The Story of the Bank of England / (A History of English Banking, and a Sketch of the Money Market)

THE BANK OF ENGLAND.

THE STORY

OF THE

Bank of England

(A History of English Banking, and a Sketch of the Money Market)

BY

HENRY WARREN

AUTHOR OF

"YOUR BANKERS' POSITION AT A GLANCE"
ETC.

JORDAN & SONS, LIMITED

116 AND 120 CHANCERY LANE, LONDON, W.C.

1903

LONDON:
PRINTED BY JORDAN AND SONS, LIMITED,
120 CHANCERY LANE, W.C.

CONTENTS

CHAPTER I.

The Period of Monopoly, 1708 to 1826.

The Bank of England, which is managed by a Governor, Sub-Governor, and twenty-four Directors, was incorporated in 1694 at the suggestion of a Scotsman, William Paterson, a man of roving disposition, whose Darien expedition proved a miserable fiasco, cost Scotland some £400,000, and shattered the health of Paterson, who died in London at the beginning of 1719, if not in poverty at least stripped of nearly all his fortune.

Schemes relating to the Isthmus of Darien (or Panama), that narrow little strip of land which unites the two Americas, have proved fruitful in disaster. France's great canal venture, we all remember, resulted in huge loss and grave scandal; and Paterson lived to bitterly regret his colonisation scheme, devoutly wishing that he had pinned his faith to his finance company, the Bank of England, for a finance company it then was in every sense of the word.

Little is known of William Paterson's early career, the various accounts relating thereto being meagre and conflicting, his enemies describing him as a mere adventurer, and his friends declaring that he was actuated by the worthiest of motives. However, when it is remembered that his second great venture (the Darien scheme) involved thousands in ruin, it is evident that had the man been a saint he would not have lacked detractors, and though his public utterances sound quaintly pious to the modern ear, it seems probable that he was only an enterprising merchant, whose morality was neither better nor worse than that of the times in which he lived.

The son of a Scotch farmer, Paterson left home at an early age, and, after settling for a short time in the West of England, set sail for the West Indies, returning to Europe about 1686 with the Darien scheme in his brain. Receiving but scant encouragement in England, despite the fact that his bank had been successfully floated, he concentrated his energies upon Scotland, where his scheme fired the public imagination, almost every Scotsman with a few pounds to invest eagerly taking the money to the company, convinced that Panama was the natural commercial centre of the world, and that gold would be rained therefrom upon fortunate Scotland. The whole nation went almost frantic with the fever, for Panama, with its gold mines and its world-wide trade, was going to make Scotland rich beyond the dreams of avarice. It is estimated that nearly half the capital of the country was sunk in the Darien scheme.

Chartered by the Scottish Parliament in 1695, three vessels sailed from Leith in July, 1698, with some twelve hundred settlers on board, Paterson and his wife among the number. All Edinburgh flocked down to Leith to wish the members God-speed, and then returned to their homes to dream of the streams of gold with which Scotland was to be flooded. In a few years everybody would be rich, and Edinburgh would be the greatest and proudest city in the world. Trade, however, was destined to flow to a city a little farther south.

The scheme proved a dismal failure. England and Holland opposed the new colony; the East India Company treated it as a rival, and Spain was actively hostile. The climate did the rest. Before the close of 1699 "New Edinburgh" was deserted, and the colonists, decimated by want of provisions and disease, set sail for New York. To make matters worse, a second company meanwhile had sailed from Scotland, where the utmost enthusiasm still prevailed; but the new arrivals found the town deserted, and themselves at the mercy of the Spanish warships. Mad with rage at the lack of success of their national adventure, the Scotch openly accused the English Government of treachery, declaring that its conduct in withholding food supplies was as discreditable to it as was the butchery of Mac Ian and his clan at Glencoe in 1692, when neither old man nor child was spared, and fugitives were allowed to perish of hunger and exposure in the mountains.

Paterson's faith in Panama must have been profound. His wife died in the new colony, and he himself suffered severely in health; yet, after his return towards the end of 1699, directly his health began to improve, we read of his approaching William with a fresh Darien venture. The King naturally refused to risk a second disaster, and Paterson, like all great speculators who have risked everything and lost, could not again persuade the public to share his enthusiasm, for that mysterious entity seldom trusts a man after a cloud has obscured his "star." Once his spell of so-called good luck is broken, the public desert him in a body, when the adventurer, if he be wise, retires into obscurity with his spoil.

Paterson lived to discover that it is only a rising star, radiating success, that can obtain a sufficiently large following to finance a great scheme, and though he strove manfully to promote the new venture, his sanguine predictions were received sceptically. Nor did his subsequent schemes meet with a better reception. But he must still have retained some influence, for, after the Act of Union in 1707, he was returned to Parliament by a Scotch burgh. His chief claim to distinction, however, undoubtedly rests upon the fact that he founded the Bank of England, of which he was appointed one of the first directors.

The Bank of England, from its inception down to the present day, has never been a Government institution. It was originally simply a company that advanced money to and transacted business for the Government, which, in return, granted it certain privileges and concessions; but the connection between the Government and the Bank was so close, and their interests so identical, that public opinion connected the one indissolubly with the other. From this conception sprang the erroneous impression that the Bank is a Government establishment, when, in reality, it is no more so than is the National Provincial Bank of England or the London and County Bank.

In 1694, the Government of William III., which was generally in a state of monetary tightness, found that the war with France was draining its resources, and, having failed to raise sufficient funds by the imposition of taxes, it resolved, apparently as a kind of dernier ressort, to accept Paterson's financial scheme, which had been shelved some three years earlier; and on 27th July, 1694, a charter was granted to the "Corporation of the Governor and Company of the Bank of England."

The capital of the company, £1,200,000, was subscribed by some forty London merchants, and lent to the Government. It is only reasonable to assume that the subscribers were supporters of the Government, and that they were Whigs, whose aim, in supplying William with the sinews of war, was the crushing of James, whose pusillanimity had disgusted even his own followers at the battle of the Boyne in 1690.

Then, again, the commercial morality of the Stuarts was notoriously bad in the City. Charles I., when the City of London refused him a loan, took forcible possession of £200,000 deposited by the Goldsmiths in the Exchequer; and Charles II., in 1672, robbed them of considerably over £1,000,000. The Goldsmiths, in those days, were the private bankers with whom the London merchants left their cash, receiving an acknowledgment or receipt in return, promising payment on demand, and the Goldsmiths deposited their surplus cash in the Exchequer, just as the banks of to-day do with the Bank of England. Through this act of spoliation the Goldsmiths were unable to meet their liabilities, and many of them, together with their customers, were involved in common ruin in consequence. James II. added to the financial sins of his house by debasing the currency: so small wonder that the merchants of London had had enough of the Stuarts, whose theory of the "Divine right" of kings did not even stop short at the pockets of their subjects—always their most vulnerable point.

The Bank of England, which to-day is quite outside party politics, was at its inception a Whig finance company, incorporated solely for the purpose of lending its capital to the Government at the rate of eight per cent. per annum; and out of this creation has evolved the present "Old Lady of Threadneedle Street," whose career, if chequered, has been one of unquestionable integrity.

It is difficult even in imagination to picture to oneself the England of 1694; but it is easy to understand that in those days great storehouses of capital were non-existent—non-existent, that is to say, in the modern sense. Our huge credit institutions, which are indispensable in the twentieth century for the proper carrying on of trade, and which dive by means of branches into almost every corner of the land, thereby collecting millions of pounds of loanable capital, would have spread their tentacles in vain during the seventeenth century, when neither the money nor the facilities for its profitable employment existed in the country.

Capital was scarce—consequently the rate of interest was high—and eight per cent. was a rate at which even the Government could not borrow in the City in 1694, from ten to thirteen per cent. per annum being about the value of loanable capital, while the commission paid was oftentimes exorbitant. The Bank, which was established by the Whigs, was naturally bitterly opposed by the Tories, who saw in its success the destruction of the cause they had at heart. The capitalist class disliked it for selfish reasons; and the Goldsmiths, recognising a formidable opponent, joined issue with its enemies.

Holders of stock and everybody connected with the Bank were looked upon as enemies of the House of Stuart, which, were it restored to power, would naturally wreak its vengeance upon a company that had helped to finance William—for forgiveness is one of those abstract attributes with which only brave and wise men are blest, and James II. had not given proof of possessing either courage or wisdom. Small wonder then that the City should support the Dutchman.

The National Debt, too, was founded during the reign of William, the first loan of £1,000,000 being raised in 1693, and those persons who held it were bound by the strongest of ties—commercial ties—to William. The fund-holders were Liberal; the Bank was Liberal; and as its very life was dependent upon the existence of the Government, it seems only natural that, in the popular mind, it should have been looked upon as a Government institution, though there is but little excuse for so classing it now. The fact that so many people still share this illusion, however, clearly proves that a large proportion of the public is unacquainted with the Bank's history.

The Bank of England's charter was renewed in 1697, and again in 1708, when, in order to prevent the establishment of similar institutions, it was granted the monopoly of Joint Stock Banking in England. This it retained until 1826, when an Act was passed permitting the formation of Joint Stock Banks of Unlimited Liability beyond sixty-five miles of London, provided they had no branches in the Metropolis.

It is a long jump from 1708 to 1826, and, of course, the charter was renewed many times between the two dates, the Government generally taking advantage of each extension to force some concession from the Bank, which, as its credit and business expanded, had increased its original capital by many millions; but 1826 was the year of reform, and the intervening period possesses little interest except to the student.

Between 1826 and 1829 the Bank opened eleven provincial branches, but those which were established at Gloucester, Swansea, Exeter, and Norwich have since been closed. Joint Stock Banks were then started in the provinces, though not with very happy results, for in 1832 their reckless trading was severely stigmatised by Lord Overstone; but it was not until 1834 that the first joint stock bank, the London and Westminster, was started in London, a clause having been inserted in the Act when the charter of the Bank of England was renewed in 1833, to the effect that, provided a joint stock bank did not issue notes, it was at liberty to carry on business in the City.

Both the Bank of England and the London private bankers opposed the new bank with acerbity, the former refusing to open an account for it in its books, and the latter declining to admit it into the Clearing House. Not satisfied with this, the Bank brought an action against the Westminster. But it was quite natural that the newcomer should have been received in this fashion, for innovations, however necessary and useful, are seldom accepted rapturously in this country, which appears to have almost a Chinese dislike of the unusual. Besides, it is not the custom of the country, even for the sake of appearances, to receive a trade rival with open arms, and it would have been a little surprising had the Bank surrendered its monopoly of joint stock banking in England without a struggle, whilst its desire, after being stripped of some of its privileges, to annoy its despoilers, was, if not laudable, eminently human.

In 1836 the London Joint Stock Bank followed the example of the Westminster, and in 1839 the Union Bank of London, which has recently amalgamated with Messrs. Smiths, opened its doors, while such well-known banks as the National Provincial Bank of England and the London and County Bank were formed in 1833 and 1836 respectively. The trade of the country had by that time far outgrown the resources of the Bank of England, which was quite unable to minister to the increasing demands of a prosperous and progressive England; and to-day the only monopoly which the Bank enjoys is that left to it by the Act of 1844.

From William and Mary to Victoria, in whose reign the Act of 1844—that Magna Charta of the banking community—was introduced, covers a most interesting period in the history of the nation, whose development had been retarded by the "Divine right" of the Stuarts, which cost Charles I. his head and James II. his throne. The theory is much in evidence to-day, though it now takes the form of a great abstract idea, not compatible with practical politics, and which has found a resting place in the heart, rather than in the head, of the people—for the practical twentieth century has a strange trick of banishing disproved theories from the head to the heart; and perhaps it is this national trait which saves the country from violent revolutions.

It would be a mistake to assert that commerce had declined under the Stuarts. It increased rapidly in spite of them; but, after the "Glorious Revolution," the "Divine right" of kings became a mere theory in this country, and the power of the Crown was made subservient to the will of the people. In short, the rule of Parliament began. The trade of the country gradually expanded, and with it the influence of the Bank.

In order that we may thoroughly grasp the position previously occupied by the Bank of England, and the influence given to it by its connection with the Government, it will be better, before briefly discussing the Act of 1844, to revert to the days when the sway of the Bank of England was absolute.

