The Battle of the Banks.

But little has hitherto been said concerning the relations of the Bank of England with its rivals in the money market, and in order to trace the movement from its beginning we must return to 1826, in which year joint stock banks could be established in England at a greater distance than sixty-five miles from London. The Bank stoutly resisted this innovation, but the Government, in consequence of the constant failures of the country private bankers, passed the Act of 1826, and the thin edge of the wedge once inserted, the Bank's monopoly in London soon disappeared.

The London and Westminster, despite the determined opposition of the Bank of England, opened business in London during 1834, and the Bank's monopoly of banking was gone. All that then remained to it was the exclusive privilege of issuing notes in and within sixty-five miles of London, the only legal monopoly it still enjoys. Unable to keep the joint stock banks out of London the Bank actively opposed them, as also did the private bankers, who, while the Bank refused to open accounts for the new companies in its books, declined to admit them into the Clearing House, which was founded by the London bankers about 1775. The irony of Fate! They are now a feeble minority in a house of their own building. But history—both domestic and economic—can supply parallel instances.

Although the new system was destined to drive out the old, the joint stock banks made a bad start, and failures were at first so frequent that the public began to share the opinion of the Bank and to look upon them as anything but safe institutions. They were born in disaster, and their policy did not provide an antidote to the old evils; but, like the Bank of England itself, they were taught prudence by a series of panics and upheavals which threatened to wipe them out of existence. They were, in short, licked into shape, and that cautious prudent policy which now distinguishes our great banking companies is the fruit of a very bitter experience.

Towards the middle of the nineteenth century the manufactures of Great Britain began to increase by leaps and bounds, and population, which always augments rapidly when food is cheap and abundant, kept pace with the country's unprecedented commercial activity. In 1801 the population of London was less than one million. In 1837 it had increased to about two millions; and at the present time Greater London contains over six and a half millions.

It is quite evident that the Bank of England could not alone minister to the increasing wants of London, and both in the Metropolis and in the provinces its joint stock rivals rapidly accumulated credit. In June, 1854, the new banks were admitted into the Clearing House, and since that date they have carried all before them. They shared in the almost magical increase in the volume of British trade, but they neither created nor provided the incentive to that remarkable outburst of national prosperity which was the result of Free Trade, and which made this country the workshop of the world. Since then, however, the world has filled up.

The population of the United States in 1870 was 38,500,000; in 1900, 75,500,000. In 1871 the population of the German Empire was 41,000,000. In 1901 it had increased to 56,000,000. During the same period the population of the United Kingdom increased from 31,500,000 to 41,500,000. There are more people in the world to be fed, and as the earth fills up the struggle for existence must surely become fiercer. Noticing this, people naturally inquire whether, seeing the changed environment, Free Trade is suitable to the times. Some years ago, when trade was bad, the bimetallic controversy was raging, but since 1895 its advocates have been dumb, for the simple reason that people will not listen to theorists when times are good. They are then too intent upon making money. They think they may not get the chance again.

No doubt, when the depressed portion of the cycle came round bimetallists would have been heard again. But in the place of Bimetallism we now find Protection, and, in all truth, the question is serious enough; for, when the present wave of prosperity dies out in the States, there seems every probability that the huge American trusts will endeavour to swamp our markets with their goods. Free traders make quite a profession of faith of their commercial opinion. They declare that they are free traders with the same fervour they might infuse into the avowal that they were Protestants or Roman Catholics. But modern Christianity is eminently adaptable to every fresh situation. Is Free Trade?

The worse the times become, the louder, probably, will grow the controversy between the free traders and the protectionists; and when we remember that our workshops support our credit, and upon what an amazingly small reserve of the precious metals that credit is based, it is evident that the question ought to be approached with the greatest caution; for a decision that emptied our workshops would ruin the nation.

As the savings of the country increased, the joint stock banks accumulated credit with astonishing rapidity, and the Bank of England, slow to recognise the power of the new system, which was so admirably suited to the changed environment, was compelled to receive its hated rivals into the fold. The companies possessed no vaults for the storage of the precious metals on a large scale, and they were therefore glad to avail themselves of the facilities at the disposal of the Bank, whose premises were much better protected than their own. And then, again, as the Bank's notes were legal tender, the companies could send them from the head offices to the branches cheaply, while they were a convenient form in which to keep a certain proportion of their cash in hand.

The evolution of the Bank of England, we can see, has not proceeded smoothly; but it is remarkable that an institution, which owed its pre-eminence entirely to monopoly, did not gradually begin to sink into a second-rate banking company directly its exclusive privilege of joint stock banking was abrogated and free trade in banking established in England. So conservative was the Bank's policy that it seems little short of marvellous that its joint stock rivals should have quietly endured its studied insults. The new movement was then, however, not only in its infancy, but was under a cloud as well, and through the companies grouping themselves around the Bank they enabled that institution to retain its position in the centre of the money market. The power incident to that position has been fully explained in the previous chapter.

The London private bankers, whose lack of enterprise can only be attributed to the fact that they were imbued with those narrow City traditions which make London the home of Conservatism, also quite failed to grasp the situation, and allowed the new companies to expand in every direction, confident that so sudden a change must end in disaster, and, therefore, they were content to look on, to shake their heads sadly at the unprofessional conduct of those new banks, and to soothe their feelings by ever and anon declaring, with due solemnity, that joint stock banking would ruin the country.

