XXII. THE ENGLISH BANKING SYSTEM
FOUNDATION AND GROWTH OF THE BANK OF ENGLAND
[150]About the year 1691 the Government of William and Mary experienced considerable difficulty in raising the necessary funds to prosecute the war with France; but "the hour brings the man." The man on this occasion was William Paterson, a merchant of Scotland, who had been educated for the Church, but had led a varied and adventurous life. The scheme he presented for the consideration of the Government for the relief of the situation was the foundation of a public joint-stock bank; which, in return for certain powers and privileges to be conferred, should advance money to the Government....
... the bill establishing the Bank of England was successfully carried through Parliament, and obtained the royal assent on the 25th April, 1694.
The basis of the bill was that L1,200,000 should be voluntarily subscribed by the public, and that the subscribers should be incorporated into a body, to be known as "The Governor and Company of the Bank of England."
The whole of the sum forming the capital of the bank was to be lent to the Government, for which the bank was to receive interest at the rate of 8 per cent. per annum, together with an allowance of L4,000 per annum for management and expenses; making in all L100,000 per annum. It was also provided that the sum of L300,000 was to be raised by public subscription, for which the contributors were to receive certain terminable annuities.
By its first charter, which was for ten years only, the Bank of England was not allowed to borrow or owe more than the amount of its capital; which meant that it could issue notes to the extent of its capital and no more. If this amount were exceeded the members were liable for such excess, in their private capacities, in proportion to their holding of stock.
The capital of the bank was subscribed in a few days, and when duly paid up, the agreed sum of L1,200,000 was handed in to the Exchequer....
The charter originally granted to the bank was for ten years only, as we have already seen; but this charter has from time to time been renewed, and also varied--sometimes in favour of the bank and sometimes curtailing its privileges. The monopoly of joint-stock banking was not granted to the bank by its first charter, but this monopoly was practically conferred on it in 1708. The act passed in that year provides:
That during the continuance of the said corporation of the Governor and Company of the Bank of England, it shall not be lawful for any body politic or corporate whatsoever, created or to be created (other than the said Governor and Company of the Bank of England), or for any other persons whatsoever, united or to be united in covenants or partnership, exceeding the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, or at a less time than six months from the borrowing thereof....
We pass on now to the end of the eighteenth century, when the country was plunged into the throes of war and financial difficulty. Up to this time the bank, since its foundation, had succeeded in meeting its notes when presented; but in the year 1796 a steady drain on the reserve of the bank commenced, owing to the fear of invasion. This drain began to assume a very serious aspect in the early part of 1797, and it appeared probable that the bank would be subjected to the danger and humiliation of a temporary stoppage. The directors, fully aware of this danger ahead of them, laid the position before the Government, and left the solution of the difficulty in its hands. After due consideration, an Order in Council was issued on the 26th February, 1797, requiring the bank not to pay its notes in gold.... It was not until 1823 that the restriction was entirely withdrawn, although as a matter of fact the bank really resumed paying in cash on demand on May 1, 1821, deeming it then safe to do so.
Although a period of safety and prosperity then appeared to have dawned, the bank was not quite clear of its troubles. The very prosperity of the times led imperceptibly to another period of distress and danger, culminating in the panic of 1825....
In 1826 the Bank of England, by arrangement with the Government, agreed to establish branches in various parts of the country, and gave up their monopoly of joint-stock banking, except within a radius of sixty-five miles of London.
The year 1833, however, saw a further restriction in the powers of the bank, when, after protracted negotiations, and in return for a further renewal of its charter, the bank surrendered its monopoly of joint-stock banking entirely, provided that no bank having more than six partners might issue notes within the sixty-five-mile limit of London.
It is a curious point that the charter of the bank never did restrict joint-stock banking in its present accepted form, but only the issue of notes by joint-stock bankers or banks having more than six partners. Up to this time the issue of notes by a bank had been thought to be its main business; so much so, that it was believed to be useless to attempt to conduct a bank without power of issue, and consequently no joint-stock bank had been founded. But about this time the need of such institutions began to be felt, and the presumed monopoly of the Bank of England was called in question--largely by Mr. Gilbart, the founder of the London and Westminster Bank. The bank tried to assert their monopoly, but without success, and in order to settle the matter effectually, the following clause was inserted in the act passed in 1833 dealing with the bank charter:
Be it therefore declared and enacted, that any body politic or corporate, or society, or company, or partnership, although consisting of more than six persons, may carry on the trade or business of banking in London, or within sixty-five miles thereof, provided that such body politic or corporate, or society, or company, or partnership, do not borrow, owe or take up in England, any sum or sums of money on their bills or notes payable on demand, or at any less time than six months from the borrowing thereof, during the continuance of the privileges granted by this Act to the said Governor and Company of the Bank of England.
It may be noted that this act of 1833 constituted Bank of England notes a legal tender, except by the bank itself or its branches....
PEEL'S ACT OR THE BANK CHARTER ACT OF 1844, AND ITS SUSPENSIONS
[151]After the renewal of the charter in 1833, the directors of the Bank of England laid down as a principle on which their future operations were to be guided, that one-third of their liabilities should be kept in cash and bullion, and the remaining two-thirds in securities. If this principle had been acted on, the bank would have been saved from many of the troubles which shortly assailed it; but though the intentions of the directors were good, circumstances were too strong for them, and the actual proportions of cash and securities to liabilities, respectively, often differed materially from the standard laid down. This was notably the case during the periods of financial pressure which were experienced in the years 1836 and 1837.
In the year 1839 matters assumed a very serious aspect. In the early part of this year the amount of cash held by the bank was about one-third of the amount of securities, but during the year the amount invested in securities increased at the expense of the amount held in cash; and by September we find that securities stood at nearly L29,000,000, while the cash was reduced to a tenth of that figure, and stood at L2,936,000 only. In order to avert a calamity which appeared to be impending, the bank arranged loans in Paris and Hamburg to the extent of between three and four millions.
This manifest exhibition of weakness on the part of the bank led to the appointment of a committee of the House of Commons to inquire into the matter. The committee condemned the principles on which the bank was working, but were powerless to effect any alteration, owing to the charter of the bank not expiring till 1844.
On the expiry of the charter, however, Sir Robert Peel brought forward his famous act for remodelling the bank, and regulating the issues of the country banks throughout. England and Wales.
The act was passed on the 19th July, 1844, and continues without alteration to the present day. The main provisions enacted thereby, briefly stated, are as follows:
I. The issue department and the ordinary banking department of the Bank of England were to be entirely separated as from the 31st August, 1844.
II. On such separation taking place, securities to the value of L14,000,000 (including the [book] debt due to the bank from the Government) were to be transferred to the issue department, together with so much gold coin and bullion that the total so transferred should equal the total amount of notes then outstanding. Thereafter (with the exception noted below) the issue department must not issue any notes in excess of a total of L14,000,000 except in exchange for gold coin or bullion.
III. The issue department might not at any time hold more silver than one-fourth part of the gold held. As a matter of fact the issue department holds no silver.
IV. Notes might be demanded from the issue department by any person in exchange for gold at the rate of L3 17_s._ 9_d._ per standard ounce.
V. If any banker having the power of issue on the 6th May, 1844, should relinquish such issue, the issue department may be authorised to increase its issue of notes against securities to the extent of two-thirds of the issue so relinquished; but all the profits on such increased issue against securities were to belong to the Government.
VI. The bank must issue a weekly statement of the position of both its issue and banking departments, in a prescribed form.
VII. Bankers having the right to issue their own notes on the 6th May, 1844, might continue such issue under certain conditions, and to an agreed amount; but no provision was made compelling such bankers to keep any reserve either in cash or securities against their issues. If any issue lapsed, from any cause, it could not be resuscitated; and no institutions could acquire the right of issue in the future.
VIII. Banks consisting of more than six partners, though within the sixty-five-mile radius of London, might draw, accept, or endorse bills of exchange not being payable to bearer on demand.
The first return issued by the bank in accordance with the regulations of the new act was that of the 7th September, 1844, and was as follows:
ACCOUNT OF THE LIABILITIES AND ASSETS OF THE BANK OF ENGLAND
For the Week ending 7th September, 1844
DR. ISSUE DEPARTMENT CR.
Notes issued L28,351,295 Government debt 11,015,100 Other Securities 2,984,900 Gold coin and bullion 12,657,208 Silver bullion 1,694,087 ----------- ----------- L28,351,295 L28,351,295
DR. BANKING DEPARTMENT CR.
Proprietor's capital 14,553,000 Government securities 14,554,834 Rest 3,564,729 Other securities 7,835,616 Public deposits 3,630,809 Notes 8,175,025 Other deposits 8,644,348 Gold and silver coin 857,765 Seven-day and other bills 1,030,354 ----------- ----------- L31,423,240 L31,423,240
... Taken as a whole the act has worked well, and has succeeded, in combination with greater knowledge and foresight, in maintaining our banking system in a sound condition....
The main point of contention between the supporters and opponents of the act lies in its want of elasticity in time of need. Under no circumstances can the bank increase its issue of notes against securities beyond the prescribed limit, without a breach of the law; but on three occasions in the past the law has been broken, though with the consent of the Government, and subsequent confirmation of Parliament....
We will now briefly review the ... occasions on which the Bank Act was suspended, and the effect of such suspensions.
The first of these occasions was during the panic in the year 1847--known as the "railway panic." Shortly previous to this year a great accumulation of capital had led to a demand for new investments, which were duly provided for the public by those concerned with such matters. Added to this, interest rates had ruled low for some time, and this conduced to a period of speculative activity. Too much capital was put into fixed investments--chiefly railways--and in one session of Parliament sanction was asked for various railway schemes involving a total capital of L340,000,000. Wild gambling in railway stocks ensued, credit was inflated above all reason, and then the turn came. This was primarily due to a bad harvest and potato crop, causing a heavy importation of corn, and consequent export of gold.
During the panic which ensued, the reserve of the Bank of England fell to L1,600,000, but when the panic was at its height, the act, passed only three years before, was suspended. The bank was authorised to increase its accommodation to the public by exceeding, to an indefinite extent, the limit fixed for the issue of notes not secured against gold. The effect of this suspension of the act was immediate and complete. The fear that "there was not enough to go round" passed from men's minds. As a matter of fact, the issue on this occasion did not exceed the normal limit, the mere knowledge that the bank was empowered to exceed this limit proving sufficient to allay the panic.
The second suspension of the Bank Act was due to the crisis of 1857, a crisis that was brought about by reckless overtrading, and came upon the public very suddenly and with practically no warning....
The third suspension of the Bank Act took place in 1866.[152] Many elements of disturbance to the money market had been in force during two or three preceding years. The Civil War in America had resulted in gold being sent to this country; but the stoppage of the supply of cotton from America, owing to the war, disorganised one of our staple national industries, and supplies of cotton had to be obtained from elsewhere at high prices, and paid for in cash. Hence a drain of gold set in on a large scale. In addition, a large speculation had been built up on credit in the stocks and shares of the many new limited liability companies which were formed at that time.
General uneasiness began to prevail towards the end of 1865; in January, 1866, the bank raised its discount rate to 8 per cent., and a crisis began to develop rapidly....
On the 9th May the bank rate was raised to 9 per cent. On the 10th May the failure of Overend, Gurney, and Company--for upwards of ten millions--was announced, and the bank rate went to 10 per cent. This failure was not made known till after business hours, so it was not till Friday, the 11th May, 1866--known as "Black Friday"--that the crisis reached its height.
The stoppage of this large house affected the whole world, and general failure seemed imminent, when, in the afternoon of the day on which the failure became known, it was announced that the Bank Act was again suspended, and calm began to take the place of mania. But though the panic was allayed, many failures shortly took place, which delayed the quick restoration of a sense of security....
From the above brief records of the financial tragedies of the past, we see that on each occasion reckless speculation and overtrading had been allowed to reach a dangerous height before any steps were taken to check them, and on each occasion the check came too late. But we also see the marvellously quick effect which the suspension of the act had on the situation....
THE FUNCTIONS OF THE BANK OF ENGLAND
[153]The distinctive functions of the Bank of England consist in its acting as:
1. Banker to the British Government.
2. Banker to the joint stock and private banks.
3. (a) Sole possessor of the right to issue notes which are legal tender in England; (b) sole possessor, among joint stock banks with an office in London, of the right to issue notes at all.
4. Provider of emergency currency.
5. Keeper of the gold reserve for British banking.
6. Keeper of the gold reserve which is most readily available for the purposes of international banking.
These various functions fit into and supplement one another, and though their diversity is sometimes pointed to as throwing too much responsibility onto one institution, it in fact enables the bank to carry out its duties with extraordinary ease, and with the least possible disturbance to the financial community. By the fact that it keeps the balances of the other banks, the Bank of England is enabled to conduct the payment of the interest on the British debt largely by transfers in its books. By the fact that it keeps the balances of the Government and has the monopoly of the legal-tender note issue, the Bank has a great prestige in the eyes of the general public, which it communicates to the other banks which bank with it. There is an impression that the Government is always behind the bank, and that the bank is always behind the other banks, and this feeling has certainly done much to foster the confidence of the British public in its banking system.
A credit in the books of the Bank of England has come to be regarded as just as good as so much gold; and the other banks, with one exception, habitually state their "cash in hand and at the Bank of England" as one item in their balance sheets, as if there were no difference between an actual holding of gold or legal tender and a balance at the Bank of England. It thus follows at times when an increase of currency is desirable, it can be expanded by an increase in the balances of the other banks at the Bank of England, since they thus become possessed of more cash to be used as the basis of credit. For currency in England chiefly consists of cheques, and customers who apply to the banks for accommodation, by way of discount or advance, use it by drawing a cheque which is passed on and so creates a deposit; and expansion of currency thus consists chiefly in expansion of banking deposits. This expansion is only limited by the proportion between deposits and cash which the banks think fit to keep, and as long as they can increase their cash by increasing their credit in the Bank of England's books the creation of currency can proceed without let or hindrance. Their balances can be increased by borrowing from the Bank of England, which is generally carried out not by the banks themselves but by their customers from whom they have called in loans, and the Bank of England is thus enabled to provide emergency currency with great ease, by means of loans and discounts which are used to swell the balances of the other banks, which thus show an increase of the cash at the Bank of England which they use as a basis for credit operations. The elasticity of the system is thus remarkable, and the merchants and bill brokers of London can by taking approved security to the Bank of England, increase the basis of English credit in a few minutes by borrowing.
1. Examining these functions of the Bank of England in closer detail we find that its first and most obvious one, which originally brought it into being, of financing the British Government and acting as its banker, is now perhaps its least difficult and important duty. Apart from the prestige which it thus acquires and its close touch with the Government and the officials of the Treasury, the bank's position as government banker is of little direct material advantage. Its duties as such, besides the normal relation between a bank and a customer, consist chiefly in making advances to the Treasury in the shape of "deficiency advances" when the government balances are too low to admit of the payment of the quarterly interest on the British debt without replenishment, or against "ways and means" advances at times when the revenue is coming in more slowly than government expenditure is proceeding. It also, when the Government has to borrow to a greater extent, manages its issues of Treasury bills, or any loan operation that the Government may have to undertake.
2. The second of the Bank of England's distinctive functions--its acting as banker to the rest of the English banking community--is the one which throws upon it its most serious responsibilities and gives it most of its actual power and ease in working. The Government gives it prestige in the eyes of the multitude, which considers that governments are omnipotent; the other banks give it the power of providing emergency currency by making entries in its books, and so acting as the easily efficient centre of a banking system in which elasticity and the economy of gold are carried to a perfection which is almost excessive. Nevertheless, it pays heavily for its apparently privileged position as bankers' bank. At first sight it would appear that these customers, keeping a regular balance of twenty-odd millions, which varies little and on which the Bank of England pays no interest, were a source of comfortable income and no anxiety to it. But in the first place it is obvious that a liability which is regarded as cash by the rest of the banking community requires special treatment by its custodian, and in practice it is so specially treated that the Bank of England maintains a proportion of cash to liabilities which is fully twice as high as that of the strictest of the other banks. This proportion rarely is allowed to fall below 33 per cent. and generally ranges between 40 and 50 per cent., and it need not be said that this high level of cash holding tells heavily on the earning power of the Bank of England. Moreover, it is its position as bankers' bank that exposes the Bank of England to the responsibility of maintaining the gold reserve for English banking and being prepared to meet, in gold, any draft on London that any one abroad who has acquired or borrowed the right to draw wishes to turn into metal to be shipped to a foreign country.
The amount of the bankers' balances is not separately stated, but is wrapped up in the total of the other deposits in the Bank of England's weekly return. It is believed to average about 22 millions in these days, and it is often contended that valuable light would be thrown on the monetary position if this item were separated from the balances of the other customers of the bank. Many of the outer bankers are in favor of this change, but there is a serious practical objection to it, in that a dangerous impression might be created in the public mind if at any time it were seen that the bank's cash reserve was below its liability to its banking customers; and the separate publication of the bankers' balances might thus check the readiness with which the Bank of England creates emergency credit. Another suggestion that is sometimes made by the many critics of the existing order of things in English banking is that the banks should keep their cash reserves themselves; but this very revolutionary change would deprive the system of its two great advantages, a centralised organisation with a centre which specialises on the duties involved by acting as centre, and the extreme elasticity with which the present arrangements work. At the same time it must be admitted that the system by which the other banks treat their balances at the Bank of England as cash leads to the existence of a vast amount of "cash" in England which on being looked into is found to consist of paper securities or promises to pay.
