, but I believe it is quite certain that the public
purchased largely, because they always purchase when the funds fall.
1154. Are you prepared to give the Committee any opinion of your own
as to the effect, one way or the other, which the system of the
joint stock banks may have produced with regard to aggravating or
diminishing the commercial pressure in the autumn of last year?--I
should state, generally, that the joint stock banks, as well as all
other banks, in London, by collecting money from those who had it to
spare, must of necessity have assisted, and could not do otherwise
than assist commerce, both then and at all other times.
1155. You say that your discounts, either at your own counter or
through the bill-brokers, are ordinarily very large, but that at the
time of severest pressure you contracted them so far as you thought
was just to your own immediate customers?--Yes; but the capital was
still there, because it was at the Bank of England, and it was
capable of being used for short periods; if we did not want it,
others might have used it.
1156. [Mr. Weguelin.] In fact, it was used by the Bank of England?--
Undoubtedly; I should suppose so; there is no question about it.
1157. You, of course, felt quite certain that your deposits in the
Bank of England might be had upon demand?--We had no doubt about it.
1158 You did not take into consideration the effect of the law of
1844, which might have placed the Banking Department of the Bank of
England in such a position as not to be able to meet the demands of
its depositors? I must say that that never gave us the smallest
concern.
1159. You therefore considered that, if the time should arrive, the
Government would interfere with some measure as they had previously
done to enable the Bank to meet the demands upon it?--We should always
have thought that if the Bank of England had stopped payment, all
the machinery of Government would have stopped with it, and we never
could have believed that so formidable a calamity would have arisen
if the Government could have prevented it.
1160. [Chairman.] The notion of the convertibility of the note being
in danger never crossed your mind?--Never for a moment; nothing of the
kind.
1161. [Mr. Weguelin.] I refer not to the convertibility of the note,
but to the state of the Banking Department of the Bank of England?--If
we had thought that there was any doubt whatever about it, we should
have taken our bank-notes and put them in our own strong chest. We
could never for a moment believe an event of that kind as likely to
happen.
1162. Therefore you think that the measure taken by the Government,
of issuing a letter authorising the Bank of England to increase
their issues of notes upon securities, was what was generally
expected by the commercial world, and what in future the commercial
world would look to in such a conjunction of circumstances?--We looked
for some measure of that nature. That, no doubt, was the most
obvious one. We had great doubts whether it would come when it did,
until the very last moment.
1163. Have you ever contemplated the possibility of the Bank
refusing to advance, under circumstances similar to those which
existed in November, 1857, upon good banking securities?--Of course I
have, and it is a very difficult question to answer as to what its
effect might be; but the notion appears to me to be so thoroughly
ingrained in the minds of the commercial world, that whenever you
have good security it ought to be convertible at the Bank in some
shape or way, that I have very great doubt indeed whether the Bank
can ever take a position to refuse to assist persons who have good
commercial securities to offer.
1164. [Mr. Cayley.] When you say that you have come to some fresh
arrangement with regard to your allowance of interest upon deposits,
do you speak of yourselves as the London and Westminster Bank, or of
some of the other banks in combination with yourselves?--I think all
the banks have come to an understanding that it is not desirable,
either for their proprietors or for the public, to follow closely at
all times the alterations of the Bank. I believe it is understood
amongst them all that they do not intend following that course in
future.
1165. Is that from a feeling that it is rather dangerous under
particular circumstances?--I cannot admit as to its being dangerous,
but there can be no doubt of this, that there is a notion in the
public mind which we ought not to contend against, that when you
offer a high rate of interest for money, you rather do it because
you want the person's money, than because you are obeying the market
rate; and I think it is desirable that we should show that if
persons wish to employ their money, and want an excessive rate, they
may take it away and employ it themselves.
1166. You think that there is now a general understanding amongst
the banks which you have mentioned, to act upon a different
principle from that on which they acted during last October and
November?--I think I may say that I know that to be the case.
1167. Was not it the fact that this system of giving so high a rate
of interest upon money at call commenced very much with the
establishment of some banks during the last year or two, which,
instead of demanding 10 days' or a month's notice, were willing to
allow interest upon only three days' notice; did not that system
begin about two years ago?--I do not think it began with the new
banks; I think it began with one of the older banks; I know that as
regards my own bank, that we were forced into it; I forgot to say,
that with regard to ourselves in taking money on deposit, the
parties must leave the money a month, or they lose interest. We do
not take money from any depositor at interest unless upon the
understand ing and condition that it remains a month with us; he may
withdraw it within the month, but then he forfeits interest; it will
not carry interest unless it is with us a month, and then it is
removable on demand without notice.
