THE
MONEY MARKET

BY
F. STRAKER

FELLOW OF AND LECTURER TO THE BANKERS’ INSTITUTE
AND LECTURER TO THE EDUCATIONAL DEPARTMENT
OF THE LONDON CHAMBER OF COMMERCE

THIRD EDITION

METHUEN & CO. LTD.
36 ESSEX STREET W.C.
LONDON

CONTENTS

THE MONEY MARKET

CHAPTER I
THE BEGINNING OF BANKING IN ENGLAND

The present position of the Money Market in this country so enters into the life of the people as a thing that is, that few trouble themselves to inquire how our monetary system came to be what it is, how it was founded, grew, and developed into its present state. Whether people are aware of it or not, the stability and condition of the Money Market of a country influences the lives of all—rich and poor alike—and the material well-being of all is largely dependent upon it. Before proceeding to any examination of the methods in which present-day business in the London Money Market is conducted, we will look back into the past, and trace the rise of our financial system from its early beginnings.

Trade is, of course, the foundation of, and reason for, the need of money; and trade commenced with the first division of labour. With the earliest men one was more fitted for one thing and one for another; one was a hunter and one a husbandman. When the hunter handed over to the husbandman so many skins for so much corn, trade was established; but this trade was, of course, only a system of barter. As men grew more civilised and trade developed, the inconveniences of this system became apparent and pressing, and gradually more suitable modes of settling transactions were evolved; although in certain remote and uncivilised parts of the world trading by barter exists to the present day. As a reminder of bygone times there is, in the Royal Exchange, a picture of the Phœnicians trading with the men of Cornwall fine cloth for tin and skins.

We know that the early inhabitants of this country had coinage of a kind, but the earliest record of any definite business in monetary transactions was in the reign of William the Conqueror, who first introduced Jewish traders to this country. From that time on, for hundreds of years, the Jews were more or less intimately connected with our finances; but they led a very chequered career in England, being frequently treated with great cruelty and barbarity. They were required for the help which could be obtained from them, but hated by the people for their usurious practices. The exactions which the kings and nobles of the time put upon them were largely conducive to these practices, however, as unless the Jews could make large profits out of the people they would not have been able to meet these exactions.

The financial importance of the Jews appears to have declined in this country towards the end of the thirteenth century; but about the same time their place was taken by the Lombards, the early Italian merchants, who came over and settled here in the street which still bears their name. These Lombards were men of some attainment, being skilled in arts and trade, and they possessed the only knowledge of banking then in existence. They combined the art of the goldsmith with the business of the banker, and gradually obtained a firm and sound footing in the country.

The reign of Elizabeth was notable, among many other things, for a great and important increase in the trade and commerce of the country. Many causes contributed to this, among others being the capture of Antwerp by the Duke of Parma, when it is said a third of the merchants of that flourishing city found a refuge on the banks of the Thames. The newly awakened national energies found fresh outlets and markets, and London gradually became the general mart of Europe and of the then known world. That the knowledge of banking and the foreign exchanges had by this time considerably developed we can gather from many sources; but the knowledge and wisdom exhibited by Sir Thomas Gresham during the reigns of Edward VI., Mary, and Elizabeth is remarkable, and his influence had a far-reaching effect on the public and private finances of the time.

In spite of this increase of the knowledge of monetary matters, however, no settled banking business developed for some time. As our merchants gradually accumulated riches they fell into the custom of sending their surplus funds to the Tower of London for safe custody. This custom was brought to an abrupt end in 1640 by Charles I. taking possession of £200,000 which had thus been lodged at the Tower; but this sum was shortly after repaid. For a time the merchants kept their moneys in their own possession, but owing to the unsettled condition of affairs ruling through the whole period of the civil war, they adopted a system of depositing their cash with the goldsmiths, who were by this time a wealthy and responsible body.

In addition to the presumed safety of funds so deposited, the goldsmiths offered an extra inducement for further funds to be placed in their hands by allowing interest on such moneys. With this additional borrowed cash at their disposal, the goldsmiths commenced the business of discounting bills and lending money; and they also lent money to the king on the security of the taxes. The receipts they issued for the money lodged with them circulated from hand to hand, and were known as Goldsmiths’ Notes, and these may be considered the first kind of notes issued in England. Scott, in the Fortunes of Nigel, makes Heriot to say, “I am a goldsmith, and live by lending money as well as by selling plate.”

In 1672, however, this gradually developing banking business received a rude shock. As we have already seen, the goldsmiths, or bankers, of the time lent their money to the king; that is, they deposited their moneys with the Treasury on the security of the revenue, from which they were afterwards reimbursed, obtaining a good rate of interest on their money in the meanwhile. A king or a government, however, can no more live beyond their income without getting into difficulties, than can an individual. The necessities and extravagances of Charles II. led him to a memorable step when, in the year 1672, he suddenly ordered the Exchequer to be closed, and refused to pay out any of the sums deposited. The amount thus annexed was about £1,300,000, and this drastic measure had the effect of bringing ruin on nearly half of the goldsmiths, and consequently on their clients who had money deposited with them. The injustice of this seizure raised such universal protest that the king agreed to pay interest at the rate of 6 per cent. per annum on the principal sum out of the hereditary excise. This interest was paid until the last year of his reign, and subsequently an arrangement was made by which about one-half the sum owing was allotted to the claimants in the form of stock. This was the real commencement of our National Debt in its present form.

CHAPTER II
FOUNDATION AND GROWTH OF THE
BANK OF ENGLAND

In tracing the history of our financial system we now come to the important event of the establishment of the Bank of England.

About the year 1691 the Government of William and Mary experienced considerable difficulty in raising the necessary funds to prosecute the war with France; but “the hour brings the man.” The man on this occasion was William Paterson, a merchant of Scotland, who had been educated for the Church, but had led a varied and adventurous life. The scheme he presented for the consideration of the Government for the relief of the situation was the foundation of a public joint-stock bank; which, in return for certain powers and privileges to be conferred, should advance money to the Government. His scheme, though well received in official circles, produced very great opposition from many classes of the public, who thought they would be prejudiced by such an institution.

The goldsmiths thought they saw in it the destruction of their business, the money-lenders a reduction in the rates of interest obtainable, certain merchants a reduction of their profits on Government contracts, while the political opponents of the Government and the king saw that the scheme, if efficiently carried out, would naturally strengthen the former and give the latter a firmer position than he occupied at that time; and all these interested parties with one accord joined forces and condemned the scheme.

But in spite of all opposition the Bill establishing the Bank of England was successfully carried through Parliament, and obtained the royal assent on the 25th April, 1694.

The basis of the Bill was that £1,200,000 should be voluntarily subscribed by the public, and that the subscribers should be incorporated into a body, to be known as “The Governor and Company of the Bank of England.”

The whole of the sum forming the capital of the Bank was to be lent to the Government, for which the Bank was to receive interest at the rate of 8 per cent. per annum, together with an allowance of £4,000 per annum for management and expenses; making in all £100,000 per annum. It was also provided that the sum of £300,000 was to be raised by public subscription, for which the contributors were to receive certain terminable annuities.

By its first Charter, which was for ten years only, the Bank of England was not allowed to borrow or owe more than the amount of its capital; which meant that it could issue notes to the extent of its capital and no more. If this amount were exceeded the members were liable for such excess, in their private capacities, in proportion to their holding of stock.

The capital of the Bank was subscribed in a few days, and when duly paid up, the agreed sum of £1,200,000 was handed in to the Exchequer.

Such in brief was the foundation of the Bank of England, and though its establishment quickly had a beneficial effect on the community at large, in curtailing the ruling rates of interest, yet its early years were marked by great trouble and many vicissitudes. Certain persons who had opposed its establishment from personal motives saw some of their worst fears being realised in the reduction of their profits, and they were not slow to take advantage of every opportunity which presented itself to throw obstacles in the path of their young though powerful rival, and to unite in efforts to thwart its progress.

With a Government always wanting more financial help, in season and out of season, with debased currency, and with enemies on every side, the position of the directors of the Bank was no enviable one; and it was only by great energy, united effort, and perseverance that they were able to keep their heads above water, and struggle on until at last they found themselves on safer and firmer ground.

The Charter originally granted to the Bank was for ten years only, as we have already seen; but this Charter has from time to time been renewed, and also varied—sometimes in favour of the Bank and sometimes curtailing its privileges. The monopoly of joint-stock banking was not granted to the Bank by its first Charter, but this monopoly was practically conferred on it in 1708. The Act passed in that year provides:—

“That during the continuance of the said corporation of the Governor and Company of the Bank of England, it shall not be lawful for any body politic or corporate whatsoever, created or to be created (other than the said Governor and Company of the Bank of England), or for any other persons whatsoever, united or to be united in covenants or partnership, exceeding the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof.”

In spite of its many embarrassments, the following extract from the London Magazine of 1737 shows how well the Bank of England had come to be thought of by that time:—

“There certainly never was a body of men that contributed more to the public safety than the Bank of England. This flourishing and opulent company have, upon every emergency, always cheerfully and readily supplied the necessities of the nation, so that there never have been any difficulties—any embarrassments—any delays in raising the money which has been granted by Parliament for the service of the public; and it may very truly be said that they have, in very many important conjunctures, relieved the nation out of the greatest difficulties, if not absolutely saved it from ruin.”

We pass on now to the end of the eighteenth century, when the country was plunged in the throes of war and financial difficulty. Up to this time the Bank, since its foundation, had succeeded in meeting its notes when presented; but in the year 1796 a steady drain on the reserve of the Bank commenced, owing to the fear of invasion. This drain began to assume a very serious aspect in the early part of 1797, and it appeared probable that the Bank would be subjected to the danger and humiliation of a temporary stoppage. The directors, fully aware of this danger ahead of them, laid the position before the Government, and left the solution of the difficulty in its hands. After due consideration, an Order in Council was issued on the 26th February, 1797, requiring the Bank not to pay its notes in gold. On the following day this Order was made public, and the Bank issued the following notice:—

“Bank of England, February 27th, 1797.

“In consequence of an order of His Majesty’s Privy Council, notified to the Bank last night, a copy of which is hereunto annexed, the governor, deputy-governor, and directors of the Bank of England think it their duty to inform the proprietors of the bank stock, as well as the public at large, that the general concerns of the Bank are in the most affluent and prosperous situation, and such as to preclude every doubt as to the security of its notes. The directors mean to continue their usual discounts for the accommodation of the commercial interest, paying the amount in bank-notes, and the dividend warrants will be paid in the same manner.”

This suspension of cash payments was a very drastic measure to take; but the public, recognising the difficulties of the situation, and appreciating the means which were being taken for the general safety, at once fell in with the spirit of the Order, and a meeting of merchants and bankers was held and passed the following resolution, which received very general support:—

“That we, the undersigned, being highly sensible how necessary the preservation of public credit is at this time, do most readily declare that we will not refuse to receive bank-notes in payment of any sum of money to be paid to us, and we will use our utmost endeavours to make all our payments in the same manner.”

An Act was passed in the following May, confirming the action of the Privy Council, but authorising the Bank to pay out sums under twenty shillings in cash, and also allowing certain bankers to have a stated amount of cash. This Act restricted the payment of cash for a period of fifty-two days only, but before it expired a further Act was passed extending the period of restriction, and subsequently other Acts were passed greatly prolonging the period; and it was not until 1823 that the restriction was entirely withdrawn, although as a matter of fact the Bank really resumed paying in cash on demand on May 1st, 1821, deeming it then safe to do so.

Although a period of safety and prosperity then appeared to have dawned, the Bank was not quite clear of its troubles. The very prosperity of the times led imperceptibly to another period of distress and danger, culminating in the panic of 1825.

The year 1824 was notable for a very great increase in the number of joint-stock companies which were promoted or suggested, and also of loans to foreign countries; and a period of intense excitement and speculation ensued. This was followed by the inevitable crisis, which developed into a panic at the end of 1825, when a large number of London and country bankers had to stop payment. The reserve of the Bank was reduced to a merely nominal figure, and the Bank authorities themselves suggested that they should again be “restricted” as to payments; but the suggestion was firmly resisted by the Government. Fortunately, at the lucky moment, an old box which had been stored away was remembered. It contained a large quantity of £1 notes, and these the Bank at once commenced to issue. This issue had very quick and beneficial results. The notes were readily received by the public in exchange for the notes of private bankers, the demand for bullion ceased; and Mr. Harman, giving his evidence before a parliamentary committee inquiring into the causes of the panic, stated it was his opinion that this issue of small notes “saved the credit of the country.”

In 1826 the Bank of England, by arrangement with the Government, agreed to establish branches in various parts of the country, and gave up their monopoly of joint-stock banking, except within a radius of sixty-five miles of London.

The year 1833, however, saw a further restriction in the powers of the Bank, when, after protracted negotiations, and in return for a further renewal of its Charter, the Bank surrendered its monopoly of joint-stock banking entirely, provided that no bank having more than six partners might issue notes within the sixty-five-mile limit of London.