In 1708, we know, the Bank was granted the monopoly of joint stock banking in England, and, further, it was made illegal for any private firm, whose partners were more than six in number, to conduct the business of a banker. This restriction was not removed until 1857, when the partners in a private bank might consist of ten, and it will be seen from the following facts that this limitation was harmful to the best interests of the country.

One result of this hard-and-fast enactment was the encouragement of small private banks in every county of England; but the fact that the number of their partners was limited to six effectually checked their expansion, and finally brought hundreds of them to the ground; for they could not strengthen themselves, and add to their resources, by amalgamation as is now possible.

As the population of the country increased, the position of the private bankers, as a class, became precarious, especially in rapidly growing commercial centres, because their supply of loanable capital was insufficient to meet the increasing demands of their clients. In their attempt to finance their customers they neglected to maintain adequate reserves, and consequently failures were numerous directly any very considerable demand was made upon them.

Instead of a few large and powerful banking companies, there existed numerous weak private firms, which, in many instances, had advanced out of all proportion to their total working resources, thereby sacrificing security to large profits. So long as times were good all went merrily; but, unfortunately, the great impetus given to trade by the conclusion of peace with France and the United States in 1783 did not last more than five or six years.

The year 1789 brings us to the French Revolution, and in 1793 we were at war with France again. Then came the reaction. Country bankers failed in every direction; but in 1797 Mr. Pitt came to the rescue in order to relieve the Bank of England, and the directors of the Bank were allowed to issue notes at their discretion, cash payments being suspended. Between 1792 and 1820 over one thousand private bankers put up their shutters; and during the 1825 crisis sixty-five banks closed their doors, hundreds of their customers being ruined in consequence. The panic of 1825, which almost emptied the Bank's tills, thoroughly convinced the Government that the country had outgrown the monopoly of the Bank of England.

By limiting the partners in private banking companies to six in number, and prohibiting the establishment of joint stock banks in opposition to the Bank of England, the Government sanctioned a policy which could not but result in disaster. Like most monopolies, that of the Bank of England was framed to exclude powerful rivals, and to keep those in opposition small and weak; and the result was disaster and ruin in every direction. The greater the trade of the country, the more apparent became the evil, until even the Government was compelled to decide that the monopoly of the Bank of England must forthwith be curtailed.

Small tradesmen were quick to realise the possibilities attached to an unlimited issue of notes, and hundreds of them combined the business of banking with their retail trades, for, although the law placed every obstacle in the way of sound banking, it encouraged small men, who possessed little or no capital, to engage in a business which should be conducted with much capital and great caution. The country was flooded with the notes of these so-called bankers, who, directly their notes were presented for payment in large numbers, failed by the dozen.

A system which encouraged all that was bad, and excluded everything that was sound and secure, was naturally doomed to extinction; and small wonder that in 1826 the era of country joint stock banking began. Like most fresh ventures which cannot be guided by precedent, it began disastrously, for the simple reason that those who were responsible for the guidance of the new companies had to learn from experience—a very bitter school. But the new banks laboured under fewer disadvantages than the old private bankers, and the Bank Act of 1844, we shall see, clearly defined their position.

We can now understand why the private banker was never a great success in this country. He was of course sacrificed to the monopoly of the Bank of England; for although six very rich capitalists could conduct a large banking business, the resources at their command would not be sufficient to enable them to extend their branches throughout the country. Consequently, before the advent of the joint stock banks we find the private banker, broadly speaking, confining his connections to a particular district or county.

It is true that he enjoyed free trade in banking down to 1844; but the regulation as to the number of partners in his business necessarily confined his offices or branches to a limited area, and effectually prevented his expansion on a large scale; so we get influential houses in the various counties, such as the Gurneys in Norfolk and Suffolk, the Smiths in Nottingham, and so on. It is noticeable, however, that both these well-known private firms, recognising the applicability of the joint stock system to the times, have surrendered their note issues, and taken a place in the modern movement, evidently foreseeing that, in order to progress, they must adopt the methods of their more successful rivals.

Undoubtedly, the country was not ripe for such a movement until the beginning of the nineteenth century; and though the number of partners in private banking firms was extended to ten in 1857, this concession by no means placed the private banker on an equal footing with the joint stock companies, which could increase their members or partners by the issue of additional capital whenever it became apparent that their business was rapidly progressing. The private banker, had he desired to farm some dozen counties, would have been compelled to find a few large capitalists to join hands with him, whereas the joint stock banks had only to obtain hundreds of very small ones, and it is quite evident that the companies possessed infinitely the easier task. In fact, down to 1844 the monopoly of the Bank of England prevented their rapid growth. Then came the period of, so to speak, free banking; but not for the private firms.

People are constantly asking: Why did not the private bankers establish themselves firmly in the country and progress? They were first in the field, and, had they been well managed, surely they would have been as progressive as their joint stock rivals.

But we know that the law never gave them the remotest chance. How could they progress on a really gigantic scale when their partners were limited to six? The law literally forced them to stand aside; and in 1826 and 1833 only the joint stock system profited by the concessions wrung from the Bank of England, because by that system alone could sufficient capital be obtained to enable a bank to farm the country from south of the Tweed to Land's End.

Of course the private banker was at liberty to adopt the joint stock system at an earlier date, but he did not at first believe in the new movement, and, consequently, clung to his own system until he was far outdistanced by his competitors, for directly the country was relieved from the incubus in the shape of the Bank of England's monopoly, and the joint stock system was given a free hand, that system, as might have been expected, instantly began to forge ahead, and in a very short space of time the private banker, who to this day cannot admit more than ten persons into partnership, was left hopelessly behind by a system which was unfettered by legal restrictions and allowed fair play.

The Bank of England's monopoly reduced the private banker to impotency. It fostered in every county of England dangerously small firms, which disappeared in hundreds as soon as credit became bad and a state of panic caused their notes to be presented for payment in unusually large numbers, and it made really great private banking companies impossible in England; while but for the fact that public opinion wrenched this power from the hands of the directors, the Bank and its monopoly, which encouraged a dangerous form of banking, might both have been swept away in a bad financial crisis.

Fortunately, public opinion won the day; and though the private banker could not compete successfully against the joint stock system on account of the smallness of his capital compelling him to concentrate his energies in a particular district, that system, being unrestricted, soon covered the land with its branches. The private bankers were at first held in check by the Bank of England's monopoly. Now they are simply being smothered out of existence by the extension of a system of which, in a manner, though, of course, not in the modern sense, the Bank was the first exponent; for a banker, at the beginning of the nineteenth century, was largely dependent upon his note circulation for his profit, our present system of deposit banking being then in its infancy. In fact, the one evolved out of the other.

If a person held one hundred pounds in bank notes, it could not but occur to him that he was in reality lending the issuer one hundred pounds entirely free of interest; and as he possessed sufficient confidence in the banker to lock up the notes in his cash box, it was only going one step farther to deposit his money at his bank and draw out the cash as he required it. Obviously, too, if he exchanged the notes for a deposit receipt, he would receive some interest upon his money; and as the receipt could be held equally as safely as the notes, he naturally adopted the plan that was the more profitable to himself. So, although in 1826 the joint stock banks in the country attached great importance to their circulation, their notes rather took the form of an advertising medium for attracting deposits, or, at least, became a means to that end, for the progressive banks did not hesitate to sacrifice their note issues in order that they might open branches in London.

We find, then, that the joint stock banks at first attempted to place as many of their notes as possible among the public, and that, by the process already explained, the holders of their notes gradually began to deposit with them, until, by degrees, our present system of deposit banking obtained a firm hold upon the habits of the people. As the trade of the country expanded, the cheque rapidly drove out a large proportion of the bank notes in circulation; and though the issue of notes certainly introduced deposit banking in this country, modern requirements have made cheques and bills of exchange the media for the transference of credit. Such being the case, the note issues of the larger joint stock banks became of secondary importance to them; and, rather than remain outside the Metropolis, we have seen that they sacrificed their notes to the monopoly of the Bank of England.

From 1708 to 1826 the Bank of England owed its predominant position entirely to monopoly, and enough has been written to show that its sway was not an unmixed blessing to the country. The private banker, without a shadow of doubt, can trace his lack of progress to the restrictions placed upon his business by the Bank charter; and the joint stock companies may certainly be said to have succeeded in spite of the Bank; yet no greater compliment can be paid to any institution than to assert that it has earned the respect, if not the love, of its enemies; and such undoubtedly may be truthfully affirmed of the "Old Lady of Threadneedle Street," even when her rule was autocratic and her rivals' dislike of her intense.

CHAPTER II.

Before and After the Act of 1844.

We have seen that part of the Bank of England's monopoly was annulled in 1826, and that in 1833 a clause was inserted in the charter to the effect that joint stock banks of unlimited liability could open in London, provided they did not issue notes; and though the state of the law still allowed the Bank to harass and annoy the new companies, its power was thoroughly broken, and its monopoly of joint stock banking gone—fortunately for ever.

The country enjoyed a period of prosperity from 1833 to 1836, but the speculative fever soon began to develop, and by the end of 1835 it was burning fiercely, for men and women possessed an extraordinary faith in those much advertised short cuts to wealth in the early thirties. No path, if it were sufficiently short, was too precipitous. Hope was boundless, credit was unlimited, and companies in profusion were formed by the philanthropists and dreamers of those times.

Then came the crisis of 1837, when the Bank's policy rose almost to the verge of madness. Just at a critical moment, when it was imperative that no untoward incident should occur to disturb the already depressed state of credit, the Bank of England refused, and persisted in its refusal, to discount bills bearing the endorsement of the joint stock banks.

The action of the Bank added to the confusion, and, as speculation in America had been rampant, it dealt a final blow to the houses engaged in the American trade by issuing instructions that their bills also should not be discounted. Then, as might have been expected, the fury of the storm beat against the Bank itself; and by the end of February, 1837, its bullion was reduced to £4,077,000. In 1839 another crisis occurred, and the bullion declined to £2,522,000. Upon this occasion £2,500,000 was borrowed from the Bank of France, and the discount rate of the Bank of England was gradually advanced to six per cent.

These constantly recurring panics thoroughly alarmed the Government, which, having stripped the Bank of England of its monopoly of joint stock banking, now turned its attention to the currency, and by the Bank Act of 1844 secured the convertibility of the note. In fact, the chief aim of the Act was to reduce the issues of the country bankers, who, by forcing large numbers of their one pound notes into circulation and neglecting to maintain a sufficient proportion of cash in hand to meet them on presentation, helped to finance the gamble of 1824. Some of the banks paid the penalty in the year following, and disappeared from the scene.

In 1821 the Bank of England, after a period of restriction, began to pay off its notes under the value of £5, but the Government allowed the country bankers to continue issuing their small notes until the expiry of the Bank Charter in 1833. In 1826 an Act was passed prohibiting the stamping of notes under £5, and forbidding the circulation after April, 1829, of those then current.

The Bank Act of 1844 confirmed the alterations of 1826 and 1833, and, in addition, made great alterations in connection with the currency. The Issue Department of the Bank of England was to be kept entirely distinct from the Banking Department. Notes, to the extent of £14,000,000, might be issued against the debt owing by the Government to the Bank and against other securities, but coin and bullion must be deposited in the Issue Department against every note issued in excess of that sum.

Notes issued by the Bank of England are, therefore, secured principally by specie, and by the Government debt, which amounts (1902) to £11,015,100; and as every note is a warrant entitling the holder to gold on demand, a Bank of England note is really and truly equivalent to gold. However, under certain possible, if improbable, conditions, the Bank could not fulfil its obligations or promises to pay cash on presentation, for if all its notes in circulation were presented simultaneously there would not be sufficient coin in the Issue Department to meet them; but that is a most unlikely contingency.

Further, these notes are "legal tender" in England. In other words, a debtor can compel his creditor to accept them in discharge of his debt; but nobody is obliged to give out change should the value of the notes tendered exceed the amount of the sum owing. In Scotland and Ireland Bank of England notes are "current" but not "legal" tender. Neither are they by the Bank itself, nor by any of its branches, and sovereigns, though not half-sovereigns or silver, may be demanded in exchange. All notes are convertible at the London Office of the Bank, whose branches, however, are only responsible for those notes issued therefrom.