1168. Is it or is it not a fact that some of the banks pay interest
upon their current accounts?--Yes, I think most of the new banks do
so; and the Unlon Bank of London does it.
1169. At a smaller rate than upon their deposits, I presume?--I think
at a smaller rate, but I believe it is a fixed rate on the minimum
balance for some period, either six months or one month, I do not
exactly know the period. I think I ought to add (and I believe it is
the case with all the banks) that the London and Westminster Bank,
from the day of its first institution until the present day, has
never re-discounted a bill. No bill has ever left our bank unless it
has been for payment.
1170. Is not that generally the case with the London joint stock
banks?--I believe it is the case.
1171. [Mr. Weguelin.] But you sometimes lend money upon bills
deposited with you by bill-brokers?--Yes.
1172. And you occasionally call in that money and re-deliver those
securities?--Yes; but that we do to a very small extent.
1173. Is not that equivalent to a re-discount of bills?--No; the
discount of a bill and the lending money on bills are very different
things. When we discount a bill, that bill becomes our property; it
is in our control, and we keep it and lock it up until it falls due;
but when brokers come to us and want to borrow, say 50,000 L. on a
deposit of bills, and we let them have the money and afterwards
return those bills to them and we get back our money, surely that is
not a re-discount.
1174. When you want to employ your money for a short period, do you
not frequently take bills of long date, and advance upon them?--But
that is not a re-discount on our part. Very often brokers in
borrowing money send in bills of long date, and afterwards we call
in that loan; but that is no more a re-discount than lending money
upon consols and calling in that money again. It is not an advance
of ours; we do not seek it; they come to us and borrow our money,
and give us a security; when we want our money we call for that
money, and return their security. Surely that is not a re-discount.
1175. [Mr. Hankey.] Is there not this clear distinction between
returning a bill on which you have made an advance and discounting a
bill, that if you have discounted a bill your liability continues
upon the bill until that bill has come to maturity?--Yes.
1176. In the other case you have no further liability
whatever?--Certamly.
1177. Should you not consider that a very important distinction?--I
think it is an important distinction. Take this case: suppose a
party comes to us and borrows 50,000 L., and we lend it him, and
when the loan becomes due we take our money back again. Surely that
is not a discount on our part.
1178. Is there not this distinction, that if you re-discount you may
go on pledging the liability of your bank to an almost unlimited
amount, whereas in the other case you only get back that money which
you have lent?--Undoubtedly.
1179. [Mr. Cayley.] The late Chancellor of the Exchequer stated
before the adjournment, in a speech in the House of Commons, that
during the Monday, Tuesday, Wednesday, and Thursday of the panic,
the Bank was almost, if not entirely, the only body that discounted
commercial bills; how can you reconcile that with what you have
said, that you gave as much accommodation as usual to your
customers?--I am not responsible for what the Chancellor of the
Exchequer said; I am responsible for what I am now stating as to the
course of our bank, that our advances to our customers on the 31st
of December were nearly 500,000 L. higher than they were on the 1st
of October. With regard to our not discounting for other parties, it
was in consequence of the discredit which prevailed, that it was
necessary we should hold a portion of our deposits in order that
they should be available in case persons called for them; a certain
number of persons did so; in the month of November we had a
reduction of our deposits, and if we had gone on discounting for
brokers we should have had to go into the market ourselves to raise
money on our Government securities, but we avoided that by not
discounting, and leaving our money at the Bank of England.
1180. Then you did not discount as much as usual for your customers
during that period?--Yes. we did, and more.
1181. But not to strangers?--Not to strangers; I make a distinction
between our transactions with our customers, who of course expect us
to give accommodation, and discounts for brokers, which is entirely
voluntary, depending upon our having money to employ.
1182. How would it have been if the letter had not issued at the
last moment? That is a question which I can hardly answer.
1183. What do you mean by that general expression of yours?--It is
impossible to predicate what may happen in time of panic and alarm.
A great alarm prevailed certainly amongst the commercial world, and
it could never have been alleviated, except by some extraordinary
means of relief. We might probably have been in the state in which
Hamburg was, where they have no bank-notes in circulation.
1184. [Mr. Spooner.] What did you mean by the expression, 'the last
moment'? You said that the letter came out at the last moment; the
last moment of what?--It was late in the day; it was a day of great
distress. For two days there was a great deal of anxiety, and
everybody expected that there would be some relief; and it was when
expectation, I suppose, was highly excited that the letter came, and
it gave relief.