It is a curious point that the Charter of the Bank never did restrict joint-stock banking in its present accepted form, but only the issue of notes by joint-stock bankers or banks having more than six partners. Up to this time the issue of notes by a bank had been thought to be its main business; so much so, that it was believed to be useless to attempt to conduct a bank without power of issue, and consequently no joint-stock bank had been founded. But about this time the need of such institutions began to be felt, and the presumed monopoly of the Bank of England was called in question—largely by Mr. Gilbart, the founder of the London and Westminster Bank. The Bank tried to assert their monopoly, but without success, and in order to settle the matter effectually, the following clause was inserted in the Act passed in 1833 dealing with the Bank Charter:—

“Be it therefore declared and enacted, that any body politic or corporate, or society, or company, or partnership, although consisting of more than six persons, may carry on the trade or business of banking in London, or within sixty-five miles thereof, provided that such body politic or corporate, or society, or company, or partnership, do not borrow, owe, or take up in England, any sum or sums of money on their bills or notes payable on demand, or at any less time than six months from the borrowing thereof, during the continuance of the privileges granted by this Act to the said Governor and Company of the Bank of England.”

It may be noted that this Act of 1833 constituted Bank of England notes a legal tender, except by the Bank itself or its branches.

When the Bank of England first commenced business in 1694, it was located in the Hall of the Grocers’ Company, in which building it continued to conduct its operations until the year 1732. A slight dispute then arising with the Grocers’ Company as to a renewal of the lease of their hall, it was decided by the authorities of the Bank to acquire a building of their own. Accordingly premises were obtained in Threadneedle Street upon a portion of the present site, and Lawson in his History of the Bank of England gives the following details as to the same:—

“The original extent of the Bank comprehends the site of the house and garden belonging to Sir J. Houblon, one of the first directors. It was a comparatively small building, invisible from the street, and surrounded by other buildings, one being the church of St. Christopher le Stocks, and the others consisting of five inns and twenty private houses. As the business and importance of the Bank grew, the surrounding premises were acquired from time to time and demolished, and the present building was gradually erected. Although the church of St. Christopher shared a similar fate with the surrounding buildings, the churchyard was preserved, and now forms what is known as the ‘Garden’ of the Bank.”

Lawson states that one of the clerks of the Bank, of the name of Jenkins, was buried in this consecrated ground. The cause of this interment in such a place arose out of a fear, as expressed by his relatives, that in consequence of his singular height (he was about seven feet tall), his body would be exhumed by body-snatchers if buried elsewhere. The sequel to this episode is within the writer’s personal knowledge. Having to pay a visit to a dentist some few years ago, he was shown, as a curiosity, an enormous human lower jaw-bone with a full set of perfect teeth. Judging from its size, the dentist said that it had evidently belonged to a giant, and he added that it had been given to him by a friend who was a builder and contractor, and that the jaw-bone had been found by one of this friend’s workmen while carrying out some alterations and excavations at the Bank of England!

Alas, poor Jenkins! to be buried in the “Garden” of the Bank of England as a sure place of refuge against body-snatchers, and in the end to have his jaw-bone exhibited as a curio in a dentist’s surgery.

Having shortly sketched the history of the Bank of England from its inception to the time when it was to be opposed by strong competitive establishments, we now will briefly examine the development of private banking up to this period.

CHAPTER III
THE EARLY PRIVATE BANKERS

We have already seen that elementary banking operations in the country were carried on by the Jews, who in course of time were succeeded by the Lombards, and that then the business, such as it was, drifted into the hands of the goldsmiths. During the more settled years of the Commonwealth the need of banking accommodation was keenly felt by merchants and traders to enable them to carry on their business, and as demand creates supply, the goldsmith bankers increased in number—and in wealth.

There was, indeed, at this time a demand made by certain persons for the establishment of joint-stock banks, on the system already in vogue in several parts of the Continent; and we find that an eminent London merchant, named Lamb, presented an address to the Lord Protector with this object in view. After enumerating all the advantages to be derived from the establishment of such institutions, his address concluded in the following quaint form:—

“Lastly, a bank with a certain number of sufficient men of estate and credit, joined together in a joynt stock, being as it were the general cashkeepers or treasurers of the place where they are settled, and divers others, tending much to the tranquility of your highness and the welfare of the English nation, which, with your highness’s favourable encouragement, I shall in all humility be ready to make known to you, and remove any objections as can be alledged in the premises, and propound a way how it may be effected, and the evils remedied and prevented, being unwilling to bury the talent in a napkin which it hath pleased the Giver of all blessings in his great goodness and mercie to bestow upon me, hoping that I shall not offend by tendering this with my best services to your highness.”

Although this matter was referred to a Parliamentary Committee, nothing came of the proposal.

In 1667 the gradually developing banking business received a check by what is known as a “run” taking place, and this appears to be the first episode of the kind of which we have any record. This event lessened the credit of the bankers, but the action of Charles II. in closing the Exchequer in 1672 nearly brought their business to an end.

By the time of the establishment of the Bank of England, however, many bankers had again regained a position of credit and wealth, and they continued to carry on and develop their business in spite of the competition of the new bank. About the same time several joint-stock banks were founded and carried on successfully until they were obliged to wind up their affairs in 1708, in consequence of the monopoly granted to the Bank of England in that year. Although the London banks, which continued in existence after the granting of this monopoly, were not prohibited by the Bank Charter from issuing their own notes, yet this part of their business gradually declined in the presence of their all-powerful rival, and it ceased altogether about the year 1750 (though some writers give the date as about 1793).

About the year 1775 the City bankers, finding great inconvenience in settling their mutual transactions, established what is called the “Clearing House,” to facilitate their exchanges with each other; of this we shall have more to say later. It may be noted that the two oldest banking houses in London are those of Messrs. Child and Company and Messrs. Hoare, both of which were established before the Bank of England.

In the early days of which we are now speaking, the personal relations of banker and customer were rather different from those of the present time of keen competition: only the merchants and wholesale dealers were personally known to their banker, who was scarcely acquainted with even the names of the retail dealers favouring him with their patronage.

The following amusing anecdote is related, bearing on the lighter side of banking, of an interview between a certain banker in Lombard Street and one of his customers who was a baker:—The baker having one day paid in £500 to his account, left the bank and stood on the doorstep debating in his mind which way he should turn, when the banker came up, and as there was no room for him to pass in without soiling his clothes against the baker’s working ones, he haughtily said, “Move away, fellow!” The baker, feeling of some importance, was naturally nettled, and replied somewhat rudely, which led to high words, and finally the banker was sent spinning into the gutter. Rising up full of wrath, he loudly called for someone to fetch a constable and arrest the fellow, when the cashier who had just received the baker’s money came forward and, to the banker’s surprise, whispered in his ear that the baker was one of his own customers. Retiring into his private room to recover himself, he soon sent for the baker. Apologies were exchanged, and it is said that the banker and baker were thereafter good friends.

Of the early history of country banks we have no very definite records, but we know that after the passing of the Act in 1708, prohibiting the foundation of banks having more than six partners,[1] a large number of private banks having fewer partners than the prescribed number came into existence to meet the necessities of the time; and after the passing of the Bank Restriction Act in 1797 their number was largely increased. At the time of the passing of this latter Act, it is calculated that there were somewhat under three hundred country banks in existence, but by 1813 we find that the number had increased to nearly one thousand.

In the eighteenth century banking was essentially free, in the fullest sense of the word, except for the one prohibition as to the number of partners constituting a bank. Anyone was at liberty to put up the magic word “Bank” over his door and commence business. We cannot say very much as to the solvency of these banks; some were doubtless sound and ably managed, but every wave of distress which swept over the country unfailingly overthrew large numbers of these so-called banks, and occasioned much local suffering.

The gradual evolution of country shopkeepers into country bankers, which was the usual course of the foundation of such institutions in the days of which we are speaking, is well exemplified in the following case, which is related in Lawson’s History of Banking:—

“In a borough town of importance in one of the north midland counties dwelt a respectable draper, possessing a good connection with the farmers frequenting the market of the town. Although the name of Robin Hood had long lost its terrors, those of Turpin and Nevison filled all men’s minds with fear—and with good reason, for they and their fraternity exercised their calling with such energy and success that it was always a matter of doubt with travellers whether or not they should arrive in safety at the next inn or their destination, whatever that might be. With the farmers above alluded to there were more than ordinary grounds of alarm; the town almost adjoining the scene of the far-famed exploits of Robin Hood and his merry men, was admirably situated for a levy by their less romantic successors of extemporaneous taxes. To avoid as much as possible the losses thus arising, farmers, having full confidence in the honesty of the draper with whom they dealt, made him the depositary of their ready cash. Ready cash of his friends was to our draper as valuable as capital of his own, and buying for ready money was profitable. Still, money remained idle in his hands, and by degrees he began to grant accommodation to his neighbours. Our draper now became famous for his extraordinary command of money, and his correspondence extended as far as Preston, in Lancashire. The profits thus arising seemed boundless, and the next step was taken by our adventurous shopkeeper: he allowed a small interest to his friends the depositors. The new business flourished to such an extent that it swallowed up the old one, and our draper at length became a banker proper, and no more a shopkeeper.

“Such was the origin of the Smiths. First confined to the town of Nottingham, afterwards extended to Hull and Lincoln, the business of the firm required a London correspondent entirely in their interest, and such they found in the late Mr. Payne.”

And thus was founded the well-known firm of Smith, Payne, and Smith, whose business has recently been amalgamated with that of the Union Bank of London.

Many are the tales told of the wit and shrewdness of the early country bankers, and the following anecdote, related in Mr. Maberley Phillips’s interesting work on Banks, Bankers, and Banking in Northumberland, Durham, and North Yorkshire, is on a par with the well-known tale of the private Irish banker, who became so very unpopular, that to show the contempt in which he was held, the inhabitants of his district gathered together all his notes which they could lay hands on, and made a bonfire of them in front of his house; much to the banker’s amusement and gain.

Mr. Phillips’s story is of Jonathan Backhouse, a Quaker, who, though originally a linen and worsted manufacturer in Darlington, founded “Backhouse’s Bank” in 1774, in partnership with his father. This institution only went out of existence in 1896, when it was amalgamated with Messrs. Barclay and Company, Limited.

“Before the time of railways, near the beginning of the century, the commercial traveller of that day made his visits to the towns of the county of Durham either by mail coach or other conveyance, and sojourned for some days in each town, where he was an important person, especially at the head hotel or hostelry of the place. It so happened that one of these gentlemen, after having dined freely at the ‘King’s Head,’ Barnard Castle, was boasting to a company present in the commercial room of his own importance and wealth, and exhibiting in proof a sheaf of bank-notes taken on his journey.

“Jonathan Backhouse, attired in the usual dress of the Society of Friends, unknown to the rest of the company, was in the room quietly reading his newspaper, when he was attacked by the wealthy commercial, and by a series of sarcastic remarks held up to ridicule as a man out of harmony with the spirit of the time and place. Following up this raillery the commercial, displaying his handful of notes, offered to bet the Quaker £5, or any sum, that he could not produce as much money as he was exhibiting. Mr. Backhouse, after a great deal of banter, said he did not bet, but to show his indifference to money offered to put a £5 note in the fire if the commercial would do the same. Suiting the action to the word, Mr. Backhouse took out a £5 note and put it into the fire. The commercial, not wishing to be behind, did the same. Mr. Backhouse offered to repeat the process, but the commercial, considerably cowed, declined; when Mr. Backhouse quietly thanked him for having burned one of his (Mr. Backhouse’s) bank-notes for which he had received £5, while the note he (Mr. Backhouse) had burned was on his own bank, and only cost him the paper.”

CHAPTER IV
THE BANK CHARTER ACT OF 1844,
AND ITS SUSPENSIONS

After the renewal of the Charter in 1833, the directors of the Bank of England laid down as a principle on which their future operations were to be guided, that one-third of their liabilities should be kept in cash and bullion, and the remaining two-thirds in securities. If this principle had been acted on, the Bank would have been saved from many of the troubles which shortly assailed it; but though the intentions of the directors were good, circumstances were too strong for them, and the actual proportions of cash and securities to liabilities respectively, often differed materially from the standard laid down. This was notably the case during the periods of financial pressure which were experienced in the years 1836 and 1837.

In the year 1839 matters assumed a very serious aspect. In the early part of this year the amount of cash held by the Bank was about one-third of the amount of securities, but during the year the amount invested in securities increased at the expense of the amount held in cash; and by September we find that securities stood at nearly £29,000,000, while the cash was reduced to a tenth of that figure, and stood at £2,936,000 only. In order to avert a calamity which appeared to be impending, the Bank arranged loans in Paris and Hamburg to the extent of between three and four millions.

This manifest exhibition of weakness on the part of the Bank led to the appointment of a committee of the House of Commons to inquire into the matter. The committee condemned the principles on which the Bank was working, but were powerless to effect any alteration, owing to the Charter of the Bank not expiring till 1844.

On the expiry of the Charter, however, Sir Robert Peel brought forward his famous Act for remodelling the Bank, and regulating the issues of the country banks throughout England and Wales.

