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.