1185. Cannot you tell us what your opinion would have been, if that
last moment had happened to have elapsed, and the letter had not
come?--It is very difficult to say; it is too much to say that it
could not have been got over. There can be no doubt whatever that
what created the difficulty existed out of London, and not in it;
and therefore it is much more difficult for me to give an opinion. I
believe that the banking interest, both private and joint stock, was
in a perfectly sound condition, and able to bear any strain which
might have been brought upon it in London.
1186. [Mr. Hankey.] Can you give the Committee any idea as to what
proportion of deposits you consider generally desirable to keep in
reserve?--You must be very much guided by circumstances. In times of
alarm, when there are failures, of course all bankers strengthen
their reserves; our reserve then is larger. In times of ordinary
business we find, both as regards our deposits at interest as well
as those which are not at interest, that there is a constant
circulation; that the receipts of money very nearly meet the
payments.
1187. You probably keep at all times a certain amount of your
deposits totally unemployed; in reserve?--Yes.
1188. In a normal state of commercial affairs, is there any fixed
proportion, or can you give the Committee any idea of what you would
consider about a fair and desirable proportion which should be so
kept unemployed?--I think the best idea which I can give upon that
subject is to give our annual statement, or balance sheet, for the
31st of December.
1189. Does that show what amount of unemployed money you had on that
day?--Yes. I will put in a statement, which perhaps will be the best
means of meeting the question, showing the cash in hand on the 30th
of June and the 31st of December in every year, as shown by our
published accounts, together with our money at call and our
Government securities; that will be perhaps the best and most
convenient way of giving the information you desire to have. (See
Table below.)
1190. Do you consider that when your deposits are materially on the
increase it is necessary to keep a larger amount of money in reserve
than you would keep at other times?--I may say that, as a general
rule, our reserve would always bear some proportion to our deposits.
_Total Lodgments with London and Westminster Bank; also Amount of
Cash in Hand, Moneys with Bill-Brokers at Call, and Government
Securities held by the Bank._
DATE Deposits Cash in Hand Money at Call Government Securities TOTAL.
31 December 1845 3,590,014 563,072 628,500 1,039,745 2,231,317
31 December 1846 3,280,864 634,575 423,060 938,717 1,996,352
31 December 1847 2,733,753 7,231,325 350,108 791,899 1,863,332
30 June 1848 3,170,118 588,871 159,724 1,295,047 2,043,642
31 December 1848 3,089,659 645,468 176,824 1,189,213 2,011,505
30 June 1849 3,392,857 552,642 246,494 964,800 1,763,936
31 December 1849 3,680,623 686,761 264,577 973,691 1,224,029
30 June 1850 3,821,022 654,649 258,177 972,055 1,884,881
31 December 1850 3,969,648 566,039 334,982 1,089,794 1,990,815
30 June 1851 4,414,179 691,719 424,195 1,054,018 2,169,932
31 December 1851 4,677,298 653,946 378,337 1,054,018 2,080,301
30 June 1852 5,245,135 861,778 136,687 1,054,018 2,122,483
31 December 1852 5,581,706 855,057 397,087 1,119,477 2,371,621
30 June 1853 6,219,817 904,252 499,467 1,218,852 2,622,571
31 December 1853 6,259,540 791,699 677,392 1,468,902 2,937,993
30 June 1854 6,892,470 827,397 917,557 1,457,415 3,202,369
31 December 1854 7,177,244 694,309 486,400 1,451,074 2,631,783
30 June 1855 8,166,553 722,243 483,890 1,754,074 2,960,207
31 December 1855 8,744,095 847,856 451,575 1,949,074 3,248,505
30 June 1856 11,170,010 906,876 601,800 1,980,489 3,489,165
31 December 1856 11,438,461 1,119,591 432,000 2,922,625 4,474,216
30 June 1857 13,913,058 967,078 687,730 3,353,179 5,007,987
31 December 1857 113,889,021 2,226,441 1,115,883 3,582,797 6,923,121
1191. Do you employ your money in the discounting of bills for other
persons than your own customers?--Discount brokers.
1192. Only to discount brokers? Yes.
1193. Not to strangers who are in the habit of bringing you in
bills; commercial houses?--I should say generally not. We have one or
two houses for whom we discount who have not accounts with us as
bankers, but generally we do not discount except for our customers
or for billbrokers.