The Act was passed on the 19th July, 1844, and continues without alteration to the present day. The main provisions enacted thereby, briefly stated, are as follows:—

I. The Issue Department and the ordinary Banking Department of the Bank of England were to be entirely separated as from the 31st August, 1844.

II. On such separation taking place, securities to the value of £14,000,000 (including the debt due to the Bank from the Government) were to be transferred to the Issue Department, together with so much gold coin and bullion that the total so transferred should equal the total amount of notes then outstanding. Thereafter (with the exception noted below) the Issue Department must not issue any notes in excess of a total of £14,000,000 except in exchange for gold coin or bullion.

III. The Issue Department might not at any time hold more silver than one-fourth part of the gold held. As a matter of fact, the Issue Department holds no silver.

IV. Notes might be demanded from the Issue Department by any person in exchange for gold at the rate of £3 17s. 9d. per standard ounce.

V. If any banker having the power of issue on the 6th May, 1844, should relinquish such issue, the Issue Department may be authorised to increase its issue of notes against securities to the extent of two-thirds of the issue so relinquished; but all the profits on such increased issue against securities were to belong to the Government.

VI. The Bank must issue a weekly statement of the position of both its Issue and Banking Departments, in a prescribed form.

VII. Bankers having the right to issue their own notes on the 6th May, 1844, might continue such issue under certain conditions, and to an agreed amount; but no provision was made compelling such bankers to keep any reserve either in cash or securities against their issues. If any issue lapsed, from any cause, it could not be resuscitated; and no institutions could acquire the right of issue in the future.

VIII. Banks consisting of more than six partners, though within the sixty-five-mile radius of London, might draw, accept, or endorse bills of exchange not being payable to bearer on demand.

The first return issued by the Bank in accordance with the regulations of the new Act was that of the 7th September, 1844, and was as follows:—

For comparison we append the Return of the 2nd September, 1903.

The provisions of the 1844 Act, above noted, are the principal ones which affected banking in general, and the Bank of England in particular—they were the food for much debate and discussion before they became law, and it may be added that several of the provisions then enacted have been the food for much debate and discussion ever since. Taken as a whole the Act has worked well, and has succeeded, in combination with greater knowledge and foresight, in maintaining our banking system in a sound condition.

The regulations as to the country bank-note issues were framed with the idea of ultimately eliminating entirely such issues; but though the amount of private notes in circulation has decreased, and also the number of bankers who have the power of issue—by lapses, bankruptcy, and amalgamations—the time when there are no country bank-notes has not arrived, notwithstanding that the framers of the Act confidently anticipated that such a result would be achieved long before now.

The main point of contention between the supporters and opponents of the Act lies in its want of elasticity in time of need. Under no circumstances can the Bank increase its issue of notes against securities beyond the prescribed limit, without a breach of the law; but on three occasions in the past the law has been broken, though with the consent of the Government, and subsequent confirmation of Parliament.

Under the laws regulating the Imperial Bank of Germany such procedure would not have been necessary. The German Bank Law has been framed largely on the same lines as our own, but it gives the Reichsbank power to increase the amount of notes issued against securities on a payment to the Government of a fine of 5 per cent. per annum on the excess issue. This fine is sufficient in ordinary times to act as a complete check on overissue, but in times of trouble it acts as an efficient safety-valve by relieving the minds of business people from the fear that “there will not be enough to go round.” If it is known that money can always be had at a price, the probability of a crisis developing into a panic is almost entirely obviated.

We will now briefly review the three occasions on which the Bank Act was suspended, and the effect of such suspensions.

The first of these occasions was during the panic in the year 1847—known as the “railway panic.” Shortly previous to this year a great accumulation of capital had led to a demand for new investments, which were duly provided for the public by those concerned with such matters. Added to this, interest rates had ruled low for some time, and this conduced to a period of speculative activity. Too much capital was put into fixed investments—chiefly railways—and in one session of Parliament sanction was asked for various railway schemes involving a total capital of £340,000,000. Wild gambling in railway stocks ensued, credit was inflated above all reason, and then the turn came. This was primarily due to a bad harvest and potato crop causing a heavy importation of corn, and consequent export of gold.

During the panic which ensued, the reserve of the Bank of England fell to £1,600,000, but when the panic was at its height, the Act, passed only three years before, was suspended. The Bank was authorised to increase its accommodation to the public by exceeding, to an indefinite extent, the limit fixed for the issue of notes not secured against gold. The effect of this suspension of the Act was immediate and complete. The fear that “there was not enough to go round” passed from men’s minds. As a matter of fact, the issue on this occasion did not exceed the normal limit, the mere knowledge that the Bank was empowered to exceed this limit proving sufficient to allay the panic.

The second suspension of the Bank Act was due to the crisis of 1857, a crisis that was brought about by reckless overtrading, and came upon the public very suddenly and with practically no warning. The reserve of the Bank of England had been allowed to fall dangerously low during the course of the year, and large financial operators had carried on vast transactions with hardly any capital—only credit—relying for assistance on the Bank. Bad news came to hand from America in September, detailing how there had been a serious financial collapse in that country; failures had occurred, shaking commercial credit to its core, and about one hundred and fifty banks had stopped payment.

A heavy drain of gold from here to America commenced, and by the middle of October credit was curtailed, and distrust was rife in England. Within a very short space of time many of our banks and financial houses were crippled and failed. In November heavy demands were made for gold for Scotland and Ireland, and on the 11th November the failure of Sanderson and Company—a great London discount house—was announced, with liabilities of upwards of five millions. Utter rottenness appeared to pervade the commercial world, and general bankruptcy seemed imminent, when for the second time the Bank Act was suspended. This took place on the 12th November, and at once had the effect of quieting the public mind. On this occasion the Bank had to make use to a large extent of its temporary authority to issue notes above the normal limit without holding gold against them. The severity of this crisis can be seen by the fact that in November the Bank reserve fell to under £600,000, while the bankers’ balances at the Bank of England alone stood at about five and a half millions, and the Bank Rate was as high as 10 per cent. This was also the rate charged by the Bank of France at the time, showing that the panic had spread, and was not solely confined to ourselves and America.

The third suspension of the Bank Act took place in 1866. Many elements of disturbance to the Money Market had been in force during two or three preceding years. The Civil War in America had resulted in gold being sent to this country; but the stoppage of the supply of cotton from America, owing to the war, disorganised one of our staple national industries, and supplies of cotton had to be obtained from elsewhere at high prices, and paid for in cash. Hence a drain of gold set in on a large scale. In addition, a large speculation had been built up on credit in the stocks and shares of the many new limited liability companies which were formed at that time.

General uneasiness began to prevail towards the end of 1865; in January, 1866, the Bank raised its discount rate to 8 per cent., and a crisis began to develop rapidly.

Speculators tried to sell their securities and found no market for them, several large railway contractors failed, and many of the newly formed limited liability companies succumbed and were wound up. The failure of the Joint Stock Discount Company, followed shortly by that of Barned’s Bank of Liverpool, brought matters to a head; the distrust became universal and culminated in panic. On the 9th May the Bank Rate was raised to 9 per cent. On the 10th May the failure of Overend, Gurney, and Company—for upwards of ten millions—was announced, and the Bank Rate went to 10 per cent. This failure was not made known till after business hours, so it was not till Friday, the 11th May, 1866—known as “Black Friday”—that the crisis reached its height.

The stoppage of this large house affected the whole world, and general failure seemed imminent, when, in the afternoon of the day on which the failure became known, it was announced that the Bank Act was again suspended, and calm began to take the place of mania. But though the panic was allayed, many failures shortly took place, which delayed the quick restoration of a sense of security. Among these failures may be mentioned the Bank of London, the Consolidated Bank, and Agra and Masterman’s Bank. All these three institutions were perfectly solvent as a matter of fact, but they found themselves in the dangerous position of having no available assets. The two last-named banks subsequently resumed business.

From the above brief records of the financial tragedies of the past, we see that on each occasion reckless speculation and overtrading had been allowed to reach a dangerous height before any steps were taken to check them, and on each occasion the check came too late. But we also see the marvellously quick effect which the suspension of the Act had on the situation. Although a period of nearly half a century has elapsed since the time of the last suspension, the position remains the same, and it is only owing to greater knowledge and greater caution that such catastrophes have been averted.

In contemplating any future catastrophe of the kind which may come upon us, it is generally assumed that the Act would be again suspended; but delays are dangerous. By the time the situation had developed to such an extent that the Government might deem it expedient to give the Bank the necessary powers, a panic such as has never before been known might overtake us; whereas if the suspension of the Act were to a certain extent automatic, and responsible people knew for certain that money could always be had at a price, the probability of such a termination of any crisis would be very remote.

CHAPTER V
THE DEVELOPMENT OF LONDON AS THE
FINANCIAL CENTRE OF THE WORLD

Before proceeding to examine the Money Market and banking system of more modern days, it will be well to glance at the causes which contributed to the predominance of London among international financial centres, and made it the clearing house of the world. At the present time this predominance is being assailed from several quarters—notably Paris, Berlin, and New York—but there is no doubt that London still holds a good lead, and with knowledge, activity, and perseverance there appears to be no reason why it should not continue to be in the forefront in the future.

In the Wealth of Nations Adam Smith points out that the increase and riches of commercial and manufacturing towns contribute to the improvement and cultivation of the countries to which they belong, and that commerce and manufacture introduce order and good government, and with them the liberty and security of individuals.

In our own history we can trace the truth of these remarks. We have already drawn attention to the flourishing state of trade which developed during the reign of Elizabeth. New industries were started, villages grew into towns, and new markets for our wares were opened up in various parts of the then known world. In consequence of the wars on the Continent, many wealthy merchants came or were exiled to our shores, and settling here, helped to swell the growing business of London. We were fortunate in the fact that this “greater liberty and security of individuals,” enabling our forefathers to devote their attention and wealth to the further development and expansion of the commerce of the country, came about with us long before a similar state of affairs began to have effect with our continental neighbours, and this gave us a good start commercially. While our neighbours were still in the throes of continual disputes and unrest, we were laying the foundations of a world-wide system of trade. We were in a position to supply the Continent with their various needs as they arose, to our own immediate benefit and the further advancement of our commerce.

In connection with the more rapid development of commerce with us than with continental nations must be remembered the energy and activity of the race forming the population of our country—an energy and activity not only in starting and conducting new industries, but in spreading abroad to new lands and forming new colonies, thus enlarging the sphere of our operations and the number of our markets.

Our geographical position has assisted materially in our commercial development. The disturbances arising from the fear and risk of invasion have been less pronounced than with continental nations, and our extended coast-line, embracing many natural shelters, has engendered our vast shipping industry, without which we could never have attained to our present position. We have also had the advantage of another natural circumstance in the proximity of our coal and iron fields to each other. This gave us for a long period an unparalleled command of certain trades dependent on this fact. Thus we see that, owing to good government, national character, and natural conditions, our trade was built up on a firm foundation, and was spread abroad until its ramifications extended into every country of the world.

Turning now from the trade point of view to the monetary position, we find that as our trade grew, so did our means and capacity of dealing with that trade. Although in early days we were rather backward in our banking system, yet that system developed quicker with us than with other countries. The eighteenth century embraced many periods of financial distress, but the Government never defaulted in any of its engagements, and our leading merchants became renowned as men of honour and integrity. During the early part of the nineteenth century our position improved by leaps and bounds, our gold standard of currency was firmly established, our merchants’ names became known and honoured throughout the world, and direct financial operations between London and all foreign parts became matters of daily occurrence.

These monetary transactions were very essential in the financial growth of London, and were a large factor in our capital becoming the centre of finance. Owing to the vast extent of our trade, both as to its amount and diffusion, we were in a position to conduct financial transactions the world over. From this it followed that when commerce began to expand and grow among continental nations, it was found that the easiest way of settling the financial business arising therefrom was through the intermediary of London. England bought from and sold to all nations, but in the first half of the nineteenth century reciprocal transactions between foreign centres of trade were few and far between. For instance, suppose a New York merchant shipped produce to Hamburg, he would draw on some appointed London house for payment; the merchant in Hamburg who had bought the goods would then have to find the means of providing this London house with the necessary funds to meet the draft from New York. This he would do by buying a draft in Hamburg from some merchant there who had shipped goods to London and was wanting payment. This draft he would remit to the London house on which the American exporter had drawn, and the London house would collect the money represented by the Hamburg draft, thus settling both transactions. This is only a rough example, but it is typical of what came to be a regular custom.

Various countries may trade together, but unless they have direct mutual financial transactions, they cannot settle their indebtedness without remitting precious metal of one kind or another, or employing the agency of another country which has direct financial dealings with both. In the time of which we are speaking London was the only centre which was in a position to carry out such transactions. In the latter half of the past century, and especially towards the close of the century, our position suffered through direct financial operations between various countries becoming established, thus eliminating the need of a middleman; but it may still be said of London that it has direct financial and trading connection with every country of the world, which at present cannot be said of either Paris, Berlin, or New York. The very fact of the establishment in London of branches of the leading banks and finance houses of France, Germany, and the United States, emphasises the position which London has attained and still holds in the financial world.