3. The Bank of England's monopoly of note issue, which once gave it the monopoly of joint-stock banking in London, is now a matter of comparatively minor importance, owing to the change in English banking habits by which the cheque has ousted the bank note for the purpose of daily commercial payments, and the regulations which were imposed on the note issue by the Bank Act of 1844. This monopoly was conferred on the bank in 1706 and was maintained until 1826, when the implied monopoly in joint-stock banking was restricted to a sixty-five-mile radius around London. In 1833 joint-stock banks were established in London itself, since it had been discovered that the Bank of England's alleged monopoly only reserved to it the privilege of note issue, and the private bankers in London had already found that it was more convenient to banker and customer to work by the system of deposit and cheque.
The development of this system was quickened by the provisions of Peel's act of 1844, which, under the influence of banking disasters that had arisen out of reckless note issuing by private banking firms in the counties, laid down an iron rule for the regulation of note issues in England. None of the other note issuers were allowed to increase their issues under any circumstances, and the Bank of England, for every additional note issued beyond L14,000,000, was to hold metal in its vaults. Under the terms of Peel's act one-fifth of this metal might be silver, and in the early returns issued by the bank under the act a certain amount of silver is found among the assets of the issue department. But since 1853, no silver has been held in the issue department of the bank, and in 1897, when the influence of the bimetallists on the existing Government led to a proposal that the proportion of silver allowed by law should be held by the bank as backing for its note issue, public opinion expressed itself so vigorously that the suggestion was promptly buried. The bank's fiduciary note issue, thus fixed at L14,000,000, was only allowed to increase by the lapse of the issues of the existing issuers, the bank being empowered to increase it by two-thirds of the amount lapsed. The lapsing process has proceeded steadily by the amalgamation of country banks with banks which have London offices and so are prohibited by the bank's monopoly. And the bank's fiduciary issue has thus been raised from the original L14,000,000 to L18,450,000. Above this line it can not go except by means of the suspension of the Bank Act, which has been found necessary occasionally in the past. The English currency system is thus, as far as the law can rule it, entirely inelastic, but it has already been shown that even when the law of 1844 was passed, the cheque currency, over which the law exercises no restriction, was already driving out the note, and banks without any right of note issue had been eleven years established in London. The Bank of England's note issue is now chiefly used by other banks as "till money," or part of the store of legal-tender cash they keep to meet demands on them. It has thus become part of the basis of credit in England, since the other banks roughly base their operations on their holding of cash in hand and at the Bank of England. Their cash at the Bank of England has already been discussed above: their cash in hand consists of coin and notes, and since the latter have thus become part of the foundation on which the deposit liabilities of the other banks are based, there is reasonable ground for the contention often put forward by practical expert critics of the English system, that the fiduciary note issue should be reduced by the repayment by the Government of the whole or part of a government debt of L11,000,000 to the bank, which backs the greater part of it, and its replacement by gold. It is evident that the amount of metallic backing for a note issue which is intended to circulate as currency is a different matter from that required in the case of a note issue which is held by bankers as a reserve and used by them as a foundation for a pyramid of credit operations.
4. By the ease with which the Bank of England provides emergency currency, it gives the English banking system the great advantage of extreme elasticity and adaptability; and it is enabled to do this by the fact that it acts as banker to the other banks, and that every credit which they have in its books is regarded by them and by the rest of the community as "cash" to be taken as practically equal to so much gold. This cash at the Bank of England in the hands of the rest of bankers can be multiplied as rapidly as the Bank of England is prepared to make advances, and as the mercantile and financial community can bring it bills for discount or securities to be borrowed on. There is no legal restriction of any sort or kind, and the close relations between the bank and its borrowing customers enable the necessary operations to be carried through with a celerity which is unrivalled, at any rate in the eastern hemisphere. The process works as follows: In every English bank balance sheet there will be found an item among the assets "cash at call or short notice," though in a few cases the slovenly habit is adopted of including this entry along with the cash in hand. This "cash," as it is called, really consists chiefly of loans made by the banks to the discount houses, and regarded by the banks as the most liquid of their resources. As such, it is at once made use of when for any reason, such as the many payments which have to be made on quarter days, or at the end of the half year when the preparation of balance sheets by firms and companies require an abnormal amount of cash for more or less ornamental purposes, the banks are subjected to extra pressure by their customers, who both withdraw actual currency from them for smaller payments, and require advances in order to show cash with bankers in their balance sheets.
The banks in order to meet this pressure, and at the same time to preserve an adequate amount of cash in their own statements, call in their loans from the discount houses; the discount houses, at a point, can only repay them by borrowing from the Bank of England and transferring the credit raised with it to the bankers, whose cash at the Bank of England is thus increased. This book entry takes the place in their balance sheets of the legal-tender cash that their customers have withdrawn, and is used as the basis for the increased deposits that have been created by the loans of the bankers to their customers for ornamental purposes. Similarly at the time of year when the transfer of the taxes to the Government's balance reduces the cash at the Bank of England held by the other banks the gap is filled by the loans made by the Bank of England to the customers of the other banks. In short, by discounting and making advances the Bank of England can at any time create book credits, which are regarded as cash by the English banking community, and on which the latter can base the credits which give the right to draw cheques, which are the most important part of the English currency. The extent to which the Bank of England can create this credit is a matter for its own discretion, but any creation of it diminishes the proportion that it shows in its own weekly returns between its reserve and liabilities. Consequently when it is applied to for amounts which bring that proportion too low the Bank of England has to take steps to reinforce its cash reserve.
5. It has been shown that the Bank of England keeps the balances of the other banks, and from this it follows that the latter look to it for gold or notes at times when the local commercial community requires an extra supply. At the end of every month, especially at the ends of the quarters or at times of national holidays, the bank's note circulation expands and coin is taken from it. The duty is thus thrown upon it of keeping an adequate supply of cash for home purposes, and, as has been already stated, its normal proportion of cash to liabilities is very much higher than that of the other banks. But these movements are tidal and regular, and though times of active trade increase slightly the demand for coin and note currency in England, the extensive and ever-growing use of the cheque reduces the importance of this part of the bank's duties.
6. Much more important is the Bank of England's duty as custodian of the gold store for international banking. London is the only European centre which is always prepared to honor its drafts in gold immediately and to any extent. Consequently the Bank of England has to be prepared to meet demands on it at any time from abroad, based on credits given to foreigners by the English banking community, and it has thus to observe the signs of financial weather in all parts of the world and to regulate the price of money in London so that the exchanges may not be allowed to become or remain adverse to a dangerous point. The difficulties of this task are increased by the extent to which the English banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further creation. For the low and wholly unregulated proportion of cash to liabilities on which English banking works, enables the other banks to multiply credits ultimately based on the Bank of England's reserve, leaving the responsibility for maintaining the reserve to the bank. This it does by raising its rate when necessary, and so, if it has control of the market and its rate is "effective"--a phrase which will be explained later--raising the general level of money rates in London.
When its rate is not effective, the Bank of England finds itself obliged to intervene in the outer money market--consisting of the other banks and their customers--and control the rates current in it. This it does by borrowing some of the floating funds in this market, so lessening their supply and forcing up the price of money. By means of this borrowing it diminishes the balances kept with it by the other banks, either directly or indirectly--directly if it borrows from them, indirectly if it borrows from their customers who hand the advance to it in the shape of a cheque on them. The result is that so much of the "cash at the Bank of England," which the English banking community uses as part of its basis of credit, is wiped out, money--which in London generally means the price at which the bankers are prepared to lend for a day or for a short period to the discount houses--becomes dearer, the market rate of discount consequently tends to advance, the foreign exchanges move in favor of London, and the tide of gold sets in the direction of the Bank of England's vaults, and it is enabled to replenish its reserve or check the drain on it. That the Bank of England should have to go through this clumsy ceremony of borrowing money that it does not want, in order to deprive the outer market of a surplus which depresses discount rates in a manner that is dangerous owing to its effect on the foreign exchanges, arises from the want of connection between bank rate and market rate. In former days the London money market never had enough money to work without help from the Bank of England. Bagehot, in his great work on Lombard Street, published in 1873, says that "at all ordinary moments there is not money enough in Lombard Street to discount all the bills in Lombard Street without taking some money from the Bank of England."
As long as this was so, bank rate--the price at which the bank would discount bills--was at all times an important influence on the market rate. Since then, however, the business of credit making has been so quickly and skillfully extended that Lombard Street is frequently able to ignore bank rate, knowing that it will easily be able to supply its needs from the other banks, at rates which are normally below it. Currency in England consists of cheques drawn against deposits which are largely created by the loans and discounts of the other banks. There is no legal limit whatever on the extent to which these loans and discounts can be multiplied, and the only limits imposed are those of publicity, which is applied rarely in all cases and in some not at all, and of the prudence with which the banks conduct their business. Hence it follows that competition between the banks often impels them to continue to make advances or discount bills at low rates when the Bank of England, as custodian of the English gold reserve, thinks it advisable in the interests of the foreign exchanges to impose a higher level. This it does by borrowing some of the credit manufactured by the other banks, in order to create artificial scarcity of money, and make its own official rate effective.
It thus appears that the Bank of England's official rate is often through long periods a mere empty symbol, bearing no actual relation to the real price of money in London; and only becomes effective, and a factor in the monetary position (1) when the trade demand for credit is keen enough to tax the credit-making facilities of the other banks to their full extent, (2) when the payment of taxes transfers large sums from the other banks to the Government's account at the Bank of England, so reducing the "cash at the bank" on which they build credit operations, and (3) when, owing to foreign demands for gold, the Bank of England takes measures, by borrowing, to restrict credits in the open market and to make its rate effective. In other respects its official rate differs materially from the rates quoted by ordinary dealers in credit. It does not fluctuate according to the supply and demand for bills, but is regularly fixed once a week at the meetings of the Bank of England court on Thursday morning. It is extremely rare for any change to be made in the Bank of England rate on any day except Thursday. Instances occur rarely when some sudden change of position makes it essential, as at the end of 1906, when the bank rate was raised to 6 per cent. on a Friday morning. In normal times the rate which is fixed on one Thursday is maintained until the next, though the rate is only a minimum and the Bank of England occasionally takes advantage of this fact and refuses to discount at its minimum, which still remains ostensibly the bank rate, while the bank actually makes a rather higher charge, which is usually made the official rate on the next Thursday.
But it must not be supposed that when bank rate is ineffective the Bank of England is doing no business. It discounts bills and makes advances at market rates at its branches, and also at its head office to its private customers. Bank rate may be described as the price at which the bank is prepared to discount in its official capacity as centre of the London market, and it is because appeal is only made in exceptional circumstances to the bank to provide credit in this capacity that bank rate is often ineffective.
THE JOINT-STOCK BANKS
The most obvious function of the joint-stock banks of England is the business of taking care of money for customers and meeting cheques drawn against their balances. Customers place money with them either on current or deposit account. On current account it can be withdrawn at any time and earns, as a rule, no interest. Many banks make it a condition that unless the current account is maintained at a certain figure, generally L100, a charge shall be made for keeping it. A usual charge is L1 5_s._ 0_d._ each half year, but arrangements vary according to the terms agreed with different customers, and the keen competition now prevalent enables many to obtain the convenience of a bank account for nothing. Sums left on deposit are generally placed for a week or longer, and if placed for a week the rate paid on them by the banks is generally 1-1/2 per cent. below bank rate.
Out of this function of meeting checks drawn by customers against the sums deposited has grown the banker's chief duty, which is now the provision of cheque currency for the mercantile and financial community. Currency in England consists of coins, notes, and cheques. The note issues are almost obsolete as currency, the Bank of England's being used chiefly as reserve by the other banks, while the issues of the country banks are so small as to be negligible. Most of the commercial and financial transactions of England to-day are settled by cheques drawn on the banks by their customers. These cheques are not legal tender, since it would obviously be impossible that a cheque drawn by an individual on a bank could be legally made acceptable by a creditor whether he wished to take it or not.
There is no legal obligation of any sort on them to maintain any regular proportion between cash and liabilities, and as their position in this respect is only subjected to occasional publicity they are not obliged to consider even the effect upon their customers of any considerable variation in the proportion between cash and liabilities which they keep. The system thus works with extreme elasticity and banking facilities can be provided in England with extraordinary ease. It has of late years been frequently contended that the ease and elasticity with which it works have carried the English banking machinery to a somewhat extreme length in the matter of the economy of gold and legal tenders and the extent of the credit pyramid which it builds up on them. After the crisis of 1890, Lord Goschen seems to have been strongly imbued with the conviction that the system had been carried too far. He therefore urged upon the London banks that they should make a monthly statement of their position, and this suggestion was adopted by the majority of them. The result was that they published a monthly statement showing how they stood on one day at the end of each month, and it thus followed that on one day at the end of each month the banks showed a proportion of cash to liabilities which they considered sufficiently adequate to stand the light of publicity. But the system has long been seen to be faulty, and a certain amount of abuse has grown up round it. It is strongly suspected, for example, that some of the banks which publish these statements make preparations for them by calling in loans or reducing their discounts for the day on which the statements are drawn up. As far as this is done the statement is to a certain extent misleading, and this practice of "window dressing," as it is called in Lombard Street, has been subject to frequent criticism, so much so that one of the leading London banks--the London and County--adopted early in 1908 the practice of showing its daily average cash holding, thus demonstrating that it was not in the habit of preparing a statement which did not represent its position fairly throughout the month. It has been stated by a president of the English Bankers' Institute that the proportion of cash to liabilities shown by country banks ranges down to a point as low as 2.2 per cent. No one can contend that this is an adequate cash basis for banking to work on, and as long as certain members of the banking community conduct their business on these lines an obvious hardship is involved on those which keep a more prudent and strong reserve of cash. It is contended by the big strong banks that their smaller brethren compete with them by providing more credit than they have any right to create, relying on their assistance in times of difficulty.
Apart from this danger of the over-multiplication of credit on an inadequate cash basis, the complete absence of any legal or other restrictions on the operations of English banking enables it to work with extraordinary ease and readiness. As long as good unpledged security, whether in the form of bills of exchange, commodities, or Stock Exchange securities, are available in the hands of customers the banks can advance against them to any extent that they consider prudent. Prudence dictates in the case of a great majority of them that a certain proportion of cash to liabilities shall be maintained, but, as was shown above in dealing with the Bank of England, the cash of English banking consists partly of credits with the Bank of England. These credits with the Bank of England, and consequently the cash credits of English banking, can be multiplied as rapidly as the Bank of England is prepared to make advances or discount bills, and so give credit in its books. The Bank of England must publish its account weekly, and it watches over its proportion of cash to liabilities with a vigilance which is greater than that of the rest of the banking community as a whole. Nevertheless, its prudence in this respect is the only restriction on it, and we thus arrive at the conclusion that the chief function of the English joint stock banks, that of providing the mercantile community with currency and credit, can be carried out to any extent as long as their customers have security to offer and their proportion of cash remains adequate to their sense of prudence. And further, their proportion of cash can be increased as rapidly as the Bank of England is prepared to make advances, which it can and does to an extent which again is only limited by its own prudence.
Besides this absence of outside regulation, the English monetary system is also distinguished by a remarkable lack of cohesion and co-operation among the members of its own body. Except to a certain extent in the country districts, where the rates allowed to depositors and charged to customers are to a certain extent a matter of convention, English banking works almost entirely at the mercy of very keen internal competition. This extreme development of competition leaves the market liable to pronounced depression in rates at times when slackness of trade or other causes decrease the demand for credits. At these times the adroit bill brokers and discount houses, which are in some respects the most important borrowing customers of the banks in London, are enabled by the use of this weapon of competition to obtain loans from the banks at rates which are often below the price that the bankers are paying to their depositors. Hence, it follows that in these times of monetary ease the credit machine goes on turning out its product at rates which are quite unremunerative and have a detrimental effect on the market rate of discount, and so on the foreign exchanges, thus increasing the difficulties of the Bank of England, which at these times of extreme ease is without any control of the position. Against this weakness of the system, however, must be set the advantage which the unrestricted and fiercely competitive manufacture of credit confers on the mercantile and trading community.
A few words should be said concerning the form of cheques with which the English banks provide their customers as currency. Legally a cheque is a bill of exchange drawn on a bank and payable on demand. That is to say, it is an order signed by a customer of the bank directing it to pay a certain sum to another party or to himself. The form, however, can be varied in various methods, increasing or diminishing the ease with which the cheque can be turned into cash. The cheque can be made payable to A B or bearer, and in this form can be taken to the bank drawn on and immediately turned into cash. When drawn to A B or order, a cheque has to be indorsed, or signed on the back, by A B before the bank drawn on will pay it. A still further restriction is the English system of crossing cheques, that is to say, of drawing two lines across the face of the cheque, by which mark it is shown that the cheque is not to be paid in cash across the counter by the bank drawn on, but must be paid into a bank by the payee, and so only becomes credited to him in his own banking account through the operations of the clearing house. It is evident that this protection greatly increases the safety of the cheque, since if it fell into the wrong hands its chance of being made fraudulent use of is greatly diminished. As the lines drawn across the face of the check by the bankers' customers are often faint and irregular, it has been found in practice that they lend themselves to the ingenuity of the fraudulent, who are easily enabled to erase them and so obtain possession of money that is not meant for them. Some of the banks therefore print these crossing lines on all of the cheques that they issue to their customers to be filled in, and when the customer wishes to obtain cash from his bank on one of these cheques he is consequently obliged to write upon it "Please pay cash," and sign this note upon it. The extensive use of crossed cheques thus tends to make the cheque still further an instrument which merely transfers banking credits from the books of one bank to another, since every crossed cheque implies that it can not be turned into cash directly, but can only transfer credit with one bank to credit with another. Another restriction with which custom has protected the English cheque is the system of writing "Not negotiable" on the face of it. These words do not mean that the cheque is really not negotiable, but their legal effect is that the holder of the cheque can not establish a better right to it than the party from whom he received it. If therefore the party from whom he received it had no right to it, his claim against the paying bank is nil. With these safeguards, and with the enormous convenience of being drawn to any amount to fit the exact requirements of each transaction, the cheque, although not legal tender, has been enabled to supersede the bank note in English currency.