The Bank still retains the monopoly of issuing notes in London and at a distance not greater than sixty-five miles from the Metropolis. No new bank of issue may be formed; and as the private bankers in London had ceased circulating their notes prior to 1844, the Act practically gave the Bank the monopoly of note issue within the prescribed area. This monopoly alone is of great value; but when we remember that its notes are legal tender in England as well, it is evident that the Bank of England still enjoys a most important concession.

The private bankers of London, and the joint stock banks in London and within sixty-five miles of it, were debarred by the Act of 1844 from issuing notes. Of course the private bankers who still issued notes within the prescribed space retained their privilege, but they were no longer able to circulate as many as they could persuade the public to accept.

Bankers, both joint stock and private, who claimed the privilege of issuing notes were compelled to make a return of their issues for a period of twelve weeks to a given date, when the average amount was ascertained, and the extent of the future issue of each bank settled in accordance therewith. The issues, in other words, were fixed, and they could not exceed the sum authorised without breaking the law, and exposing themselves to a fine equivalent to the average excess during any one month. The Government, anxious to avoid a repetition of the scandals of 1825 and 1836, was evidently determined to limit the note circulations of the country banks, and there seems little doubt that, when the Act was framed, one of its aims was the slow but sure extermination of the country bank note.

Banks which intend giving up their note circulations may compound with the Bank of England, which is then allowed to increase its own issue by two-thirds of the disappearing issues. The Government, however, takes all the profit accruing from such arrangements.

The result of these regulations can be seen in the accretions made from time to time to the Bank's authorised issue of £14,000,000, which has now increased to £18,175,000. The majority of the issues of the private bankers fixed by the Act of 1844 have since lapsed; and the same may be said of the more progressive of the country joint stock banks, which, as their deposits grew, opened branches in London, thereby sacrificing their note circulations to the monopoly of the Bank of England, whose notes are fast driving those of the small country bankers out of circulation. Broadly speaking, it may be said that Bank of England notes are the only notes accepted readily by the English public; but the mere fact of their being legal tender ensures that.

Readers who are not acquainted with the history of Banking must not assume that the Act of 1844 affects either Scotland or Ireland. The note circulation of both those countries is regulated by the Act of 1845, but in neither country are the provisions identically the same as those affecting England.

Any person may demand of the Issue Department notes in exchange for gold bullion of standard fineness at the rate of £3 17s. 9d. per ounce.

The Bank Act of 1844, according to its framers, would make panics and crises evils of the past; but, as a matter of fact, it was a new broom, and its sweeping powers were greatly overestimated. Its provisions, we can see, related entirely to currency reform; and though the country bankers could no longer borrow on their notes to an unlimited extent, it must be remembered that Sir Robert Peel's famous Act, if it fixed the maximum amount of their issues, did not take the precaution to also fix the minimum reserve of cash in hand to be held against them. Obviously, no Act could strengthen the position of the banks against panics unless it laid down the minimum or legal reserve of cash to be maintained against deposits, and we shall see that, in this respect, the Act of 1844 did not realise expectations.

Controversy raged furiously around Peel's Act, and, needless to say, it became the bone of party contention. Whenever a subject reaches that stage in this country, its merits are forced into the background. Sides are taken, critics and politicians range themselves upon either the one or the other, and the subject, consequently, speedily gets all the truth lashed out of it. The number of people who really understand the question thoroughly is infinitesimal; and they, as a rule, by a strange irony of fate, do not dabble in politics. The important subject is therefore handed over to the tender mercies of the multitude, which, quite ignorant of its underlying principles, splits itself into two hostile camps, beats out the dust with sticks, and then returns a man to Parliament to vote on this side or on that.

When in 1847, three years after the passing of the Act, another crisis occurred, public opinion attached all the blame to Peel's Act; but public opinion was wrong. Public opinion is usually based upon instinct rather than upon reason, and, consequently, carried away by a sense of indignation or wrong, it rushes madly at what it considers the cause of the mischief. In this case its bugbear was Peel's Act. The real reason was to be found in the simple fact that neither the Bank of England nor any of the large banks held a sufficient proportion of cash in hand to meet those sudden demands for gold which may be made upon a banker at any moment, and to which his business is peculiarly exposed during periods of bad credit.

It was the old, old story, which in these days seems hardly to require an explanation. After a period of exceptional prosperity, there almost invariably follows a lean year or two, when loanable capital is cheap and the prices of commodities depressed. Then is the company promoter's opportunity, and schemes, wise and otherwise, are brought to the notice of the public. Presently there comes a gradual expansion of enterprise, and rising prices beget confidence, when a whisper goes round to the effect that good times are coming.

At first business improves slowly and surely. Then, as prices mount higher and higher, every producer increases his output, anxious to share in the general prosperity. Suddenly, just before the end, there is a boom. Prices rush madly upwards, until every prudent man sees that business has degenerated into a mere gamble, and that he must act quickly if he does not wish to be caught by the receding tide. Unless the banks are strong at that moment, disaster is inevitable; and as they had not taken the necessary precaution in 1847, the result was a crisis.

Capital was cheap during the last quarter of 1844, the Bank rate remaining stationary at two-and-a-half per cent. from September of that year to October, 1845. Cheap money gives the promoter his opportunity; and in 1845 the railway mania was at its zenith. England was in the hands of the surveyor, and the "boom" began in real earnest. As usual, everybody was to become immensely rich, and, as usual, most people were again bitterly disappointed. By a strange process of reasoning, experience does not count in finance. Hope, after a very little while, drives out of the memory of human beings the nightmare of disaster; so, in an astonishingly short space of time, they are gambling again. The crisis of 1837 had lost all its significance by 1845; and then, of course, the Bank Act was to prevent commercial panics in the future!

At the end of 1846 the Bank rate was raised to four per cent., and in October, 1847, it touched eight per cent. The speculation in railways naturally resulted in a gamble in iron; and, after the terrible famine in Ireland of 1846, when thousands died of fever and want in their wretched hovels and even on the roadsides, the suspension of the Corn Laws led to large importations of foreign grain. A sudden fall in prices immediately followed the increased supply, and the merchants in Mark Lane began to fail. Then people looked gravely at one another, and inquired what would happen next.

Credit is the disposition of one person to trust another; therefore as business gradually expands, credit or confidence increases at precisely the same ratio; and when prices are high and profits large, the impression prevails that everybody is making money—consequently, confidence begins to drive out caution; so, towards the end of a period of prosperity the acquisitive fever burns fiercely. Everybody is in mad haste to get rich; caution is flung to the winds; and we get a débâcle. Then follows a time of bad credit. That is to say, immediately after the reaction, everyone is disposed to be sceptical of his neighbour's position, to wonder whether he were hit by the recent upheaval, and to be extremely cautious in granting credit to his customers. This took place after the crisis of 1847. For a little while everybody was afraid to trust his neighbour; but by 1857 speculation was in full swing again, and the inevitable collapse followed. These periods of good and bad times, or good and bad credit, run their course with the regularity of a fever.

So it was in 1847. Directly a few failures were announced, the public became alarmed, and speculation received a check. The failures continued, and every holder of bills, anxious to have money at his credit at the banks, tried to discount them. But the banks were totally unprepared for this sudden demand, and in Liverpool and Newcastle some of them closed their doors. The London bankers refused their customers ordinary accommodation, and the Bank of England at first declined to advance against securities. Bills, consequently, could not be met at maturity, and the result was panic and a run on the banks.

The situation was saved by the suspension of the recently passed Bank Act, and on 25th October, 1847, the Government authorised the Bank of England to issue notes at its discretion, until the feeling of apprehension had subsided. The Bank thereupon advanced on bills and stock, and, although the rate of discount was eight per cent., the fact that money could be obtained on good bills and first-class securities speedily allayed the panic, and by 23rd November following the Act was again in force. Further, the amount issued by the Bank beyond the limit imposed thereby did not exceed £400,000, although its reserve, by 23rd October, was reduced to £1,547,000.

Perhaps we shall now be better able to understand the Act of 1844, and to see that, though it effected a most useful reform in the currency, and prevented a host of weak country bankers inundating the provinces with their doubtful paper, it does not contain a single clause which would either prevent or alleviate a panic. Indeed the paradox is that during a crisis relief can only be obtained by breaking the Act, and allowing the Bank of England to advance notes freely against the better-class securities. The power to issue notes was taken out of the hands of numerous weak banks, and confided to one strong one. Perhaps, however, it would be more correct to say that the power for evil of the small country bankers was "fixed" by the Act; and, as we have seen, the Bank of England's notes are gradually driving those of the English provincial banks out of circulation. Then, again, the extinction of the country issues gave a marked impetus to our modern system of deposit banking. The cheque soon became the principal credit document in circulation, and the country joint stock banks relied absolutely for their advancement upon their ability to attract deposits to their books.

So long as the Bank of England's notes can be exchanged for gold on demand, it is impossible for them to depreciate in value, and they cannot drive more gold out of the country than is equal to the Bank's fixed or authorised maximum, because, against every note issued in excess, specie for a like amount must be deposited in the Issue Department. Certain writers urge that this limitation is an interference with the freedom of the banker; but, seeing that our modern system of banking rests upon so small a cash basis, surely it is absolutely essential that our currency at least should be above suspicion in times of falling credit. The public does not require notes then. It wants credit; and this it obtains in the books of the banks.

The currency, certainly, should be left absolutely to the laws of supply and demand; and though it is true that the Bank of England sometimes has to protect the convertibility of its notes by raising its rate of discount, still, our present system approaches very near to perfection in so far as the exchange of the note for gold is concerned, and it certainly does not seem desirable to have the country again flooded with paper money which may, or may not, be paid on presentation.

Any person who possesses gold can have it turned into coin immediately; so, under our present system, every addition to the currency must come either direct from the mines or else be received in settlement of the balance of indebtedness owing by foreign nations to this country. We are, therefore, spared those evils which result from an over-issue of paper, and which were sometimes so greatly in evidence before the passing of the Act of 1844.

The absurdity of the attack on the Act must now be apparent, inasmuch as the only reform it could possibly effect was a currency reform, which was certainly badly needed. Viewed in that light it must surely be acknowledged that the Bank Act of 1844 is one of the soundest financial Bills that has ever become an Act of Parliament. The fact that, in spite of the great change in our banking system—which may be said to have been revolutionised since 1844—the Act has successfully stood the test of time, is also proof positive (if proof were required) that it was framed with great skill and judgment.

Had the Act further decreed that every bank should maintain a ratio of, say, at least eighteen per cent. of legal tender against its public liabilities, even panics might have been avoided. At any rate, the banks would have been better prepared to meet drains upon their resources, though even then—as has been pointed out is the case with the Act itself—the law would have to be broken directly a run was made on the banks by their customers. For all that, such a regulation would keep the banks in a fair state of preparedness during normal times, and consequently every bank in the land would be ready to face a panic.

Our system of credit is based on a small cash reserve; and it would be impossible to devise any workable scheme which would afford bankers absolute security, because it would prove too costly both to the banks themselves and to their customers, who would have to pay much higher rates in proportion as the depositors' money was secured. The most prudent banker can only insure his business up to a certain point, as, if he kept more than a certain proportion of cash in hand, he would conduct his business at a loss; so if a panic take possession of his customers and they rush for gold, he is lost if the demand should drain his reserve and encroach on his till-money. No system in the world could possibly save him then. The most our banks can do, therefore, is to be prepared to a certain extent, and, viewed in the light of past history, it is criminal of directors not to take the ordinary precautions. A clause in the Act, as already suggested, would at least ensure a fair state of preparedness in all our banking companies, and beyond that it is impossible to go.

It has been shown that the Act works most effectively in a time of panic when it is broken. It is, perhaps, interesting to recall that the Bank of Germany, in order to remedy this defect, is allowed to issue notes beyond the authorised amount at its own discretion; but the German Government, in order to check abuses, makes over-issue an unprofitable transaction for the Bank by imposing a fine of five per cent. on any amount issued in excess of the authorised limit. Were our own Government to adopt the same expedient, the Bank of England, during a time of stress and excitement, could meet all demands automatically, and the Act would be almost perfect of itself. On the other hand, the Government might not like to see so much power pass into the hands of the directors of the Bank, though there can be little doubt that they would use it with the greatest moderation and to the public advantage.