CHAPTER VI
FACTORS OF THE MONEY MARKET

Having now surveyed the history and development of our financial system up to a point when “system” can really be said to have started, and also having glanced at the causes which have placed London in the forefront of all financial centres, we will consider the formation, as a whole, of what is called the “Money Market”; and then more carefully examine certain of the more important factors which help to form that market.

There is no definite “market” for money in the sense of a “place of purchase and sale,” like a cattle market or a corn market; when we speak of the “Money Market” we refer to the body or aggregation of large dealers in money—bankers, bill-brokers, etc.—who either have money to lend or who require to borrow money, and by whom the rate to be charged for the use of money is largely settled, as a result of their mutual transactions.

This body of money-dealers is not clearly defined into two classes—lenders and borrowers—as an ordinary market is divided into two classes—buyers and sellers; but with money-dealers all are practically both buyers and sellers; that is, all are ready to sell the use of money at a certain price, and to buy the use of money at another price.

The Bank of England in bygone days was the predominant factor in the Money Market; but now, in ordinary times, it has somewhat fallen from its high estate in that respect. It is only at certain times that its funds find their way into the Money Market to any large extent. But the Bank still has the power, when occasion arises, to make its influence predominate, as it constitutes the final reserve, in case of need, of our banking system. The Bank likewise has the power to make its influence felt when the directors deem it advisable to obtain control of the Money Market, for the purpose of maintaining the monetary position on a basis of safety. As we shall see when dealing with the subject of the [foreign exchanges], if, in order to check an outflow of gold, the directors of the Bank wish to raise the value of money in London—that is, to raise the rate at which money can be borrowed or lent—they raise the official rate of the Bank of England. If the outside market lags behind, or does not keep in line with the movement, they force it to do so by themselves borrowing large sums from the market, thus reducing the available supply of money in the hands of the market, and consequently enhancing the value of money.

The chief factor in the formation of the Money Market is the body of the joint-stock and private banks of London, and through them of the bankers of the kingdom. Practically all the working capital of the country and the floating money of private individuals, together with moneys awaiting permanent investment, are now in the hands of our bankers.

Of this vast accumulation of capital held by bankers—amounting in the United Kingdom to some £800,000,000—a certain part is retained in actual cash, besides a balance which is kept with the Bank of England or a London agent, some is invested in securities, and the balance is used in lending to those that require the use of further capital for their business or private needs. Of this balance so lent, a large percentage is advanced to individual customers by way of loan, overdraft, or in the discounting of bills; and the remainder is used in the Money Market proper, or what has been aptly called “The Short Loan Fund.” The rate of interest which private individuals have to pay for advances from time to time is largely based on the prevailing official rate of the Bank of England as regards loans, and on the “market rate” as regards the discounting of first-class bills.

For the greater part of the money in a banker’s hands no interest whatever is paid, that is, for practically the whole of the current account balances. For the remainder, the money on deposit, only a small interest is paid; but a banker must always keep before him the fact that nearly all his liabilities are repayable in cash on demand. Thus he must always keep himself prepared for eventualities, and his first line of defence consists of cash and balance with the Bank of England or London agent, and he reckons his advances to the Money Market as his next most quickly convertible and available asset.

For the money advanced to the Money Market bankers are content to receive a low rate of interest, provided that the advances are absolutely safe, and can quickly be called in when necessary. These conditions can be obtained by lending money at “call” (that is, repayable on demand) or at a few days’ notice to the bill-brokers, who deposit as security for such loans, first-class bills, or certain of the highest class of securities, such as Consols, etc.

The bill-brokers and discount houses of London form the second most important factor in the Money Market. These firms and institutions practically act as middlemen or intermediaries. Many of them possess large capital themselves with which to conduct their business, but the bulk of the funds which they employ consists of borrowed money. This money is borrowed from various sources; the greater part from the banks, some from the India Council, and some from our merchant princes and finance houses, who of themselves really constitute another factor in the Money Market. Besides these sources for borrowing money, the bill-brokers further increase their working funds by receiving money on deposit from the public. With the funds so collected they buy bills, usually only those of a first-class character, and these they either hold until maturity or rediscount with the banks, and occasionally with the Bank of England.

The British Government is at certain times a factor in the Money Market, that is, when on account of any extraordinary outlay, or when expenditure is temporarily exceeding revenue, it issues Treasury Bills and Exchequer Bills. If these bills are bought by the Money Market, it follows that the amount of money in the hands of the Market is, at least for the time, decreased by the amount of money paid for the bills (which goes into the Bank of England and helps to increase “Public Deposits”), and consequently the rates for money in the open market are inclined to rise or “harden.” When these bills are repaid the contrary effect is produced, market supplies are increased and rates are inclined to droop.

Another factor which has to be taken into account in this matter is the India Government. The India Government has, from time to time, large funds lying here which are not required for immediate use, nor are they available to lend for long periods; these funds practically constitute a floating balance. Use is made of this money by lending it out to the market through a well-known house, much in the same manner that banks lend their floating balances. The money is usually lent in sums of not less than £50,000, for periods from a fortnight to a month; and it is generally stipulated that the securities deposited against the advances shall consist of either Consols, or Indian Securities of certain kinds, such as rupee paper and the guaranteed debentures of a few of the first-class Indian railways. The India Government generally manages to obtain a very fair return for the money so lent.

The Stock Exchange is another element which requires consideration, although it is a rather one-sided element, inasmuch that it is nearly always a borrower. In busy times on the Stock Exchange enormous sums are borrowed from the banks for the purpose of speculation of one kind or another. Stocks are bought by various persons who have not the money to pay for them, in the anticipation that they will increase in value; and these persons arrange with their brokers to “take up” the stock for them—that is, that the brokers shall find the money to pay for these purchases—and this ultimately results in a banker advancing the money. During periods when the rates of interest are low also, large amounts of stock bearing a higher interest are then “taken up,” for the purpose of securing the difference in the amount of the interest paid for the loan and the interest received from the stock, and the money for these purchases is largely borrowed from banks. These Stock Exchange loans are made from “account to account”—that is, from one settling day on the Stock Exchange to the next—and as there are two settling days every month, the loans are nominally granted for about a fortnight each. The interest charged is fixed at the beginning of each account for that account, and varies according to the prevailing conditions at each renewal.

Lastly, we have a somewhat new factor entering into the Money Market, but one which is increasing in importance, and that is the establishment in London of branches of many powerful and rich continental banks, who make use of the London Money Market for employing their surplus funds when they can do so to advantage. They lend money to the bill-brokers much as do ordinary London banks; and at times, when the conditions are favourable, they invest their funds in English bills, occasionally absorbing considerable amounts of Treasury and Exchequer bills. These purchases of English bills increase the money in the market for the time being, and the competition of these foreign bankers tends to depress the rate charged for discount. It must be remembered, however, that this course of business gives the banks in question power to draw gold from us heavily on the maturity of the bills, or at any time when they see fit, by selling their bills before maturity.

From a consideration of these various factors, we see how largely they are interwoven together and dependent on each other. The banks gather in deposits from all quarters and lend to the bill-brokers, while leaving a large amount with the Bank of England; and the bill-brokers borrow from the banks and buy up bills from all quarters; but if the banks “call” their money from the bill-brokers the latter are driven into the arms of the Bank of England, to reborrow the money which the banks have called from them. This is also the case if the India Government call in their loans, and the money to repay the same cannot be borrowed from the banks. Similarly with the Stock Exchange, if much money is absorbed in this quarter, the banks will reduce their accommodation to the bill-brokers, who may by this action again have to rely on the Bank of England; and again, lastly, if the foreign banks commence to draw money from us, the strain comes as usual on the Bank of England.

All these factors work round the Bank of England as a centre, and the need of strength on the part of that institution becomes at once apparent when it is seen what mighty interests are dependent on it, that the financial credit of the country rests ultimately upon its stability, and that its policy and actions involve consequences of weal or woe to the community at large.

CHAPTER VII
THE BANK RETURN

We will now examine the weekly “Return” issued by the Bank of England in accordance with the requirements of the Act of 1844, and consider the significance of the various items appearing therein. The Return is made up to the close of business on every Wednesday, and is published on Thursday. Though the figures given always attract attention, and are regularly made the subject of analysis and criticism in the financial articles of the Press, yet the interest taken in the Return varies considerably from time to time. During periods of financial quiescence this interest is somewhat of an academical character; but in times of doubt and distrust a very real and practical interest is exhibited, not only by the group of bankers, bill-brokers, and merchants constituting the “Money Market,” but by that section of the general public who have financial transactions at stake, and who possess the requisite knowledge to understand the true import of the figures of the Return.

For the purpose of our analysis we will take the Return of the 2nd September, 1903.

ISSUE DEPARTMENT

In a previous chapter we saw that under the Act of 1844 the Issue Department was to be separated from the Banking Department, and that it was at liberty to issue £14,000,000 of notes against securities, of which the Government Debt, amounting to £11,015,100, was to form a part. Any issue of notes above this amount of £14,000,000 was to be secured by an equal amount of coin or bullion, with the proviso, however, that the issue of notes against securities might be increased from time to time to the extent of two-thirds of the amount of any lapsed country issue.

In the return before us we see the result of nearly sixty years of the working of the Act. The notes issued stand at £51,831,835, and are secured by the Government Debt of £11,015,100 (as at the passing of the Act) and other securities amounting to £7,434,900 (against £2,984,900 in 1844), the balance being made up of gold coin and bullion, no silver being now held. We thus see that advantage has been taken of the lapsing of country bank issues to increase the issue against security by £4,450,000; but it must be remembered that the net profit on this additional issue against securities is credited to the public account.

The actual amount of notes issued, as shown in the returns of 1844 and 1903 respectively, as shown on pages 32 and 33, has increased by the sum of £23,480,540; but if we compare what is called the “Active Circulation” now with that of 1844 we see that the increase is only £9,332,690.

The Active Circulation is arrived at by deducting the amount of notes held by the Banking Department from the total of notes issued by the Issue Department, and it represents the notes actually in the hands of the public. This increase in the Active Circulation is a fluctuating one, but at any time it is totally out of proportion to the expansion of our trade and financial system which has taken place during the last fifty years. The comparative insignificance of the increase is explained by the fact that during the period under review our manner of effecting payments has changed so vastly, cheques having almost completely taken the place of notes in settling our various transactions, both in business and private affairs.

The old idea that a note issue was of vital importance to the life of a bank, and that a mere bank of deposit could not be profitably and usefully conducted, was exploded in the early part of last century, as already explained. The new ideas which then began to prevail, and which led to the formation of our joint-stock banks, have expanded and developed in a manner that was probably not anticipated by the banking pioneers, who successfully assailed the Bank’s presumed monopoly of joint-stock banking.

In such a manner have these new ideas and methods expanded, that the use of the bank-note has practically been done away with, except for special reasons and in certain cases.

These exceptions divide themselves into two heads. Firstly, the large number of Bank of England notes held in place of actual coin in the tills of our banks; and secondly, notes used in settling certain transactions when it is not the custom, or it is not convenient, to pass cheques; such as the settlements arising from the purchase of property, travelling expenses, and for effecting payments and purchases with the non-banking class—a class which is diminishing day by day under our present system of banking.

The amount of notes held by bankers as “till money” is of paramount importance in point of amount compared with the amount of notes in circulation for the other purposes mentioned. The average amount held by bankers from time to time usually remains at a fairly steady figure, whereas the amount of notes in the hands of the people varies considerably; increasing at the end of each month on account of salaries paid by notes, at the end of quarter for payment of rents, etc., and largely increasing during the holiday season by reason of notes carried by travellers to the Continent and elsewhere.

As regards the items appearing on the credit side of the Issue Department’s weekly balance sheet, the Government Debt stands at the same figure as at the passing of the Act.

Other Securities have risen in accordance with the provisions of the Act, and are doubtless of a first-class character, although no information is vouchsafed to us as to the actual securities held.

The remaining item of Gold Coin and Bullion of course fluctuates with the amount of notes issued; the department is something like an automatic machine in this respect—you put in gold and take out notes, and you put in notes and gold comes out. The Issue Department is not only compelled to issue notes in exchange for sovereigns, but also for gold bullion—in bars or foreign coin—at the rate of £3 17s. 9d. per ounce of standard fineness. Any bullion the Bank acquires in this manner it is at liberty to send to the Mint and have converted into coin; but as a matter of fact, a large amount is retained in the form in which it is received, that is, in bar gold and foreign coin. If an export of gold is in progress the exporter can, of course, obtain five sovereigns for every £5 note he presents; but it frequently suits his purpose better to draw bar gold or foreign coin in exchange for his notes, and the Bank is at liberty to charge what it likes for so accommodating him. The price usually charged by the Bank for its bar gold is £3 17s. 10½d. per ounce, but if the demand is pressing it will raise its price to perhaps £3 17s. 11d. Above this figure it is not effectual to raise the price, or sovereigns would, in that event, be drawn and melted down. A similar course as regards sale is in vogue for dealing with foreign coins, and the Bank makes a small profit on such transactions.