The chief function of the joint stock banks having thus been shown to be the provision of currency for the English community, it may further be noted that a remarkable development of their activity has been the rapidity with which they have covered England with branch establishments. It was estimated in 1858 that the total number of bank offices in the whole of the United Kingdom was just over 2,000; at the present moment the aggregate branch offices of four of the English joint stock banks which are richest in respect of branch establishments have exceeded this total. One bank in England has over 600 offices, one has over 550, two have over 400, three have more than 200, twelve have more than 100. This multiplication of branch offices has been carried out partly by the absorption by the joint-stock banks of the smaller institutions in the country, whether private or joint stock, and partly by the rapidity with which they have opened branches in the great provincial centres and their suburbs, and to a moderate extent in the small country towns. The result of it is to give the English monetary system the power of easily supplying the needs of the various parts of the community as the requirements of others ebb and flow. At the same time this rapid development increases the competition between the various English banks, which we have already shown to be carried to an almost excessive degree, and by the wide local distribution of their liabilities enhances the possibility of strain on them in times of difficulty.
Some of the banks include under the heading "cash at call and short notice" advances which they make to the Stock Exchange for the fortnightly periods that elapse between its settlements. The funds that they so use obviously have an important effect upon the marketability and price of securities in London. On the first day of every settlement it is usual to see rates quoted as those at which the banks are lending to their stock exchange clients for the financing of speculative commitments. In the arrangement of these rates a certain amount of combination and co-operation among the banks, or some of them, has grown up as a matter of custom, but since for this class of accommodation the bankers are subject to competition on the part of the agencies of the foreign banks and the big finance houses it is often found difficult to maintain even this amount of harmonious working among the bankers.
It has been shown that the rate at which the banks make advances to the discount houses has an important effect upon the market rate of discount in London, but the banks exercise a still more important and direct effect upon this discount by being themselves large buyers of bills. It is impossible to gauge exactly the extent to which they hold bills among their assets, since many of them in their balance sheets include their discounts along with their loans and advances. Among the many suggestions that reformers have put forward in the matter of English banking, one is that this item of the banks' holding of bills should be separately stated. But though this obscurity in the statements of the English banks makes it impossible to know the precise extent to which they hold bills, there is no doubt their purchases of them are on the whole the most important influence upon the market rate of discount in London. Nearly all the discount houses, whose functions will be described later, buy bills, largely with the intention of reselling them to customers, among whom the joint-stock banks are the largest and most important and most regular buyers, and it is contended by the discount houses that the market rate of discount, for which they themselves are generally supposed to be responsible, is really and in fact regulated by the price at which the big joint-stock banks are prepared to buy. This being so, since the market rate of discount is perhaps the most important influence on the foreign exchanges and so on the inward and outward movements of gold, it will be seen that this function of the bankers is one of the greatest possible importance from the point of view of London's free market in gold.
Besides thus regulating the price at which bills of exchange can be discounted in London, the banks have in recent years taken an increasingly large and important part in the creation of bills of exchange by placing their acceptances at the disposal of their customers. The increasing extent to which the bankers have in recent years intruded into this class of business is a grievance that is resented rather keenly by the merchant firms, or accepting houses, as they are often called. It is contended by the latter that the business of acceptance is a special function for which special training is required, and that the joint-stock banks rarely have available the special abilities that make for its proper conduct. On the other hand, the high standing of the joint-stock banks and their big reserve resource in the shape of their uncalled capital makes their acceptances an exceptionally fine credit instrument, and it seems natural enough that they should, to a certain extent and within moderate limits, place these facilities at the service of their customers.
Finally it may be added that the English joint-stock banks are now showing a disposition to engage to some extent in the business of dealing in foreign exchange which has hitherto been left to the finance houses and foreign firms established in London. The London and County and the London City and Midland banks have now established regular foreign exchange departments. This development is generally welcomed as a sign of a desire on the part of the banks to widen their horizon and to come into closer touch with the affairs of the financial world at large, but, as in the case of the banks' increasing interest in acceptance, there are some critics who consider that it is better for the bankers to stick to their obvious and highly important function of providing the community with credit and currency, and taking care of the money of their customers.
THE PRIVATE BANKS
Any differences that exist between the private and joint-stock banks of England lie in their ownership rather than in their functions. Their functions are the same, but the manner in which they carry them out is perhaps influenced to a slight extent by the fact, which really distinguishes them, that the private banks are owned by a few partners who generally conduct the business for themselves or exert more or less influence on it, while the joint-stock banks are managed by salaried directors and officials on behalf of a large body of shareholders formed into a public company, the shares in which can as a rule be bought and sold on the London Stock Exchange.
Since private enterprise naturally precedes joint-stock institutions, it goes without saying that the private banks of England were the pioneers of the banking business. There are still in existence private firms which were founded before the Bank of England. A goldsmith called Child was doing business of a banking character soon after 1660, and Child's Bank still exists. Hoare's Bank was instituted in about 1680, fourteen years before the Bank of England received its charter. Modern developments have almost driven them out of the field, and among the leading banks in the city of London only two are left which can still be called private in the old sense of the word. There are one or two other institutions which are on the borderland: and at the west end of the town several old firms, including Child's and Hoare's, have retained their old constitutions.
THE MERCHANT BANKERS AND ACCEPTING HOUSES
The most important function of the merchant bankers is not that of banking, but of accepting. Banking, in the strict sense of the term, they do not engage in--that is to say, they are not prepared to meet claims upon them by an immediate payment of cash or legal tender over the counter, but by payment of a cheque on one of the banks in the stricter sense of the term. The function of the London accepting houses, though of enormous importance, is still to a certain extent subordinate to the judgment of the English banks. They finally decide whose paper is most readily negotiable, and, in times when the credit machine is felt to be somewhat out of gear, the bankers occasionally discriminate against the paper of firms which they consider to have been giving their acceptance too freely. In this respect, as in so many others, the Bank of England remains the final arbiter, since the paper of an accepting house which is questioned by the other banks can be negotiated at the Bank of England through a discount house, and the Bank of England has before now intervened with effect when it considered that questions raised concerning certain acceptances have been without justification.
This business of acceptance is one into which the other banks have themselves recently intruded with considerable effect, accepting bills for their customers, home and foreign, for a commission; and there is a certain apparent anomaly in the position which makes them guardians of the volume of acceptance created by the private firms and acceptors themselves on a steadily increasing scale. Nevertheless, this anomaly has little or no untoward effect in practice. The bankers are naturally extremely cautious in raising any question as to the security of general credit in London, and they are in many ways closely connected with the private accepting houses, so that the system, which appears to be full of uncomfortable possibilities on paper, works easily enough in practice.
Other functions of the merchant firms and accepting houses are their activity in general finance and in exchange business. Both these functions arise out of their old business as merchants, which gave them close connection both with the governments and the business communities of foreign countries.
THE DISCOUNT HOUSES
The great volume and diversity of the bills of exchange which come into the London market to be melted and turned into present cash before their date of maturity has caused the existence of a class of dealers in bills (bill brokers) who specialise in handling them and may be regarded as intermediaries between the holders of the bills--that is to say, originally, the drawers of them, or their representatives, or any one else into whose hands they may have passed them on--and the bankers, who are the ultimate buyers and hold them as investments until maturity. It is the business of the discount houses to buy these bills on a wholesale scale, using for this purpose funds largely lent them by the banks, and to meet the requirements of the bankers with regard to the date named and quality of the bill, providing them out of the store that they keep constantly replenished.
We have also seen that the discount houses fulfill a very important function by borrowing funds from the bankers at call and short notice. These funds are regarded by the bankers, and actually described in their balance sheets, as cash, cash at call, and short notice. It is a somewhat elastic extension of the term "cash" to apply it to money that is being lent to any borrower, even of the highest credit and against the most liquid possible collateral. But it is always assumed by the bankers that these funds placed in the discount market can be called in readily at any moment. That they can be called in is practically a fact; but it arises chiefly from the ability of the discount houses when pressed for repayment of these loans by the bankers to fill the gap in credit by an appeal to the Bank of England and the production of fresh cash, as it is called, by borrowing from it. The discount houses take security to the Bank of England and raise with it the right to draw cheques. These cheques they pay to their bankers, whose cash at the Bank of England, which we have already seen to be regularly used as a part of the basis of credit in England, is thus increased.
Besides the money that they habitually borrow for short periods from bankers, the discount houses also have considerable amounts placed on deposit with them by other lenders, some of which they employ, especially in times when the volume of bills is comparatively small, by loans to the Stock Exchange for financing the speculative commitments of the public, and by holding or carrying securities of a reasonably liquid character. They also take some part in the underwriting of new loans and in the general financial business of the London market.
[154]It is impossible to exaggerate the importance of the functions which the bill brokers discharge in the London money market. They are only about twenty in number, including three joint stock companies. One or two of the brokers work on commission, as your brokers do, but the majority are really dealers in bills. That is, they buy or discount, and sell, or rediscount, bills of exchange.
Let me illustrate their method of working: A bank in New York may buy $1,000,000 worth of sterling bills drawn on England and send them forward to its London agent to be discounted with the bill broker. The bill broker will discount these bills at, say, 4 per cent. If he thinks rates are likely to fall, he will hold the bills; if he thinks them likely to rise, he will try to sell the bills at about 3-3/4 per cent. or 3-7/8 per cent. discount, thus making a profit on the transaction of 1/4 per cent. or 1/8 per cent. per annum. Similarly he may discount large parcels of bills for Eastern and South American banks. Many of these bills will be bills drawn on and accepted by banks and finance houses. These are known as "bank bills." But on the other hand, the bill brokers are free buyers of "trade bills." The trade bill in England arises in the following way: Trader A sells goods to trader B. He will draw a draft on trader B at, say, three months date. Trader B will accept the draft and return it to trader A, who will discount it with his banker or with the bill broker. The rate of discount for trade bills is usually 1/2 per cent. per annum higher than the rate for bank bills.
The essential feature of almost all the bills on the market is that they represent a commercial transaction, such as a sale of goods, where value passes. It is this that lends them their self-liquidating quality; for they are usually liquidated by the acceptor out of the proceeds of the resale of the goods during the currency of the bill.
The bill broker not only employs his own capital in buying bills, but also money which he borrows from the banks and others at call or at short notice. Enormous sums are employed in this way.
INTERVIEW WITH THE GOVERNOR AND DIRECTORS OF THE BANK OF ENGLAND
[155]Q. When does your present charter expire?
A. The bank's exclusive privileges of banking continue subject to one year's notice and to repayment by the Government of the debt of L11,015,100 and of all other public debt held by the bank at the time.
Q. What is the par value and present selling price of your shares?
A. The bank's capital is in the form of stock, L100 of which is at present quoted at about L267.
Q. How many stockholders have you?
A. There are at present over 10,000 accounts.
Q. Is the stock fully paid?
A. Yes.
Q. Have your shareholders any liabilities in addition to the ownership of shares?
A. Legal opinion is to the effect that there is no further liability on bank stock.
Q. Is there any limit to the number of shares which may be held by any one person, and is your approval required before a transfer of your stock can be made?
A. There is no limit--the bank's approval is not required.
Q. Does every share have a vote at shareholders' meetings?
A. To have a vote a proprietor must hold L500 of stock, but no matter how much additional stock a proprietor may hold he can not have more than one vote.
Q. Is there any custom restricting the class from which the directors may be selected?
A. There is no legal restriction as to the class from which directors may be selected, except that they must be "natural-born subjects of England, or naturalized," but in actual practice the selection is confined to those who are, or have been, members of mercantile or financial houses, excluding bankers, brokers, bill discounters, or directors of other banks operating in the United Kingdom.
Q. How many branches have you?
A. There are eleven branches--two in London and nine in the provinces.
Q. Is the business conducted at your branches of the same class as at your main office in London?
A. Yes.
Q. Do your branches have business relations with merchants, farmers, and all classes of people in their respective localities?
A. There are no restrictions of any kind as to the class of people with whom the bank has business relations.
Q. Is the Bank of England a member of the London Clearing House?
A. Yes; but "on one side only," as it is termed. The Bank of England presents, through the clearing house, all drafts drawn on clearing bankers paid in to it by its customers; but the clearing bankers do not present, through the clearing house, drafts on the Bank of England paid in to them by their customers. Such drafts are paid direct to the credit of their accounts at the Bank of England.
Q. Do you at any time allow interest on special deposits?
A. It is not the practice of the bank to allow interest on any deposit.
Q. Can you state approximately the average length of time and the average size of bills discounted by you?
A. Time, forty to fifty days; size, probably about L1,000.
Q. What is the distinction between what are known as "prime bills" and other bills?
A. A "prime" bill we should define as a bill accepted by a London or provincial bank in first-class credit or a merchant or merchant banker of the first class whose business it is to grant credits.
Q. Do you discount any prime bills?
A. Yes.
Q. Do you discount to any considerable amount for individuals and merchants?
A. The bank discounts all approved bills offered to it by persons or firms having properly constituted accounts.
Q. Is it your custom to employ surplus funds in purchase of bills from discount houses?
A. No.
Q. Do you rediscount bills for the joint stock or other banks?
A. The bank is always prepared to rediscount for other banks at its official rate, and does a large business from time to time with the colonial and foreign exchange banks who are from the nature of their business always sellers of bills.
Q. Would you charge a merchant house having a good account with you the bank rate or the market rate for prime bills?
A. The market rate.
Q. To what extent does bank rate govern your discount and loan transactions?
A. The rates for discount and loan transactions at the bank usually approximate more or less closely to the bank rate.
Q. Do you at times discount bills for parties having no account with you?
A. No.
Q. Are a considerable number of your loans on call?
A. None.
Q. When and under what conditions is the bank rate changed?
A. The bank rate is raised with the object either of preventing gold from leaving the country, and lowered when it is completely out of touch with the market rate and circumstances do not render it necessary to induce the import of gold.
Q. Does the bank sometimes borrow money in the open market for the purpose of raising the market rate?
A. Yes.
Q. Do you sometimes sell consols for the same purpose?
A. Yes; on rare occasions.
INTERVIEW WITH SIR FELIX SCHUSTER, GOVERNOR OF THE UNION OF LONDON AND SMITH'S BANK LIMITED
[156]Q. Your bank is organised under the General Companies Acts as are all joint stock banks in England?
A. Yes.
Q. You are not under government supervision or examination?
A. No.
Q. The authorised par of your stock is L100, and L15 10_s._ have been paid on each?
A. Yes.
Q. Are your shares held by individuals and corporations?
A. By individuals, not by corporations. There are upwards of 8,600 different shareholders.
Q. In the transfer of shares, do you require the name of the transferee to be submitted and approved before the transfer is made?
A. Yes.
Q. That of course is in order to insure the responsibility of your stockholder?
A. This is in order to insure the responsibility of our stockholder, and to prevent one holder from securing too large a holding. Furthermore we give no single proprietor more than 20 votes, however large his holding may be. Every 10 shares carry one vote, so the holder of 200 shares has a maximum number of votes.
Q. Is that the usual custom with the joint-stock banks of England?
A. I am afraid I cannot answer offhand. I suppose it is so in some cases, but the practice varies.
Q. In London there is usually a difference between the rates charged on loans and bills in favor of bills, is there not?
A. Yes.
Q. Would you say that that difference is perhaps from one-half to 1 per cent. in favor of the bill?
A. It depends so very much on the circumstances of the moment that it is very difficult to generalise. At the present moment I would say a three months' bill is worth 1-7/8, and a three months' loan would be worth perhaps 3-1/2.
Q. Were most of your branches organised by you or were most of them other institutions purchased by you?
A. Some of them were other institutions; some of them were organised by us; most of them were those old banking firms which were carried on as private businesses and have since become branches of our bank.
Q. The tendency is for the consolidation of banking in Great Britain, is it not?
A. Yes.
Q. Very strongly in that direction?
A. Very strongly in that direction, yes.
Q. As a matter of fact, a large part of the commercial banking in England is done by about a dozen institutions, is it not?
A. In Liverpool and Manchester there are very important local banks. However, it is no doubt the fact that four or five banks do about half the banking business.
Q. In the main you believe that the banking situation is stronger and better and the country is better served through the system of branches than through the independent banks?
A. I am quite convinced of that, if only for one reason, that I do believe the indiscriminate granting of credits to the individual is injurious to himself, the private bankers being too much in the habit of regarding old family associations and not so careful as the joint-stock company would be, and he has accustomed people to trade on the credit that they get from the banker. I do not think that is banking business. The bank ought never to supply the trader with working capital. I think it is bad for the trader.
Q. Is it not quite essential to the success of a financial institution doing a commercial business to become a member of the Clearing House if it is to meet with a large degree of success?