The object of this chapter is to show that panics were not lessened in any degree by the Act, and perhaps it may be said that the fact has been dinned into one's ears to the verge of irritation. But an ardent reformer's feelings are strong, and it is difficult to make this subject clear to those who are not conversant with the history of Banking, and who, perhaps, are disposed to think the subject both dry and uninteresting.

The panic of 1847 was followed by another in 1857, and in 1866 the Overend and Gurney crisis occurred. From 1866 down to the present day, unless we include the Baring scare in 1890, the country has been free from these scourges, and the reason is not very far to seek.

The Act of 1844 placed the currency of the country on a sound basis, and experience, by teaching the banks caution, did the rest. The large banking companies, after the terrible panic of 1866, plainly recognised that advances must be made with great discretion, and that, if they valued their own safety, speculation must be either kept well within bounds or discouraged entirely. Merchants and traders who require capital for speculative purposes can only obtain it by making application to the banks, which, in the very great majority of instances, now refuse to make advances unless tangible securities be deposited to cover their loans.

Merchants, therefore, unless their credit be exceptionally good, or unless they possess first-rate stocks and shares, cannot speculate to the same extent as was possible forty years ago and, of course, those persons who possess marketable securities, which bring them in incomes, are the last people in the world to risk an assured position for possible great future gain. They are accustomed to the good things of this earth, and though they may earnestly desire a large accretion to their wealth, the thought that, in the event of failure, they may lose what they already possess, checks the impulse to finance a scheme, which, while holding out promises of great success, is also not without possibilities of grave disaster. As a rule, only small men will take such risks, and the banks will not finance them at any price.

By refusing to accommodate weak speculators, the banks have kept business in a healthy channel, and have largely confined speculation to those people who can afford to pay their losses—always a cautious class. The rank speculator, therefore, has been driven to outside houses, and such houses, we know, are constantly failing; but Lombard Street, having weeded this dangerous element out of its system, is now more stable.

Recognising that their system of credit is always exposed to possible disaster, and having had the fact brought forcibly home to them upon so many occasions, the banks, since 1866, have gradually accumulated larger and larger cash reserves in order to be better prepared to deal immediately and effectively with those cataclysms which from time to time are certain to assail them; and though it is an open question whether their reserves are even now sufficient, the most casual observer must acknowledge that, with a few exceptions, our banking companies are in a better state of preparedness at the moment than perhaps during any other period of their history.

By compelling the schemers to deposit securities against their loans and advances the banks secure themselves against large bad debts; and by accumulating fair cash reserves they insure their business against suspension during panics. Having taken these precautions, it is not surprising that their path has been rendered comparatively smooth during recent years; and, further, the more prudent manner in which the business of a banker is now conducted makes the shares of the large banking companies less speculative holdings, and greatly reduces the risks of shareholders in connection with their liabilities on the uncalled portion of their shares, though that liability should by no means be forgotten or accepted in any other light than that of serious responsibility.

This brings us to another point in their history. It was not until 1858 that banks could be registered as limited liability companies, and, needless to say, no unlimited bank has been formed since that date; whilst every joint stock bank now in existence (although, in the great majority of instances, the members are liable for certain known sums on each share held by them) has limited the liability of its shareholders, those companies formed prior to 1858 having since taken the necessary steps.

Naturally, persons of wealth would not risk their fortunes by holding shares in an unlimited bank, but now that the exact liability is known the responsibility is accepted with a lighter heart, and, consequently, this class of security is considered a desirable investment by those who can afford to take a little risk in return for higher interest than that yielded by the so-called "gilt-edged" variety of securities.

The reader cannot but be struck by the gradual evolution of our banking system; and it must be evident to him that the present more secure position is the outcome of a bitter struggle with adversity. It is usual, when discussing the Bank of England's position in the money market, to degenerate into abuse, and to show that the Old Lady of Threadneedle Street has committed every conceivable folly in dealing with questions of finance. No doubt the accusations are true in the light of past experience. But they were the follies of her times, and, if we are to believe the critics, we are not greatly in advance of our own. Then is it not a little unreasonable to expect the Bank directors of 1825 to be in advance of the financial opinion then current in the City? They had the very best advice of the day at their disposal, and had the present-day critics lived in 1825 they would have urged the Bank directors to take the very course that was then adopted.

English history, at a certain period, seems an account of one long struggle between the will of the people and the power of the Crown; and Banking history, prior to 1844, reads like one long struggle between the banks and the Bank of England. But there is this distinction, to wit, the sterling honesty of the Bank. Surely, in the whole world's history there is not another such instance of unbroken faith on the part of a financial institution which has enjoyed a life of more than two hundred years. While anxious to give an accurate account of the Bank's history, and to explain all its faults and all its failings, it is impossible, the closer one examines its actions, not to be the more impressed by its honesty of purpose.

Every new movement gropes its way out of the darkness into the light. The process is, however, a slow one; and if, in the future, there are new problems to be solved, then future generations will have to learn the laws affecting them in the school of experience. Despite their increased knowledge, they will probably make the same mistakes as those recorded in these chapters, for it is astonishing, as our environment changes, how short a distance we can see in front of our noses. Banking in 1950 will in all probability be very different to banking in 1902—especially if population increases at its present rate all the world over.

CHAPTER III.

The Bank's Weekly Return.

For the nonce we have finished with history, and will turn our attention to the Bank of England as it now stands in the centre of the Money Market. The joint stock banks publish their balance sheets either annually or half-yearly; but the Bank of England, in compliance with the Act, compiles a weekly statement to the close of business each Wednesday. This Return or Balance Sheet is submitted to the directors on the following day, and, when passed by them, is exhibited on the wall of the Bank to an expectant crowd of messengers and officials, whose business it is either to criticise or copy it. But by far the greater number of the persons there assembled merely wish to know whether any alteration has been made by the directors in the Bank's discount rate, and, that ascertained, the crowd rapidly thins.

The following is a copy of the Return or Balance Sheet for the week ended Wednesday, 1st October, 1902:—

ISSUE DEPARTMENT.

BANKING DEPARTMENT.

A glance at the right hand side of the statement relating to the Issue Department tells us that every note, either in the hands of the public or held in reserve in the Banking Department, is covered by securities and specie deposited in the Issue Department. The amount of the notes in circulation is, of course, obtained by deducting the notes in hand in the Banking Department from the total amount of Notes Issued on the left-hand side of the Issue Department. The difference, £30,401,185, is called the "circulation," and represents the sum which the Bank of England had borrowed from the public on its notes on the 1st October last.

Each department is distinct, and has, in fact, a separate existence; so if the Banking Department requires gold, it must, like an ordinary individual, exchange some of its notes in hand at the Issue Department, obtaining therefrom the additional coin to satisfy the demands of its customers in the Banking Department.

The Bank has transferred the Government debt and other securities, which together amount to £18,175,000, to the Issue Department, and this sum is called the "authorised issue," for the simple reason that the Government allows the Bank to issue notes for a like amount against these securities, which are mortgaged to the holders of its notes. Gold coin and bullion, we know, must be deposited against every note issued in excess of this sum; and as both sides of the statement agree, it is evident that this has been done. These £51,000,000 of gold and securities, then, are hypothecated to the holders of the Bank's notes, and, in the event of the Bank of England being wound up, the creditors in the Banking Department could not touch either the securities or the gold. But we see that the Bank holds £21,391,145 of its own notes in the Banking Department, and, of course, these notes are secured in the same manner as those held by the public; consequently, this department enjoys similar rights and privileges in respect of them. Add the notes in hand in the Banking Department to the "circulation," and it will be found that the total equals the amount issued.

It follows that the Bank only makes a profit on the authorised portion of its note issue, for, as gold is deposited against the remainder, it must lose thereupon to the extent of the cost of production of the notes issued in excess. Obviously, then, the Act does not limit the note issue of the Bank, but it does limit that portion which is not covered by gold, and, consequently, it removes the probability of our seeing Bank of England notes at a discount, as was the case during the early part of the nineteenth century, for the fact that the Bank of England is compelled to redeem its notes in gold on demand prevents depreciation of its paper.

Of course, the amount of notes in circulation varies from day to day, and so, too, does the amount of notes issued, which rises and falls as the stock of bullion in the Issue Department is either increased or diminished. Every note paid is immediately cancelled, and no note, after it has been changed at the Bank, ever goes into circulation again. Hence the reason why Bank of England notes present such a marked contrast to the notes of the country bankers, who issue their paper over and over again, until it becomes quite unpleasant to handle, and distinctly malodorous.

The Bank of England may be said to perform four separate functions. Its Issue Department, as we have seen, is responsible for the notes. Secondly, the Bank manages the National Debt on behalf of the Government. Thirdly, in consequence of its holding the bankers' reserves, it acts as agent for the Mint. And, fourthly, it conducts an ordinary banking business, but it includes among its customers the largest and most influential depositor and borrower in the Kingdom, to wit, the British Government.

The Banking Department, which we will next discuss, stands quite by itself. The first entry on the left-hand side of the balance sheet, we can see, consists of the Bank's capital. Then follows the "rest" or reserve fund, which is never allowed to fall below £3,000,000, the accretions made thereto from time to time representing the profits of the Bank, which are distributed among the stockholders in the shape of dividend after the close of each half-year on the 5th April and the 5th October.

The third entry on the statement, Public Deposits, is made up of the various Government balances; and Other Deposits, which form by far the largest debit in the balance sheet, comprise current account and bankers' balances, the latter largely predominating. Since 1877 the Bank has not published the sum standing to the credit of the London bankers in its books; and as this deposit represents the reserve upon which the bankers might have to draw in the event of a panic, it seems an error of judgment not to give publicity to the figures, even if they do show how largely the Bank of England is dependent upon the other banks for its own working resources.

Public or Government Deposits and Other Deposits stand in a very peculiar relation to each other, and, before discussing the October return, it is perhaps desirable to illustrate this relation. The fiscal year ends on the 5th April; consequently, the Government is busily engaged in collecting the revenue during January, February, and March. "Other Deposits" are often referred to as the market fund of cash, and as those persons who pay their taxes draw cheques upon their bankers, it follows that during these months huge sums are transferred from the bankers' balances (Other Deposits) to the credit of Public Deposits, which are consequently swollen appreciably.

Bankers' balances being reduced, the banks have therefore less to lend; and if the demand for loanable capital is brisk at the time, borrowers are driven to the Bank of England, which sometimes has to raise its rate of discount in order to protect its reserve. Payment of instalments upon Government loans and large issues of Treasury bills produce a like effect.

On the 5th October (four days after the date of the return under discussion) a quarterly instalment on the National Debt is due. Then credit flows from Government Deposits back to Other Deposits. The banks can lend freely again, and the Bank of England, in order to attract borrowers, may even have to lower its rates. Undoubtedly, this is a somewhat artificial state of affairs, because money at times is made either cheap or dear, not solely as the result of demand and supply, but partly according to the personality of the holders of the loanable capital when the demand arises.

A glance at the return shows us that there is a balance of over £10,000,000 against Government Deposits. This implies that the Bank has control of the money market, that many of the bill brokers, finding Lombard Street empty, have been compelled to borrow from the Bank, which puts on the screw as demands upon its resources increase. Further, rates are not likely to be easier until money is released by the Government. Were the banks to keep their own reserves, and did the Government deposit with three or four of the strongest of them, then this constantly recurring tightness would not occur; but under our one reserve system it is unavoidable. However, it by no means follows that the average rate of discount would be lower under such a system. Indeed, the probability is that it would be much higher, because the banks would be compelled to keep larger reserves, and, consequently, would have less to lend.

The last amount on the liability side of the statement is £188,590, which is owing by the Bank on bills in circulation. Shortly after the passing of the Act, and before the joint stock banks had accumulated their vast deposits, the Bank of England issued a much larger volume of these post bills; but since the country banks have been able to draw upon their London agents and head offices in London, the Bank's bills in circulation have gradually dropped from well over £1,000,000 to their present figures. The last three entries, when added together, give us the amount of the Bank's indebtedness to the Government and to the public; and the aggregate, £71,279,825, represents the total liabilities of the Banking Department. But a company, if it be solvent, must possess assets for a like sum, and these we find on the right hand or credit side of the statement.