BANKING DEPARTMENT

Turning now to the return of the Banking Department, the first item which appears is Proprietors’ Capital, which stands at the enormous figure of £14,553,000—enormous in itself, and enormous in comparison with the capitals of other and competing banks. From the original sum of £1,200,000 with which the Bank commenced business in 1694, the capital has gradually increased until it amounted to the present figure in 1816, since which year there has been no alteration.

The Rest in the Bank of England Return is an accumulation of undivided profits, and compares with the Reserve Funds of other banks. It now stands at about the same figure at which it stood in 1844; and it is never reduced below the sum of £3,000,000. The Bank has also a further reserve in the valuable asset of its premises in the City—the very finest site in London—no credit being taken for the value of this item.

Taking the Proprietors’ Capital and Rest together, we see that the Bank has a total working capital of about seventeen and a half millions, which is far above that of any other Bank, both in amount and in proportion to liabilities. This large capital forms, of course, an element of great strength, but the profit which is earned is so spread out on such a sum, that the actual dividend paid is small in comparison with that of many ordinary joint-stock banks. The dividend paid during the last ten years has averaged 9½ per cent., having been at the rate of 10 per cent. since the end of 1896. The price of Bank Stock has fluctuated between 311 and 367 during the same ten years.

Public Deposits include the balances of the Exchequer, Savings Banks, Commissioners of the National Debt, and Dividend Accounts. This is a very variable item, and its fluctuations at certain seasons of the year have a marked effect on the Money Market. On the 14th of January, 1903, Public Deposits stood at just over eight millions, and on the 25th March, 1903, at over sixteen millions, this increase being due to the collection of taxes at this season of the year, which gradually sweeps away a portion of the balance of other banks, and draws a large sum from the pockets of the people. The increase of the balance of Public Deposits reaches a maximum about the end of March, when the collection of taxes comes to an end.

This gradual accumulation of an extra sum of £8,000,000 in the hands of the Bank of England naturally affects the amount of money which other bankers have at their disposal for lending purposes, and money being thus scarcer, borrowers have to pay more for the use of it. Hence it follows that during this season of the year a tightening of the rates charged by bankers for accommodation is generally seen. After the end of the financial year on the 5th April, the Government generally commences to disperse its large balance by paying its various bills; and this disbursement, together with the dividends on public stock which are paid at the beginning of April, quickly alters the position; money becomes plentiful in the hands of ordinary bankers, and the rates charged for the use of it consequently fall away. From this time on to about the beginning of December, Public Deposits gradually decrease, although there is generally a slight rise at the end of each quarter, followed by a fresh fall immediately after the quarter, this movement being due to the payment of dividends.

Other Deposits include the balances of the ordinary customers of the Bank, both in London and the country, and also the balances kept by bankers with the Bank of England. The balances of the ordinary customers of the Bank are subject to the same conditions and fluctuations as are the balances of the customers of other banks, but the bankers’ balances are of another class. Every “clearing” bank must keep an account with the Bank of England, in accordance with the rules of the Clearing House, as will be explained later. Most other London bankers also keep an account there, as well as many country bankers. The aggregate of the bankers’ balances forms a large proportion of the “Other Deposits.” Up to the year 1877 the total of bankers’ balances was stated as a separate item in the Weekly Return, but this practice was discontinued at that time. In the year 1877—the last year of separate publication—these bankers’ balances averaged about nine and a half millions, but the amount has doubtless largely increased since that time.

Bankers’ balances form, as we shall see, the ultimate reserve on which our banking system rests. Hence the subject is one of great importance. Every “clearing” banker keeps a balance for the purpose of settling the difference which may arise with each day’s settlement at the Clearing House. In addition to this, they, as well as other London and country banks, maintain a large balance at the Bank of England for the purpose of meeting any sudden or extraordinary demands which may be made on them. This is done in place of keeping cash in their tills for the purpose, though of course a sufficient sum in ready cash is kept in hand to meet the ordinary daily requirements. In the case of those country banks which do not keep an account at the Bank of England, the custom is adopted of keeping a reserve balance with a London agent. This reserve swells the amount under the control of the latter, and consequently of the balance he deems it prudent to maintain with the Bank of England. Thus our system is so knitted together that a demand for cash, in whatever part of the country arising, has a prompt effect, to a less or greater degree, on the bankers’ balances at the Bank of England.

From this can be seen the great importance of bankers’ balances, and the great responsibility thrown on the Bank of England of keeping itself strong enough to meet demands from all quarters. The system is certainly a peculiar one, that results in all banks keeping a large part of their surplus funds with another bank, and that not a State bank, though the banker of the State. It is an interesting fact that on many occasions since the passing of the Act in 1844 the “reserve,” or actual cash held by the Bank of England, has been less than the bankers’ balances alone.

This custom of the reserves being held by a central bank has been, and is, the subject of much criticism, principally on the ground that a “one reserve system” is not a sufficient guard against disaster in time of crisis, and that it would be a much safer method were each bank to keep its own special reserve in cash against sudden need. The discussion of the subject during the last few years, combined with other circumstances, has led to some increase in the cash held by bankers in general, and several banks are understood to have commenced keeping a special reserve in cash, on a small scale. The whole subject is a very intricate one, and one that cannot be more than glanced at in the course of this small book.

Taken as a whole, and in ordinary times, “Other Deposits” indicate the state of the Money Market. They rise and fall fairly regularly at certain known seasons of the year; but if they rise above the average for the time of year, it may be taken as an indication that money is abundant, and that bankers and others have funds in hand for which they cannot find profitable employment, and therefore the interest rate charged for the use of money is likely to fall. On the other hand, if “Other Deposits” are below the average, money is evidently in request, and rates are likely to rise. This is in ordinary times. In times of trouble, however, “Other Deposits” will rise considerably, and at the same time interest rates will also advance. The reason of this is that on any note of alarm being sounded in the financial world, bankers will at once begin to strengthen their position—to “keep their powder dry”—and consequently will begin to increase their balances at the Bank of England. Owing to the curtailment in their loanable funds resulting therefrom, money will increase in value, and a higher rate will have to be paid for the use of it by borrowers.

Together with the bankers, other large customers of the Bank of England will increase their balances against emergencies, and possibly, if the trouble become acute, money will be transferred to the Bank from other banks for greater safety. Thus in such times we see the “Other Deposits” of the Bank increasing, while the deposits of other banks are decreasing. It is related that during one crisis a customer of a certain bank became alarmed, and drew out his balance. Not knowing what to do with his money when he had got it, he wrote to the financial editor of one of the great daily papers, asking him where it would be safe to put it, and quickly got back the reply, “Put it in the——,” naming the same bank from which the customer had withdrawn it!

The remaining item on the liability side of the Banking Department, namely, “Seven-day and other Bills,” largely explains itself by its title. The item is not a growing one, as can be seen by referring to the first return issued after the passing of the Bank Act in 1844, when the amount under this heading was over one million pounds.

The seven-day bills referred to are what are known as Bank Post Bills, and are practically drafts on the Bank of England. The custom of issuing these bills appears to have originated about the year 1738, when, in response to representations, the Bank announced that it would give “bills payable at seven days’ sight, that, in case of the mails being robbed, the proprietors might have time to give notice thereof.” The changes which have occurred since this date, and even since 1844, amply account for the falling off in this item. It may be noted that the Bank does not take advantage of the customary three days’ grace in respect of these bills.

Government Securities.—As an ordinary bank in issuing its balance sheet roughly summarises the classes of securities in which its funds are invested, so does the Bank of England in its Weekly Return. The item “Government Securities” comprises, as its name indicates, the amount of all securities held which are guaranteed by the British Government, and it also includes any temporary advances made to the Treasury on “Ways and Means” or “Deficiency Bills.” Advances which are made on the security of “Deficiency Bills” are generally required at the end of each quarter, excepting the March quarter, when, as we have seen, the Public Deposits are large, and the advances are required to meet the interest due on the public funds at the beginning of the ensuing month. The advances are repaid in the course of a few weeks from the incoming revenue. While in force they have the effect of increasing the figure at which Government Securities stand, and also, on the other side of the account, of increasing the total of Public Deposits.

Other Securities.—Under this heading are included all the investments of the Bank other than Government Securities—investments in general securities, loans, bills under discount, and advances to bill-brokers.

No particulars are given as to the amount invested in the various items above mentioned; the investments in general securities, and the loans to ordinary customers of the Bank, may be presumed to be fairly steady in amount, as is the case with other banks; but the amount of investments in bills under discount and of advances to bill-brokers are subject to wide fluctuations from time to time. These fluctuations are due to the complicated system of our Money Market. As will be explained later, ordinary banks employ a certain portion of their funds in advances to bill-brokers. These loans are either repayable at “call,” or are fixed for a certain number of days, and the amount lent varies with each particular bank from day to day, and from week to week. In the aggregate, however, the amount advanced in this way by all the banks combined is not subject to much fluctuation, for this reason—what one bank may lose in available lending balance another will gain, and so the total is not materially altered. At certain seasons of the month and of the year, however, or during periods of threatened disturbance in the Money Market, this is not the case. Circumstances may compel several or even all the banks simultaneously to call on the bill-brokers to repay their advances or part of their advances. Thus the aggregate of the money lent in this manner is materially reduced.

The bill-brokers, finding that they cannot obtain the funds from the ordinary sources wherewith to repay the amounts “called” from them, must have recourse to the Bank of England—both for discounting bills and for short loans. These facilities are there granted to them on certain conditions. The accommodation thus granted to the bill-brokers amounts to very large figures when the resources of the Money Market become locked up, owing to some special cause, such, for instance, as the issue of a big loan like the Transvaal loan of May, 1903. For this loan the “application money” alone, in the hands of the Bank of England, amounted to over £35,000,000, the bulk of which had been temporarily taken from the balances of other banks, thus reducing their lending powers and compelling them to call their advances from the bill-brokers.

Notes, and Gold and Silver Coin.—These two items together form what is known as the “Reserve” of the Bank, and the Reserve is the most important item appearing in the Weekly Return, and the item on which the attention of the Money Market is constantly fixed.

On looking at the balance sheet of one of our joint-stock banks, we find that the first item appearing among the assets of such an institution is “Cash in hand and Balance at the Bank of England”; but it is impossible to tell from this how much is actual cash, and how much balance at the Bank. The average proportion of “Cash and Bank of England balance” to “liabilities to the public” held by our leading joint-stock banks is about 15 per cent., while the proportion of “Cash” (Notes, and Gold and Silver Coin) to “liabilities” with the Bank of England has averaged 50 per cent. during the last ten years, and the fall of its reserve to anything like 15 per cent. would doubtless be coincident with a world-shaking panic. The reason of this great divergence in the proportion of cash in hand held by the Bank of England in comparison with other banks needs explanation, as do also the means taken to maintain the Reserve at a figure of presumed safety.

The “Reserve” is the reserve of the Banking Department only, and has no connection with the Issue Department as regards the convertibility of its notes. The great importance that is attached to the Reserve being maintained at a large figure is due to the fact that not only can this Reserve be drawn upon for home requirements, but that it is open to attack, and serious attack, from abroad.

As regards home requirements, the needs of the public in usual times follow a regular course, and one that is known and can be provided for beforehand; but this is not the case as regards foreign demands, and it is in connection with these demands that most of the changes in the Bank Rate owe their origin. If the directors of the Bank of England had to deal with home demands only, the question of fixing the Bank Rate would be an easy one—that is, of fixing the rate at which they are nominally prepared to discount for the public and for bill-brokers, and the rate which, by custom, governs the interest allowed on deposits and in many cases the rate charged for loans by other banks. But London is the most open market for gold in the whole world, and any country which requires gold for any purpose can draw it from London with more ease than from any other quarter. Hence our stock of gold is peculiarly open to attack, and in fixing the Bank Rate from time to time, the directors have to consider the question of whether gold is coming to us or leaving us. If gold is coming here in large quantities, the Reserve will improve, money will be plentiful with ordinary banks, who will consequently be prepared to lend at cheaper rates—considerably below the advertised rate of the Bank of England—and that institution will gradually lower its rate so as to keep in line with the prevailing conditions. On the other hand, if gold is leaving us in considerable quantities, the Reserve will of course fall, and this will be followed by a gradual tightening of rates in the Money Market, and the Bank Rate will be raised, not only in order to check the export of the metal, but to attract imports. Why a high Bank Rate is likely to attract foreign gold to our shores, and a low rate to have the contrary effect, will be explained in a later chapter dealing with the [Foreign Exchanges].