A. No. After all, there are only seventeen banks, I believe, now in the Clearing House, but there are a great many other institutions who are not members of the Clearing House and who do not suffer from that fact. Scotch banks with branches here who do a large banking business are not members of the Clearing House. There are all the colonial banks with head offices or branches in London and other large institutions; those are not members of the Clearing House. There are Barings and Rothschilds; they are not members of the Clearing House.
Q. Would you say the Bank of England is in any way a competitor of the other banks in England?
A. Yes. That is a source of very grave complaint by the other banks.
Q. The Bank of England do not pay interest on any accounts?
A. No; but in some cases they act as intermediaries for lending money. It is a very subtle distinction.
Q. While the bank rate is fixed and is to-day, say 2-1/2 per cent., is it not a fact that the Bank of England does some business for its customers and also purchases bills for their account at a lower rate?
A. That is so, and that is one of the matters of complaint. By fixing the rate at 2-1/2 per cent., or 3 per cent., or 4 per cent., they can regulate the rate we fix for our own customers. We regulate our deposit rate in accordance with the bank rate. We also regulate the rate we charge for our loans in accordance with the bank rate, and we are bound by it to a certain extent, and they themselves feel at liberty to depart from it.
Q. What does the bank rate mean; what does it govern in fact?
A. It means the general charge to the trade of the country, because although we say that bills in the market are discounted at a lower rate than bank rate, yet there is a vast number of trade bills which are purely governed by the bank rate.
Q. We found both in Germany and in France the question of the amount of reserves, either in specie or in bank, was regarded as of little importance by the bankers. They depend on the Reichsbank and the Bank of France for rediscount in times of need.
A. Both in France and in Germany banks are much more dependent on the central institution than we are here. They lean on their central institution to a very great extent; for instance, the rediscounting of bills and borrowing from the central institution is, I believe, quite a usual occurrence. Here it is an occurrence which would only take place in the last resort. As far as I am aware this bank has never as long as it has been in existence had one penny from the Bank of England, whether by way of advance or by way of a discounted bill. We do not rediscount our bills in the market either; so every transaction we enter into we have to see through to the very end.
INTERVIEW WITH MR. CHARLES GOW, GENERAL MANAGER OF THE LONDON JOINT STOCK BANK, LIMITED
[157]Q. Your capital stock is L100 authorised, L15 paid?
A. Yes.
Q. Does your board pass upon a new stockholder?
A. Yes.
Q. Who really conducts the business of the bank?
A. The managers, who are appointed by the directors; that is to say, myself and all those belonging to me.
Q. Are most of your acceptances secured?
A. Every one.
Q. How are they secured, generally speaking?
A. They are secured in the great majority of cases by bills of exchange, by first-class securities with plenty of margin, even by cash in hand to a moderate extent, and to a very small extent by bills of lading for produce shipped. That is a very small item.
Q. Can you state the reason for accepting bills instead of furnishing the cash?
A. We accept those bills because it happens to be the custom of the particular banks to draw a long bill. The customer himself who buys cotton in Bombay, or wherever it may be, acts according to the custom there to draw a bill to a certain usance. Now, for instance, with regard to an inland bill, we would not give credit of that sort to a man in London, but wherever there is a regular course of business abroad to draw at long usance we comply with it.
Q. What is the character of your bills discounted?
A. Those are all marketable bills, trade bills; you know what they are; they are between the manufacturer and the man to whom he sells.
Q. You always require two names?
A. Always.
Q. What does the form of obligation by the borrowers upon collateral take?
A. Just the same form as your promissory note.
Q. You have branches, have you not?
A. We have about forty-odd branches all in London and close to London.
Q. You do not then endeavor to acquire a country business through your branches?
A. For this reason, that we commenced as a purely London bank, and we have so far kept to that original determination of not launching out into country business, because, as I say, it differs from the ordinary London business. Country business is not quite so liquid, and can not be.
Q. If you had an account of a man running, say, a hat store, his account was satisfactory in character and had been carried with you for several years, and he wanted to stock up on hats, there would be no way in which he could go to you and borrow the money with which to buy those goods unless it was through a guarantor?
A. No. He would go then to the wholesaler from whom he would buy the goods, and give that wholesaler his bill, and that bill would be a discountable article, and that is how the money would be raised.
Q. Do you ever allow overdrafts, as they do in Scotland?
A. They are not unheard of, but not a principle of our business. Overdraft is a principle of country banking.
Q. My observation leads me to believe that the banking situation in London is practically controlled by twelve or fourteen of what are known as the London joint-stock banks, through their offices and through their branches?
A. Yes; I think that is right. However, there are still independent banks in the country, and I doubt whether amalgamation will go very much farther than it has gone. You see, these amalgamated banks have already become so large that they begin to get a little unwieldy. Lloyds Bank is an enormous thing, with $350,000,000 of current and deposit accounts.
Q. Would you say that the public are better served through these branches than they were through the independent banks?
A. Some say that they are not so well served, that accommodations are curtailed now as compared with what they used to be, and that I can understand to some extent, because, working a very large concern from one centre, you see, fiats will go forth, "Cut that man's credit off," and not listen to taking a large view. They say, "I have enough of that kind of accommodation; I have 100 shipbuilders or shipowners; I am not going to give out more than a proportion of my money into that particular trade; therefore, I will not have any more," whereas the independent banks would be perhaps a little more accommodating.
Q. If I were to go to you to-day with a ninety-day trade bill, the acceptor known to you as good, and also with a loan secured by Pennsylvania Railroad bonds, my loan to mature in ninety days, what rate would you charge me on those separate items?
A. The bank rate to-day is 2-1/2 per cent. You are a good customer, and I should charge you 2-1/2 per cent. for discounting that trade bill, and I might charge you 3 per cent., or even perhaps 3-1/2 per cent. on the Pennsylvania Railroad collateral for this reason, that one is not as realisable as the other. When the bill becomes due it has to be paid, or I give it back to my customer, and say "Give me the money for that." I can not quite say the same to him about his collateral.
Q. What per cent. of earnings on your capital did you show last year?
A. Roughly, our net earnings were 20 per cent. It cost us 50 per cent. of our gross earnings to run the business.
Q. What taxes do you have to pay?
A. We pay income tax on all our earnings, and deduct from our gross profits. We are entitled to deduct, roughly speaking, our expenses, and then upon the remainder we have to pay the income tax, or whatever it is, at 1 shilling in the pound, for instance, now.
Q. Would you say that the Bank of England is a popular banking institution among other banks in England?
A. Yes, I should say so decidedly. Its popularity goes to this extent, that it is absolutely indispensable to them. Some of them may grumble at this proceeding or that proceeding, but they have one and all to own that the Bank of England is indispensable to them.
Q. As a matter of fact, if you had presented to the Bank of England last fall some bills which had been negotiated through you which appeared to be finance bills, do you not think they might have gently hinted that it was not agreeable to them to have you negotiate any more finance bills?
A. I may say they have that recourse, and they might say to me if I gave them any just cause for doing it, just the same as anybody else.
Q. In other words, the Bank of England has such a commanding position here among the financial institutions which control all the finances of Great Britain that they dominate it when they choose to?
A. When they choose.
Q. It is the custom of the bank to co-operate very cordially with the other banks, is it not?
A. Oh, yes; we are as free as free can be. There is very little conference, or anything of the kind; we are all pretty good friends all round.
FOOTNOTES:
[150] F. Straker, The Money Market, pp. 7-16. Methuen and Company. London. 1904.
[151] Ibid., pp. 28-40.
[152] [The fourth suspension occurred August 6, 1914.]
[153] Adapted from Hartley Withers, The English Banking System, Publications of the National Monetary Commission, Senate Document No. 492, 61st Congress, 2nd Session, pp. 3-64.
[154] James H. Simpson, Some Leading Features of the London Money and Discount Markets, an address delivered at the annual banquet of the bankers of the city of New York, Jan. 19, 1914. (In Banking and Currency at Home and Abroad, Distributed with the Compliments of the National City Bank.)
[155] Adapted from Interviews on Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, Publications of the National Monetary Commission, Senate Document No. 492, 61st Congress, 2nd Session, pp. 7-29.
[156] Ibid., pp. 34-55.
[157] Ibid., pp. 60-91.
XXIII. THE SCOTCH BANKS
[158]The functions performed by the eight Scotch banks and their 1,245 branches[159] are essentially similar to those already described as being carried out by their English brethren. The differences between the currency systems of the two countries are in degree rather than in essence. In Scotland the note issue has made a harder fight for its existence than in England, owing no doubt to the fact that the Bank of England's monopoly did not extend to Scotland and that the great Scotch joint-stock banks therefore extended the system of using notes as currency, while the development of joint-stock banking in England was necessarily opposed to it, since joint-stock banks in England with an office in London were unable to issue notes. Nevertheless, even in Scotland the advantages of the cheque have told in its favour, and, as will be seen below, liabilities of Scotch banks under note issue are now much smaller than those under deposit as current accounts.
DEMOCRACY OF SCOTCH BANKING
The Scotch note circulation increased from L5,332,000 in 1872 to L7,173,000 in 1908. This increase, when compared with the fact that the note issues of the English country banks have during the same period diminished almost to vanishing point, shows that the bank note is much more tenacious of life north of the Tweed. This is partly owing to the fact that in Scotland notes may be issued of the denomination of L1, whereas in England the smallest allowed is of L5, so that the note was thus circulated more easily among the poorer classes in Scotland and so gained and retained a hold upon a much wider circle of the community. In this respect, as in others, Scotch banking is more democratic than English, and provides its facilities for a poorer and lower class of the community, though this distinction between the banking systems of the two countries is being rapidly diminished. Especially in its early days it laid itself out much more readily to the encouragement of the small capitalist and borrower, often granting him facilities against security, or an absence of security, which would have been only regarded as feasible under quite exceptional circumstances in England. A very interesting system was at one time fairly general in Scotland, and is even now by no means obsolete. It was the system described as that of cash credits, by which borrowers were able to go to banks and obtain advances against the joint personal security of themselves and one, or two, or three friends. By this means, in which a kind of co-operative responsibility was recognised as a security by the Scotch bankers, very poor borrowers were enabled to obtain banking facilities, and many instances are recorded in which by a loan of this kind, of quite small importance from the banking point of view, foundations of fortunes have been laid and the general commercial prosperity of the community has been furthered in a very satisfactory manner. And even now the essential difference between Scotch and English banking is this readiness of the former to take into consideration the personal standing of the applicant rather than the stuff or paper which he brings to it as security for an advance.
USE OF NOTES AS "TILL MONEY" IN RELATION TO THE ESTABLISHMENT OF BRANCHES
Banking by branches in Scotland has proceeded even more rapidly than in England, and the percentage of branches per head of the population is higher in the northern part of the Kingdom. This wide diffusion of banking facilities in Scotland has been largely brought about by the fact that its banks, having the privilege of note issue, were able to hold their own notes as "till money," so economising in the matter of cash. The following passage is from a work entitled Scottish Banking, 1865-1896, by A. W. Kerr, author of a History of Banking in Scotland:
Were it not for the power to issue notes, and the readiness with which the public receive them, the banks could never have afforded to open a third of the branches which have been established. The reason for this is a very simple one. Without the right of issue a bank must, at every one of its offices, hold the whole of its balance of cash in the shape of coin, or of notes of other banks, which, as far as it is concerned, are as unprofitable as coin. Such balances entail a complete loss of interest which can only be borne where the amount of business is of considerable extent. There are probably not above 100 (at most 200) localities in Scotland that would satisfy such conditions. When, however, a bank can hold its till money in the shape of notes, it is enabled to extend its operations into districts which would otherwise be quite inaccessible....
The authority of a practical Scotch banker is equally emphatic on the point. Mr. Robert Blyth, general manager of the Union Bank of Scotland, read a paper at the thirty-first annual convention of the American Banking Association, in October, 1905, on the subject of Scottish banking. In the course of this very interesting paper he made the following statement: "It is in another quarter altogether that the Scotch banks find the value of the L1 note. It is the unissued notes in the tills of the branch offices, forming the till money at more than a thousand branches, wherein the real value lies. Without them the banks would require to keep L8,000,000 or L10,000,000 of gold coin, not as a reserve but as till money. It is these L1 notes which have enabled branch offices to be planted in every part of the country."
It thus appears, from the highest possible authority, that the Scotch banks are enabled by their right of note issue to economise gold to the extent of L8,000,000 or L10,000,000, and it is amusing to observe how the objects aimed at by Peel's legislation with regard to note issue have thus been defeated even more completely in Scotland than in England. In England banking turned the flank of Peel's Act by developing the use of cheques, which superseded the note as the common form of payment in daily transactions. In Scotland, banking evaded the spirit of Peel's regulations, which were intended to insure that every addition to currency should be secured on an addition to the bullion held by it, by actually economising bullion to the extent of L8,000,000 or L10,000,000.
EVASION OF PEEL'S ACT
Scotland used the same weapons as England, namely, the cheque and the development of deposit banking. The eight Scotch banks have, according to their latest balance sheets, L7,000,000 of notes outstanding, and L108,000,000 of liability on deposits and drafts. With regard to the latter item Peel's regulations had nothing to say, and since ordinary banking prudence demanded that some cash should be held against it, and since the gold held against notes was not specially earmarked as such, Scotch banking was able to treat its cash against deposits as the basis both of its notes and deposits and so produce the economy which is boasted of by its champions. The law says nothing concerning cash to be held against deposits, and the metallic basis of these is probably extremely slender, if the cash held against notes is set on one side; but it is impossible to detect its actual amount, since the Scotch banks include with their cash their balances at the Bank of England, etc. And the net result is, that when the proportion of its cash to its total liabilities on notes and deposits is worked out it is found to be decidedly low, even when compared with English practice. For the eight banks taken together, gold and silver coin, notes of other banks, cash at Bank of England, and cheques in course of transmission represent almost exactly 10 per cent. of their note and deposit liabilities.
It should be observed that the notes which the Scotch banks hold as till money do not appear in their statements, for until they are issued they are not a liability, and though they are treated by the banks in practice as an asset, they can not figure as such in a balance sheet. That they are practically treated as such is witnessed by Mr. Blyth, as quoted above, when he says that without them the banks would require to keep L8,000,000 or L10,000,000 of gold coin. And it is, of course, this habit of regarding unissued notes as a banking asset in the shape of till money that accounts for the low reserve of actual cash that the Scotch banks show.
DEFECTS
Scotch banking is so generally regarded as one of the highest achievements of the banking intelligence that some hesitation is natural in criticising the system by which, according to its own evidence, it has obtained most of its success. At the same time, it is difficult to avoid the conclusion that a serious danger lurks in a system which regards a banker's unissued promise to pay in the light of a banking asset. Mr. Blyth points out that these unissued notes are "not a reserve but till money," but the distinction between till money and reserve is one upon which it is possible to lay too much stress. In assessing the strength of a bank it is usual to compare the amount of its cash in hand, as a whole, with the amount of its liability to the public on deposit and current account, etc., and note circulation if any. The cash in hand, as a whole, consists of the till money and cash reserve. If the till money consists to any extent of the bank's own promises to pay, it follows that the bank's cash reserve as a whole is to that extent weakened, for it need not be said that in case of serious trouble, which is a contingency of which all provident bankers have at all times to beware, a bank's own promises to pay would be of little service to it. If a bank's credit were doubted, these promises to pay would not be available for it in meeting demands upon it. At such periods the public requires from its bankers not promises to pay but physical gold. In Scotland the confidence of the public in its bankers is so great, and the readiness with which it circulates their promises to pay appears to be so ingrained in the national character, that the contingency of the demand of the public for gold seems to be extremely remote. The criticism therefore which detects a weak point in this asset upon which Scotch banking prides itself so highly may be said to be merely academic. Nevertheless, when we examine Scotch banking by the test of figures, we find that it does actually work, as indeed would be expected from the statement of its exponents, on a cash basis which is decidedly narrow.
Though the functions that they perform are practically the same as those of the English bankers, Scotchmen have succeeded in avoiding the excessive competition in carrying them out which is a weakness of English banking. In Scotland, on the other hand, cohesion and co-operation among the banks are carried to an extreme of which the mercantile community frequently complains. The banks are few and stand together like a close corporation; they agree absolutely and arbitrarily among themselves as to the rates they will allow to depositors, the rates at which they will advance or discount, and the terms and commissions for which they will do business for customers. The extent to which this regulation of the price of the product that they turn out is carried, is almost incredible from the English point of view, and though it is contended by the champions of the Scotch system that it encourages that wholesome democratic influence in Scotch banking which is in favor of the small borrower of limited resources, who is thus able to obtain accommodation on the same terms as much larger and more important customers, yet it must be obvious that the Scotch banks, by making these hard and fast agreements among themselves as to the price of the accommodation that they will give, and maintaining it in every case, are in fact putting the same price upon a very different article. The result of it is beginning to tell upon them a little in these days, since, when the big Scotch merchants and manufacturers find that their local bankers charge them the same rates for accommodation as the small tradesmen of the towns, they are naturally impelled to make arrangements to provide themselves with monetary facilities somewhere south of the Tweed, where rates are ruled by the circumstances of each case, and competition and higgling often in times of monetary ease deliver the bankers into the hands of the borrowers. As it is, the Scotch banks in regular conclave fix their rates in accordance with those current in the London money market or the Bank of England's official minimum, and, having fixed them, stick to them. The system is very profitable to themselves, and their customers certainly can not complain on the whole of the facilities with which they provide them. Nevertheless, the cast-iron rigor with which they work hand in hand in combination appears to be an excessive development of banking unity, and an ideal banking system would seem to lie somewhere in the middle between the excessive competition of the English bankers and the cast-iron combination of their Scotch brethren. Finally, it may be added that it is a little inaccurate to speak of a Scotch banking system, if the phrase be taken to imply that Scotch banking stands by itself and works on its own resources. In fact, it is only an appendage of the English system and relies habitually on drawing gold from the Bank of England, as its centre and the keeper of its reserve.
