The Banks and the Public.

We have seen that the history of the Bank of England may be divided into two periods. From 1708 to 1826 the Bank enjoyed the monopoly of joint stock banking in England. After 1826 it had to adapt itself to a constantly changing environment. England, in fact, outgrew the Bank, just as the financial world has outgrown London. The directors of the Bank of England were City merchants, whose ideas usually run in a particular groove. It is not, therefore, in the least remarkable that they stuck to old customs and neglected new opportunities. The directors of the London and Westminster Bank made the same mistake. So did those of the Union Bank of London, the London Joint Stock Bank, and one or two others, simply because their training was of the City: that is to say, like the streets around the Bank, narrow.

To a very great extent the Bank of England is dependent upon the bankers' balances, for, unless it held them, it would not be able to finance the Government. If its directors had, however, thoroughly understood the movement of 1826, the Bank would now be a much more independent institution, and would be a power in every county in England and Wales. In 1826 the Government expressly desired the directors of the Bank to open country branches, and by 1830 it possessed eleven offices in the large provincial towns. But the innovation was not encouraged by those in authority, and to-day the Bank of England possesses only nine country and two Metropolitan branches. Unquestionably a golden opportunity was neglected, for, had the directors decided to open in the large provincial towns, Bank stock would probably be worth over five hundred at this moment.

At first the joint stock bank movement was neither popular nor successful, but nobody questioned the credit of the Bank of England; and if that institution had quickly met the wants of the country by opening branches in the towns, it could have had the pick of the provincial business, for everybody, including both commercial firms and the leisured classes, would have been anxious to deal with a bank which was absolutely above suspicion. And who would dream of making a run upon the "Government" bank? The Bank would gradually have accumulated vast deposits, which would have made it independent of the "bankers' balances"; but the ground is now covered with banking companies, and the Bank of England's opportunity is gone, never to return. At present it is a great bank of discount. Had it farmed the provinces in earnest, it would have become a great deposit bank, deriving its power from its depositors and the Government account, instead of from the Government and the bankers, as it now does. But its directors were not trained bankers, and they failed to realise the important part that branches or feeders were to play in the new system, consequently, with the huge capital of the Bank, large dividends on its stock are now out of the question.

Our present system is, after all, the result of chance as well as of skill. It grew. Further it committed all the follies of youth and inexperience. Then, again, at the beginning, it was as a house divided against itself, and consequently upon more than one occasion it fell, for a banking system can only be worked successfully when all the strong members are pledged either to stand or to fall together. Indeed, our system would be considerably strengthened if the great banks were in closer touch with the Bank of England.

Some few years ago, when there was a somewhat bitter feeling between Lombard Street and the Bank, it was often suggested that were each bank to keep its own reserve of cash the rate of discount would be more stable; but, in the event of such a change, the banks would undoubtedly have to maintain increased reserves, and a greater proportion of their resources would consequently be non-productive. As they would then have less capital to lend, it also follows that, even if rates in the open market did fluctuate less, the average rate of discount paid by the public would be higher, because there would be less capital in the London short loan money market to meet the demands of the bill brokers and stockbrokers.

On the other hand, if the banks realised their investments in proportion as they increased their reserves, and so maintained the same amount of capital in the London short loan fund, their own profits would decrease; and the bank proprietors are not philanthropists. In the one case the public would suffer, and in the other the banks themselves would lose, whilst in neither instance is the advantage to be gained at all proportionate to the risk incurred by a sudden disturbance of credit.

Our present system, with all its imperfections, has gradually grown up around the Bank of England, and if Lombard Street were to decide to keep its own reserve, the result would be confusion, and confusion might be followed by panic—so great is the faith of the public in the Old Lady, whose history entitles her to both consideration and respect. The change might, or might not, result in a run upon Lombard Street; but the Bank of England, whether or not the money market were disorganised, would not lose the confidence of the nation, which is convinced that the Bank cannot fail.

Lombard Street, we may rest assured, would not risk so drastic a change. It may be urged that, were the banks to keep their own reserves, the Bank could not finance the Government, which would then have to borrow to a greater extent in the open market; and perhaps such would be the case. But though the Bank of England is at present largely dependent upon the "bankers' balances," and upon the power derived from its position in the centre of the system, it must not be assumed, even if the banks could agree among themselves as to the ratio of cash each should hold, that the Bank would be compelled to bow to their decision.