Nearly £16,000,000 are invested in Government securities; and though any advances made to the Government by the Bank on deficiency bills are included therewith, the description is correct, as a loan to the British Government is as safe as Consols. Just before the dividends on the funds fall due the balance in the Exchequer is often insufficient to meet requirements, and it is then that money is borrowed from the Bank of England on deficiency bills. Of course the Bank also advances to the Government for other purposes, and the extent of these loans may be seen in the statement issued by the Chancellor of the Exchequer each week.

The next entry on the Assets side, "Other Securities," is extremely misleading, or, at least, it embraces such a wide variety of assets as to make the entry practically useless to all who wish to ascertain the real position of the Bank. Included therein are (1) All the investments of the Bank other than Government securities; (2) Loans to customers and to the Stock Exchange, and bills of exchange discounted for customers and for the bill brokers; (3) The book value of its various premises, unless, of course, its head office and branches have been paid for out of the profits of previous years, on which subject the return does not enlighten us.

The balance sheets of some of the minor joint stock banks are disgracefully compiled, but, with respect to this one entry, the Bank of England return runs them very close, and it seems a pity that so powerful a corporation does not set a better example. The Bank, because it holds the bankers' reserves and keeps the Government accounts, is often able to corner the outside market; therefore the least it can do is to issue a plain statement, which will enable the public to see the exact situation created by the unique position it occupies.

The return is badly worded, and essential information is certainly withheld, while distinctness is not by any means one of its good points, for nobody, unless he studied the statement with the greatest care, could possibly divine the meaning of some of its quaint, old-world phraseology. But, as we all know, "great men and great things are never in a 'urry"; and the Bank of England, which is great in the best sense of the word, like the Government whose account it keeps, has never been known to anticipate a new development. A pedigree person always swears by the old. But the time has surely arrived when public opinion should compel the directors to issue a fuller and less ambiguous weekly statement. The present form was no doubt a model of lucidity in 1844; but it is woefully behind the times in 1902.

The last two entries on the Assets side form the Bank's reserve of legal tender. Strictly speaking, a bank's cash reserve is that sum which it has set aside to meet possible demands of an abnormal character, and as the Bank of England's till-money is included in the two entries in question, the total, £23,616,229, cannot be considered a true reserve, as a certain deduction has first to be made therefrom to provide for the ordinary demands made upon its resources in the usual course of business. Further, the Bank, because it is the bankers' bank, is peculiarly exposed to large drains of specie and notes. It follows, therefore, that to ascertain its true reserve, a very large amount would have to be deducted from the sum in question. A true reserve is a sum set apart for a particular purpose, of which no portion is used in the business it is intended to guarantee. It is a fund apart. Consequently, a banker's real reserve is obtained by deducting from his legal tender in hand the sum he requires for the conduct of his business. The Bank of England, however, needs more till-money than an ordinary banking institution.

Glancing at the liability side of the statement, we see that the first two entries represent working capital. In other words, £18,369,736 is a fixed sum, against which it is not necessary to hold one penny in reserve, because no withdrawals can be made therefrom during a time of bad credit. Such an immense amount of working capital makes the Bank of England more independent of its depositors than is the ordinary joint stock bank, and, therefore, its strength as a banking company is increased appreciably thereby, for the weakness of our banking system is due entirely to a fear of possible sudden demands on the part of depositors.

Still keeping on the same side, the last three entries give us the Bank's liabilities to the Government and to the public; and as large demands upon this sum of £52,910,089 may be made at any moment, a sum of notes and coin is held in the Banking Department to meet them. This sum, the Bank's so-called reserve, amounts, we know, to £23,616,229, and we next have to ascertain the ratio per cent. it bears to the liabilities in question. The following sum will supply the answer:

(£23,616,229 × 100) / (£52,910,089) = £44·6%

The Bank, then, on 1st October last, held £44·6 in notes and specie in the Banking Department to meet each £100 it owed to its customers. Yet we say "as safe as the Bank of England," when, as a matter of fact, the Bank could not pay its debts on demand; and, paradoxical as it may seem, so the Bank is safe, because its credit is so good that no man in England would ever dream of questioning its stability, for, if he did, he would only be laughed at for his pains. Again, comparatively speaking, the Bank of England is certainly safer than its rivals, and when we consider, in so far as its customers are concerned, the huge amount of its capital and reserve, it is evident that it is by far the safest bank in the land for depositors, as the larger the capital of a bank the greater is the guarantee of the customer against loss.

We have seen that the notes and coin in the Banking Department work out at a ratio per cent. of 44·6 to deposits; but as notes are not legal tender by the Bank of England, its creditors can refuse to accept them in discharge of a debt. This £21,391,145 of notes might, however, have been exchanged for gold with the Issue Department at any moment, so that the Bank could have paid off 44·6 per cent. of its liabilities on the day in question—a huge proportion.

It may be objected that, as a certain portion of its gold is held in bars, which would have to be sent to the Mint for coinage, the Bank could not discharge its debts quite so rapidly, and the contention would be perfectly true. But, assuming this exchange were made, £12,226,185 in gold would remain in the Issue Department to meet £30,401,185 of notes in circulation. The Bank, of course, could not then pay one half of its notes were they presented; but such a demand is almost outside the bounds of probability. Still, it is one of those extremely remote possibilities which no prudent Board of Directors can afford to forget; and we may be quite sure that this fact has not been overlooked by the Bank, which can always protect its gold by raising its discount rate.

In the next chapter another view will be taken of the Bank of England's weekly balance sheet.

CHAPTER IV.

The Issue and Banking Departments Combined.

In the preceding chapter the Issue and Banking Departments of the Bank of England have been discussed separately. Strictly speaking they can, of course, only be so treated, as each division stands alone; yet the notes in the Banking Department undoubtedly form a connecting link between the two divisions, seeing that they make the one department by far the largest single creditor of the other. Therefore it is intended in this chapter to discuss the return as a whole, to place the totals in the Issue Department back in the Banking Department, and to ascertain the Bank's exact state of preparedness to meet all its liabilities. The following table will enable us to do this:

ISSUE AND BANKING DEPARTMENTS.

1st October, 1902.

It may be urged that as the gold and securities in the Issue Department are mortgaged to the holders of Bank of England notes, they cannot be treated as ordinary assets, and that is true enough; but when we remember that upon the day in question the Banking Department could have exchanged notes to the value of £21,000,000 for gold, the objection loses much of its force.

However, assuming the Banking Department made the exchange, then specie to the extent of over £12,000,000 and the second and third items on the right-hand side of the balance sheet would be mortgaged to the holders of the notes in circulation, and the Bank, were it in need, could legally neither sell the securities nor apply the £12,000,000 in question to the liquidation of any other debt.

But, practically, there is small likelihood of the Bank of England being drained of specie by its notes, which have always been accepted without demur, even during the most troublous years of its history; and, while remembering that the notes in circulation are secured in the manner aforesaid, we may safely consider the Bank's state of preparedness to meet its total public indebtedness from the point of view that its liquid assets would be more than sufficient to discharge all probable demands made by both holders of notes and depositors.

On the 1st October last the Bank owed on its Notes in Circulation, Public and Other Deposits, and Bills, the huge sum of £83,311,274, which we will call its "Liabilities to the Public." Against this it held £35,842,414 in specie and bullion, which, a glance at the table shows, works out at a ratio per cent. of 43·02. The Bank had, then, £43·02 of the precious metals in hand to meet each £100 it owed to its customers. There is not another bank in the kingdom able to publish a balance sheet showing such a splendid proportion of cash in hand to liabilities—but we must also remember that there is not another bank in the country whose responsibilities are so great and so multifarious.

In the previous chapter it was shown that the Banking Department possessed £44·6 in notes and coin to meet each £100 of the public liabilities included therein, and, moreover, this would be the ratio given by the critics; but we now see that, when the two departments are united, the ratio only works out at £43·02. Strictly speaking, the larger ratio is correct; yet the smaller gives a much truer idea of the Bank's ability to pay off its creditors in cash on demand. Further, as the Bank cannot compel its customers to accept its own notes in discharge of a debt, the ratio £43·02 certainly gives one a more accurate impression of the Bank's position in relation to all its creditors.

The Government Debt, Other Securities, and Government Securities amount to £34,001,080, which works out at a ratio per cent. to liabilities of £40·81, making the ratio of total liquid assets £83·83. A debt owing by the British Government is rightly included with the liquid assets of the Bank, for when the credit of the Government ebbs our banking companies, which hold huge amounts of Consols, will no longer be solvent institutions; but no reasonable man imagines that an edifice which has been centuries in building, and which is still far from being either complete or perfect, will "go under" in a day, though all know that it cannot last for ever in its present form. We, however, only live sixty years or so, and therefore each generation of business men considers what will last out its time, and troubles itself but little about what the state of commerce will be fifty years later, as though dimly conscious that, in the end, man will have to go back to the land.

The Bank, we see, possesses £83·83 in cash and the very best securities to meet each £100 it owes to the public. Such figures cannot fail to impress one, for they prove indisputably that, on its merits, the Bank of England is by far the strongest banking company in the three kingdoms. They should not, however, blind our eyes to the fact that the Bank is a credit institution, and that were its creditors to go for gold in a body it would inevitably "smash," for, as we can see from the figures in the first column of the table on page 49, it never keeps a supply of the precious metals equal to its liabilities on demand. But, for all that, the Bank is splendidly prepared to meet every probable demand; and one cannot ask more of its directors.

It would be easy enough to write an indictment against the Bank, proving that its policy is all wrong, that it could not discharge its obligations under certain given conditions, and that, therefore, it is a menace to the solvency of the country. But such deductions, which have already been made by more than one critic, are crass nonsense, and only testify to the critics' ignorance of the subject. We know that the Bank's system is not by any means a perfect one, but, surely, the person who advertises an infallible financial system is either a great rogue or a great simpleton; for why is he not himself rich beyond desire?

The Bank of England, it is admitted, cannot meet its liabilities on demand, and most people would think that its directors had gone mad if they prepared to, while the stockholders would certainly threaten to turn out those directors who proposed a policy which would reduce the value of their stock considerably below parity.

The question seems to be: Is the Bank of England sufficiently prepared to meet all likely withdrawals of gold by its customers and by the holders of its notes?

The two columns, which give us the amount of the Bank's liquid assets, tell us plainly enough that the Bank of England was well prepared on the 1st October. We can see that it held a good supply of coin and bullion, and, secondly, a valuable list of convertible securities; but as the securities are only convertible so long as the Bank, which holds the reserves of cash of all the banks in the United Kingdom, is in a position to meet all probable demands upon its store of gold, it is evident that the first ratio is of paramount importance.

The Bank of England, which possesses the only large store of the precious metals in this country, has to meet both the home and foreign demands for gold. It follows, therefore, that its ratio per cent. of Reserve to Liabilities is eagerly scrutinised each week on the publication of the return, because it indicates whether or not loanable capital is likely to be dear or cheap. The means at its disposal for maintaining an adequate supply in reserve will be discussed later on.

Should the said ratio fall below, say, forty per cent., then it is prudent to inquire the reason; and should it recede to, say, thirty-three or thirty-four per cent., then there may be cause even for apprehension; but so long as the Bank of England keeps a fair ratio of reserve to its public indebtedness, there is no cause for alarm: though a bank which holds the national reserve must always be extremely cautious, even when credit is good and there is not a breath of suspicion in the air, for the proverbial little cloud gathers strength with incredible speed when once it does appear.

Undoubtedly our banking system is exposed to the gravest dangers, but as it brings us cheap money we accept the risks; and unless a critic can produce a workable scheme which will eliminate the hazard and retain the blessing of cheap loanable capital, he had better by far confine his attention to those safeguards that reduce the risks of our present system, which is workable, to a minimum. Provided the Bank of England keeps an adequate reserve in the Banking Department, we have at least the satisfaction of knowing that all that can reasonably be done to ensure safety has been done, and that those risks, which a credit bank cannot avoid under any system, have at least been insured against under our own.