BANK OF SCOTLAND
INTERVIEW WITH SIR GEORGE ANDERSON, GENERAL MANAGER[160]
Q. When was the Bank of Scotland founded?
A. In 1695.
Q. When does your present charter expire?
A. By act of Parliament the "governor and company of the Bank of Scotland" have "perpetual succession."
Q. How many branches have you?
A. One hundred and sixty-three branches and twelve sub-branches in Scotland: also an office in London.
Q. How are your branches managed?
A. By agents (managers at London and Glasgow) appointed by the directors.
Q. Do your branches have business relations with merchants, farmers, and all classes of people in their respective localities?
A. Yes.
Q. What is the law governing your note issues, and how are note issues limited and how secured?
A. The bank is authorised to issue, without holding coin against them, notes to the value of L396,852, but for any excess beyond that amount we must hold, at the head office, an equivalent value in gold coin, one-fourth of which may, however, be in silver coin.
Q. Will you state (a) the class of bills usually discounted by you, giving the number of names required; (b) the minimum size; and (c) the maximum length of time to run?
A. Mercantile bills, also a few accommodation bills, usually two names; minimum, say, L10. The maximum length of time to run is six months.
Q. What classes of collateral are accepted by you for loans?
A. Personal security, marketable securities, life policies, mortgages over ships, shipping documents, etc. In the important banking centers of Scotland lending against collateral security has become largely prevalent.
Q. Do you rediscount bills from other banks?
A. No.
Q. Explain the phrase "cash credits," and upon what conditions are they given?
A. A "cash credit" is a credit allowed, in virtue of which a customer may draw cheques on the bank until the balance due to us reaches a certain fixed limit. The account is an ordinary operative one, and interest is charged on the balances actually due to the bank from day to day.
Q. Have you in mind how many branches you had ten years ago?
A. One hundred and twenty.
Q. Do you ever buy any shares of railroad or industrial companies?
A. Yes; of the highest class.
Q. Do you ever own bank shares?
A. No.
ROYAL BANK OF SCOTLAND
INTERVIEW WITH ADAM TAIT, CASHIER AND GENERAL MANAGER[161]
Q. When was the Royal Bank of Scotland founded?
A. In the year 1727.
Q. When does your present charter expire?
A. It is perpetual.
Q. How many branches have you?
A. One hundred and fifty-two.
Q. Are all your branches of the same class, or have you main and subsidiary branches?
A. In some cases there are sub-branches. Some are mainly or almost entirely deposit branches; others have few deposits, but a large advance business.
Q. Is the business conducted at your branches of the same class as at your office in London?
A. No; the London office is itself a branch office and much of the ultimate settlement of balances takes place there. The conduct of the ordinary London business is on the same lines as that of any other London branch bank. No notes can be issued in London.
Q. Do your branches have business relations with merchants, farmers, and all classes of people in their respective localities?
A. Yes, they have business relations with all classes of people.
Q. What is the law governing your note issues, and how are note issues limited and how secured?
A. The act of Parliament of 1845 governs our note issue. There is no limit to the amount of notes that may be issued, but the bank is required to hold gold (and silver to an extent not exceeding one-fifth of the total) against the notes in the hands of the public on the average of each month, and that at its head office in Edinburgh--gold held at branch offices does not count--to an amount sufficient each week on Saturday to cover the notes in the hands of the public in excess of a certain amount specified, L216,451.
Q. To what extent are your notes legal tender in Great Britain?
A. Our notes are not legal tender at all.
Q. What other banks have the right of issue in Scotland?
A. The Bank of Scotland, the British Linen Bank, the Commercial Bank of Scotland (Limited), the National Bank of Scotland (Limited), the North of Scotland and Town and County Bank (Limited), the Union Bank of Scotland (Limited), the Clydesdale Bank (Limited).
Q. Are the notes of your issuing banks secured; and if so, how?
A. They are not secured. In case of the liquidation of the five last-named banks, however, their shareholders are unlimitedly liable for their notes and they are liable to contribute a sum necessary to restore to the general assets the sums that may have been paid out of the same in respect of claims under notes.
Q. What is the total amount of their outstanding issues?
A. About L7,500,000.
Q. Do you pay the Government in the form of taxes or otherwise, either directly or indirectly, for your privilege of note issue?
A. Yes, we all pay a license duty of L30 for each place at which notes are issued, and a tax of 8_s._ 4_d._ per L100, or a penny per L1, on the average amount of notes in the hands of the public at the close of each week.
Q. Is it your custom to carry a fixed amount in government securities?
A. Yes, but the amount is not rigidly fixed.
Q. Do you discount any but prime bills?
A. Yes; we do all classes of business.
Q. Is it your custom to employ surplus funds in purchase of bills from discount houses?
A. Yes; bills accepted by London banks.
Q. Do you rediscount bills for other banks?
A. No; except for foreign or colonial banks who are correspondents.
Q. Is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another?
A. Yes.
Q. What, if any, artificial means are taken by you to secure changes in the volume of currency (notes and coin) to make it responsive to business demands?
A. None are deemed necessary. Our system works automatically. Our note issue is unlimited; we are only required to provide gold to cover the amount in the hands of the public at the close of each week and on the average of each four weeks.
Q. What is the customary charge for acceptance of a ninety-day bill?
A. Five shillings per cent.
Q. Your acceptance constitutes what is known in London as a prime bill?
A. Yes.
Q. Do you pay interest on both current accounts and deposit accounts?
A. It is our custom to pay interest on deposits only. In London, however, it is different; there interest is allowed in special cases on large balances on current accounts if left for some time.
Q. How does the bank rate affect the rate allowed by you on deposit?
A. The Scotch banks all allow the same rate and charge the same rates for discounts and overdrafts, and these are fixed relatively to the Bank of England rate. Our deposit rate is usually 1-1/2 per cent. under the minimum bank rate.
Q. Were most of your branches organised by you or were most of them other institutions purchased by you?
A. Most of them were originated by ourselves.
Q. Have you in mind how many branches you had ten years ago?
A. About 136.
Q. What relations do the Scotch banks bear to the Bank of England? Do they deal with it directly?
A. The Royal Bank of Scotland has an account with the Bank of England, which has been in operation since 1728, and it collects bills and cheques for the Bank of England all over Scotland.
Q. Do you regard your system of currency issue as sufficiently elastic for your needs?
A. Yes; there never has been any difficulty. Moreover, no Scotch bank has ever failed to pay its creditors, including the holders of notes, in full.
COMMERCIAL BANK OF SCOTLAND (LIMITED)
INTERVIEW WITH ALEXANDER BOGIE, GENERAL MANAGER[162]
Q. When was the Commercial Bank of Scotland (Limited) founded?
A. In the year 1810.
Q. When does your present charter expire?
A. It is not limited in point of time.
Q. Has the Government any voice in the management of the bank or any interest in it through the ownership of shares?
A. None.
Q. Have the managers of the branches full control of the business in granting discounts, etc.; if not, what discretion is usually given them?
A. Agents have power to grant advances, but subject to the approval of head office. In advances of considerable amount, an agent's duty is to get authority from the head office before granting it. The discretion allowed is dependent on the size of the branch and the nature of the business and the class of customer, and on the record of the agent. By our system of reports on advances (weekly, monthly, and quarterly) we keep in close touch with the advances and means of borrowers. The London branch is, of course, on different lines, and our manager there has greater powers than an agent at a branch in Scotland.
Q. Is the business conducted at your branches of the same class as at your main office in Edinburgh?
A. Yes; very much the same. The head office has administrative work and supervision of branches, investment, etc., which does not, of course, arise elsewhere.
Q. Do you discount to any considerable amount for individuals and merchants?
A. Yes; it would perhaps be well to point out that in Scotland a large portion of advances made to traders are granted in the form of overdrafts on current accounts. The number and amount of bills in Scotland are less now than in former years. Cash payments for the purpose of obtaining discount are more frequent, and the number of bills discounted by wholesale houses is reduced in consequence.
Q. Is it your custom to employ surplus funds in purchase of bills from discount houses?
A. Only occasionally, when rates suit.
Q. Do you rediscount bills for other banks?
A. It is not our practice to do so.
Q. To what extent does bank rate govern your discount and loan transactions?
A. In ordinary transactions, altogether. In all transactions the bank rate governs as regards the minimum.
Q. Explain the phrase "cash credits," and upon what conditions are they given?
A. A cash credit account is an operative current account in security of which the principal debtor and two or more co-obligants have granted a personal bond in favor of the bank. The account is operated upon by the principal debtor, but all the parties are bound as principals and are jointly and severally liable to the bank.[163]
Q. Is the bank, through its branches, employed by other banks to any considerable extent for the transfer of funds from one city to another?
A. We act as correspondents for the large English and Irish banks and for colonial and foreign banks.
Q. Do you favor the issue of L1 notes? Why?
A. Yes; under the Scottish system, as it enables the banks to plant branches at little expense and so to open up the trade of the country in all districts and directions.
Q. It is your practice to employ your surplus funds in the purchase of prime bills through bill brokers?
A. We occasionally have such transactions.
Q. Were most of your branches organised by you, or were most of them other institutions purchased by you?
A. All of them were organised by ourselves.
Q. Is the question of the amount of reserves, either in specie or in bank, regarded as of importance by Scotch bankers?
A. I should think so, though I only know positively my own opinion.
Q. Do you ever buy any shares of railroad or industrial companies?
A. No industrial company shares and only gilt-edged railway stocks.
Q. Do you ever own bank shares?
A. No.
UNION BANK OF SCOTLAND (LIMITED)
INTERVIEW WITH ROBERT BLYTH, GENERAL MANAGER[164]
Q. When was the Union Bank of Scotland (Limited) founded?
A. In 1830.
Q. When does your present charter expire?
A. The bank has no charter expiring at any specified time. It is incorporated under the companies acts.
Q. Have the obligations of the bank to the public or to the Government been changed from time to time?
A. The liability of the shareholders was formerly unlimited, but when the bank became registered under the companies act, 1879, the liability of the shareholders--unless in respect of notes--was limited to the amount of the uncalled capital.
Q. The tendency is for the consolidation of banking in Great Britain, is it not?
A. It is, but this tendency set in at a much earlier period in Scotland than it has done in England.
Q. Do you rediscount bills for other banks?
A. Yes; but only to a very limited extent.
Q. Is private banking carried on in Scotland?
A. Private banking ceased to exist in Scotland prior to 1845.
Q. Do you ever buy any shares of railroad or industrial companies?
A. No.
Q. Do you ever own bank shares?
A. No.
FOOTNOTES:
[158] Adapted from Hartley Withers, The English Banking System. Publication of The National Monetary Commission, Senate Document No. 492, 61st Congress, 2nd Session, pp. 41-50.
[159] (September, 1915).
[160] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland and Italy, Publications of the National Monetary Commission, Senate Document No. 405. 61st Congress, 2nd Session, pp. 142-155.
[161] Ibid., pp. 127-139.
[162] Ibid., pp. 172-185.
[163] The cash credit system, sometimes pointed to as a unique feature of Scotch banking, is by no means unknown in England.--EDITOR.
[164] Ibid., pp. 157-170.
XXIV. THE FRENCH BANKING SYSTEM
THE BANK OF FRANCE
[165]The Bank of France was established in the year 1800, and was at first an entirely private concern, with a capital of $6,000,000. Among the first subscribers were Napoleon Bonaparte, Hortense Beauharnais, and bearers of names which are still prominent in the French banking world, such as Mallet, Hottinguer, Seillers, etc.
At that time, the privilege of issuing notes was not confined to a single bank. But in 1806 the Bank of France was placed under state control, and, by and by, the other issuing banks disappeared, by amalgamation or otherwise, and the Bank of France became, and has ever remained since, the only issuing bank in Continental France.
The present capital is $36,500,000, all paid, divided in $200 shares.... [Francs are given in terms of dollars.]
These shares are held by the public, the average being about 5-1/2 shares for each shareholder. One-third of the shares are held by persons possessing only one share. They are dealt in freely in the market, their quotation being at present about 465 per cent.
The profits go to the shareholders, as in every other company. In 1912 the bank earned a net profit of $8,200,000. The last yearly dividend was paid at the rate of 20.83 per cent....
The governor of the Bank of France and the two sub-governors are appointed by the State. They are assisted by fifteen regents, nominated by the meeting of the shareholders. The same meeting appoints three censors whom you would call auditors.
The board, composed of the governors and regents, decides all questions concerning the rate of discount on loans, the issue of notes, etc.
Three of the regents, assisted by twelve shareholders chosen from amongst the prominent members of the commercial and industrial profession, compose the "discount committee," which meets at least three times a week and decides upon the acceptance or refusal of the bills presented for discount....
The notes are ... legal tender, but, of course, may be exchanged, at sight, against cash--I don't say against gold, as I will explain presently.
The denominations circulating at present are $10, $20, $100, and $200. One dollar and $4 notes were issued at critical times, but have been withdrawn since. In case of need, they would be resorted to again, and in this respect I should like to mention the fact, demonstrated by experience, that even where the circulation is already sufficient, a supplementary issue of small notes--unless, of course, the amount be too unreasonable--is much less likely to depreciate the currency than an issue of larger ones. In a certain sense, we may consider that a country which refrains from issuing small notes in normal times, possesses ipso facto a valuable reserve in case of emergency....
I need not recall the remarkable role played by the Bank of France, under the leadership of its very distinguished governor, M. Pallain, during critical periods such as 1907, when that institution succeeded in keeping the French discount rate on an exceptionally moderate level, while giving valuable and effective aid, at the same time, to the London market.
How is this successful policy of the Bank of France materially possible? Precisely because it has the option to pay in silver as well as in gold. When the situation is such that withdrawals of yellow metal are to be feared, the bank quotes a premium on gold. At present, for instance, the quotation is about one-tenth of one per cent. premium, that is to say, you will only get $999 in gold against $1,000 in notes. If you want to get $1,000 cash, you can get them, but in silver.
As a consequence, there is no necessity to raise the discount rate in order to protect the gold reserve, and French commerce has the privilege of benefiting, as a rule, by the lowest rate of discount in the world. Thus the average bank rate, in 1912, was 3.37 per cent. in France, as against 3.77 per cent. in England, and 4.95 per cent. in Germany.
If we consider a period of fifteen years, from 1898 to 1912, the average rates are:
per cent. France 3.8 Holland 3.52 England 3.62 Belgium 3.65 Switzerland 4.14 Austria 4.22 Germany 4.50
CASH HOLDINGS OF THE BANK OF FRANCE
[166]The undeniable characteristic of our present currency system is that it presents a transition between the money system and the clearing system, the ultimate form of which we are unable accurately to define. This period of transition, which began when the idea of genuine credit was conceived, will last for centuries before we can rid ourselves of money as a medium. The system of purely fiduciary currency, which is in process of becoming firmly established, is not yet sufficiently stable to prevent us from being thrust rudely back into the old ways whenever we exceed the limits of our resources.
Crises afford a striking proof of this fact. The initial period, the precursor of the crisis, is nothing but an abnormal extension of credit and of speculation. At such times the need of leaning upon the solid foundation of metallic currency is felt with a new intensity; and when, with a blindness resulting from overconfidence, this need has been neglected, when, from a disregard of the functions of money, a crisis is brought about by the violent rupture of the equilibrium of credit, gold at once resumes its rights, is sought for on all sides, and, according to the seriousness of the offence, exacts complete amends, with the honors of a premium as high as it may choose to make.
It clearly appears, therefore, that this quest for simplification in the means of credit, which each nation ardently pursues in the interest of its own industrial and commercial development, demands the greatest circumspection. In developing credit, metallic currency must not be too much overlooked. We must not lose sight of the fact that "credit, in order to be solid and permanent, must have a solid and permanent foundation."
The first care of the architect who is about to erect a great building is to secure for it a broad and firm foundation. Likewise, in the vast and continuous upbuilding of a nation's credit, the metallic base requires the most attentive and enlightened consideration. To provide for it, the entire resources of the State are not too great. It is difficult to understand how, in certain countries, an undertaking of such universal interest should be left to private enterprise. How can the latter be powerful enough to accumulate holdings in currency which may have to remain idle for long periods, and which can unflinchingly resist all assaults and all storms?
In France a system which has already passed the hundred-year mark and has been particularly fortunate as to results, intrusts the Bank of France with the duty of building up and preserving the metal holdings, and this great organisation shows itself fully worthy of the confidence which the Government has always reposed in it. During its long career the bank has never ceased to control credit with rare foresight and a remarkably steady hand.
From 1870 up to the present time the cash holdings of the Bank of France have not ceased to grow. But the bank, of its own volition, could not have made such an accumulation. The exchanges are usually in our favor, owing to our position as lenders to foreign countries and to the extent of our exports, and this for many years past has resulted in the continual flowing of the precious metal into the vaults of the Bank of France.