As a matter of fact, such a decision on the part of Lombard Street would change the Bank of England from a discount bank into a deposit bank—a metamorphosis which Lombard Street could not face with equanimity. The Bank, whatever arrangements it may make with its own customers, does not at present compete against Lombard Street for deposits at interest; but were the bankers to withdraw their balances, the Bank would be compelled to appeal to the public for deposits, and who can doubt that it could not attract as much capital to its vaults as it required? The Bank would only have to make its rate of interest sufficiently attractive, and the public would rush to it with deposits. Where would Lombard Street be then?

Unless the Bank rate be unusually high, the banks allow one-and-a-half per cent. below it upon money left at interest in London. The country deposit rate, which is somewhat higher, is affected to a certain extent by competition in the provincial towns and cities. But the Bank would not confine its efforts to London if its hand were forced. It would offer high rates at its branches, and might even open fresh offices. The bankers' deposit rates would then be forced upwards in order to arrest the drain from themselves to the Bank of England. No; Lombard Street cannot play fast and loose with the Old Lady; and, if certain critics will reflect, they will see that the Bank has less to fear from a change in our present system than have those who occasionally threaten her. Her position, were the banks foolish enough to withdraw their balances, is not quite so hopeless as it is sometimes made to appear upon paper. Indeed, the better the understanding between the Bank and Lombard Street, the safer is our "one reserve" system, and consequently the less liable is the country to financial crises—for it is only by the united action of all the great banks that the situation can be saved in times of stress. This was clearly proved during the Baring scare of 1890.

The "clearing" bankers from time to time fix the deposit rate for London by the Bank rate, and though their country branches are not bound by their decision—which is advertised in the newspapers directly a change is made—the country deposit rate fluctuates with the Bank rate, though, as a rule, it neither falls so low as the London rate when capital is cheap, nor advances so far when it is dear. Further, the rates charged for loans and advances should be regulated to a certain extent by the Bank rate. However, that is a question which need not be entered into here.

Should the bankers decide to keep their own reserves, it is evident that the Bank of England's rate of discount would immediately cease to be a representative rate, and that a powerful rival, with a great history and a clean record, would at once begin to compete against the bankers for both deposits and advances. Were the Bank of England, so to speak, to decide to remain outside the system, Lombard Street could not even fix a minimum deposit rate for London, because the Bank, if it required capital, would bid against its rivals, and would soon obtain all it needed. Instead of being more stable, rates in the open market would move up and down with startling suddenness. Would-be borrowers, puzzled by such irritating movements, would soon grow nervous, for the prices of commodities would fluctuate too, and everybody would be afraid to make large purchases. The closer one examines the question, the more absurd appears the suggestion of a split between the Bank and our great joint stock banking companies; and the only wonder is that any person with the slightest sense of proportion can seriously advance so dangerous a proposition, which that friend of our youth, "Euclid," would have at once pronounced "absurd."

Custom has placed its seal upon our banking system; and the person who is rash enough to break that seal may discover that he has released new forces, which, though theory plainly demonstrates that they will act in a certain direction, are pretty sure to make their way through an unsuspected flaw which offers less resistance. A system which has been over two hundred years in the building cannot be changed in a day—especially a system which, even if it be not understood, has entered into the daily life of the people. It is because the system is not understood that the change would be so dangerous—so irritating. It would be asking the British public to think, to change its habits, to suddenly adopt new ideas; and as that mysterious body has never yet been educated up to thinking for itself, it would be found that it would kick against a new system like the stubborn donkey it is. Here is the real danger. The change, if the public would adapt itself to it, might prove beneficial—but the public would not; and as even its advantages over the present system are doubtful, where is the practical banker who would suggest the move? His one aim is not to disturb the money market, and for that reason alone he would hesitate to remove the Bank of England from its position in the centre of the system; but when we remember that the Bank, by accepting deposits, could probably beat Lombard Street at its own game, the change in question need not be discussed seriously.

There is one other phase in modern banking which, perhaps, calls for notice, and that is the fierce competition for safe business taking place between the banks themselves both in London and the provinces. Most of our large towns and cities are overbanked. Consequently, the public has a choice of many markets, as it were; and, quite naturally, it tries to lend in the dearest and to borrow in the cheapest. It may be asked: How much longer will this state of affairs exist? And the answer is: Just so long as the banks decide that it shall; and not a day longer!

The better the risks of banking are understood by the public the more difficult will it be for a weak bank to attract custom; and as the smaller banks, especially in the manufacturing centres, are unable to obtain sufficient deposits to meet the demands for advances, it follows that, when their loans grow out of all proportion to their resources, they are compelled to amalgamate with a large institution possessing numerous branches, and therefore in a position to collect huge sums of loanable capital, and distribute it just where it is wanted.