CHAPTER VIII
THE GROWTH OF JOINT-STOCK BANKS

We have already seen in dealing with the Bank of England that the formation of a bank with more than six partners was supposed to have been expressly prohibited by the Bank’s Charter. The direct result of this presumed prohibition was the establishment throughout the country of a large number of small private banks. Many of these were institutions of credit, ably managed and backed with a fair capital; but the majority of them were weak, and in times of trouble proved a source of danger and loss to the community. The various financial crises of the later part of the seventeenth and the early part of the eighteenth century gradually brought home to the people and the Government the unwisdom of the system whereby the growth of small banks was fostered, and the establishment of large and wealthy institutions was forbidden. At length—in 1826—the Bank of England was by Act of Parliament compelled to part with a portion of its presumed monopoly, and joint-stock banks were allowed to be established outside a sixty-five-mile radius from London.

It is somewhat remarkable that after the formation of joint-stock banks was at last permitted, very small advantage was at first taken of the permission thus afforded; one joint-stock bank was founded at Lancaster, another at Bradford, and a third at Norwich. But it was not until a period of commercial prosperity set in that any considerable number of such banks were founded. In the year 1833, however, and for a few following years, a large number of provincial joint-stock banks sprang into existence.

The presumed monopoly of the Bank of England within the sixty-five-mile radius was next called in question in London, and it was asserted that the monopoly consisted only of a prohibition of the formation of banks of issue, and steps were taken to found a joint-stock bank in London. This was strongly opposed by the Bank, which tried to have its Charter so amended that its monopoly might be complete. This proposal of the Bank of England was, in its turn, strongly opposed by the Government, which not only refused to alter the Charter, but, at the next renewal thereof, in 1833, actually inserted a clause expressly permitting joint-stock banks to be established within the sixty-five-mile limit, provided that such banks did not borrow or take up in England any sum or sums of money on their bills or notes payable on demand or at less than six months from the borrowing thereof.

No sooner had this clause become law than advantage was taken of it, and the formation of the first joint-stock bank in London was commenced. This bank was the London and Westminster, which was established in 1834, and it was quickly followed by the London Joint Stock Bank in 1836, and the Union Bank of London and the London and County Bank, both in 1839.

The London and Westminster Bank commenced business in the city of London and at Westminster in March, 1834; at that date the paid-up capital was £50,000 only; but that the bank quickly commanded confidence, and began to gather together a lucrative connection, can be gathered from the fact that by the close of that year its balance sheet showed that it held balances belonging to the public of over £180,000. The paid-up capital had by then been increased to about £180,000.

The earlier joint-stock banks which were established in London had to contend with many disadvantages. They were not allowed by the Bank of England to open current accounts with that institution, and the private bankers would not allow them the facility of being represented in the Clearing House—an institution to which we shall refer later.

They were likewise troubled with legal difficulties, as the position of the shareholders of such banks was merely that of a common law partnership; and consequently, in any action, the exact names of all the shareholders had to be given, and all were parties to the action. This inconvenience was remedied by an Act passed in 1838, which allowed a banking company to sue or be sued in the name of any of its members; but the position of its shareholders still remained the same as to their unlimited liability, and it was not until the year 1858 that an Act was passed allowing joint-stock banks to take advantage of the system of limited liability; a system which was first allowed to ordinary joint-stock companies by an Act passed in 1855.

Another inconvenience with which these banks had to contend was occasioned by the enactment providing that no such partnership could accept bills having a less date than six months. Various expedients were tried to circumvent this difficulty, but none were successful, and it was not until the year 1844 that joint-stock banks were released from this incubus.

In spite of so many embarrassing and hindering circumstances the joint-stock banks more than held their own, and gradually increased their wealth and importance. From small beginnings they gathered strength as the years rolled on, and little as the originators of the movement may have imagined to what colossal proportions the business would attain to-day, the joint-stock banks of England and Wales together hold deposits from the public exceeding the enormous sum of £600,000,000; a sum nearly equal to our National Debt.

The number of our banks, both private and joint-stock, has been decreasing for many years. This is owing partly to the failure of the weaker banks of both classes, but chiefly to the numerous amalgamations of recent years. At the close of the year 1849 there were ninety-nine joint-stock banks established in England and Wales, at the close of 1892 there were one hundred and two, and at the close of 1902 only sixty-eight, not including the Bank of England. These banks then held deposits amounting to no less a sum than £600,333,000. The decrease in joint-stock banks in the last ten years, from one hundred and two to sixty-eight, is remarkable; but this does not necessarily imply any lessening of banking accommodation to the public; on the contrary, the reverse is the case, owing to the great increase in the number of branches which have been established.

According to the Economist, there were 2,336 banking offices belonging to joint-stock banks open to the public in England and Wales on the 31st of December, 1891, whereas on the 31st of December, 1901, the number had nearly doubled and stood at 4,146. The network of banks thus spread over the length and breadth of the land has resulted in tapping new sources of business. An enormous number of people now keep banking accounts who previously did not do so, but who used to pay cash for all their purchases and keep their money in the proverbial stocking. Though the average balances maintained by this new class of customer may be small, it is a case of “many a mickle makes a muckle,” and the aggregate of new balances so obtained has largely helped to swell the total balances in the hands of the banks. In 1892, one hundred and two joint-stock banks of England and Wales held balances amounting to nearly £400,000,000, whereas now, as already mentioned, a sum exceeding £600,000,000 is in the hands of the banks. It must be remembered, however, that a considerable portion of this increase is due to the fact that a large number of private banks have been absorbed by joint-stock banks during the ten years in question, and that the balances held by the private banks so absorbed were not included in the figures of ten years ago.

Some of the joint-stock banks of London established branches in certain mercantile districts of the town early in their career, but they were slow to see the advantage to be gained by opening branches in the suburbs, and by catering for the wants of private individuals, tradesmen, and the smaller classes of merchants and manufacturers. But the conspicuous success which attended the efforts of one or two institutions in this direction, drew the attention of other banks to the advantages to be gained by keeping level with the growth of Greater London, and providing what is required by its inhabitants. The result is that the suburbs of London are now as well, or better, provided with banking accommodation than any other part of the kingdom; and so great is the competition among various banks in this direction, that the limits of discretion appear to be overstepped in certain districts, as to the number of branches which can possibly obtain a profitable business from those localities.

As regards capital invested in banking companies, we find an increase, but not anything like the same proportionate increase that the balances exhibit. The paid-up capital of the joint-stock banks of England and Wales at the end of 1892 (not including the Bank of England) was about forty-four million pounds, and by the end of 1902, or in ten years, it had only increased to about forty-seven and a half million pounds; and this in spite of the capital represented by absorbed private banks not appearing in the former total.

The “Reserve Funds” of the banks, however, show a fairly satisfactory increase of six millions, from twenty-eight millions to thirty-four millions in the ten years.

Adding together the two items of Capital and Reserve, so as to arrive at the total working capital, we find that this has increased from seventy-two millions in 1892, to eighty-one and a half millions in 1902, or an increase of little more than 13 per cent., while the balances increased about 50 per cent. in the same time. The uncalled and reserved (i.e. capital which can only be called up in the event of failure) capital of the banks increased from one hundred and fifty millions to one hundred and sixty-three millions, or an increase of slightly under 10 per cent.

Turning from the consideration of the amount of funds which the joint-stock banks have at the present time within their disposition and control, to the question of how they employ those funds, it is interesting to note the changes which have taken place during the last ten years. The main portion of a banker’s assets is divided between—

1. Cash, and the balance maintained at the Bank of England or with a London agent, and money at call or short notice.

2. Investments.

3. Discount and Advances.

As regards these three items, we find the following changes have taken place during the last ten years. At the end of 1892 the joint-stock banks held nearly ninety-four millions in cash, etc.; they now have nearly one hundred and sixty-five millions. This represents an increase of about 75 per cent., and is a very satisfactory feature in present-day banking, indicating that the question of keeping a stronger cash reserve is receiving attention, the liabilities in the time having increased only 50 per cent. As regards investments, ninety-five millions was held in this form in 1892, against one hundred and thirty-one millions ten years later, an increase of 38 per cent.; while Discount and Advances have increased from two hundred and eighty-three millions to three hundred and eighty-seven millions—which represents an increase of about 37 per cent. These proportionate increases of Cash, Investments, and Advances and Discounts have taken place while the balances have proportionately increased 50 per cent. In the next chapter we shall proceed to examine in more detail the composition of the balance sheets of banking companies, and the relative proportions which the items appearing therein bear to each other, or should bear to each other, to be in accordance with the system of business maintained by our leading banks.

For ready reference we append on the next page a short table relating to the figures which we have been considering in the present chapter. These figures amply show the advance made by joint-stock banks during the last ten years.

AGGREGATE FIGURES OF THE JOINT-STOCK BANKS
OF ENGLAND AND WALES
(EXCLUDING THE BANK OF ENGLAND)

,000,000 omitted (except in the last two columns)

CHAPTER IX
JOINT-STOCK BANK
BALANCE SHEETS

The object of a joint-stock bank is to pay a dividend on its share capital at a rate as high as can be earned consistently with the performance of the main obligations of such a bank, that is, the safeguarding of moneys deposited with it by customers, and of capital subscribed by shareholders.

With regard to moneys deposited, it must be borne in mind that the relation of banker and customer is that of debtor and creditor; and as the bulk of a banker’s liabilities is repayable in cash on demand, without notice of any kind, it behoves him so to conduct his business that he may be in a position to meet any demand, and that without delay or hesitation—or ruin stares him in the face.

We have already seen that before banking—as we understand it—was practised in England, moneys were deposited with the goldsmiths for safe keeping only and that in course of time the goldsmiths realised that they were never called upon, at any one time, to repay the whole amount deposited with them; that an undemanded portion always remained in their hands which they could safely use for their own profit. This principle, indeed, constitutes the foundation of modern banking. But the question of what demand may be made on any particular day, or during any given period, has to be considered and provided for by each banker for himself. Experience teaches that on an average over any lengthened period the payments are met in the aggregate, and more than met, by new deposits. This is evidenced by the steady growth of balances held by the banks.

The receipts for any one particular day, or during any short period, however, may, and frequently do, fall short of the payments. At the end of each week, for example, bankers lose a large amount of cash, which is drawn for wage-paying purposes, and it is not for several days that this cash gradually dribbles back through tradesmen paying in the money they have received from the wage earners. A similar depletion of cash takes place at the end of each month for the payment of salaries. Again, about the middle of each month suburban and provincial banks have their balances depleted owing to retail customers paying the monthly accounts of their wholesale houses. (This latter demand is not for cash, however, but is satisfied from the Bank of England balances, which, of course, has the same ultimate effect as if actual cash were drawn.) At the end of each quarter there is also a disturbance of balances for rents then falling due; and finally, in the summer and autumn months much actual cash is taken temporarily from the banks for harvest and holiday requirements. Thus the banks lose a portion of their cash or bank balance on certain days and at certain seasons of the year. These demands are all known demands, and the banker is prepared accordingly.

It is not sufficient, however, that a banker should be in a position to meet known demands; unforeseen demands may be sprung upon him at any moment, and he must be prepared to meet them immediately they arise. Mr. Bagehot, in his Lombard Street, writes as follows of these unexpected demands:—

“Any sudden event which creates a great demand for actual cash may cause, and will tend to cause, a panic in a country where cash is much economised, and where debts payable on demand are large. In such a country an immense credit rests on a small cash reserve, and an unexpected and large diminution of that reserve may easily break up and shatter very much, if not the whole, of that credit. Such accidental events are of the most various nature: a bad harvest, an apprehension of foreign invasion, the sudden failure of a great firm which everybody trusted, and many other similar events have all caused a sudden demand for cash.”

A banker therefore fortifies himself against any sudden or unexpected call by keeping much more cash in his till than he is ever likely to require in normal times; by maintaining a large balance with the Bank of England—which to all intents and purposes is equivalent to “cash” in the till; and by lending out large amounts to bill-brokers, which advances are fully secured, and are repayable either on demand or at short notice. He is able to arrange the amount advanced in this way from day to day—by lending further sums or calling in loans—according to the circumstances of the moment, so that he can maintain that amount in “cash” or “bank balance” which he considers necessary for his safety.

So we see that “cash” and “balance” at the Bank of England together constitute a banker’s first line of defence—they are, so to speak, his “firing line”—and the money which he lends to the bill-brokers constitutes the “supports” to the “firing line.”

The next defence which a banker maintains against possible pressure is represented by the amount invested in securities. Investments yield on an average a higher return than sums lent at short notice or call; but it must be remembered that securities are not so easily realised, if the necessity should arise.

Of these investments a large portion is represented by Consols, as, in case of need, these can always be sold for cash at very short notice, or in case of great pressure doubtless the Bank of England would be willing to make advances on the security of this stock. Of securities guaranteed by the British Government, other than Consols, there will probably be a large holding, although these securities might not in time of panic be so readily realisable as Consols. Yet it is probable that the Bank of England would, in order to avert disaster, accept such stocks as security against advances. Other high-class securities which yield a somewhat higher return will also probably be held to a large amount. A banker, however, should not rely too much on these securities for purposes of realisation in time of monetary pressure, it being quite possible that at such times there would be no buyers of any class of securities with the probable exception of Consols.

After making due allowance for “cash,” “bank balances,” “call money,” and “investments,” a banker employs the balance of his funds in discounting bills, buying bills from the market, and making advances to customers.