1194. Do you consider that any advantage can arise to the public by
the Bank of England advancing to a greater extent than can be
considered strictly prudent on the soundest principle of banking,
under the idea of their affording aid to the commercial world?--As I
said before, as long as there are good bills in circulation, that
is, bills about which there would be no doubt of their being paid at
maturity, there should be some means by which those bills could be
discounted.
1195. And do you think that it is part of the functions of the Bank
of England to discount a bill for anybody, merely because the party
holding the bill wishes to convert it into cash?--As I said before,
the Bank of England will have great difficulty in getting rid of
that inconvenient idea which there is in the mind of the public,
that the Bank of England is something more than an ordinary joint
stock bank. I think it must depend very much upon circumstances
whether you can or cannot refuse the discount of good bills which
are offered to you.
Note C.
Statement of Circulation and Deposits of the Bank of Dundee at
Intervals of Ten Years between 1764 and 1864.
Year Circulation Deposits
1764 30,395 --
1774 27,670 --
1784 56,342 --
1794 50,354 --
1804 54,096 157,821
1814 46,627 445,066
1824 29,675 343,948
1834 26,467 563,202
1844 27,504 535,253
1854 40,774 705,222
1864 41,118 684,898
The Bank did not begin to receive deposits until 1792, in which year
they amounted to 35,9441.
Note D.
Meeting of the Proprietors of the Bank of England.
September 13, 1866.
(From 'Economist,' September 22, 1866.)
A General Court of the Bank of England was held at the Bank at
twelve o'clock on the 3th instant, for the purpose of declaring a
dividend for the past half-year.
Mr. Launcelot Holland, the Governor of the Bank, who presided upon
the occasion, addressed the proprietors as follows: This is one of
the quarterly general courts appointed by our charter, and it is
also one of our half-yearly general courts, held under our bye-laws,
for the purpose of declaring a dividend. From a statement which I
hold in my hand it appears that the net profits of the Bank for the
half-year ending on the 31st of August last amounted to 970,014 L.
17s. 10d.; making the amount of the rest on that day, 3,981,783 L.
18s. 11d.; and after providing for a dividend at the rate of 6 L.
10s. per cent, the rest will stand at 3,035,838 L.. 18s. 11d. The
court of directors, therefore, propose that a half-yearly dividend
of interest and profits, to the amount of 6 L. 10s. per cent, without
deduction on account of income tax, shall be made on the 10th of
October next. That is the proposal I have now to lay before the
general court; but as important events have occurred since we last
met, I think it right I should briefly advert to them upon this
occasion. A great strain has within the last few months been put
upon the resources of this house, and of the whole banking community
of London; and I think I am entitled to say that not only this house
but the entire banking body acquitted themselves most honourably and
creditably throughout that very trying period. Banking is a very
peculiar business, and it depends so much upon credit that the least
blast of suspicion is sufficient to sweep away, as it were, the
harvest of a whole year. But the manner in which the banking
establishments generally of London met the demands made upon them
during the greater portion of the past half-year affords a most
satisfactory proof of the soundness of the principles on which their
business is conducted. This house exerted itself to the utmost--and
exerted itself most successfully--to meet the crisis. We did not
flinch from our post. When the storm came upon us, on the morning on
which it became known that the house of Overend and Co. had failed,
we were in as sound and healthy a position as any banking
establishment could hold; and on that day and throughout the
succeeding week, we made advances which would hardly be credited. I
do not believe that any one would have thought of predicting, even
at the shortest period beforehand, the greatness of those advances.
It was not unnatural that in this state of things a certain degree
of alarm should have taken possession of the public mind, and that
those who required accommodation from the Bank should have gone to
the Chancellor of the Exchequer and requested the Government to
empower us to issue notes beyond the statutory amount, if we should
think that such a measure was desirable. But we had to act before we
could receive any such power, and before the Chancellor of the
Exchequer was perhaps out of his bed we had advanced one-half of our
reserves, which were certainly thus reduced to an amount which we
could not witness without regret. But we could not flinch from the
duty which we conceived was imposed upon us of supporting the
banking community, and I am not aware that any legitimate
application for assistance made to this house was refused. Every
gentleman who came here with adequate security was liberally dealt
with, and if accommodation could not be afforded to the full extent
which was demanded, no one who offered proper security failed to
obtain relief from this house. I have perhaps gone a little more
into details than is customary upon these occasions, but the times
have been unusually interesting, and I thought it desirable to say
this much in justification of the course adopted by this house of
running its balances down to a point which some gentlemen may
consider dangerous. Looking back, however, upon recent events, I
cannot take any blame to this court for not having been prepared for
such a tornado as that which burst upon us on the ith of May; and I
hope the court of proprietors will feel that their directors acted
properly upon that occasion, and that they did their best to meet a
very extraordinary state of circumstances. I have now only to move
that a dividend be declared at the rate of 6 L. 10s. per cent for
the past half-year.