For instance, a large bank collects very much more capital in certain districts than it lends therein; but at branches situated in busy manufacturing cities the demand for capital, especially when trade is brisk, approximates much too closely to the sums collected at those branches to be compatible with sound banking. However, the bank has accumulated more than it requires in other towns, and is therefore in a position to transfer the surplus to those places where demand is strong, and, at the same time, to maintain a good ratio of liquid assets to liabilities, whereas a local bank in a busy centre can often only meet the requirements of its customers by advancing to a dangerous extent.

The directors of such banking companies are beginning to realise this danger; and fearful that one day they may be caught short of cash, the smaller joint stock banks are gradually being absorbed by the greater companies, whose numerous tentacles enable them to distribute their capital evenly throughout their system, and to maintain fair cash reserves against their liabilities.

As the small banks disappear, competitors are removed from the market; and there is every probability that banking in this country will by-and-by be in the hands of a few large and powerful banking companies. The public could not resist the banks were they to unite against it. Already the "clearing" banks have fixed the deposit rate for London, and it is only one step farther to declare the minimum rate at which they will advance—for what resistance can the public offer to a combination with more than £910,000,000 in deposits alone behind it?

Were the banks to hold a conference, and to decide that competition must be kept within bounds, the public would not have a voice in the matter. The English banks, like those of Scotland, would, after having come to some arrangement among themselves, meet from time to time in order to fix the minimum rates of interest and commission, and their customers would either have to pay those rates or else obtain accommodation outside the confederation. Of course, all the banks would have to close up their ranks before this arrangement would be possible, and, at the moment of writing, it seems improbable that certain companies, which make a business of competition, could be persuaded to come inside. So long as the banks are divided the public will be able to drive bargains with them, but, directly they fall into line, their rule will begin, and the quicker the smaller companies disappear the nearer the reign of the banks approaches.

Seeing that our banking system can only work smoothly so long as both Lombard Street and Threadneedle Street work in harmony, it follows that in time the link which connects the large banking companies will become stronger, and the relations between them pleasanter, because, in business as elsewhere, friendship is centred in the head rather than in the heart. The banks must draw closer together, because, if they do not, their system is unworkable; and, as they are now compelled to adopt certain precautions in order to protect themselves against panic on the part of their customers (who in that respect are their enemies), it is only natural that they should take steps to put an end to excessive competition, which weakens their position and prevents their acting together at a moment when united action alone can restore confidence in their ability to meet their liabilities.

We all know the stale apothegm: "Self-preservation is the first law of nature." It is the religion of the world. We can see the law at work among our friends, but, being polite, we refrain from comment—though if we be wise, we reflect; for here is the great unpreached gospel which governs the actions of men. Self-preservation clearly dictates that the banks cannot afford to allow competition among themselves to weaken the system upon which their safety depends; and, should the danger become pronounced, they are certain to combine against the public in order to at least agree to certain minimum rates below which none will do business.

It may be said: You yourself were the first to point out that certain customers are in a position to make terms with the bankers, and to advise them to do so. That is true enough; and so long as the banks are divided amongst themselves this is possible; but it by no means follows that, because the customers can make certain bargains this year, they will be able to make similar arrangements next, for the banks have their remedy, and when the right time comes they will not neglect to take it.

We have dissected that complex machine, which is called the Money Market, and of which the Bank of England is the heart. As each unit is dependent upon the strength of the whole, no bank should be allowed to trade upon the credit of the rest, for obviously it cannot exist outside the system during a time of stress unless it possess an adequate reserve of cash. Therefore each unit ought to bear its fair share of the burden when the sun is shining, and, if it refuse, it should be made to take the consequences when the storm bursts.

The closer our banking system is examined the stronger becomes the conviction that the interests of all the banks are identical, and that, therefore, if banking is to be conducted in this country with comparative safety, every bank should be compelled, either by the law of the land or by public opinion, to keep a fair reserve in legal tender against its liabilities. Further, the true interests of the banks are the same as those of the public—for the good business man is always a cautious man, and if he takes the trouble to study the risks to which a banking business is exposed, he will hardly care to place his money with a company unless it be well prepared to face those storms to which its environment peculiarly exposes it.

Under our one reserve system the banks must either stand or fall together during a crisis. The system, therefore, requires the support of all; consequently, the duties or obligations of each bank should be clearly defined, and this can only be done by an Act of Parliament or by an understanding between the banks. The closer the banks draw together the safer is our system of banking.