In thirty-five years the amount of our metallic reserves has increased almost threefold. And it is worthy of note that while the amount of circulation increases together with that of discounts, loans, and current accounts, the fact is nevertheless established that the bank note tends to be more and more exclusively represented by cash holdings. The silver holdings are continually diminishing, while the total holdings have increased. Indeed, the Bank of France avails itself of every opportunity to relieve its coffers of this depreciated currency. Since 1898 a considerable portion of the holdings have been absorbed by the recoinage of a certain number of 5-franc pieces into subsidiary coins.
PLACE OF THE BANK OF FRANCE IN THE DISTRIBUTION OF CREDIT
We purpose now to investigate the organs of French credit, and to assign to each of these organs its function, in order then to ascertain what operations the Bank of France can perform and within what limitations. We have therefore to examine (1) the function of local banks and of financial institutions; (2) in what manner the Bank of France promotes the free distribution of credit; (3) in what measure the bank must control credit.
LOCAL BANKS AND THE FINANCIAL INSTITUTIONS
The natural organs for the distribution of credit are the banks, but not all are able to spread it or popularise it in the same degree. Thus the "Haute Banque" (the great banking interests of Paris), solely engaged in operations of higher speculation or in international financial relations, does not interest us. The function of distribution is reserved for the local banks and the financial institutions, while the function of the Bank of France is to preside over this distribution.
Local banks, pre-eminent less than one hundred years ago, have gradually seen their field of activity growing smaller, and a large number of them have been amalgamated with great institutions, possessed of much greater resources, with branches over the entire country, and, it must be said, free from the routine which caused the downfall of many provincial houses. With their decline we greatly regret to see the disappearance of personal credit, which it is more and more difficult to make available. The intuitus personae (the judgment of character), which may serve as a basis for credit granted to a neighbor by a neighbor, can not be considered by a corporation official who has almost no means of estimating the solvency of individuals except from the material and tangible side.
The local banks, as far as they have survived, have adopted methods which do not bring them into competition with their powerful rivals. They have been obliged to grant long-term credits or content themselves with being intermediaries for the Bank of France in granting credits to parties known to them, generally farmers or small landed proprietors, with a view to rediscounting the paper. On this point again there is cause to regret, if not their disappearance, at least their effacement. The institutions for agricultural credit, in spite of all the attention they have received, have not yet been able to replace the local banks in the distribution of personal credit applied to agriculture.
The great financial institutions, of which the four most important are the Credit Lyonnais, the Comptoir National d'Escompte de Paris, the Societe Generale, and the Credit Industriel et Commercial, have a much more important part in the distribution of credit. Thanks to their numerous agencies, to their attractive conduct of business, with the service of a courteous and attentive staff, they have gradually taught the people new habits in investment and confidence in credit, to such a degree that he who but yesterday hoarded in a stocking prefers to-day, if not to speculate on the Bourse, at least to make deposits in the savings banks. The great financial institutions have done much to give even the lowest classes confidence in credit, and to introduce a system of clearing.
In closer contact with the public than the Bank of France, which is restricted by having to protect the reserve of which we have spoken, these institutions are able more readily and effectually to reach and to mould the public. But that is not their only service nor the only reason for their existence. There are transactions which they alone undertake, which they alone can undertake, and which must be performed because they are in the line of progress. These operations are sources of profit in the same way as are discounts and loans for the Bank of France. Such are demand deposits, stock-market orders, and the flotation of securities. These operations cannot be undertaken by the local banks. Occupied for the most part with long-term dealings, they have no use for deposits payable on demand. If they should have such deposits, their total would never reach a sufficient proportion safely to permit the investing of an important amount.
On the other hand, the Bank of France does not and, even if it wished, cannot compete with the financial institutions in undertaking such operations. Neither the acceptance of interest-paying deposits nor the flotation of securities can come within the province of a bank of issue. The flotation of securities necessitates a certain contingent responsibility, and the institutions which place securities on the market sometimes engage their credit for very large sums, which are sufficiently guaranteed by their capital, but the credit which is intended to safeguard the stability of the bank note cannot be pledged for that purpose.
It happens that the Bank of France sometimes transmits subscriptions, but this is a gratuitous and entirely voluntary service. In no case can the bank take for its own account bundles of securities in order to dispose of them to the public. The purchase and sale of securities, which is so profitable a business in all financial institutions, could never, it is clear, be a successful undertaking in the Bank of France. The staff of the bank has no special information as to the various securities dealt in on the Bourse, and cannot, therefore, give valuable advice. Its role would apparently be confined to handing out the financial journals and passively awaiting orders. If it should act otherwise, the staff would engage the moral responsibility of the Bank of France; but the bank, evidently reluctant to undertake such operations, prefers to leave that field to its auxiliaries, the financial institutions.
However, at the present time, the Bank of France tends to compete with these institutions for the purpose of maintaining sound conditions of credit which inclines more and more to speculation. Thus it is extending its department for the purchase and sale of securities in order to safeguard a poorly informed public against the excesses of speculation which dazzle with the hope of an always illusive gain.
IN WHAT MANNER THE BANK OF FRANCE PROMOTES THE FREE DISTRIBUTION OF CREDIT IN FRANCE
Thus the Bank of France must leave entire freedom of action to the financial institutions and must not encroach, theoretically at least, on their functions, which, as has been shown, differ materially from its own. The bank even owes them its protection, since they are valuable auxiliaries in pursuing its aim of extending credit as liberally as our metallic base permits. In the interest of the public the cash holdings are daily at their disposal. The help and protection of which we speak are not mere passive professions. Unfortunately, there have already been numerous cases where the bank has had to interfere in order to bring effective assistance to private banks. The bank has, of course, acted thus for the welfare of the entire community, but also for the satisfaction of protecting its auxiliaries with all its power in the fulfilment of a difficult task.
Let us recall the failure of the Societe des Depots et Comptes Courants, in the beginning of 1891.
"The Bank of France, after exacting such security as the concern could still offer and, furthermore, the guaranty of several large banking institutions, for the purpose of limiting possible losses, authorised discounts to the amount of 49,228,206.87 francs. Thanks to this assistance, all deposits were paid off, and the dreaded effects of a panic were once more averted."[167] However, in spite of the precautions that had been taken, the liquidation was slow.
Whenever the financial institutions have found themselves in need of effective pecuniary assistance, the Bank of France has regarded it a duty to help them, and in normal times, by assisting them with its resources, it facilitates liberal credits.
IN WHAT MEASURE THE BANK MUST CONTROL CREDIT
It may happen that the great financial institutions expand too rapidly or unwisely this or that branch of credit. Mindful, above all, of their own interest, which is but natural, they have no especial regard for the public welfare, their only aim being to make their capital bear fruit and to pay large dividends to their shareholders.
The Bank of France aspires to a nobler ideal, and many of its policies are primarily for the public good. The development of credit is an extremely delicate matter; there are many instances where the application of this agency has led to great catastrophes. It is undoubtedly impossible to exercise a strict supervision over the financial institutions; any such measure would soon appear vexatious and would be, moreover, contrary to our spirit of liberty and independence. But we can quite justly ask whether these concerns are fully sheltered against disasters; whether nothing can happen to them of a nature to shake their credit; and in such a contingency what should be the attitude of the Bank of France.
The preceding instance, and others that might be referred to, inform us sufficiently as to the possibility of failures. The house of Baring Bros., the Union Generale, and others enjoyed an immense credit, thought to be unshakable, and the events of a day flatly contradicted that opinion.
In the course of the discussion concerning the last renewal of the charter of the Bank of France, much was said as to the possibility of allowing a certain interest to depositors in the bank.... M. Burdeau[168] has shown that it is impossible for the Bank of France to become a bank of deposit. The issue of bank notes and the receipt of interest-bearing deposits are absolutely incompatible services. Their union in a single hand "would replace the present organization by an entirely new one, which, in case of a crisis, would offer much less vitality and power of resistance." For us it is sufficient to know that the payment to depositors of 1 per cent. on deposits subject to check would attract to the bank nearly all inactive funds, and that a sum in the neighbourhood of 1,000,000,000 francs would leave the private banks. This would be their death-blow--a result which we are unwilling to contemplate.
By their very nature the financial institutions are liable to weakness, and for the public good there must be some means of supporting them. For this reason the Bank of France, which presides over the distribution of credit, can permit the expansion of its auxiliaries only up to the point where its help would suffice to prevent the collapse of the market. Such a measure appears imperative in a country where the protecting wisdom of the Bank of France has always been relied upon. Fortunate land, fortunate institution, which excites the envy of foreigners, especially of England, where the least failure may result in disastrous consequences.
Thus the banks of deposit have contributed to progress by gathering and giving life to sums previously lying scattered and idle. They are valuable auxiliaries in the distribution of credit. For this reason they deserve help and protection. The bank, the mission of which is of a wider and loftier scope,[169] has shown on many occasions that its helpfulness is not a pretence; daily, in fact, it assists them by rediscounting their bills. The prosperity of the financial institutions has continually increased. It is associated with the confidence and growing security of our times.[170] But the bank must be ready to meet even improbable contingencies in order to be in a position to recapture the market with a sure hand as soon as danger threatens it.
Under these circumstances, what can the bank do? In the first place, it can utilise its powerful reserve which has been accumulated for this purpose. It can, in the next place, curb the action of the banks by competing with them when they appear to enter upon a dangerous course, and by showing them what steps to take.[171]
On the other hand, there is a whole series of operations which private banks do not undertake, or do not tend to develop as they deserve. Directed by self-interest toward the more profitable transactions, they somewhat neglect the others. The Bank of France finds no one engaged in these less remunerative operations, and is, moreover, the better able to undertake them itself, because they are not incompatible with the duties of a bank of issue.
Foremost, perhaps, among these operations is the popularising of credit by means of an ever increasing number of small loans, frequently accepting as pledge securities such as State rentes, bonds of the Credit Foncier, of cities, railroads, and industrials. An enormous transfer business is also carried on for both banks and the public at very low cost. Moreover, the bank clears large sums, annually relieving the clearing house of this burden.
The small business man, much more than the small rentier, reaps continually greater benefit from the advantages offered to the public by the Bank of France. We shall here simply call to mind the dates of some innovations favorable to the democratisation of credit.
January 15, 1824.--Creation of transfer drafts.
April 29, 1824.--Creation of transferable certificates of deposit.
January 13, 1830.--Reduction of interest on loans against bars and coin from 4 per cent. to 1 per cent.
1834.--Loans against rentes and public securities.
1837.--Daily discounting of paper except on holidays.
Law of June 30, 1840, article 2.--Option of replacing the third signature, exacted for discount, by deposit of any French public securities.
Decree of March 26, 1848.--Similar option of replacing by warehouse receipts.
Law of November 17, 1897.--Admission of bills for discount carrying the signature of an agricultural syndicate. The minimum for bills discounted is reduced to 5 francs.
There is here a whole series of measures, which, with the assurance of a cordial welcome, should induce the small business man to trade with the bank.
The bank accepts large quantities of small paper with small signatures, and it finds itself, accordingly, in normal times deprived of first-rate paper, of that which is as good as gold in international commerce. Gilt-edged paper always finds its market at lower rates than in the bank, and M. d'Eichthal, a regent of the bank, wrote as far back as fifty years ago: "Whatever may be the discount rate, among the bills discounted there will be found but few with the signatures of the Rothschilds, the Hottinguers, and other houses of the same rank. Those are delicacies which always command a premium."[172]...
The bank has always resolutely undertaken to carry through a whole series of operations which could not show great profit; above all, it has unremittingly aimed to be of service to the greatest number. The number of bills discounted grows continuously, while the total amounts, smaller during the most prosperous periods, invariably increase in periods of tight money. The average amount and term of bills is 600 francs for twenty days. This result would be considerably modified, if we were to take into account the bills handed in for collection only, the average value of which hardly exceeds 200 to 250 francs.
TERRITORIAL EXPANSION OF THE BANK OF FRANCE
With its growth in extent the bank has not only developed its services to meet new business needs, by providing an increased staff, and larger, more attractive, and better conducted offices, but it has also endeavored to reach a more and more widely extended territory. Indeed, the mere fact that the bank has entered a place, if only to make collections there, gives a favorable turn to credit conditions; credit becomes cheaper, in that the basis for money rates becomes the official discount rate, because the financial institutions have then a more economical method of replenishing their cash. The smallest provincial town where the bank has entered is, therefore, in regard to low money rates, as favored as Paris.
Exchange between cities, particularly when joined with a special commission, reaches sometimes a considerable sum. As soon as the bank opens its branch, exchange is no longer possible. Therefore, whenever the charter of the bank has been renewed, the legislator, in response to the wishes of the public, has wisely required new territorial expansion of the bank. If the bank has not always taken the initiative in this mode of expansion, it is because it has been restrained by several motives. In the first place, the opening of new offices entails considerable expense. It is necessary to count upon several years of deficit, during which the running expenses, including salaries of staff, are just as high as if the profits were large. We could name several cities which for years have shown constant deficits. It can therefore be understood that the Bank of France, which is already established in the 200 towns most important from a commercial standpoint, and which, by means of its collecting department, touches 265 towns of less importance, extends its service only with caution to new localities, since each new branch must necessarily produce a larger and more persistent deficit. Thus territorial expansion is for the bank an ever-increasing burden; it is equivalent to an additional tax imposed by the legislature at every renewal of the charter. The bank submits to this with good grace for the benefit of the public.
In the second place, there is a limit to that expansion. Where the bank has no branches, the financial institutions may take root and develop among a population which appreciates their services. Their profits come largely, it appears, from small towns, where competition is less keen. We have already said enough concerning the service of these institutions in the development of French credit to show the danger of inflicting upon them fresh injury. On whatever side the bank desires to expand it finds this limit. If the bank encroaches a little on all sides, the result may be very appreciable.
The territorial expansion is further perceptibly increased by what is known in the bank as the exterior accounts. This system, of quite recent origin, allows any person not residing in the town where the branch is established to enjoy the same privileges as residents. Business may be transacted by mail with the aid of certain accounting forms, which often differ from those used for ordinary accounts. Each transaction is the subject of a special report, addressed to the customer by the branch. Not only is the transaction itself reported, but useful information as to the position of the account is also given, thus permitting the customer to follow the movement of the account until the half-yearly statement is sent.
This department is highly esteemed by the suburban public, and renders many services to landed proprietors and to farmers, especially in the cattle-raising trade.
Thus the direct expansion, which, as has been seen, meets with serious obstacles, is assisted by this indirect expansion.[173]
Evidently we are far from realising the attractive dream of a France no longer deprived in part of banking facilities, but with all bills taken at par because the bank would reach everywhere. But for the sake of this end, no doubt desirable in itself, is it worth while to go to extremes for a scarcely perceptible advantage, to disturb an institution in other respects strong and useful, and thus perhaps to risk disorganising the general credit system of France? On the contrary, we should be content with and even congratulate ourselves upon a progress which leads us, slowly perhaps, but surely, toward the realisation of credit on low terms everywhere and for all.
THE BANK OF FRANCE AND AGRICULTURAL CREDIT
"There is no such thing as agricultural credit; there is only credit," said M. Dupin in 1845.[174] Matters have not changed since. It is certain, for instance, that Scotland, which for a long time was the classical land of pauperism, owes its prosperity to the banks, which, by developing credit in favor of agriculture, have entirely transformed the soil and the country. Indeed, more than any other, the Scotch farmer needed credit, and more than any other he has benefited by it. It may be said that personal credit is peculiar to agriculture. Thus it suffered as a result of the evolution already mentioned, which, by causing the disappearance of local banks or by giving them a new direction, struck a fatal blow to personal credit.
We know that "agricultural credit" includes loans from seed-time to harvest. The first labor done, the first loan made to the land can only be repaid much later. The average time necessary for agricultural loans is five or six months at least. Now, for other reasons the by-laws of the bank prohibit the discounting of paper having more than ninety days to run. By a special favor which would not be accorded in business, where each loan has a different object, the bank allows the renewals necessary for agricultural loans, which almost exclusively take the form of bills payable to order. The bill returned to the maker on the day of maturity is renewed the following day. The date of maturity alone is changed.
A very important agricultural industry, which we have already mentioned, is that of cattle-raising. The cattlemen are, for the most part, customers of the bank wherever it has a branch. This customer of a somewhat special kind appears, by the very nature of his trade, to be indicated as a suitable client for the bank and not for the financial institutions. The bank permits the cattlemen to indorse each other's paper, and thus can accommodate them without intermediaries. There results a very useful co-operation. Moreover, by using the bank the cattlemen effect great savings, the full value of which they alone can estimate.
After the law of July 18, 1898, and the legislation that followed, it might have been expected that the use of agricultural warehouse receipts would be greatly extended. This legislation makes a serious exception to the common law for the benefit of agriculture. It "constitutes the landowner, so to speak, a public warehouse. It is he who, without any other controlling appraisement, makes declaration as to quantity and commercial value to the clerk of the justice of the peace. In short, the agriculturist enjoys a confidence which so far has been denied to industry and commerce." Notwithstanding this favor, the agricultural warehouse receipts are little used,[175] and the bank, despite its willingness to take them freely, regrets to find them among its discounts in such very small number.
Our survey would not be complete should we fail to say a word concerning the agricultural credit associations, of which also much was expected and which have only in a very limited measure fulfilled the high hopes of their founders.[176]
For the support of agricultural credit the State draws from two sources the funds required to supply the organs of distribution, the local and regional associations. The first source is the loan of 40,000,000 francs made by the bank on November 17, 1897, when the charter was renewed. This amount, like the 140,000,000 francs already advanced in 1857 and 1878, bears no interest. The second source is the yearly payment made by the Bank of France on the profit-yielding circulation. This payment cannot be less than 2,000,000 francs yearly, and more often it is in the neighborhood of 5,000,000 francs.