Mr. Hyam said that before the question was put he wished to offer a
few observations to the court. He believed that the statement of
accounts which had just been laid before them was perfectly
satisfactory. He also thought that the directors had done their best
to assist the commercial classes throughout the late monetary
crisis; but it appeared to him at the same time that they were in
fault in not having applied at an earlier period to the Chancellor
of the Exchequer for a suspension of the Bank Act. It was well known
that the demand on the Bank was materially lessened in the earlier
part of the day, in consequence of a rumour which had been
extensively circulated that permission to overstep the limits laid
down in the Act had been granted. That concession, however, had only
been made after the most urgent representations had been addressed
to the Chancellor of the Exchequer at a late hour in the night, and
if it had then been refused he felt persuaded that the state of
affairs would have been much worse on the Saturday than it had been
on the Friday. The fact was that the Act of 1844 was totally
unsuited to the present requirements of the country, which since
that period had tripled or quadrupled its commerce; and he was sorry
to know that the measure seemed to meet with the approval of many of
their directors. Any one who read the speeches made in the course of
the discussion on Mr. Watkins' motion must see that the subject
called for further inquiry; and he trusted that the demand for that
inquiry would yet be conceded.
Mr. Jones said he entirely dissented from the views with respect to
the Bank Act entertained by the hon. proprietor who had just
addressed the court. In his opinion the main cause of the recent
monetary crisis was that, while we had bought 275,000,000 L. worth
of foreign produce in the year 1865, the value of our exports had
only been 165,000,000 L., so that we had a balance against us to the
amount of 110,000,000 L. He believed that the Bank acted wisely in
resisting every attempt to increase the paper currency, and he felt
convinced that the working classes would be the people least likely
to benefit by the rise in prices which would take place under such a
change.
Mr. Moxon said he should be glad to know what was the amount of bad
debts made by the Bank during the past half-year. It was stated very
confidently out of doors that during that period the directors had
between 3,000,000 L. and 4,000,000 L. of bills returned to them.
The Governor of the Bank.--May I ask what is your authority for that
statement? We are rather amused at hearing it, and we have never
been able to trace any rumour of the kind to an authentic source.
Mr. Moxon continued--Whether the bad debts were large or small, he
thought it was desirable that they should all know what was their
actual amount. They had been told at their last meeting that the
Bank held a great many railway debentures; and he should like to
know whether any of those debentures came from railway companies
that had since been unable to meet their obligations. He understood
that a portion of their property was locked up in advances made on
account of the Thames Embankment, and in other ways which did not
leave the money available for general banking and commercial
purposes; and if that were so, he should express his disapproval of
such a policy. There was another important point to which he wished
to advert. He was anxious to know what was the aggregate balance of
the joint stock banks in the Bank of England. He feared that some
time or other the joint stock banks would be in a position to
command perhaps the stoppage of the Bank of England. If that were
not so, the sooner the public were full & informed upon the point the
better. But if ten or twelve joint stock banks had large balances in
the Bank of England, and if the Bank balances were to run very low,
people would naturally begin to suspect that the joint stock banks
had more power over the Bank of England than they ought to have. He
wished further to ask whether the directors had of late taken into
consideration the expediency of paying interest on deposits. He
believed that under their present mode of carrying on their business
they were foregoing large profits which they might receive with
advantage to themselves and to the public; and he would recommend
that they should undertake the custody of securities after the
system adopted by the Bank of France. In conclusion, he proposed to
move three resolutions, for the purpose of providing, first, that a
list of all the proprietors of Bank stock should be printed, with a
separate entry of the names of all those persons not entitled to
vote from the smallness of their stock, or from the shortness of
time during which they held it; secondly, that a copy of the charter
of the Bank, with the rules, orders, and bye-laws passed for the
good government of their corporation, should be printed for the use
of the shareholders; and thirdly, that auditors should be appointed
to make detailed audits of their accounts.
Mr. Gerstenberg recommended that the directors should take some step
for the purpose of preventing the spread of such erroneous notions
as that which lately prevailed on the Continent, that the Bank was
about to suspend specie payments.