As the dates when bills fall due for payment are fixed, if for any reason a banker deems it prudent to increase his “cash” and “bank balance,” he can readily do so by letting his bills in hand mature, and not taking up new bills in their place. It is open to the banker to sell the bills he holds, that is, to rediscount them, if he choose to do so; but this course is not practised at the present day, except by a few country banks. Moreover, in the event of a panic, probably no one can be found to buy bills, so that they are not in practice realisable before the maturity dates. As an illustration of this, it may be mentioned that on one occasion during the crisis of 1847, it was found to be impossible in the city of London to discount even an Exchequer Bill of the English Government.

Of the various investments of a banker, “advances to customers” are the most difficult to realise in time of pressure, as the wherewithal for the customers to repay their advances is then wanting, and in their efforts to obtain necessary funds the danger would only be aggravated. In such times, indeed, the commercial world requires extra assistance to avert an actual crash.

“Premises” is an item appearing among the assets in balance sheets of joint-stock banks. It is probable that in many cases the value of the premises largely exceeds the figure at which they are put in the accounts, and hence they constitute a hidden reserve; but the investment, by its nature, is one that cannot readily be made available to meet sudden demands.

We see, therefore, that a banker’s assets usually consist of the following six classes of investments:—

The first three of these classes constitute what is known as a banker’s “liquid assets.”

Table Showing, in the case of Nine Representative Joint-Stock Banks, the Percentages of the Various Classes of Assets respectively to the Amount of Liabilities to the Public.

The averages of these percentages[2] respectively are as follows:—15·3, 12·6, 21·3, 49·2, 61·6, and 111.

On examining this table it will be noted that the proportions of funds invested in “liquid assets” do not vary materially with the different banks. When we examine, however, the separate classes of investments making up the total of “liquid assets,” we see that the case is different, and a wide divergence is shown. This is especially so in “call and short money,” where the proportions vary from 5·4 per cent, to 25 per cent, and in “investments,” where they vary from 11 per cent to 31·5 per cent.

The figures given are those of one particular day, and that a day on which, according to popular belief, some of the banks indulge in what has been called by the Press “window dressing”—that is, adjusting to a greater or less extent the amounts held in the respective classes of securities, with a view to the presentation of more impressive figures in the balance sheet to be published as at that day. Had we the actual daily records of the various banks at our disposal, it is not improbable that a greater variation would be shown in the items of “cash” and “call money”; but these figures are not available. It is true that most of the banks now publish monthly statements as to their position, and it is a noticeable fact that while some banks issue these monthly statements as on the close of business of the last day of each month, others vary the day on which the statements are made up; and it is open to conjecture that this variation of date is with the object of making a better showing.

It must not, however, be inferred that such a course as this (“window dressing”) is the usual one adopted by our banks; but it is a method of business which is possible, and which rumour has it is pursued in certain cases. This explains such remarks in the money articles as, “Money was in request to-day, owing to a large amount being called off the market by the banks for window-dressing purposes.”

As regards “call and short” money, it is possible that in time of actual panic a considerable portion of it would not be repaid when “called,” especially as regards the “short” money. It is generally believed, though not stated in any balance sheet, that a large part of this “short” money is not lent to the bill-brokers, but to the Stock Exchange—that is, to stock-brokers. Loans to the Stock Exchange are fixed from one account to the next (about a fortnight ahead), and are then supposed to be paid off if required. In time of difficulty, however, would—or rather could—this money be repaid by the various brokers to whom it is lent? Supposing a broker had a loan of £100,000 secured on American railroad shares, and a crisis suddenly developed, from where could the broker obtain the money to repay the advance if it were called in? He would not be able to sell the shares without serious loss, if at all; and he would have great difficulty at such a time to induce another banker to make him a fresh loan. In all probability the loan would not be repaid, however much the lending banker was desirous, or in need of regaining possession of his money.

Therefore such loans to the Stock Exchange (excepting, perhaps, amounts secured on Consols or such like) cannot fairly be entered under the heading of “call and short” money in a balance sheet. It is desirable, for these reasons, that balance sheets should give more explicit information than is usually the case; and more particularly they should specify separately the amounts lent to the bill-brokers at “call” and “notice,” and the amount lent to the Stock Exchange from account to account.

Turning to the question of “investments,” it may be noted in our table that those banks which show only a small proportion of “call” money, in most cases show a large proportion of “investments”; while, on the other hand, those which show a large amount at “call” hold only a small amount in “investments.”

The table exhibits a wide divergence in the proportions of “investments” held. These proportions vary from 11 per cent, to 31·5 per cent. The actual proportion of investments held, however, is not of so much concern as the nature of the securities which compose the investments; that is, whether or not they are readily realisable in case of need. The classes of investments are fairly shown in most bank balance sheets, and from a study of these some useful information can be gained. As an illustration of this, bank E in the table on page 94 shows in its balance sheet approximately the same holding in Consols as bank I, but the latter bank has deposits from its customers of twice the amount shown by the former. Now if bank E were to reduce its Consols by one-half (giving the same proportion as I), and put the proceeds in “cash” and “call money,” its position would appear thus (using the actual figures of Consols shown by the balance sheets of the two banks)—

This somewhat reduces the wide disparity at present shown in the respective figures, and it is quite possible that this difference could be still further reduced if we knew the actual amount held by each of these banks in securities, other than Consols, guaranteed by the British Government, and made the same assumptions with regard to these as in the case of Consols. As a matter of fact, considerably more than half of the 26·6 per cent. of investments held by bank E appears in the balance sheet of the bank as being composed of such securities, and these might prove a more valuable asset in time of trouble than so much money nominally at “call” or “short notice.”

From this example we can see that in examining the balance sheet of any bank, particular attention must be paid to the composition of the investments, whether they are of such a character that one may fairly rely on being able in time of stress to realise them immediately, or, in the alternative, borrow from the Bank of England on their security. We may repeat, as the matter is of importance, that the actual amount of securities held, or the proportion which they bear to the total balances, is not of such importance in the case of a bank, as the nature of the securities which form the investments. One London bank’s investments simply consist of a large holding of Consols; and though times might conceivably come when it would be impossible to realise even such a holding at short notice, yet such an investment forms a backbone and reserve which cannot be overestimated.

Having considered the securities which constitute the “liquid assets ” of bankers, we will now briefly turn our attention to the manner in which the remainder of bankers’ funds are usually utilised. As we have already seen, this remainder is used mainly in discount operations and advances to customers, while a certain amount is generally sunk in premises, etc. These three items have been classified together in our table, as the necessary information is not given in some of the published balance sheets to enable us to specify them separately. As regards “premises,” it may be repeated that though they form a valuable asset, yet they are not an available one, and would, generally speaking, only be realised in the event of a winding-up.

The bills held under discount comprise bills which are discounted for the customers in the ordinary course of business, and also bills bought from bill-brokers; and they constitute a fairly available asset.

The “Advances” to customers is a security of a very fixed nature. In times of trouble it is the asset most difficult of realisation, and it is the rock on which the majority of banks which have come to grief have struck.

No information respecting this asset is vouchsafed in any balance sheet beyond the bare total. It is a known fact that banks are lenders on practically any kind of security which has a fairly steady value, and in which there is a “market”; stocks, shares, produce, houses, lands—all are offered as security, and all are accepted under various conditions. But it is of the utmost importance that bankers should closely watch and scrutinise the aggregate of advances which they may make upon any one kind of security, so as to keep the amount within due limits. If too large a sum is advanced on one kind of security, and that security should become much depressed in value, the banker may be caught between two fires: on the one hand, the customers who have deposited this security will, from its fall in value, have become financially weakened, and perhaps not be in a position to repay the advances; and on the other hand, if the banker wish to repay himself by realising the securities, he may find that the margin of value has run off, and what can be obtained by selling the securities in the market will not cover the advances, or possibly, for the time being, they will prove to be unsaleable. Thus he will be left in the dangerous position of having a considerable proportion of his assets indefinitely locked up, and a certain number of his customers in a weak and reduced condition financially.

Neglect of the precaution of spreading advances over different suitable classes of investment has brought many banks to ruin in the past, and under similar conditions would do so in the future. This danger is not now so pressing as in former times. Owing to the present custom of establishing branches, and to amalgamations, the operations of banks are now frequently spread over wide areas, and therefore automatically their advances tend to spread over many more industries and securities than was formerly the case. When banks were more local, their prosperity rose or fell with the industry and conditions of their particular district.

We see then there is danger in locking up too large amounts in advances on any one class of security. But there is an equal danger in advancing too large sums to a few customers. A firm may be of very good standing and report, and keep a first-class and highly remunerative account with its banker. From time to time it has advances from its banker, which he is very glad to make, and which are regularly repaid. But a time may come when an advance may not be repaid when due; instead, a further advance is asked for. This is made without question, and probably further advances, always increasing and never reducing. After a time the banker may become a little fidgety, and cautiously suggest a reduction, but will probably be told that ample funds will come to hand shortly. When this time comes the funds may not have been received, and the customer may insist that he must have further help, or he will not be able to meet his obligations. The banker should require ample cover before advancing further sums; but if he is weak and yields to pressure, matters will go from bad to worse, until the customer may practically rule and command the bank, the two concerns will be involved together, and when the customer “goes” the banker will go too, or at the best suffer a big and weakening loss—not only loss of money, but loss of credit, which will affect him seriously in the future, and may ultimately cause his fall.

This danger is not a hypothetical one. It is unfortunately founded on fact. It was this cause which led to the disastrous and all-reaching failure of the City of Glasgow Bank. When the position of that bank was examined it was found to have lent as much as six million pounds among four customers. Gilbart says: “Almost every bank that has failed can point to some one, two, or three large accounts to which it mainly attributes its failure.”

On looking at the last column of our table we see that all the banks hold assets in excess of liabilities to the public; the excess is in respect of the capital and reserve fund. As an additional security for the depositors, each bank has only a part of its subscribed capital paid up. The remainder, the uncalled capital, constitutes an extra reserve for the benefit of the depositors.

The profits made by joint-stock banks are high, the majority of dividends varying between 10 and 20 per cent.; and notwithstanding such satisfactory dividends, large reserve funds have been accumulated from undivided profits. These reserve funds in some cases equal, and even exceed, the total of the paid-up capital. It may be added that many of the banks are popularly credited with holding other reserves which do not appear in their balance sheets.

CHAPTER X
THE BILL-BROKERS

The business of the bill-broker is one that has grown up during the past century—chiefly during the latter part of it. A bill-broker acts the part of an intermediary between banker and merchant. At first glance the need of such an intermediary is not very apparent, considering the large number of banks now in existence which keenly compete for business. On looking further into the matter, however, the importance and utility of the bill-brokers, both to banker and merchant—that is, to those who wish to buy bills and those who have them to sell—become apparent.

To undertake the business of discounting bills successfully great knowledge and discrimination are necessary; knowledge that can only be obtained by experience, and discrimination by keeping in touch with the changes occurring in the standing and position of the mercantile and financial community. As with the rest of the world, merchants and financiers do not stand still; they progress or they fall back. Many bills which in 1893 would have been treated as first-class paper are now, in 1903, looked at askance; while the acceptances of many firms who were unknown ten years ago are now readily taken. It is the business of the bill-broker to keep himself thoroughly informed of the “standing” and “position” of the mercantile community, so that he can readily discriminate good bills from doubtful ones.

A bill-broker does not confine his operations to what is called “bank paper”—that is, to bills accepted or endorsed by one of our well-known banks or leading finance houses—but he is prepared to deal in bills accepted or endorsed by members of the ordinary mercantile community, provided he is satisfied as to the position of the parties whose names appear on the bills. These latter bills are called “trade bills.” The rate for discounting such bills is always somewhat higher than the rate for bank paper because of the slightly greater risk.

The bankers of the present day discount a large number of bills for their customers in the ordinary course of business. Bills obtained from this source, however, do not meet a banker’s requirements in several particulars. For one thing, the amount of bills offered directly to bankers for discount is not sufficient, as a general rule, to satisfy their demands; and, moreover, a banker has no power of regulating the supply of bills offered to him in this way. One day he may be asked to discount bills to a very large amount, when he is not anxious to increase the amount of his holding of bills; on another day he may wish to increase his holding, but none may come forward. And lastly, with bills offered for discount by ordinary customers a banker has no power of so picking his bills that he can ensure having a large amount of bills maturing at any given period, when he anticipates that he will require to increase his cash. But all these conditions can be met by dealing with the bill-brokers. A banker can obtain bills to any desired amount from the bill-brokers, he can regulate the supply of the same according to his wishes, and he can stipulate that the bills sent in by the bill-brokers are to mature within any given time—thirty days, sixty days, ninety days, and so on; and he is thus in a position to provide automatically for an expected demand for cash at certain times, by the maturing of bills.