All these sums, intended for agriculture, are distributed by the Government, and are used in endowing the associations of agricultural credit. The regional associations, which are the pivot of the present organisation, are self-governing societies, with a capital of their own. This capital, added to the advance made by the State, is invested in first-class securities, which are then deposited in the Bank of France, as discount guarantee to take the place of the third signature, if need be. The local offices send their paper to the regional office, which then takes it to the bank, as the needs of funds are felt.
Such is the part of the Bank of France in the distribution of agricultural credit. Effective intervention was obviously very difficult, yet the bank has contrived, even beyond its legal obligations, to give the benefit of its credit to agriculture, which so justly deserves the care it is receiving.
THE BANK OF FRANCE
INTERVIEW WITH M. PALLAIN, GOVERNOR OF THE BANK OF FRANCE[177]
Q. Is the Bank of France ever attacked in the controversies between political parties?
A. No charge has ever been made that the bank favored or aided any political party. There is never any claim that politics enters in any degree into the management of the bank.
Q. Is the capital entirely private property?
A. Yes. All the shares are divided between 30,000 shareholders, of whom about 10,000 have not more than one share.
Q. How are your branches managed?
A. All branches are managed by a manager, assisted by a local board of directors, selected from among the best qualified commercial, industrial, and agricultural representatives in the region.
Q. Do the branches have business relations with the merchants, farmers, and all classes of people of the locality?
A. Yes, they are open to everybody.
Q. You have, I suppose, in the branches regular clients who have an account with you?
A. Yes, and a considerable number of them.
Q. Do your branches do the same kind of business as the branches of the Credit Lyonnais?
A. The Bank of France and its numerous branches do all banking business consistent with the laws properly regulating a bank of issue.
Q. A bill drawn in New York on France, on a bank, for instance, the Credit Lyonnais, at Paris, and accepted by it, would it be admissible for discount?
A. Yes, if it bore, besides the signature of the French establishment accepting it, at least one other French signature; that of the person presenting it, for instance, having a current account at the Bank of France.
Q. A part of your portfolio comes from rediscounting for banks?
A. Certainly, and it is an important part.
Q. Could you give us an estimate of the proportion of bills which are discounted for banks and those discounted for other customers?
A. I should estimate that about 70 per cent. of the paper now held bears the signature of some bank as one of the indorsers; but it is manifest to us that the number of merchants and manufacturers who appreciate the facilities given by the bank for direct discounting and who profit by it increases perceptibly every day.
Q. Does the Bank of France make the same charge for the discount of bills and for loans upon collateral?
A. The bank usually charges somewhat more for loans upon collateral than for the discount of bills. The rates at present are 3 per cent. and 4 per cent., respectively.
Q. Could we obtain an estimate of the percentage of the deposits of the other banks at the Bank of France in comparison with the whole of such deposits?
A. In the credit establishments which you will visit you will be able to establish the fact that the liquid cash is, in comparison with their turnover, relatively very small. In France we consider that the strength of a bank consists more in the composition of its portfolio, i. e., in the value of its commercial bills, rather than in the importance of its cash reserve.
Q. Is the amount of all taxes paid by the bank to the State included in your report?
A. Yes. The public charges of the bank in 1907 were more than 11,000,000 francs, whereas the profits distributed were 31,000,000 francs.
Q. Have you a system of transfers similar to that used by the Reichsbank?
A. Yes, this system, in France, dates as far back as a century or more.
Q. What is your method of transfer?
A. Transfers from place to place are made by simple notification to branches.
Q. Are the other banks accustomed to use the Bank of France in order to transfer their funds?
A. The greater part of the banks use no other method, even to increase the cash in one of their branches in a remote part of France.
Q. Is the Bank of France subject to examination by the Government?
A. There is no regular system of examination, but the Minister of Finance has the right to ask for information whenever he chooses.
Q. Is the Bank of France regarded as a bank for banks or as a bank for the people?
A. The Bank of France remained for a long time, indeed, the bank for banks, but since it has covered so much territory with its numerous branches; since the minimum amount of all its operations has been lowered; since it has opened deposit accounts to all, it is already and it tends to become more and more--as you ask--the bank of all the French public.
Q. Is there any contention in banking or economic circles that it is necessary to restore or extend the right of issue to banks, other than the Bank of France, to enable them to increase their own profits or to afford adequate facilities to borrowers or to meet legitimate business demands?
A. The unity of issue was achieved in France in 1848, and at no time since then has there been any question, in responsible circles, of a possible return to plurality of issue. The same tendency is leading, little by little, to an absolute monopoly in England, Germany, and even in Italy. I think that it would also be interesting for you to examine the recent example of Switzerland, which had its note-issue system founded, as in America, on the plurality of banks and which has now substituted for this system one single privileged bank. This transformation has received popular approval by referendum.
Q. Does the export of gold reduce the volume of notes?
A. Not necessarily. It may happen that among our assets a certain fraction of the gold is replaced by an equal amount of bills in our portfolio, and that without changing the total of notes in circulation.
Q. There is nothing in the law requiring your notes to be covered by a certain proportion of gold?
A. No regulation of this kind exists in our legislation.
Q. Do you rely upon raising the rates of discount to stimulate the importation and to prevent the exportation of gold?
A. It is a principle consecrated by experience that the supreme means of defence for an issue bank, to protect its metallic reserve, is to raise the rate of discount, and we never lose sight of this principle. However, the extent of our reserves allows us to contemplate without emotion important variations of our metallic stock, and we only exceptionally have recourse to a measure which is always painful for commerce and industry. The stability and the moderation of the rate of discount are considered as precious advantages, which the French market owes to the organisation and traditional conduct of the Bank of France.
Q. Would you like to express an opinion as to why the Bank of France is able to hold its gold with a bank rate of 4 per cent. when the rates elsewhere are higher?
A. The causes of this phenomenon are multiple. Theory teaches us that capital goes where it can obtain the highest remuneration, but in considering this remuneration account must be taken of risks; these are numerous and of different kinds; I mean, of course, commercial risks; risk of losing on exchange when the capital is brought back, etc. This at once explains why it is possible in France to maintain a rate of discount lower than elsewhere. French capitalists might fear, perhaps, that the higher interest obtainable outside might be offset or more than offset by the risks incurred. Account must be taken, secondly, of the situation always held by France as a creditor nation, and which by the constant income of capital which it assures to us certainly contributes to counter-balance the current of exportation which might result from the lowering of the rate of discount.
Q. Does the Bank of France sometimes take steps to maintain the bank rate by the purchase of bills in the market or otherwise?
A. No, never.
Q. The tradition and the reputation of the Bank of France make it important that it should hold a larger reserve than any other bank in the world?
A. It is true that France keeps locked up in its bank a proportionately larger amount of specie than any other country, but this policy is not without important compensations. Suppose the French public, changing its mind, should reduce by one-half its monetary reserve of which the bank is the guardian. It would gain thereafter the interest on perhaps two milliards of francs released and which would have become productive--that is to say, a saving of from 80 to 100 millions of francs per year at the maximum--but if one reflects that it would lose the advantage of the reduced rates of discount which the extent and character of our reserves enable us to maintain and from which all French production profits; that it would lose, in addition, the sentiment of absolute security, of complete financial independence, which every crisis has strengthened, one would be less tempted to conclude--with certain critics--that the policy of maintaining heavy reserves, the natural expression of the country's instincts, is an unwise policy from an economic and practical standpoint.
Q. You have, I believe, no requirement of law by which the Bank of France is obliged to purchase gold at a certain fixed price?
A. The bank buys gold according to the tariff of the Mint, but it is not obliged to do so. Private individuals, instead of having their money coined for themselves, find it more advantageous to sell their ingots to the bank, which has them coined when needed.
THE CREDIT LYONNAIS
INTERVIEWS WITH BARON BRINCARD, ADMINISTRATEUR DELEGUE, AND OTHER OFFICIALS OF THE CREDIT LYONNAIS[178]
Q. What is the date of the organisation of the Credit Lyonnais?
A. July 6, 1863.
Q. Under what law was it organised?
A. We are under the general law, a general companies law.
Q. What is the minimum amount of capital required?
A. There is no minimum, but at least one-fourth of the capital is required by law to be actually paid in.
Q. How many shareholders have you?
A. Our capital is divided into 500,000 shares, but as many of these shares are issued to "bearer" we do not know how many shareholders we have.
Q. The cash in hand is merely carried for the necessities of business?
A. Yes. Any bank, if it has need for additional cash, may present for rediscount at the Bank of France the bills and other commercial paper which it has in its vaults.
Q. What per cent. of your deposits do you intend to carry in cash either in your own vaults or in other banks?
A. Eight to 10 per cent. on the average.
Q. Does the Bank of France ever loan below its published rate?
A. No. It never does.
Q. It is not, I believe, the policy of your bank to buy public securities in large amounts?
A. No. Our idea is to buy all the commercial paper that we can get. That is our business. At present it is almost impossible to get any commercial paper because business is so slack; therefore, we are obliged to go outside and buy treasury bills.
Q. To what kinds of banks do you lend on collateral?
A. Mostly foreign banks; for instance, banks in New Orleans during the cotton season. It is not to our interest to lend to French banks. We lend money to foreign banks and to French merchants, but never to foreign merchants or to French banks. We never lend on real estate. That is the business of the Credit Foncier.
Q. Do you own all of the securities you sell, or do you take orders and buy and sell them on commission?
A. The greater part of our transactions are made on commission.
Q. In your statement of liabilities you show deposits about $132,000,000, and current accounts about $168,000,000. Will you kindly explain the difference between these two accounts?
A. Deposits are sums of money deposited, especially by private people. Accounts current represent the balances to the credit of business people.
Q. If I come here and open an account with you and make a deposit and say I want to transact business with you, borrowing money from time to time, and depositing and drawing daily, would you put that account in your "accounts current"?
A. If you were not a merchant, you would have a deposit account opened for your daily deposits and drawings. Your account could never show a debit balance and the amounts which you might borrow would have to be secured by deposit of securities and would be placed under the item "loans on securities." If you were a merchant, an account current would be opened for the requirements of your business, and this account could become debtor.
Q. Deposits and current accounts are payable on demand?
A. Yes; on demand. Deposits are made up of sums deposited by customers whose accounts are not active; they are more in the nature of reserve deposits, whereas current accounts represent deposits made by customers mostly in active business.
Q. Do you pay interest on practically all of your deposits and current accounts?
A. Yes.
Q. Do you find that the Bank of France competes with you in any way?
A. In no way.
Q. They receive accounts from individuals and small tradesmen in the branches, do they not?
A. Yes; but they do not grant uncovered credits. There is no competition between the Bank of France and the other banks, because they do not do the same kind of business. The Bank of France receives deposits, but does not allow interest upon them; it only discounts bills with three signatures; it is the bankers' bank; it acts as the regulator of the money market.
Q. Do its branches receive deposits?
A. Yes; they receive deposits, without allowing any interest. In times when money is cheap the rate of discount of the Bank of France is rarely below 3 per cent., and in the Credit Lyonnais and other banks the rate may be sensibly below that of the Bank of France.
Q. Can you state the number of employes in the Credit Lyonnais?
A. About 14,000. It varies according to the time of year.
Q. Are all of the important banks in the City of Paris members of the clearing house?
A. Yes; about 13 of the most important.
Q. How frequently are the clearings made?
A. Three times a day. As a matter of fact, our clearing house is not so important as yours in America.
Q. The clearing houses in the cities of France are in no sense a factor; they are merely the machinery through which the cheques are cleared, are they not?
A. To our knowledge there is but one clearing house; it is in Paris and is merely a mechanism for settling balances.
Q. Are you examined at any time and in any way by the Government?
A. No. The control of the Government is limited to the supervision for taxes, to which every company is subject.
Q. Your relations with the Bank of France are very intimate and cordial, are they not?
A. Yes.
Q. Is that true with all the banks in France?
A. The Bank of France is quite impartial; it gives no preference to any one; there is no favoritism.
Q. I understand none of the farmers or peasants will use cheques.
A. The use is extremely rare.
Q. How about your tradesmen all through the small towns, and the doctor and lawyer and professional man; would they draw the money out and pay their bills in cash?
A. Certainly; most of them.
Q. When you establish a branch in a small town, you generally find a local independent bank there. Can this local bank compete with you?
A. There are certain places where the private banks have kept on, but the tendency is for the private banker to disappear. We take small sums and have numerous branches. One great distinction is that the private bank is always in the hands of a family. A man who originally starts a private bank may be a good banker, financier, and business man, but it does not always follow that his son, who in all likelihood will inherit the business, will be capable of running it. Our joint-stock banks do not go from father to son, but are always under efficient management.
Q. What proportion of your own payments are made in gold?
A. A very small proportion. The people prefer notes.
Q. Do the French people hoard money as much as formerly?
A. No; it is becoming more the custom to put money in the banks. Thirty years ago they kept the money at home.
COMPTOIR D'ESCOMPTE
INTERVIEW WITH M. ULLMANN, DIRECTOR OF THE COMPTOIR D'ESCOMPTE[179]
Q. One of the things that we have in mind is to inquire in regard to the character of the business done by your branches.
A. Yes. We are especially a discount bank and our customers are mostly commercial people engaged in commerce and industry, so that our principal business in our branch offices consists in discounting commercial paper, in making advances against securities, goods, or warehouse receipts, or sometimes giving blank credits to our customers for commercial requirements.
Q. Have you stock in other banks which you control?
A. We are interested in the Banque de l'Indo Chine, which is an issue bank in the French colonies, but we do not control it; we hold a certain amount of shares.
Q. Are there any other banks which you control?
A. No.
Q. You have not been in the habit of buying up other banks?
A. No. The system here is to establish agencies of our own; the Germans, on the contrary, control other banks in order to arrive at the same result, viz., to get as much influence as possible throughout the country. We try to come to the same result by establishing our own agencies.
Q. Is that true of the Credit Lyonnais?
A. The Credit Lyonnais and the Societe Generale have the same system.
Q. Is it usual for large banks in Paris to confine their underwriting operations to bond syndicates?
A. Yes; banks receiving deposits, such as the Credit Lyonnais and the Societe Generale, do not usually participate in syndicate operations covering the shares of industrial concerns; other banks, such as the Banque de Paris et des Pays-Bas, do so, but they are not deposit banks. They have more liberty to engage their own capital in any enterprise.
Q. You are not restricted by law in doing any business you please?
A. No; it is only the custom and rules of our society.
Q. If there were a large industrial corporation in France which wanted to develop its business and issue bonds upon it, and if they were customers of yours of unquestioned financial standing, would you take their bonds and sell them?
A. Yes.
Q. But not their stock?
A. If they were a well-known concern we would sell their shares too; we have done so.
Q. Is there co-operation between the large banks?
A. We meet very often and often have common interests in business.
Q. Do you, in a sense, divide the field? I suppose you have a certain field in which you do business and other banks do not; Turkey, for instance?
A. Turkey is reserved for the Banque Ottomane.
Q. Take the electrical business, for instance.
A. As far as we are concerned we are connected with the Thomson-Houston; and it is natural if the Thomson-Houston and their friends have any business to do, that they deal with us.
Q. There is nothing in the law which restricts you to any class of investment?
A. No.
Q. And nothing that requires you to keep any reserve; that is, any amount of cash as against your liabilities?
A. No.
Q. Is the Bank of France your principal reliance in case you need money? Do you think it necessary to carry any additional reserve?
A. Under our French system we consider the commercial paper we keep in the portfolio a cash reserve, as we can rediscount it at the Bank of France. We know the Bank of France will discount these bills and thus enable us to convert the bills instantly into cash; this is the basis of the French banking system.
Q. Outside of Paris it happens that you have branches at many of the same places as the Bank of France; is there competition between the branches of the Bank of France and your own branches?
A. No; the Bank of France does more rediscounting than discounting, and the Bank of France also has more conservative rules than the other banks. We may lend under the Bank of France rate, so our clients have an interest in keeping their accounts with us.
Q. You do not consider the Bank of France as an active competitor?
A. No; competition is greater with the Credit Lyonnais and with the other private banks than with the Bank of France.
Q. You do considerable rediscounting of bills, I take it?
A. Yes.
Q. At a lower rate than the Bank of France?
A. Frequently.
Q. Is the development of branches a matter of recent times?
A. Yes; we began the system of establishing branches about twenty years ago.
Q. How many employes have you?
A. Including the country, something like 5,000.
Q. Have you a pension system for your employes?
A. Our clerks consent to a rebate of 5 per cent. on their salaries, and we duplicate this rebate by a voluntary contribution, in order to constitute a pension fund; it amounts now to about 7,000,000 francs.
Q. If a new bank were to be organised here, would it be admitted as a member of the clearing house?
A. Certainly.
Q. You have no new banks except the Union Parisienne?
A. There is also the Banque Francaise, managed by M. Rouvier, who formerly was Premier.
BANQUE DE PARIS ET DES PAYS-BAS
INTERVIEW WITH M. MORET, MANAGER OF THE BANQUE DE PARIS ET DES PAYS-BAS[180]
Q. We assume that your business is in many respects quite unlike that of the other joint-stock banks?
A. Yes; in some respects.
Q. What is the difference?
A. The Societe Generale, Credit Lyonnais, etc., receive deposits from the public; they invest these deposits and try to make the most of them, paying a small rate of interest on them; they also loan money on commercial paper which can be rediscounted at the Bank of France. Here we are more a business bank; we do not care for deposits from the public; we work with our own money, with the money which is the capital of the bank, and we are occasionally assisted by the capital of the directors, the people who sit around this table, who are all rich people and some of them bankers. As a rule we do not receive deposits from the public.