Mr. W. Botly said he wished to see the directors taking into their
consideration the expediency of allowing interest on deposits.
Mr. Alderman Salomons said he wished to take that opportunity of
stating that he believed nothing could be more satisfactory to the
managers and shareholders of joint stock banks than the testimony
which the Governor of the Bank of England had that day borne to the
sound and honourable manner in which their business was conducted.
It was mainfestly desirable that the joint stock banks and the
banking interest generally should work in harmony with the Bank of
England; and he sincerely thanked the Governor of the Bank for the
kindly manner in which he had alluded to the mode in which the joint
stock banks had met the late monetary crisis.
The Governor of the Bank said--Before putting the question for the
declaration of a dividend, I wish to refer to one or two points that
have been raised by the gentlemen who have addressed the court on
this occasion. The most prominent topic brought under our notice is
the expediency of allowing interest on deposits; and upon that point
I must say that I believe a more dangerous innovation could not be
made in the practice of the Bank of England. The downfall of Overend
and Gurney, and of many other houses, must be traced to the policy
which they adopted of paying interest on deposits at call, while
they were themselves tempted to invest the money so received in
speculations in Ireland or in America, or at the bottom of the sea,
where it was not available when a moment of pressure arrived.
Mr. Botly said he did not mean deposits on call.
The Governor of the Bank of England continued--That is only a matter
of detail; the main question is whether we ought to pay interest on
deposits, and of such policy I must express my entire disapproval.
Mr. Moxon has referred to the amount of our debts, but, as I stated
when I took the liberty of interrupting him, we could never trace
the origin of any rumour which prevailed upon that subject. As far
as it can be said to have ever existed it had its origin most
probably in the vast amount advanced by the Bank. It must, however,
be remembered that we did not make our advances without ample
security, and the best proof of that is the marvelously small amount
of bad debts which we contracted. It has never been a feature of the
Bank to state what was the precise amount of those debts; but I
believe that if I were to mention it upon the present occasion, it
would be found to be so inconsiderable that I should hardly obtain
credence for the announcement I should have to make. I am convmced
that our present dividend has been as honestly and as hardly earned
as any that we have ever realised; but it has been obtained by means
of great vigilance and great anxiety on the part of each and all of
your directors; and I will add that I believe you would only
diminish their sense of responsibility, and introduce confusion into
the management of your business, if you were to transfer to auditors
the making up of your ac counts. If your directors deserve your
confidence they are surely capable of performing that duty, and if
they do not deserve it you ought not to continue them in their
present office. With regard to the supposed lock-up of our capital,
I must observe that, with 14,000,000 L. on our hands, we must
necessarily invest it in a variety of securities; but there is no
ground for imagining that our money is locked up and is not
available for the purpose of making commercial advances. We advanced
in the space of three months the sum of 45,000,000 L.; and what more
than that do you want? It has been recommended that we should take
charge of securities; but we have found it necessary to refuse all
securities except those of our customers; and I believe the custody
of securities is becoming a growing evil. With regard to railway
debentures, I do not believe we have one of a doubtful character. We
have no debentures except those of first-class railway companies and
companies which we know are acting within their Parliamentary
limits. Having alluded to those subjects, I will now put the motion
for the declaration of the dividend.
The motion was accordingly put and unanimously adopted.
The chairman then announced that that resolution should be confirmed
by ballot on Tuesday next, inasmuch as the Bank could not, under the
provisions of its Act of Parliament, declare otherwise than in that
form a dividend higher than that which it had distributed during the
preceding half-year.
The three resolutions proposed by Mr. Moxon were then read; but they
were not put to the meeting, inasmuch as they found no seconders.
Mr. Alderman Salomons said that their Governor had observed that he
thought the payment of interests on deposits was objectionable; and
everyone must see that such a practice ought not to be adopted by
the Bank of England. But he took it for granted that the Governor
did not mean that his statement should apply to joint stock banks
which he had himself told them had conducted their business so
creditably and so successfully.
The Governor of the Bank said that what he stated was that such a
system would be dangerous for the Bank of England, and dangerous if
carried into effect in the way contemplated by Mr. Moxon.
Mr. P. N. Laurie said he understood the Governor of the Bank to say
that it would be dangerous to take deposits on call, and in that
opinion he concurred.
Mr. Alderman Salomons said that he, too, was of the same opinion.
On the motion of Mr. Alderman Salomons, seconded by Mr. Botly, a
vote of thanks was passed to the Governor and the directors for
their able and successful management of the Bank during the past
half-year, and the proceedings then terminated.
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