No doubt the Bank's large working capital of over £17,500,000 has contributed very considerably to its ascendancy, and helped it, especially since 1844, to more than hold its own against all comers; for despite the fact that we occasionally hear sneers—no doubt prompted by jealousy—at its so-styled omnipotence, an examination of its return soon convinces the sceptical that it is still the largest and safest bank in England. Further, it has occupied this enviable position for over two hundred years.

The ratio per cent. of Advances (loans, bills discounted, securities, &c.) to Liabilities is only 38·21—a proportion, especially when it is remembered that an unknown amount of investments is included therewith, which clearly informs us that the Bank is fully alive to the responsibilities of its unique position, and that its directors, while they are no doubt anxious to make as much net profit as possible for the proprietors, have not lost sight of the fact that they also have duties to perform towards the public.

But it must not be thought that the directors discharge their duties towards the public so well from philanthropic motives. Even from a selfish standpoint it pays them to keep the Bank thoroughly prepared, as, should they allow the reserve to sink too low, an anxious period would be certain to follow, when additional profits, made by trading with too large a proportion of the deposits, would speedily be swept away by the expense incurred by borrowing back at high rates in order to strengthen the cash in hand. For a little while the interest upon the increased loans would swell the profits, but directly the foreign exchanges moved against this country, and gold began to flow abroad, even an inexperienced director would realise the folly of risking a panic for the sake of seeing the dividends rise, and he would not make such a doubtful experiment a second time.

Perhaps, before bringing this chapter to a close, it may be interesting to compare the total indebtedness of the Bank of England to the public and its stockholders with that of Lloyds and the National Provincial Bank of England to their customers and shareholders. The following table will supply the figures:—

We can now see how much larger are the working resources of the Bank of England than those of either of the other above-mentioned banking institutions, though, as the joint stock banks keep their reserves of cash with the Bank of England, the comparison loses a little of its force. Still, the preponderance of the Bank of England is most marked, a fact one is not, perhaps, so apt to realise when the Issue and Banking Departments are considered apart.

CHAPTER V.

The Store in the Issue Department.

We next have to consider the amount of gold coin and bullion in the Issue Department—to wit, £33,617,330, and we must remember that this accumulation is the national store, that the cash reserves of all the banks in England, Scotland, and Ireland are dependent thereupon, and that, consequently, the solvency of the nation is decided thereby.

The indebtedness of the English, Scotch, and Irish Banks to the public at December, 1901, as shown by their balance sheets, upon current accounts, deposit receipts, and notes in circulation, amounted to nearly £910,000,000. The liabilities of the Bank of England and of those private bankers who publish balance sheets are included in this huge total.

This £910,000,000 may be called the "floating capital" of the country. It is deposited or left with the banks, who invest a certain proportion of it in securities, in short loans to the bill brokers and stockbrokers, in making advances and loans to their customers, and in discounting bills for them; and, as the said millions are left at either call or short notice, the banks also have to maintain a sufficient supply of legal tender to meet all probable demands upon this immense debt. It is with this "floating capital" that the present chapter is principally concerned.

Stored in their strong rooms the banks keep sufficient legal tender (Bank of England notes and specie) with which to conduct their business. The sum thus held may be called their "till money"; and it probably would not exceed five per cent. of the £910,000,000 in question—viz.: £45,500,000. A large part of this till money is, however, held in Bank of England notes, which are warrants for gold upon the store in the Issue Department, but as creditors cannot refuse the notes they are quite as valuable to a banker as gold. All a banker has to consider is whether he has a sufficient supply of legal tender to discharge his public indebtedness; and if he have, he need take no thought for the morrow.

Deducting £45,500,000 from £910,000,000, we get £864,500,000. Though this is an accumulation of credit in the books of the banks rather than of cash, their customers can demand the equivalent from them in legal tender; yet we see that, were the banks drained of £45,500,000, they would then be entirely dependent upon their reserves at the Bank of England.

The reserves are included in Other Deposits, £42,695,526; and seeing the magnitude of the amount it seems a pity that the Bank of England does not tell us each week what portion of this total belongs to the other banks. Further, the Bank of England employs these balances in its own business; and, though it generally maintains a very large ratio per cent. of reserve to liabilities, the fact remains that a certain proportion of the cash reserves of our banks is lent out to the public—a somewhat startling position at first sight. The banks accumulate a reserve against those dangers from which their business is never free, and the Bank of England advances some of it to its own customers! Apparently, what could be more absurd? But in finance things are so often not what they seem.

We now come to the store of gold coin and bullion in the Issue Department—£33,617,330. A certain proportion of this must be retained in order to secure the convertibility of the notes of the Bank, and the remainder may perhaps be called the national store or accumulation. The banks of the United Kingdom are indebted, roughly speaking, to the public to the extent of £910,000,000. But we have seen that, say, £45,500,000 of this sum is secured by legal tender in hand, so the unsecured portion amounts to £864,500,000. Our position, then, stands as under:—

As a matter of fact, we are looking on the bright side of the picture, for seeing that a large amount in Bank notes would be held among the £45,500,000 deducted, it follows that the store in the Issue Department might be appreciably reduced were a considerable number of these notes presented for payment; and then again, the indebtedness of those private bankers who do not publish balance sheets has been omitted. Suppose we say that the banks hold £35,500,000 in specie. This, added to the store at the Bank, gives us £71,300,000. Then our banks owe £910,000,000; but there is only £71,000,000 of specie in their possession with which to pay their huge debt. On the other hand, many of the banks do not hold nearly five per cent. of their liabilities to the public in legal tender on their premises; and, were the truth known, it is more than probable that in some instances three-and-a-half to four-and-a-half per cent. would be nearer the mark.

England, after all, is only a gigantic workshop, and so long as her shops are busy there is no danger. But have those people who live on incomes invested solely in British securities ever reflected that, were there no work for her shops, this system of credit would collapse like a castle of cards, when their incomes would be gone? Our solvency as a nation depends absolutely upon the skill and ability displayed by British manufacturers, and upon the muscles and intelligence of their workmen. Given a high standard of efficiency and adaptability on the part of our producers, then trade flows to this country, and by trade alone can we support our credit and pay our debts. Small wonder, then, that thoughtful people are becoming alarmed at the apotheosis of Games in this country, and at the large number of idlers who do not take a part in production, but are dependent upon the interest received from investments, which can only be productive so long as our commerce is flourishing.

The capital of this country has been computed by a competent authority at about £10,500,000,000, but doubtless these figures are very wide of the mark. Still, the amount of fixed capital invested in the country must be immense. By "fixed" capital, as distinguished from the floating or loanable capital deposited with the banks and kindred institutions, those investments of a more permanent character are implied. A depositor can demand his money back from his banker, but bank shares he would have to sell on the Stock Exchange—therefore the one is "floating" and the other "fixed" capital. It is the same with Consols, railway shares, and with the shares of all companies in which there is a market. When there is not a market, then the capital is fixed indeed; and there would not even be a market for Consols were the Bank of England drained of its gold. Moreover, during normal times the demand for loanable capital at the banks will help to determine the price an investor will receive should he desire to sell any of his fixed investments.

It consequently amounts to this: The fixed capital of the country cannot be converted or sold unless the banks maintain large cash reserves; so we may truthfully assert that about £10,000,000,000 of capital is erected on a basis of about £71,000,000 of cash. This cash, in its turn, can only be kept in the country while our workshops are busy; therefore it at once becomes apparent that the national aim should be to increase our trade, for the yield, and consequently the value, of British securities is bound to either increase or diminish in proportion as the trade of the country is either flourishing or the reverse. Even the Government can only meet the interest on Consols while the people are in a position to pay their taxes.

Such a statement may come as a shock to those persons who are accustomed to draw their dividends each half-year or year, and to imagine that unless the world came to an end these dividends could not cease; but they would cease were this country to fall hopelessly behind in the race for trade. This is not the old Socialist maxim that "Labour supports the world" put into a new print dress. It is evident that the fixed capital of this country, as represented by stocks and shares, would be mere waste paper unless the banks held sufficient gold to ensure a market for them: and as this gold cannot be kept in the country unless our workshops are able to compete successfully with those of other nations, it follows that the position of those persons who draw incomes from British securities is entirely dependent upon the brains and abilities of the men who direct our industries. How important, then, that the very best talent the nation possesses should be used in trade; and what folly it is on the part of those so-called "superior" persons to sneer at the trader—at him who, without doubt, enables them to draw their incomes regularly!

There was a time when capital, broadly speaking, could only be obtained in London; but since then population has increased all the world over, and as capital is only the savings of labour, it naturally follows that it can now be obtained abroad, and that London is less necessary to the foreign borrower; and, as the world fills up, it must surely become less and less necessary. Yet our gilded youth affects to despise trade. This is somewhat absurd, when it is trade that enables him to live in idleness; and British pride, unless it recognises this fact, may have a bad fall.

The banks of the United Kingdom, roughly speaking, are indebted to the public to the extent of £910,000,000. They only keep till-money in their safes, and are dependent upon the store in the Issue Department of the Bank of England for their reserves of cash. In other words, this £33,000,000 of specie is the foundation stone upon which £910,000,000 of credit rests. It has already been shown in what relation the fixed capital of the country stands to this fund.

The smaller of the provincial banking companies keep their cash reserves with their London agents, who also place their reserves with the Bank of England. Consequently, as the agents include the reserves of these banks with their own deposits, they, like the Bank of England in relation to the bankers' balances, lend out a percentage of the reserves of the smaller banks. It follows, therefore, that the bankers' balances in the hands of the Bank are smaller than would be the case if each bank kept its reserve with it. The London agents are dependent upon the Bank, and the smaller banks upon the agents.

As the store in the Issue Department is the only large collection of specie and bullion in the three kingdoms, and as the amount therein is always extremely small when compared with the huge liabilities which, under certain conditions, it might be asked to liquidate, any considerable depletion of this store makes the owners of large bank balances nervous; for if the Bank of England cannot pay the bankers, then their bankers will not be able to pay them.

Again, the liabilities of the banks are so immense in comparison with their reserves that a very small diminution of the fund in the Issue Department makes owners of capital anxious, whilst a serious drain would probably create a panic; and unless means were devised to allay the panic, it might develop into a revolution; for we are very commercial in these days, and are beginning to realise that mere glory may be bought too dearly. Commercialism, however, is not exactly a fascinating virtue.

We are constantly being told that the money market is an extremely sensitive organisation. And no wonder! The banks owe hundreds of millions on demand and short notice. Considerably over eighty per cent. of these millions is invested and lent, and as the banks' reserves of gold are small, every sudden demand for large supplies of the precious metals is liable to disorganise the market; and the Bank, which holds the final reserve, is therefore compelled to raise its rate of discount in order to protect the bullion in its Issue Department.

But for this very reason capital may generally be borrowed more cheaply in London than elsewhere; and though cash is perhaps dangerously economised, credit is proportionately the more easily obtainable, and the price of a loan is cheaper than would be the case were the banks to maintain a higher ratio of cash to liabilities. They would then have less to lend, and in times when trade was brisk demand would drive up the rate of interest to higher figures than those which prevail under our present system, and reduce the profits of borrowers. The average rate, too, would be greater.

The dangers of our system are very apparent, but so are its advantages; and though we consider it pays us to take the risks, it is evident that we cannot afford to neglect the necessary precautions.

CHAPTER VI.

Weekly Differences in the Return.

It were better, before proceeding further, to give a copy of the Bank Return as it appears in the daily papers each Friday, when comparisons are made with the figures of the preceding week, and the various differences carried into distinctive columns. That for the week ended Wednesday, 1st October, 1902, has been selected, in order that the figures may be the same throughout this volume. The statement is given below:

Issue Department.

Banking Department.

Why, it may be asked, is so much importance attached to this return, and why do the critics, each week, endeavour to state precisely how much the "market" has borrowed from, or repaid to, the Bank, and to explain the cause of the various accretions and diminutions in the different assets and liabilities? With regard to the latter attempt, each critic, it is said, is quite convinced that he alone understands the true inwardness of the various movements which result in the increases and decreases recorded in our table; but it is just whispered that those persons at the Bank of England who know the cause laugh at their deductions.