Certainly, the new companies did not manage well at first, and a few of them were wiped out in consequence; but, in spite of mistakes, they progressed, because their system was adaptable to the requirements of a growing England. In these times it is the fashion to apotheosise man—to picture him as a kind of demi-god; therefore, it is asserted that man makes his mark on the times. But it is surely more rational and logical to assume that the times gradually mould the particular cast of brain that is adaptable to a constantly changing environment, and that the man who chances to possess that cast of brain goes with the tide—which takes him a long way. At any rate, such was the case with the joint stock banks, which owe their success entirely to the adaptability of their system to a changing market. Moreover, that market is still changing.

The old-fashioned London bankers found, to their great surprise, that they had not read the signs of the times aright; but the orthodox seldom play the rÔle of a prophet successfully, because they have lived too long in one groove, and so are apt to forget that England is not the world, which is steadily increasing in population. Instead of failing, the joint stock banks merely occupied the ground, and, by so doing, confined the business of the London private banker to the one street in which he was established and in which his father lived before him. They had no respect for age—those new companies!

The joint stock banks spread their tentacles north, south, east, and west of his sacred City, thereby effectually preventing his expansion, and "concentrating" his energies in the one street aforesaid, just as the nations of Europe have "concentrated" the kingdom of the unspeakable Turk. Great movements seldom originate within London, which is strikingly lacking in originality, and that new blood from the provinces which flows in an ever-increasing stream towards the great City, and alone arrests decay, also seems to bring with it the new ideas.

The London private bankers waited in vain for the expected disappearance of their rivals, who, despite severe panics and crises, continued to add rapidly to their resources, until, surrounded by rival branches, profitable expansion became difficult for the private banker, whose business is now so localised as to render effective competition with the companies impossible. He cannot make rapid progress because he does not possess the branches through which alone the necessary credit can flow to the central office, and therefore the extinction of private banking in its present form seems only a question of time, for the wealthy are certain to deal with those banks whose vast accumulations are at least the outward and visible sign of the confidence the public has in their stability.

But the joint stock banks did not confine their energies to London. The London and South Western Bank, which was established in 1862, began a vigorous crusade in the London suburbs, with the happiest results to its shareholders; and the London and Provincial Bank, which was formed two years later—in 1864—established small suburban branches in every direction, with equally satisfactory returns for its enterprise; while the London and County, larger and, perhaps, more cautious than either, also recognised the advantages of suburban expansion. A branch bank belonging to one of these three banks is now to be found in almost every London suburb.

The London and Westminster Bank (established in 1834) was the first in the field, but the atmosphere of the City is not favourable to progress, and the Westminster, though an exceptionally strong and well-managed bank, undoubtedly failed to move with the times. So, too, did the London Joint Stock Bank and the Union Bank of London, which has recently somewhat altered its name. It was not until the provincial joint stock banks invaded London that these companies began to realise the opportunity they had missed; Lloyd's and Parr's Banks however, evidently taking in the situation, adopted the new system, and by skilful amalgamations rapidly forced themselves to the front. The country banks, in short, practically took possession of Lombard Street.

Why the Bank of England did not share the same fate as the private bankers has already been demonstrated. It certainly was not one whit better informed than they; and it sympathised with them in their distrust of the intruders, whose speedy downfall it quite expected to witness. That the joint stock banks must come to grief was the opinion of the majority of City men in 1834, and the then directors of the Bank were City men imbued with those tenets which found credence within the sacred square mile.

The bank which keeps the Government account must always be a great power in the land. Had that account been removed in 1844, together with the last vestige of monopoly, the Bank—the directors of which shared to the full in that tenacity and narrow-mindedness characteristic of wealthy City merchants, whose businesses, and therefore whose ideas, flow in the narrowest of grooves—must have ceased to be a progressive institution. But no Government has ever hinted at deserting the Bank, whose record, though bristling with mistakes, is one of unbroken integrity; and the public has always looked upon its management as above suspicion. Especially was this the case during the first few decades of the new movement.

The Bank of England had public opinion behind it; and the joint stock banks, concerning whose stability opinion was divided, were not then strong enough to keep their own reserves and to defy the Bank; but when their system had stood the test of time, the Bank opened its doors to them, and the companies meekly bowed to the inevitable—for they were not the power in Lombard Street in those days that they are now.

In the first instance, we found the private bankers grouped around the Bank; and now we see our huge joint stock banking companies in a similar relation to her. They kept their reserves with her when their system was in its infancy, when the Bank of England, as a result of monopoly, was the greatest credit institution in the country. As the companies spread their tentacles throughout the land, accumulating credit at an extremely rapid pace, those reserves grew proportionately, until, to-day, we find the Bank of England in the centre of a system which owes over £910,000,000 in cash to the public.

Our modern credit system has developed around the Bank, which, as the holder of the bankers' reserves, now occupies an almost national position. That position is, undoubtedly, the indirect result of a monopoly which, prior to 1826, enabled the Bank of England to build up a huge business unopposed by others of its kind. In other words, it had a start of 132 years. The greater, consequently, attracted the smaller. But united Lombard Street is now a much greater power than Threadneedle Street—therefore it is always wise to remember that the Bank of England can only retain its position in the centre of the money market so long as Lombard Street is agreed that it shall.

The banks are not legally obliged to keep their reserves with the Bank of England. Were they so inclined, they could withdraw them to-morrow and accumulate stores of the precious metals of their own. It follows, therefore, that the best of feeling should exist between the "Old Lady" and Lombard Street. Obviously she is not now in a position to dictate her own terms, as her greatest power is derived from the "bankers' balances" on the left-hand side of her balance sheet.

Perhaps it is now easier to understand that the Bank of England, when it from time to time states the lowest rate at which it will discount bills for outsiders, occupies the position of a most important lender, whose minimum rate, though not always the market rate, is seldom either greatly above or below those of its rivals.