Bankers therefore find it easier, and, owing to the broker’s specialised knowledge of the position of parties, on the whole safer, to buy bills from the bill-brokers than to try to obtain directly all that they require. Bills so purchased possess a further advantage, for not only are they secured by the names on them, but, in addition, they usually carry the guarantee of the bill-brokers as well; and this, when dealing with large and wealthy firms, is a distinct advantage. It must also be remembered that there are a large number of banks—principally country banks—who are so situated that in the ordinary course of business they never have what is called “A1 paper” offered to them for discount, and yet they require to invest a certain amount of their funds in such bills. These institutions of necessity make use of the bill-brokers to satisfy their needs.

In consideration of the bill-broker’s guarantee, and of having had the advantage of his knowledge in selecting and collecting bills, a banker is content to buy bills from a broker at a slightly lower rate than the ruling market rate, usually ⅛th or ¹/₁₆th per cent. per annum lower. For instance, if bank or first-class paper is quoted in the market at 2⅜ths per cent. per annum for bills due in three months’ time, bankers would buy such bills from the broker at 2¼ per cent. The broker thus makes a turn of about ¹/₃₂nd per cent. on the deal, but in active times this “turn” is often divided with the merchant from whom he buys. This profit may seem small, but when the enormous turnover of a bill-broker is taken into consideration, it is apparent that the total profits derivable from this business are very considerable. This is confirmed by the satisfactory dividends paid by the two or three public companies conducting discount business.

Looking at the other side of the question, persons who have good bills to discount find they have a readier market in the bill-brokers than in the banks, and practically all the first-class bills throughout the country find their way to the London market for discount.

In order to keep their connection, bill-brokers must be prepared to do business in good bills at any time, to practically any amount; and to be in a position to do this, they rely either on borrowing the necessary funds from the banks, or on selling some of their stock of bills in hand to the banks. The interest on the call and short-notice money borrowed from banks is on an average materially lower than the rates at which bills are discounted, and consequently a profit is made by the bill-broker (who holds the bills he buys), of the difference between the two rates; and when bills are sold to the banks a turn is made on the transaction, as we have already seen. Competition among the various brokers, however, is always tending to keep down rates, and consequently the profits of the business.

Bill-brokers also buy very large amounts of trade bills from colonial, and in some cases foreign banks, which are endorsed by the banks in question. These bills, when not held by the brokers, are sold to various banks throughout the country, and of course form a first-class security. It may be mentioned that it is not the custom now for any London bank to rediscount bills which they may have discounted for their customers, and only in very rare instances do country banks adopt this course, though the names of two or three of such sometimes appear as endorsers.

Unlike a banker, a bill-broker has to pay interest on all his working funds, and this makes him anxious always to utilise those funds to their fullest extent. Unlike a banker also, he has no large reserve of idle funds to keep for meeting sudden demands. Should such demands arise, he relies on being able to borrow from banks or elsewhere, sufficient funds to meet those demands, or, as a last resort, to obtain assistance from the Bank of England.

As regards the funds with which the bill-brokers conduct their business, we have already seen that they are largely borrowed from various banks. The business is very simple, and is marked by an absence of any kind of red tape. Every morning the representatives of the brokers call on the banks with which they do business, and ascertain whether the latter wish to lend any more money, or if any of the money already borrowed is required to be repaid; at the same time usually arranging the rate to be paid for money. They also ascertain if the banks wish to buy any bills, and arrange the rate for such business.

In the case of money being lent to a broker, he simply sends in security to cover the advance, and draws a cheque on the banker for the agreed amount. In the case of money being “called in” by a banker, the broker sends in his cheque on some other banker for the sum called, and takes away a corresponding amount of security.

The securities deposited by bill-brokers for loans of this class consist either of first-class bills or what are known as “floaters.” “Floaters” are bearer securities of the highest class, such as Consol certificates, the debentures of certain Indian railways, the bonds of the Corporation of London and the London County Council. They obtain the name of “floaters” from the fact that they float from bank to bank, as one bank calls and another lends.

In the case of a banker buying bills from a broker, the broker sends in a parcel of bills which roughly amount to the agreed figure, and draws a cheque for the amount less the discount. It is not usual for brokers to endorse the bills they so sell, but they give the banker a continuing guarantee in respect of all the bills which he may buy from them from time to time.

It frequently happens at certain seasons of the year when there is a pressure for money, or on special occasions—such as on the issue of a big public loan, when a large amount of bankers’ floating balances is temporarily withdrawn—that heavy demands are made on brokers to repay money they have at “call” from the bankers. The brokers are then placed in the position of having large sums to repay, and as none of the banks are lenders, they are forced to apply to the Bank of England for assistance. The brokers are then said to be “in the Bank,” and they usually try to get out as soon as they can, in order to escape the higher interest there demanded from them. Formerly the Bank of England declined to discount any bills for brokers and would only make them temporary advances. This rule, however, is now relaxed, and the Bank will either discount approved bills at the “official” rate, or make temporary advances. The bills discounted with the Bank of England are not supposed to have more than sixty days to run before maturity, and must bear the names of at least two British firms, one of which must be the acceptor.

The advances made by the Bank of England are not at “call,” as with other banks, but for a fixed number of days, never less than three, and sometimes for as many as ten. The rate charged varies from Bank Rate to ½ per cent., or even 1 per cent., above that rate.

It follows from this that when brokers have to obtain assistance from the Bank, the rate for money in the open market at once begins to stiffen, as demand exceeds supply; and if any considerable amount has to be borrowed from the Bank, the outside rate will rise until it is on a level with the Official Rate; or even slightly higher, if the Bank is charging above the Official Rate for its advances.

Generally speaking, the aggregate amount of money from all sources available for the use of the market keeps approximately at a level figure, but a portion of it is not always in the same hands; and it is this shifting balance of market money which really controls the rates charged for the use of the whole of the money. If this shifting balance finds its way into the Bank of England, all rates harden, owing to the competition among brokers to obtain money without applying to the Bank. On the other hand, if the shifting balance passes into the coffers of the bankers, the competition among them to lend their funds will tend to reduce the rate of interest which can be obtained for the use of the money.

CHAPTER XI
THE CLEARING HOUSE

A work dealing with the subject of the Money Market would not be complete without reference to the Clearing House—the institution by which our enormous financial operations are adjusted. Without such arrangements as are carried out so practically and automatically by the Clearing House, it would be impossible to carry on our present trade, and our banking system could not have developed into such a high state of efficiency as we at present find.

Although our Clearing House has now been established for more than a century and a quarter, London cannot lay claim to be the originator of the clearing system. Edinburgh established such a system some years before its adoption in London, and a somewhat similar arrangement appears to have been in vogue in certain continental towns, it is said, since the sixteenth century.

Up to the year 1775 all the cheques which a London banker held on other London bankers were presented daily to the bankers on whom they were drawn, and paid in cash or notes. Such a system was very inconvenient to both the collecting and the paying bankers, as not only did it entail the trouble of sending out clerks to present the various cheques, but every banker was bound to keep an unnecessarily large stock of cash and notes in his till, in order to be prepared to meet in cash any demand which might be made upon him. There was also considerable risk in the clerks’ carrying about such large amounts of notes and gold.

In the year 1775 certain of the private bankers of London arranged a scheme between themselves whereby to minimise this inconvenience and risk. They hired a room in which the representatives of each bank met daily, and exchanged the cheques and bills which they held on each other. The balances only which each bank had either to receive or pay were settled in cash. By this means a great saving was effected in the use of actual cash, and the risk of transfer of large sums from bank to bank was to a large extent reduced.

At a later date the use of actual cash was still further economised. Each of the banks represented in the Clearing House was compelled by regulations to keep an account at the Bank of England. After this regulation came into force, instead of cash being paid or received at the end of the day, as was formerly the case, each banker’s account at the Bank of England was either credited or debited with the balance due to or by him on the aggregate of his daily transactions.

When the Clearing House was first established it met with much opposition, although its advantages were so apparent. Several of the largest bankers refused to countenance it. In course of time, however, the great advantages it possessed wore down all opposition, other bankers joined the “clearing,” a regular set of rules was drawn up for the conduct of its business, and a committee of bankers was appointed to supervise its working.

On the establishment of joint-stock banks in 1833 they were prohibited from enjoying the facilities of the clearing system, owing to the jealousy of the private banks. It was not until 1854 that this jealousy was overcome, and the joint-stock banks permitted to join the Clearing House; but the Bank of England did not take advantage of the system until ten years later.

In the year 1858 the Country Clearing system was established. Under this arrangement all cheques on country banks held by other banks are passed through the Clearing House into the hands of the London agents of the banks on which they are drawn. The London agent sends by post each night to the various country banks which he represents, a parcel of cheques consisting of the whole of the cheques on each respective country bank which have been passed to him through the clearing. Each of the country banks has thus but one remittance to deal with each morning, instead of numerous remittances from banks situated all over the country. On the other hand, the trouble to which each bank was formerly put of forwarding all country cheques received direct to the various banks on which they might be drawn was done away with.

The West End and suburban banks of London cannot, by reason of distance, be directly represented in the Clearing House. A system, however, is in operation by which practically the total of their daily transactions becomes merged in the total figure of each day’s clearing. Cheques presented to these banks by other banks are paid by what is known as a “payment.” A “payment” is in effect a draft on their head office or clearing agent, and these drafts are passed through the Clearing House.

By these various developments it has come about that the vast majority of bills and cheques passing through the hands of bankers, throughout the country, become focussed in the London Clearing House, and the returns of that institution, showing the total of the daily transactions with which it has dealt, consequently afford a good barometer of the state of trade throughout the country, the figures rising or falling as prosperity or depression affects our commercial condition. The returns are now published weekly, and the figures there shown are stupendous in their amount—the average daily clearing on ordinary days for the year 1902 amounting to £15,559,600, and on Stock Exchange settling days to £38,961,800, while the grand total for the year amounted to the record figure of £10,028,742,000.

Without going into detail as to the exact mode of procedure carried out in the working of the clearing system, we will roughly delineate the manner in which the transactions are brought to a head at the close of each day’s work.

The clerks of each bank represented in the Clearing House make out a summary at the end of each day, showing the amount of the “articles” (cheques, bills, and drafts) which they have handed to the representatives of other banks, and the amount of the articles handed to them by other banks, and the difference of these two figures shows the net amount which has to be received or paid as the result of the aggregate of all their transactions.

All the clearing banks must keep an account at the Bank of England, and a nominal account is kept at the Bank, called the “Clearing Bankers’ Account.” At the close of each day the amount owing by each bank, which on balance has to pay, is debited to that bank’s account at the Bank of England, and credited to the “Clearing Bankers’ Account”; while as regards those banks which have to receive on balance, the “Clearing Bankers’ Account” is debited, and the account of those banks credited. Thus while the Clearing Bankers’ Account at the Bank is automatically balanced each day—as, in the aggregate, the credits of one set of banks must be balanced by the debits of the other set—the whole of the enormous total of transactions thus brought to one head is settled by a few dozen entries in the books of the Bank of England.

Quite recently, and not before it was absolutely necessary, the building of the Clearing House was largely extended, and the internal arrangements reorganised, giving greater facility for the work carried out there; and an innovation has been made in supplying Burroughs’ Automatic Adding Machines for the use of the clerks of the house. About one hundred and forty of these machines are now in use, and though when they are all at work the Clearing House is certainly not the quietest spot in the City, yet the convenience and great economy of time and labour resulting from their use cannot be fully appreciated by any except those in daily touch with the work.[3]

CHAPTER XII
FOREIGN EXCHANGES

in the course of this book reference has been made on several occasions to the influence on the Money Market of the foreign exchanges. It will be impossible in the course of a short treatise such as this to enter fully into details and technicalities. Anyone wishing to obtain a fuller explanation of the subject cannot do better than study Mr. George Clare’s book entitled The A B C of the Foreign Exchanges.

Bills of exchange have been used in settling commercial transactions since very early times. The Romans appear to have employed them to some extent, but it is to the early Italian, and even more to the early Jewish merchants, that we owe the development of the system. By the fourteenth century the use of bills was firmly established, and their form, and the laws and customs relating to them, were much the same as at the present day.

Before inquiring into the effects which the foreign exchanges have on our Money Market, we will state clearly what a foreign bill of exchange really is. When a foreign bill is bought, what is it that is bought? The transaction is simply this, that so much money is paid here for the right to so much currency of a certain country to be delivered at once, or at a given date, at a certain place, to the buyer of the bill or to his nominee. The bill itself is merely an order to pay, and the transaction resolves itself into bartering so much money of one country for so much money of another country, to be delivered at a specified place and time.

The value of the imports of the United Kingdom for 1901 was 522 millions of pounds, and of the exports 348 millions, together nearly 900 million pounds; and to understand how these huge transactions were settled financially, it is necessary to have some knowledge of the principles and customs of foreign exchanges. It is common knowledge that we do not pay gold for our imports nor receive gold for our exports. The imports are paid for mainly by the exports, the balance being made up of sums due to us for interest on capital invested abroad, for repayment of money invested abroad, and for freights, etc. Some gold, however, does enter into the settlement of these transactions. This gold is sent from country to country, centre to centre, and further on in this chapter we shall see the causes of these movements and the effects arising from them.