The return is of the greatest moment to the public, for the simple reason that it shows the ratio per cent. of the Bank's reserve of notes and cash in hand to its liabilities, and, also, the amount of coin and bullion in the Issue Department. The Bank holds the final reserve; and if demand is brisk and the other bankers have advanced largely to the outside market, the bill brokers are driven to the Bank. As the banking companies have advanced all their spare capital, demand can only be supplied from the reserve at the Bank of England; and the Bank, which must protect its gold, checks demand by charging high rates to all who borrow.

The return, then, tells us whether loanable capital is likely to be cheap or dear. If the ratio to liabilities be small, and the store of gold diminishing, we know that demand has reached the Bank, and that money will be dear. When money is dear, Consols and other so-called gilt-edged securities are almost certain to fall in value. If it become really scarce, then the banks, which lend huge sums on the Stock Exchange, charge the brokers enhanced rates, and "carrying over" becomes difficult. Numerous speculative accounts have to be closed, and securities, consequently, fall in price.

Now, a glance at the return of 1st October, 1902, shows that the ratio on that date is 44·6 per cent., and the Bank's discount rate four per cent. The bullion in the Issue Department decreased £1,492,620, and the Bank, in order to arrest this drain, raised the rate from three to four per cent. The political unrest in France, which at first threatened to disturb the London money market, and the tightness of money in New York, were, undoubtedly, two factors which largely influenced the decision of the directors, who, no doubt, also took into their consideration the fact that the autumn demand for currency might further reduce their reserve. Noticing that Consols were at 93-1/8, and believing that the stringency was only temporary, one might feel disposed to buy, trusting that cheaper money during the earlier part of the new year would drive them up to 96 or so.

The weekly return of the Bank of England, then, is the barometer which tells us whether loanable capital is either scarce or abundant, dear or cheap; and, when read with the Board of Trade returns and the foreign exchanges, it enables us to guess, with more or less uncertainty, but still intelligently, and with a degree of probability, whether or not money is likely to be in future demand. The Railway and Bankers' Clearing House returns, too, indicate the course of trade, and are of more than academic interest. It is, however, always wise to remember that finance is not an exact science, for if it were the theorists would be fabulously rich; and we know that they are generally so hard up as to be compelled to write books and financial articles for a living.

Now we can see why the Bank of England's weekly balance sheet is keenly interesting to every person who possesses capital either to lend or to invest, to dealers in bills and securities, and to every speculator on the Stock Exchange, as a strong or a weak return may make all the difference to the rates charged on "contango" day. Borrowers and lenders are equally concerned, for the rate of interest does not depend upon the caprice of any individual or of any bank, but is solely the outcome or result of demand and supply; and demand, when the banks have exhausted their supplies of spare capital, then centres itself fiercely upon the Old Lady of Threadneedle Street simply because she holds the final reserve of cash, and for no other reason whatsoever.

Reverting to our statement, we find that the increases and decreases of the various totals balance each other; and if the differences agree, then the assets and liabilities, on adding the Bank's capital of £14,553,000 to the latter, must also balance each other, for the simple reason that the Bank keeps its books by double entry. The best system of bookkeeping which can possibly be adopted is the simplest system, because the very fact of accounts being complex and involved is sure to result in a multiplicity of mistakes, which prove that the system is faulty. In double entry there must be a debit for every credit; so every sum debited to one account in the books of the Bank of England is credited to another or to others; and as the assets and liabilities in the statement tally, therefore the balances in the last two columns, which are the result of multitudinous debits and credits made during the week, must agree also. But how is it possible for an outsider to follow these internal movements? He simply cannot. Consequently his deductions made from the differences shown week by week are sometimes very wide of the mark, and, for his own reputation's sake, it would be wiser if he were to confine his remarks principally to the all-important questions of the ratio in the Banking Department and the bullion in the Issue Department.

For instance, simply with the differences in question to go upon, it may be said that the return shows that the market has borrowed largely from the Bank, "Other Securities" being up over £5,000,000. Part of this amount increased "Other Deposits," and a transfer was also made to "Public Deposits" in order to pay the Government for £2,000,000 of Treasury bills, while the accretion to "Government Securities" seems to indicate that the Government borrowed a certain sum from the Bank on Ways and Means, and that loans were made to the market on this class of security.

In London the "loan account" system is greatly in evidence among the banks. That is to say, when a customer is granted a loan for, say, £10,000, his current account is credited £10,000, and a loan account, opened in his name, is debited £10,000. The interest is calculated upon the loan account, and the advantage resulting to the banks is too evident to call for explanation in these pages.

When loans are made by the Bank of England, accounts which increase "Other Securities" are debited, and other accounts, which increase "Other Deposits" are credited—if the loans are made to the public. Should the loans be made to the Government, "Public Deposits" and "Government Securities" also increase proportionately from the same cause. The Bank, because it keeps the bankers' accounts, occupies a peculiar position in relation to these entries, and that position will be discussed in a later chapter.

The notes in the Banking Department have decreased £2,694,960 and the specie £17,314, so, if we add these two sums together, the total, £2,712,274, represents the diminution in the reserve. A glance at the Bank's liabilities shows us that they have increased appreciably, and as the reserve has shrunk considerably, it follows that the ratio is very much smaller than that of the previous week. Indeed, the reserve had not fallen so low since May; and the monetary outlook being uncertain, the directors, as a precautionary measure, raised the rate of discount.

Next, suppose that we wish to ascertain the amount of cash which has been withdrawn from the Bank to meet the demand within the country. The bullion in the Issue Department is £1,492,620 down, and the coin in the Banking Department £17,314; so the Bank has lost £1,509,934 in coin and bullion. But £730,000 was exported during the week; therefore, if we deduct £730,000 from £1,509,934, the difference, £779,934, is the amount that is gone into home circulation.

But, it may be asked, how can one ascertain the amounts of the exports and imports of the precious metals? Late in the afternoon of each day the Bank exhibits a statement on its walls giving this information, and it was from these placards that it was ascertained that the sum in question had been sent abroad. Hence it is possible to learn how much cash was withdrawn from the Bank for home requirements during the week, or, better, the amount of the efflux on the day of the publication of the return.

But, as has already been explained, these deductions are not always reliable.

CHAPTER VII.

The Bank of England as Agent of the Mint.

In theory any person can take gold bullion to the Mint, which, under the Coinage Act, is compelled to give him in exchange sovereigns containing an equal quantity of gold to that left; but nobody ever does, and practically the Bank of England acts as the Mint's agent. By the Bank Act he receives £3 17s. 9d. per ounce, instead of £3 17s. 10-1/2d., the full Mint price, the deduction of 1-1/2d. being about equal to the loss of interest incurred, for the Mint does not bargain to pay out coin immediately on delivery of bullion.

All the bankers in the United Kingdom, we know, obtain their supplies of cash from the Issue Department of the Bank of England, which, as a natural consequence, supplies the currency requirements of the nation. Possessing the only large store of bullion, it can, so to speak, feel the pulse of the whole trading community; and, directly a demand sets in for specie, it sends bullion to the Mint for conversion into coin. This it can do without any loss of interest whatever, for, of course, the bullion is lying idle in the Issue Department. A bank which keeps the Government accounts, and stands in this relation to the other bankers, must of necessity become the agent of the Mint, which, even in its output of silver and bronze coins, relies absolutely upon information received from the Bank of England. The Bank, in fact, supplies both the London and country bankers with these token coins.

As an illustration of this one of those little social amenities which take place between bankers and their clients about Christmas time may be mentioned. Naturally I am not alluding to the higgling occasioned by the increase of advances and bills discounted to meet a growing demand at this period of the year. But many persons, just before the festive season sets in, like to obtain supplies of bright new silver coins with which to anoint the palms of their humbler fellow-subjects, whose manners about that time become aggressively pleasant and ingratiating. These coins they get from their bankers, who receive them from the Bank of England and its branches, either directly or through their agents. As soon as the bankers run short of silver coins, they apply to the Bank, which, being in close touch with every source of demand, is able to guide the Mint on a question of supply.

The Bank of England does not possess a legal monopoly, but occupies this position solely because it holds the final reserve of cash. If the Government and all the bankers keep accounts with the Bank of England, then the Bank must act as the agent of the Mint so long as this state of affairs continues, because its Issue Department has to meet all demands for cash made upon it by the Bank's customers and the holders of its notes; and as these customers, either directly or indirectly, include every large dealer in gold in the land, it supplies the currency as a matter of course. Dealers do not send their bullion to the Mint, because it is more convenient to sell it outright to the Bank, which settles with them immediately, thereby removing all uncertainty as to the length of time coinage will occupy.

It follows, therefore, that the Bank of England has to meet all demands for gold, whether for home or foreign requirement; but it is when gold is leaving the country in large quantities that drastic measures have to be taken in order to stop the depletion of the Bank's reserve of the precious metals, for some of the home drains are only of a temporary nature, and unless capital be greatly in demand at the time they do not affect the rate of interest, as the money flows back to the Bank after a short interval.

The Bank of England on 5th January, 5th April, 5th July, and 5th October pays the quarterly dividends on the National Debt. The Government, which at the present time has to provide over £6,000,000 each quarter, has a huge sum standing to its credit before one of these payments matures, and the sudden release of so much capital often causes the rate of discount to fall, especially during those years when trade is good, and the demand for loanable capital consequently brisk. If times are dull, then the rate will not ascend when the Government is taking money off the market, as the demand upon the reduced resources of the banks will not be sufficiently keen to drive a large number of borrowers to the Bank of England.

We have an illustration of this in the fact that from February, 1894, to September, 1896, trade was so inactive, and demand therefore so small, that the Bank rate stood at two per cent. during the whole period. In other words, we had two and a half years with the Bank rate at two per cent. With trade bad and money cheap, speculation soon became rampant. The gilt-edged variety of securities yielded less, because trade was less productive, and consequently capital, instead of being kept idle in the banks, was transferred to the better class securities, which returned less to the investor in proportion as increased demand forced up prices. With incomes reduced and balances lying idle at the banks, the public developed a speculative mania, and one result was the Stock Exchange boom of 1895, for investment business and speculation always increase when trade is bad. Bad times, in fact, at first add to the business of the House.

Traders keep large balances with the banks for the same reason that the banks themselves have huge sums standing to their credit in the books of the Bank of England, because they are bound to accumulate credit in order to meet their engagements, and, also, to maintain a surplus in case of accidents, such as bad debts and the inability of customers to pay their debts immediately on maturity. When trade slackens and prices fall, producers reduce their output, and the result is an accumulation of credit in the books of the banks. Moreover, a certain proportion of these balances is not then required to finance and guarantee commercial undertakings. Hence the movement to which attention has already been drawn.

But the holders of gilt-edged securities require some inducement in order to persuade them to sell; and this is forthcoming in the shape of accretions to the capital value of their stocks and shares as a result of the increased demand. But the floating capital of the country is not decreased by this exchange. It is left at precisely the same figures. The buyers draw cheques upon their bankers, and the sellers pay the same cheques to their own credit; consequently, the floating capital in the hands of the banks is always about the same, be the times good or bad, so long as speculation or investment is confined to British securities. When, however, foreign securities are purchased, gold sometimes has to be sent out of the country to help pay for them; and it is then that the situation may cause apprehension—for capital is leaving the country. Should the drain prove serious, the Bank would have to raise its rate; and were it to prove continuous, notwithstanding an abnormally high Bank rate, we might have a crisis.

Returning to the dividends on the funds, "Public Deposits" are increased before the above-mentioned dates, and when this money is released, the result is a large addition to "Other Deposits," because most of the money returns to increase the bankers' balances. A small part, however, is taken by the fund-holders in cash; so we may notice a decrease in the Bank's reserve of notes, and, consequently, an increase in the circulation, together, perhaps, with a fall in the bullion, representing the small proportion withdrawn in actual cash. Should the banks, in consequence of this increase in their deposits, be taking bills from the brokers at cheaper rates, then "Other Securities" would also lessen, because the bill brokers would pay off the Bank and borrow in the cheaper market. The converse occurs when the Government is collecting the revenue, issuing a new loan, or borrowing on Treasury bills.