Q. But you do receive some deposits?
A. We receive the deposits of big companies which we have created or promoted or whose stocks we have issued--they are our customers--but we do not receive deposits of small accounts from the public.
Q. What is your capital?
A. 75,000,000 francs.
Q. You have current accounts--190,000,000 francs?
A. They are current accounts, from manufacturing concerns, railway companies, big organisations of any kind.
Q. You have a considerable foreign business?
A. We have connections all over the world, and very often we take an interest in business abroad.
Q. Do you operate more particularly in one part of the world than in another?
A. No; although we have only three branches--one in Brussels, one in Amsterdam, and one in Geneva.
Q. Do you endeavor to carry any special amount of cash at the Bank of France? Or are you indifferent as to the amount of balance you have there?
A. We always calculate what sum each day will be likely to be withdrawn; besides which we always have a large amount of commercial paper which we could rediscount at the Bank of France at once. Therefore we keep just enough cash in vault to meet any cheques which may be presented.
Q. Do you carry an account in New York?
A. We lend money to bankers there. Different kinds of loans, some are at sixty days or ninety days.
Q. You are not restricted in any way as to the character of the undertakings you may make?
A. No; we can do as we like.
Q. Do you specialise in practice or do you consider propositions of various kinds?
A. All sorts of propositions, railway building, harbors, tramways, electrical enterprises, etc.
Q. Do you sometimes take an interest in business such as placing Pennsylvania Railroad and Union Pacific bonds?
A. Yes.
Q. You frequently act as managers of syndicates which might include the other banks of France?
A. Very often we take the head of syndicates.
Q. You are the leading bank in that business in France?
A. They say so.
Q. Is there cordial co-operation between the banks of Paris and the Bank of France, generally speaking?
A. Yes; business as a rule is done, when it is a big business, with several of these big societies or banks, and perhaps with all of them together.
Q. Are there particular corporations in which you have a permanent interest?
A. Yes; so as to have some control in certain large companies.
Q. What do you think of the attitude of the Government toward the Bank of France? That is to say, are they exacting more and more from it?
A. I do not think that they exact too much from it. The shares of the Bank of France are always very high in price; it has not hurt at all the development of the bank.
CREDIT FONCIER DE FRANCE
INTERVIEW WITH M. TOUCHARD, SECRETARY[181]
Q. Is the Credit Foncier a public institution?
A. Yes, it is a mixed institution; it is at the same time a joint-stock company and a society under the control of the Government by reason of privileges which the Government has granted to it.
Q. Who are the shareholders?
A. Any one; the shares are dealt in on the Bourse. The firm capital is at present 200,000,000 francs; the shares are issued at 500 francs.
Q. What dividend do you pay?
A. We now pay 6 per cent.; for several years it was only 5 per cent.
Q. Does the Government receive no income from it?
A. No; on the contrary, the Government began by giving us a subsidy of 10,000,000 francs; that was at the beginning, in 1852, in order to help us make loans at a rate advantageous for that time. This subsidy was not renewed, and the State does not intervene now, except occasionally to exercise its control.
Q. Does the company appoint the officers?
A. The Government appoints the governor and the two sub-governors. There must also be three treasurers-general among the 23 members of the council of administration. These treasurers, as well as the other administrators, are named by the general assembly of stockholders; but before presenting their names to this assembly, it is customary to obtain the approval of the Minister of Finance.
Q. Do you pay the same taxes as the other banks?
A. Yes. We are treated like any ordinary bank. We have the special privilege of issuing bonds secured by mortgages. It is a very complicated system in France; there are legal complications which would render it impossible for any corporation to undertake the business unless it had special privileges.
Q. Are you confined by law to business with mortgages?
A. We have two principal kinds of operations--mortgage loans and communal loans. The total business of the two branches of operations amounts at present to about 4,000,000,000 francs. Operations on so large a scale involve a considerable transfer of funds, and make necessary a treasury service requiring, of course, the use of banking methods. Our statutes, therefore, recognise our right to carry on ordinary banking operations, within certain rather sharply defined limits.
Q. How is your banking business limited?
A. We are allowed to receive deposits up to a maximum of 100,000,000 francs.
Q. Do you invest in securities other than mortgages?
A. We employ our deposit funds in discounting commercial bills on condition that they have two signatures and can be presented to the Bank of France; that is to say, they must not run over three months.
Q. You take mortgages on private estates?
A. Our mortgages may be on houses or on rural property.
Q. What is the precise relationship of the stockholders to the business of the company? Have they really a voice in the administration?
A. The two hundred largest stockholders meet once a year to ratify accounts, vote the dividend, and consider the questions docketed for the day of the meeting.
Q. What is the usual length of time for mortgages on real estate?
A. Our statutes allow us to loan for seventy-five years on ordinary rural or city property. In the case of summer resorts and certain other property liable to depreciate rapidly, for the sake of prudence we do not generally lend for more than thirty years; besides, the borrowers always have the right to repay at any time, and they often avail themselves of this right, so that the average length of our loans is much less--hardly exceeding fifteen or twenty years.
Q. What is the cost for amortisation in the long mortgages on property in the country?
A. The amortisation is spread over the whole duration of the loan, so that the total of the interest paid and the capital reimbursed forms a constant yearly annuity.
Q. Do you employ your amortisation funds to buy new mortgages?
A. Yes; we lend again.
Q. May you call your bonds at par? Are they payable at par at your option?
A. In our recent issue we have put that clause in, viz., that we can redeem our bonds at par. Generally we only redeem a certain portion of them each year, which are drawn by lottery.
Q. What is the minimum size of your mortgages on private estates?
A. There is no minimum; but we do not care to make very small loans because it costs too much to foreclose.
Q. What percentage of your total business is in the country and what in the city?
A. About one-half in Paris, and our best business is in Paris. The urban mortgages cause us less difficulty, and the tendency is for the proportion of them to increase.
Q. Who are the subscribers to the bonds, and what are the usual sums subscribed? Are they small or large?
A. They are bought by small people, and generally remain in the hands of persons of small capital. This is one of the reasons why their quotations show so little fluctuation.
Q. Do you lend on farms?
A. Yes. Up to one-half, except on forest land, vineyards, and the like, on which we lend only one-third. We do not lend on mines. On factory buildings we lend only on the value of the ground and of the building, independently of its industrial value.
Q. What other institutions of this character are there in France?
A. There are no others; we no longer have a legal monopoly, but we very nearly have a practical monopoly. There are private individuals who make mortgage loans, but no large company makes this the principal feature of its business.
Q. How long has it been the privilege of the Credit Foncier to add lotteries to its loans?
A. It has done so from the beginning, although we are obliged to ask the permission of the Minister, but it is on that account that we have been able to place our bonds so low.
CAISSE DES DEPOTS ET CONSIGNATIONS
INTERVIEW WITH M. DELATOUR, GENERAL DIRECTOR OF THE CAISSE DES DEPOTS ET CONSIGNATIONS[182]
Q. We should like to know the general character of the business conducted by your institution.
A. The mission of the Caisse des Depots et Consignations is to receive, hold, and repay all private funds intrusted to the State either voluntarily or under compulsion.
Q. You say that you also do an insurance business. What do you mean by that?
A. The insurance office, managed by the Caisse, issues policies of life insurance, insurance payable after death or in case of accident, like any private insurance company. As regards accidents to employes while at work, it insures only against such accidents as cause death or permanent total or partial incapacity for work.
Q. Is this a corporation?
A. The Caisse des Depots et Consignations is not a corporation. It is a state organism, but, while charging the Caisse with the management of all private funds, which may be turned over to it by the State under different headings, the legislature bestows upon it full autonomy, in order to avoid even a semblance of possible confusion in the handling of private moneys with the handling of public moneys. Moreover, it has placed the Caisse under the direct supervision and the guaranty of the legislative powers.
Q. What is done with the profits realised from the business?
A. Profits earned by the Caisse on deposits of the savings banks are turned over to the reserve and guaranty fund of savings banks.
Q. What restrictions govern the investment of your funds?
A. As long-term investments, we make loans to departments and municipalities, sometimes to the State; we take government rentes, treasury securities, guaranteed railroad bonds, etc. As short-term investments, we take treasury bonds, bonds of the Monte de Piete of Paris (municipal pawnshop), etc. Finally, we keep large sums in cash, either in our own vaults or to our credit in the treasury and the Bank of France, which, for that purpose, keep account currents on demand for us.
Q. You do not, as a rule, invest in mortgages?
A. No; owing to the difficulty in disposing of such investments.
Q. You purchase no bills and do no commercial business whatever?
A. No; that role is played by the Bank of France. Sometimes we make advances on securities, but only on treasury bonds.
Q. Your organisation is quite unique in the world, is it not?
A. There is nothing like it in England or America, but there are similar institutions in Belgium and Italy, for instance. In France this institution is highly appreciated by the lawmakers, who steadily increase its functions, and the number of laws and regulations governing the Caisse is ever growing.
Q. It is customary in France for savings banks to carry their reserve with this establishment?
A. The savings banks are bound to turn over to us all they receive from their depositors, except such sums as may be required to meet immediate demands.
Q. Then, as a matter of fact, this is a central bank for the savings banks of France?
A. Precisely.
CREDIT AGRICOLE
INTERVIEW WITH M. DECHARME, CHEF DU SERVICE DU CREDIT MUTUEL ET DE LA COOPERATION AGRICOLE AT THE MINISTERE DE L'AGRICULTURE[183]
Q. What is the nature of the business of the Credit Agricole and when was it instituted?
A. The first law was in 1899. The first bank was opened in 1900. The Credit Agricole is based upon local organisations. France is divided into 86 departments, in each of which we are to have a regional bank (caisse regionale); and we hope eventually to have a local office (caisse locale) in each commune of each department. Among these 36,000 communes there are many which are cities, which naturally would not have agricultural banks. There are only 2 out of the 86 departments in France which have not already established a regional bank.
Q. Who furnishes the capital?
A. The basis of the system is the local office of the Credit Agricole in which each member--local farmers--has one or many shares of 20 francs, but on which he has to pay only 5 francs down. On payment of these 5 francs he becomes a stockholder. When a local office has been established it turns all of its capital over to the regional office. Then comes the State which advances to the regional bank an amount four times the capital which has been subscribed by the local banks. The money given by the Government is not really given; it is lent without charge, without interest.
Q. For what purposes can this capital be used?
A. The regional office does not lend directly to the farmers; it lends to the local office, and the local office has a board of directors which examines the demands of the various members.
Q. Under what conditions do they make loans to farmers, and are their loans confined entirely to people engaged in agriculture?
A. The State loans to the regional office without interest; the regional office loans to the local office at 3 per cent.: the local office loans to the farmers at between 3-1/2 and 4 per cent.; in the northern region at 3-1/2 per cent.; in the southern at 4 per cent.
Q. Under what conditions?
A. The farmer who wants to borrow from the local office draws a bill upon himself, takes it to the local office, and the board of administration there considers it. If they approve it, the president signs it--and it has then two signatures--and then sends it to the regional office; if the regional office has plenty of money they will lend the money directly; if not, the president of the regional office signs it--it has then three signatures and is bankable paper--and it is taken to the Bank of France. During the crisis in the south of France last year in the wine-growing region at Montpellier, the centre, the regional office had one million capital; the Government then added 4; that made 5, but they lent at that office all together 16 millions, and the difference was obtained from the Bank of France in the way described by using paper with three signatures. Before the founding of these agricultural societies it would have been difficult for a farmer to obtain the three signatures necessary to borrow from the Bank of France, and what happened last year in the south of France could not have occurred before the organisation of the Credit Agricole. It should be added there has never been one cent lost by the Credit Agricole.
Q. Are all loans made to members?
A. Yes; exclusively to members.
Q. Who can become a member?
A. Farmers; agricultural workmen are excluded. We do not lend to people for nourishment to support themselves. We lend them money to increase the production of the land.
Q. Must a man have some share in the crops?
A. We lend money to buy a horse, a cow, or to buy fertilizer. We will lend to a man who rents a farm, but does not own it, to buy machinery, cattle, etc., but we will not lend to a man who wants to borrow the money for his own consumption; we do not lend money for a man to buy a coat, for instance. These local offices are in communities where everybody knows everybody else, and they always ask what the man wants to borrow for, and if he says he wants 400 francs to buy a cow, they watch him, and if four or five days afterwards he has no cow, they know it. As the liability is without limit, the other members of the locality would be responsible. At the beginning the farmers were afraid of unlimited liability, and on that account they had to make it limited, but now, in all of the new offices, the responsibility is unlimited.
Q. What are your co-operative societies?
A. They are societies for the production, preservation, sale, or transformation of agricultural products. There are co-operative agricultural societies in the wine-growing regions which have their own wine cellar; there are co-operative dairy societies for making butter and cheese; there are also co-operative societies which use waterfalls and electricity; co-operative mills to grind corn; co-operative railways to bring beet roots to the sugar refinery; co-operative distilleries and co-operative warehouses for corn. To these co-operative societies we make loans for twenty-five years. The Government loans without charge to the regional office and the regional office lends to these co-operative societies for twenty-five years at 2 per cent.
Q. What is the security?
A. The guarantee is the consolidated liability of all of the members of these co-operative societies and also a mortgage upon their real estate; their responsibility is absolutely without limit.
Q. Do you compete at all with the branches of the other banks or with the Bank of France?
A. No; we have an entirely different class of customers.
Q. Is there any other institution of this character in France, or do you practically cover the field?
A. The members of these local offices are people who up to the time these local offices were organised had never had any banking connection at all. The only persons with whom the local offices compete are individuals who used to loan to farmers at very high rates of interest.
FOOTNOTES:
[165] M. Robert Masson, Sous-Directeur du Credit Lyonnais, The Bank of France, an address delivered at the annual banquet of the bankers of the city of New York, January 19, 1914.
[166] Adapted from Maurice Patron, The Bank of France in Its Relation to National and International Credit. Publications of the National Monetary Commission, Senate Document No. 494, 61st Congress, 2d Session.
[167] "Compte rendu de l'assemblee generale des actionnaires de la Banque de France," 1891.
[168] Burdeau, "Discours sur le renouvellement du privilege de la Banque de France," June 29 and July 6, 1892, in the Officiel of June 30 and July 7.
[169] The Bank of France, during periods of quiet and prosperity, aims at a gradual effacement, at a more complete retreat toward a very high but very restricted sphere of economic activity. But as soon as the least trouble appears ... the Bank assumes again its place at the head of our great financial institutions. (Brouilhet, "Le nouveau regime de la Banque de France." Revue d'Economie Politique, 1899.)
[170] The discounts and loans of the financial institutions are growing in importance, and are steadily increasing in proportion to those of the Bank. This condition, revealed by statistics, is in itself not alarming, but it once more justifies that intervention, so many motives for which we have brought out.
[171] It seems that this protective mission especially applies to the department for stock market orders, originally reserved for the customers of the Bank, and later opened to everybody. Thus it prevents the financial institutions from driving us toward excessive speculation. This purpose explains, according to our notion, the growth and broadening of the business of stock market orders at the Bank of France.
[172] P. Coq, "Les circulations en Banque," Paris, Guillaumin, 1865, p. 38.
[173] The indirect expansion might be increased by wider use of the "crossed check." It will be long before we may expect good results from this practice, since we are as yet too far from the time when this check, almost unknown in France, will be currently used.
[174] Journal Officiel, 1845, p. 2471.
[175] The main reason lies in the numerous formalities which the law of April 30, 1906, has simplified but not suppressed, in the many expenses caused by the organisation, and also, it appears, in the inexperience of some of the officials. The clerks of the justices of the peace, intrusted with the delicate and novel functions of registrars of chattel mortgages, are, as a rule, little fitted to perform them.
[176] The model of these institutions came to us from foreign countries; but the foreign differ from ours materially, because of the diversity of their origin. With our neighbors, the movement began slowly in the lowest levels of the rural population. With us, on the contrary, the system of agricultural associations began at the top. Thus, these institutions penetrate only with difficulty into the rural districts, where economic education has but just begun.
[177] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy. Publications of the National Monetary Commission, Senate Document No. 405, 61st Congress, 2nd Session, pp. 189-218.
[178] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland and Italy. Publications of the National Monetary Commission, Senate Document No. 405, 61st Congress, 2nd Session, pp. 219-248.
[179] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy. Publications of the National Monetary Commission, Senate Document No. 405, 61st Congress, 2nd Session, pp. 249-267.
[180] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy. Publications of the National Monetary Commission, Senate Document, No. 405, 61st Congress, 2nd Session, pp. 268-276.
[181] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, Publications of the National Monetary Commission, Senate Document, No. 405, 61st Congress, 2nd Session, pp. 277-291.
[182] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, Publications of the National Monetary Commission, Senate Document, No. 405, 61st Congress, 2nd Session, pp. 296-308.
[183] Adapted from Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy. Publications of the National Monetary Commission, Senate Document, No. 405, 61st Congress, 2nd Session, pp. 309-322.