The principal currency drains will be discussed in the following chapter.

CHAPTER VIII.

The Principal Currency Drains.

The principal currency drains occur during the holiday season and at harvest time, more especially during the latter period, when large amounts of cash are sent into the country to satisfy the requirements of labour. Early in November a demand for gold arises in Scotland, owing to the fact that rents there fall due at Martinmas (11th November); and as the Scotch banks, by the Act of 1845, are compelled to hold gold against notes circulated in excess of their authorised issues, a rather heavy call is made upon the Bank of England, whose returns then show a noticeable decrease in the reserve and bullion. During years of active trade, and, consequently, of brisk demand for loanable capital, these autumnal drains of gold generally force up the rate of interest, thereby making the last quarter of the year the dearest for borrowers.

But we are discussing internal demands only, and as, so long as gold does not leave the country, it is merely a question of certain sums flowing from the London money market and drifting back to it again, this ebb and flow, which is shown by the various ups and downs occurring from time to time in the items of the Bank return, does not create any apprehension. Indeed, these movements occur so regularly at certain times of the year that large borrowers often anticipate them in order that they may tide over such periods with the minimum of inconvenience. It is, however, otherwise when gold is leaving the country in large quantities in order to settle the balance of our indebtedness to other nations, for that may not come back. How it is again enticed to these shores I will endeavour to explain.

We now come to a foreign drain of gold; and this depletion of the currency, we know, flows from the store at the Bank of England into the hands of the foreign creditors of the nation. We export to, and import from, other nations on a gigantic scale, and as our imports are invariably in excess of our exports, it follows that the balance of indebtedness on this score is always very considerably against us; but there are other debts due to this country which from time to time turn the balance in favour of England, and the prices quoted for bills on the various Exchanges are the indexes which tell us whether gold is likely to be either received from, or sent to, the great commercial centres of the world.

Other debts due to this country have been mentioned—debts which either tend to reduce or turn in our favour the balance we owe to foreign countries. England has immense sums invested in foreign securities, and the interest received therefrom acts in this direction. So, too, does the huge sum earned by her ships in the shape of freights. Then, again, London, still earns a large amount in the shape of commissions, even if her position as the Clearing House of the world is now less powerful than formerly, owing to large accumulations of capital in other centres.

On the other hand a considerable amount of foreign capital is invested in English securities, which, when sold on the Stock Exchange, give the foreigner a claim on our stock of gold; and though we, by similar sales of foreign securities, can prevent this temporary drain of specie, the enormous dealings in stocks and shares on the various Exchanges are most keenly watched by the directors of the Bank of England, lest huge realisations of British securities by foreigners should drain the Bank of its gold, with which international indebtedness can alone be settled.

This brings us to the markets for bills of exchange, the prices of which, like those of every other security, are settled by supply and demand. If, at a given date, this country owes a foreign nation considerably more than it has to receive, then bills on England will be plentiful in that country; and, further, they will be cheap, because, as debtors to England have less to remit than the aggregate of bills on England offered for sale, the supply will be in excess of the demand, and English bills, consequently, can be bought at a discount. Conversely, the supply of bills in London on the foreign country will be smaller than the sum English debtors owe therein, and in order to save the expense of exporting gold, such bills will be eagerly sought after, and, as the supply is smaller than the demand, buyers soon drive them to a premium, when the rate of exchange is said to be "unfavourable" to England.

As the balance of our international indebtedness must be cancelled by gold, it follows that the fewer the bills offering the higher will be the prices paid for them; and when, just towards the end, it becomes evident that the supply is limited the bidding is often spirited; but the premium paid cannot exceed for any considerable length of time the expense incurred by exporting and insuring the precious metals between any two countries, as the debtor always has the choice of despatching gold to his foreign creditor, and, naturally, he chooses the cheaper expedient.

The extreme fluctuations are called "gold points," and they mark the limit to premiums procurable on bills of exchange. The table given below will show us those points at which gold will probably either leave or reach this country:

When the rates are near those given in the second column, the Bank, if its reserve be low, begins to consider the advisability of raising its rate of discount, for it is evident that foreign bills are at a stiff premium, and that a demand for gold may be made upon it at any moment. Of course the difference between the "gold points" gives scope for speculation, and some cambists gamble in bills for the rise or the fall just as speculators do in securities. Then, again, the arbitrageurs largely influence prices by buying and selling securities which are dealt in on the Stock Exchanges of more than one country. Wars, revolutions, panics, and social upheavals also cause abnormal fluctuations in the rates.

Let us assume that a drain is threatened from Paris. The gold in an English sovereign is, we can see, worth about 25·22½ francs, and if only 25·12½ is being offered on 'Change, it follows that bullion will soon be exported to France. This the Bank wants to prevent. The cost of transmission of bullion between the two countries is about one half per cent.; therefore, in order to induce French capitalists to invest in English bills of three months' date, the rate of interest in London must be more than two per cent. in excess of that in Paris before it will pay them to ship bullion to this country, if it be the intention of the purchasers to withdraw their capital when the bills mature, as the gain of two per cent. per annum for three months only just balances the loss of 10s. per cent. incurred on specie shipments, while no margin is left to defray possible loss through unfavourable exchanges at the time of withdrawal. Were a purchase of six months' bills contemplated, the difference in the two rates would only have to exceed one per cent. before bullion could be exported profitably.

When, therefore, the Bank of England wishes to influence the foreign exchanges, it raises its rate by one, instead of by one half as is usual when the drain is caused by the currency requirements of this country, or by an increased demand for loanable capital when trade is active and the foreign exchanges favourable. One constantly hears the question: Why has the Bank of England raised the rate by one instead of by one half as it did last time? A glance at the foreign exchange tables will generally supply the answer. If the expenses for transporting and insuring bullion between any two countries are appreciable, then were the Bank rate raised by one half (remembering that an addition of one half per cent. per annum gives a profit of only 2s. 6d. per cent. on a transaction in three months' bills) it is evident that the inducement is not sufficient to attract gold over here for that consideration alone.

By raising its rate, and, if necessary, borrowing in the market in order to bring the market rates in touch with its own, the Bank makes an investment in English bills a profitable transaction; and the greater its excess over foreign rates, the stronger is the inducement to send money to England. Of course, were this country really living on its capital, this influx of gold would only postpone the inevitable day of settlement, for a bankrupt does not increase his wealth by borrowing from one person in order to pay off another. But our receipts do not always coincide with our payments; and when, for instance, gold is sent to the United States in the autumn to help to pay for crops imported here, the Bank of England, by raising its rate of discount, and making that rate a representative one, attracts gold from the Continent, in order to tide over the interval between debts payable by us immediately and debts due to us at a future date.

English bills being a profitable investment, the price of paper on England at once begins to rise, and when the so-called gold point is reached the precious metals are shipped to these shores, because the premium on bills on England is in excess of the cost of despatching bullion. Every rise in the rate of discount here induces foreign holders of long-dated paper on England to retain their purchases. If they bought three months' bills on England when the Bank's discount rate was three, interest at the rate of three per cent. per annum was deducted from the face value of the bill to make it equivalent to a bill due at sight. Should the minimum rate be raised to four per cent., and were the holders then to remit the bills to this country to be discounted, they would have to submit to a deduction at the rate of four per cent. per annum. In other words, they would lose one per cent. per annum on the transaction. Long-dated bills would therefore be held until near maturity in order to avoid this loss.

An accretion to the Bank rate, then, not only attracts gold or capital here, but it also induces foreign holders of long-dated bills on England to keep them in their cases. On the other hand, a fall in the Bank's rate of discount from, say, three to two per cent. might not only slacken the demand for English bills, but it would also cause a considerable number of long-dated bills on England to be sent over here to be discounted, as the foreign holders would naturally be anxious to secure the profit between the three per cent. per annum paid to them, and the two per cent. per annum at which they would then be taken from them. The result might possibly be a temporary drain of gold from this side.

But it is when a home and a foreign efflux of gold occur at the same time that the situation becomes serious, and unless immediate action is taken by the directors of the Bank of England to check the outflow, there is always the danger—so small is our gold reserve when contrasted with our exports and imports—that a balance against us at an unlucky moment may create an awkward tension, which, unless speedily relieved, may possibly produce a crisis.

We like to flatter ourselves that England is always safe; but so large is the amount of bills offering from day to day in the London money market that the very doubt of there not being sufficient capital in the possession of the banks to discount them creates uneasiness; and if it were thought that the Bank of England, which holds the few millions of reserve upon which hundreds of millions of credit rest, could not retain its gold, excitement would reach fever pitch in this country, for everybody's income would be in danger, and the Government, whose supineness allowed such a state of affairs to develop, would be in danger too. But we know that, in the rate of discount, the directors of the Bank possess an effective instrument to prevent such a catastrophe, and have the experience to use it to advantage.

Money begins to leave the Bank for internal circulation during the summer months in order to meet the demands created by the holidays and the harvest, and then in October there is always the probability of a large outflow of gold to the States to help pay for the crops imported therefrom; while the movement of specie to Scotland in November, occurring as it does just at a critical moment, is likely to cause some apprehension, should the Bank's reserve have been depleted earlier, unless the fact that it is merely a temporary transfer to enable the Scotch banks to comply with the Act of 1845 be thoroughly grasped.

The October drain of gold from the Bank when the New York exchange is unfavourable has in it an element of danger, especially if it happen at a time when the reserve at the Bank of England is unusually low; and if loanable capital be then abnormally scarce there is always the risk that the end of the year requirements may produce a tension, which, should credit be bad at the time, may develop into a panic.

If the Bank manage well, however, it fortunately often foresees that the autumnal demands may possibly impose a severe temporary strain upon its resources, and by raising its rate in anticipation of a short period of exceptional demand, it attracts gold to itself in order to be thoroughly prepared for possible large depletions of currency later on, for it is easier to accumulate gold before the event than to check an outflow when the movement is beginning to create uneasiness, and to attract attention to the lack of preparedness on the part of the Bank to meet large withdrawals of specie for export.

It is not my intention to write a treatise on the foreign exchanges, and I am quite well aware that I have only touched on the fringe of a great subject; but if these illustrations help, however slightly, to elucidate certain of those undercurrents which determine prices, then the sole aim of this chapter has been attained.

CHAPTER IX.

Banks and the Creation of Credit.

We have seen how the Bank of England came to occupy so commanding a position in the money market, and we now have to consider why its rate of discount is still a fairly reliable index to the value of loanable capital. Its advent was extremely distasteful to the private bankers, who then reigned supreme in London, and who were not slow to recognise in the new corporation a formidable competitor, for a company which financed the Government was obviously to be feared. Before 1826 the Bank of England was the only joint stock bank in the country. Its notes gradually drove those of the London bankers out of circulation, and until its joint stock rivals firmly established themselves in the Metropolis, the Bank was in every sense the most powerful institution of its kind in the land.

Being by far the largest lender of capital in the country, it was only natural that its rate should accurately interpret those forces which make loanable capital dear or cheap, as the case may be. But the Bank could not arbitrarily fix the value of money for a very considerable period, even when it was able to issue notes without let or hindrance, any more than it can now. Supply and demand must settle that ultimately; and whenever the Bank inflated prices by the over-issue of paper, we have seen that the reaction produced thereby invariably threatened its existence. This is easily explained.

Persons borrow money in order that they may trade with it; and sudden loans of large amounts of capital in the shape of notes immediately stimulate the markets, and the increased demand engendered thereby causes the prices of commodities to rise. Rising prices, whether of securities or goods, give a marked impetus to speculation—so hopeful are traders directly markets begin to improve; and increased speculation causes further rises in the prices of both commodities and loanable capital. Everybody wants to borrow, and to share, in the coming period of great prosperity.

With prices rising here, imports naturally increase, as foreigners are anxious to sell their goods in the best market. On the other hand, the English markets have become less profitable to buyers, and, consequently, exports fall off, the result being that the balance of our indebtedness to other nations is largely increased. The foreign exchanges soon begin to move against England, and the Bank of England (we will assume) which had created the speculation by large issues of notes, suddenly finds that it is threatened with a foreign drain of gold, and is compelled to raise its rate in order to protect its reserve.